<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration File No.: 333-3885
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 AUGUST 28, 1996
SUBJECT TO COMPLETION
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 28, 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-C1
----------------
The Commercial Mortgage Pass-Through Certificates, Series 1996-C1 (the
"Certificates") will consist of 14 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-1 Certificates,
the Class H-2 Certificates (collectively, the "Regular Certificates"), the
Class R Certificates and the Class LR Certificates (together, the "Residual
Certificates"). Only the Class A-1, Class A-2, Class A-3, Class B, Class C,
Class D and Class E 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-21 IN THIS PROSPECTUS SUPPLEMENT AND PAGE 9 OF THE
PROSPECTUS BEFORE PURCHASING ANY OF THE OFFERED CERTIFICATES.
==============================================================================
<TABLE>
<CAPTION>
INITIAL CERTIFICATE OR PASS-THROUGH RATED FINAL
CLASS NOTIONAL BALANCE <F1> RATE <F2> DISTRIBUTION DATE <F3>
- -------------- ------------------------- ---------------- -----------------------
<S> <C> <C> <C>
Class A-1 ..... $ %
- -------------- ------------------------- ---------------- -----------------------
Class A-2 ..... $ %
- -------------- ------------------------- ---------------- -----------------------
Class A-3 ..... $ %
- -------------- ------------------------- ---------------- -----------------------
Class B ....... $ %
- -------------- ------------------------- ---------------- -----------------------
Class C ....... $ %
- -------------- ------------------------- ---------------- -----------------------
Class D ....... $ %
- -------------- ------------------------- ---------------- -----------------------
Class E ....... $ %
- -------------- ------------------------- ---------------- -----------------------
==============================================================================
<FN>
<F1> Approximate, subject to an upward or downward variance of up to 5%.
<F2> 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.
<F3> The Rated Final Distribution Dates 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.
</FN>
</TABLE>
The Offered Certificates will be purchased by Prudential Securities
Incorporated and Smith Barney Inc. (the "Underwriters") from the Depositor
and will be offered by the Underwriters from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at
the time of sale. Proceeds to the Depositor from the sale of the Offered
Certificates will be approximately $ , before deducting certain expenses
expected to be approximately $ payable by the Depositor. The Offered
Certificates are offered by 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
September , 1996 (the "Delivery Date"), against payment therefor in
immediately available funds.
PRUDENTIAL SECURITIES INCORPORATED SMITH BARNEY INC.
SEPTEMBER , 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 142 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. One hundred of the Mortgage Loans, 97 of
which were originated by Midland Loan Services, L.P. ("Midland"), were sold
by Midland to Midland Commercial Financing Corp. ("MCFC"), one of the
Mortgage Loan Sellers hereunder. Twenty-eight of the Mortgage Loans were
originated either by Smith Barney Mortgage Capital Group, Inc. ("SBMCG") or
by correspondents of, or other entities related to SBMCG, and 15 of the
Mortgage Loans were purchased by SBMCG from various unaffiliated banks,
savings institutions or other entities in the secondary market. These
Mortgage Loans will be sold by SBMCG to Midland, the other Mortgage Loan
Seller hereunder, immediately prior to the closing of this offering. The
Mortgage Loans will be sold to the Depositor by the Mortgage Loan Sellers 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 and Class G 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 occurring on or prior to August 25, 2007 (the "EC Maturity
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. The Class
A-EC Certificates will not be entitled to any distributions (other than any
unpaid Class Interest Shortfalls) after the EC Maturity Date. With respect to
each Distribution Date, the Class H-2 Certificates will be entitled to
distributions of interest at the Class H-2 Pass-Through Rate on the Class H-2
Notional Balance. The Class H-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 October, 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-1 AND CLASS H-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-1 AND
CLASS H-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-1 AND CLASS H-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-1 AND CLASS H-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-1 AND CLASS H-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-1 AND CLASS H-2
CERTIFICATES TO RECEIVE DISTRIBUTIONS WILL BE SUBORDINATE TO SUCH RIGHTS OF
THE HOLDERS OF THE CLASS F CERTIFICATES; AND THE RIGHTS OF THE CLASS H-1 AND
CLASS H-2 CERTIFICATES TO RECEIVE DISTRIBUTIONS WILL BE SUBORDINATE TO SUCH
RIGHTS OF THE HOLDERS OF THE CLASS G CERTIFICATES. IN ADDITION, EACH CLASS OF
REGULAR CERTIFICATES WILL HAVE THE BENEFIT OF SUBORDINATION OF THE CLASS LR
AND CLASS R CERTIFICATES TO THE EXTENT OF ANY DISTRIBUTIONS TO WHICH THE
CLASS LR AND CLASS R 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 H-1 and Class H-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 H-2
Certificates, which reduce the Class A-EC Notional Balance or the Class H-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 two of the
Mortgage Loans generally provide that for a specified
S-2
<PAGE>
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 prior to the EC
Maturity Date as 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 September 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 anticipated that the Certificates will have the following ratings:
the Class A-1, Class A-2 and Class A-3 Certificates will be rated "AAA" by
each of Duff & Phelps Credit Rating Co. ("Duff & Phelps") and Standard &
Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. ("S&P"
and together with Duff & Phelps, the "Rating Agencies"); the Class A-EC
Certificates will be rated "AAA" by Duff & Phelps and "AAAr" by S&P; the
Class B Certificates will be rated "AA" by each of Duff & Phelps and S&P; the
Class C Certificates will be rated "A" by each of Duff & Phelps and S&P; the
Class D Certificates will be rated "BBB" by each of Duff & Phelps and S&P;
the Class E Certificates will be rated "BBB-" by each of Duff & Phelps and
S&P; the Class F Certificates will be rated "BB" by each of Duff & Phelps and
S&P; and the Class G Certificates will be rated "B" by each of Duff & Phelps
and S&P. The Class H-1, Class H-2, Class R and Class LR Certificates are
unrated. It is anticipated that S&P's rating of the Class A-EC Certificates
will expire on the earlier to occur of (i) the EC Maturity Date and (ii) the
first Distribution Date on which the Class A-EC Notional Component A is
reduced to zero. The Class A-EC Notional Component A represents an amount
equal to the sum of the Certificate Balances of the Class A-1, Class A-2 and
Class A-3 Certificates. The Class A-EC Notional Balance represents an amount
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.
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 two separate "real estate mortgage investment conduits"
(each a "REMIC" or, alternatively, the "Upper-Tier REMIC" and the "Lower-Tier
REMIC") 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-1 and Class H-2 Certificates will constitute
"regular interests" in the Upper-Tier REMIC, and the Class R Certificates and
Class LR Certificates will constitute the sole Class of "residual interests"
in the Upper-Tier REMIC and the Lower-Tier REMIC, 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.
S-3
<PAGE>
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.
<TABLE>
<CAPTION>
Approximate Approximate
Percent of Credit
Total Support
<S> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------
% CLASS A-EC CLASS A-1 Anticipated Ratings: (AAA/AAA) %
---------------------------------------------------
% Excess interest on CLASS A-2 Anticipated Ratings: (AAA/AAA) %
Class A-1 through Class E ---------------------------------------------------
% CLASS A-3 Anticipated Ratings: (AAA/AAA) %
---------------------------------------------------
% Anticipated Ratings: CLASS B Anticipated Ratings: (AA/AA) %
(AAA/AAAr) ---------------------------------------------------
% CLASS C Anticipated Ratings: (A/A) %
---------------------------------------------------
% CLASS D Anticipated Ratings: (BBB/BBB) %
---------------------------------------------------
% CLASS E Anticipated Ratings: (BBB-/BBB-) %
---------------------------------------------------------------------------------
% CLASS F Anticipated Ratings: (BB/BB) %
---------------------------------------------------------------------------------
% CLASS G Anticipated Ratings: (B/B) %
---------------------------------------------------------------------------------
% CLASS H-2 Interest only CLASS H-1 Principal only %
Unrated Unrated
----------------------------------------------------------------------------------
Not offered hereby: Classes A-EC, F, G, H-1 and H-2.
Ratings: (Duff & Phelps/S&P)
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
INITIAL
AGGREGATE
ANTICIPATED CERTIFICATE CERTIFICATE CASH FLOW OR
RATING BY DUFF PRINCIPAL OR % OF PASS-THROUGH WEIGHTED AVERAGE PRINCIPAL WINDOW
CLASS & PHELPS/S&P NOTIONAL AMOUNT TOTAL DESCRIPTION RATE LIFE (YEARS) <F1> (YEARS) <F1>
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Senior Certificates
- -------------------------------------------------------------------------------------------------------------------------------
A-1 AAA/AAA $ % Fixed Rate % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
A-2 AAA/AAA $ % Fixed Rate % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
A-3 AAA/AAA $ % Fixed Rate % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
Excess Interest
A-EC AAA/AAAr $ % Only <F2> --
- -------------------------------------------------------------------------------------------------------------------------------
Subordinate Certificates
- -------------------------------------------------------------------------------------------------------------------------------
B AA/AA $ % Fixed Rate % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
C A/A $ % Fixed Rate % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
D BBB/BBB $ % Fixed Rate % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
E BBB-/BBB- $ % Fixed Rate % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
Greater of
Weighted Average
Net Mortgage Rate
F BB/BB $ % Variable Rate and % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
Greater of
Weighted Average
Net Mortgage Rate
G B/B $ % Variable Rate and % --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
H-1 Unrated $ % Principal Only N/A --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
Weighted Average
H-2 Unrated $ % Interest Only Net Mortgage Rate --
- --------- --------------- ---------------- --------- --------------- ---------------- ---------------- ----------------
<FN>
<F1> Based on Scenario 1, which assumes a 0% CPR and no defaults. See "YIELD
AND MATURITY CONSIDERATIONS--Weighted Average Life" herein.
<F2> With respect to each Interest Accrual Period up to and including August
25, 2007 (the "EC Maturity Date"), the Class A-EC Certificates will be
entitled to an amount equal to (i) the excess of the weighted average,
as of the related Due Date, of the Net Mortgage Rates on the Mortgage
Loans (the "Weighted Average Net Mortgage Rate") over the weighted
average of the Pass-Through Rates of the Class A-1, Class A-2, Class
A-3, Class B, Class C, Class D and Class E 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 sum of the
Certificate Balances of the Class A-1, Class A-2, Class A-3, Class B,
Class C, Class D and Class E Certificates), multiplied by (ii) the
Class A-EC Notional Balance. The Class A-EC Certificates are not
entitled to distributions (other than any Class Interest Shortfalls)
after the EC Maturity Date.
</FN>
</TABLE>
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 October 25, 1996. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" herein.
Scheduled Final
Distribution Date .... .
Rated Final
Distribution Date .... As to each Class of Certificates (other than
the Class A-EC Certificates), , 2028.
Optional 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--Optional
Termination" herein.
Auction Call Date ..... After the Distribution Date occurring in
September 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.
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 two separate
"real estate mortgage investment conduits"
("REMIC").
ERISA ................. The Class A-1, Class A-2, Class A-3 and
Class A-EC Certificates should qualify for
an exemption from the prohibited transaction
provisions of ERISA. The other Classes of
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 September , 1996.
S-7
<PAGE>
Structural Summary:
Interest Payments ..... On each Distribution Date, each Class of
Certificates (other than the Class H-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 H-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, 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 H-1 Certificates,
to the Class H-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-1 and
Class H-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 separately to the Classes of
Regular Certificates (other than the Class
A-EC and Class H-2 Certificates) in reverse
alphabetical order starting with the Class
H-1 Certificates. Realized Losses allocated
to the Class H-1 Certificates will reduce
the Class H-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
S-8
<PAGE>
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 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 .. $379,109,545
Number of Mortgage Loans ................... 143
Weighted Average Mortgage Rate ............. 9.06%
Weighted Average Remaining Term to Maturity 119 months
Weighted Average DSCR (1) .................. 1.39x
Average Mortgage Loan Balance .............. $2,651,116
Balloon Mortgage Loans ..................... 94.4%
- ---------------
(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 DATE NUMBER OF MORTGAGE
CUT-OFF DATE PRINCIPAL BALANCE PRINCIPAL BALANCE LOANS
- ---------------------------------- ------------------ ------------------
$ 500,000 - $ 999,999 ............ 6.4% 29
$ 1,000,000 - $ 1,499,999 ............ 11.9% 35
$ 1,500,000 - $ 1,999,999 ............ 5.9% 13
$ 2,000,000 - $ 2,499,999 ............ 9.0% 15
$ 2,500,000 - $ 2,999,999 ............ 5.7% 8
$ 3,000,000 - $ 3,499,999 ............ 8.8% 10
$ 3,500,000 - $ 3,999,999 ............ 7.9% 8
$ 4,000,000 - $ 4,499,999 ............ 4.5% 4
$ 4,500,000 - $ 4,999,999 ............ 2.6% 2
$ 5,000,000 - $ 5,499,999 ............ 7.0% 5
$ 5,500,000 - $ 5,999,999 ............ 3.0% 2
$ 6,500,000 - $ 6,999,999 ............ 7.2% 4
$ 7,000,000 - $ 7,499,999 ............ 3.8% 2
$ 7,500,000 - $ 7,999,999 ............ 2.1% 1
$ 8,000,000 - $ 8,499,999 ............ 4.4% 2
$ 9,000,000 - $ 9,499,999 ............ 2.5% 1
$10,000,000 - $10,499,999 ............ 2.7% 1
$17,500,000 - $17,999,999 ............ 4.7% 1
S-9
<PAGE>
GEOGRAPHICAL DISTRIBUTION
% BY CUT-OFF DATE NUMBER OF MORTGAGE
JURISDICTION PRINCIPAL BALANCE LOANS
- ---------------- ------------------ ------------------
California ...... 13.3% 13
Texas ........... 11.3% 23
Illinois ........ 7.9% 9
New York ........ 7.1% 9
Ohio ............ 7.0% 9
Nevada .......... 6.5% 3
Other (1) ....... 46.9% 77
- ------------
(1) No other jurisdiction has Mortgage Loans aggregating more
than 4.3% of the Initial Pool Balance.
DEBT SERVICE COVERAGE RATIOS (1)
NUMBER
OF
% BY CUT-OFF DATE MORTGAGE
RANGE OF DEBT SERVICE COVERAGE RATIOS PRINCIPAL BALANCE LOANS
- -------------------------------------- ------------------ ---------
1.00-1.04 ................................ 3.6% 3
1.15-1.19 ................................ 0.8% 1
1.20-1.24 ................................ 1.2% 3
1.25-1.29 ................................ 27.4% 29
1.30-1.34 ................................ 20.6% 33
1.35-1.39 ................................ 12.6% 21
1.40-1.44 ................................ 9.5% 11
1.45-1.49 ................................ 7.3% 9
1.50-1.54 ................................ 4.3% 5
1.55-1.59 ................................ 3.3% 12
1.60-1.64 ................................ 3.7% 7
1.65-1.69 ................................ 1.3% 2
1.70-1.74 ................................ 0.2% 1
1.75-1.79 ................................ 0.1% 1
1.85-1.89 ................................ 0.3% 1
2.15-2.19 ................................ 1.0% 1
2.25-2.29 ................................ 0.5% 2
2.45-2.49 ................................ 2.1% 1
- ------------
(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-10
<PAGE>
LOAN TO VALUE RATIOS
% BY CUT-OFF DATE NUMBER OF MORTGAGE
RANGE OF LOAN TO VALUE RATIOS PRINCIPAL BALANCE LOANS
- --------------------------------- ------------------ ------------------
25.0% to less than 30.0% ......... 0.1% 1
30.0% to less than 35.0% ......... 0.9% 1
40.0% to less than 45.0% ......... 3.5% 5
45.0% to less than 50.0% ......... 0.6% 1
50.0% to less than 55.0% ......... 4.7% 14
55.0% to less than 60.0% ......... 6.3% 11
60.0% to less than 65.0% ......... 16.1% 29
65.0% to less than 70.0% ......... 24.4% 32
70.0% to less than 75.0% ......... 35.8% 45
75.0% to less than 80.0% ......... 7.5% 4
PROPERTY TYPES
% BY CUT-OFF DATE NUMBER OF MORTGAGE
PROPERTY TYPES PRINCIPAL BALANCE LOANS
- ------------------------------------- ------------------ ------------------
Congregate Care ...................... 4.0% 5
Hotel ................................ 6.6% 5
Industrial ........................... 3.3% 5
Mini Warehouse ....................... 0.6% 2
Mini Warehouse & Office/Warehouse ... 0.4% 1
Mobile Home Park ..................... 4.7% 5
Multifamily .......................... 41.4% 64
Nursing Home ......................... 1.0% 1
Office ............................... 10.7% 13
Office/Retail ........................ 2.0% 2
Retail, Anchored ..................... 12.5% 12
Retail, Single Tenant ................ 7.5% 17
Retail, Unanchored ................... 5.3% 11
MATURITY YEARS
% BY CUT-OFF DATE NUMBER OF MORTGAGE
YEAR PRINCIPAL BALANCE LOANS
- -------- ------------------ ------------------
1999 .... 0.6% 1
2001 .... 7.4% 10
2002 .... 5.2% 5
2003 .... 11.1% 10
2004 .... 0.6% 1
2005 .... 7.6% 7
2006 .... 35.2% 53
2008 .... 13.7% 26
2009 .... 0.1% 1
2010 .... 3.4% 3
2011 .... 14.1% 23
2012 .... 0.9% 3
DELINQUENCY STATUS AS OF SEPTEMBER 1, 1996
% BY CUT-OFF
DATE PRINCIPAL NUMBER OF
STATUS BALANCE MORTGAGE LOANS
- ---------------- -------------- --------------
No Delinquencies 100% 143
S-11
<PAGE>
PREPAYMENT LOCKOUT/PREMIUM ANALYSIS <F1>
PERCENTAGE OF MORTGAGE POOL BY PREPAYMENT
RESTRICTION ASSUMING NO PREPAYMENTS
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prepayment Restrictions
- -------------------------------
Lockout ........................ 8.0% 8.0% 6.2% 6.2% 6.2% 4.5% 4.5% 5.5% 5.6% 0.0% 0.0% 0.0%
Greater of Yield Maintenance or
Percentage Premium of:
5.00% or greater .............. 50.6% 50.6% 50.6% 49.6% 47.4% 42.6% 39.2% 47.3% 23.0% 12.9% 5.9% 2.6%
4.00% to 4.99% ................ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
3.00% to 3.99% ................ 6.9% 4.8% 6.7% 4.2% 3.2% 3.5% 3.6% 4.3% 2.6% 2.7% 6.6% 6.8%
2.00% to 2.99% ................ 0.0% 0.0% 0.0% 1.9% 0.0% 2.1% 2.2% 2.6% 2.6% 2.6% 0.0% 0.0%
1.00% to 1.99% ................ 5.4% 5.4% 5.4% 5.4% 7.2% 7.8% 7.9% 8.1% 8.1% 0.4% 0.0% 0.0%
0.00% to 0.99% ................ 28.7% 28.7% 28.7% 28.4% 25.1% 17.5% 14.5% 6.1% 5.9% 4.4% 3.2% 0.8%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total of Yield Maintenance .... 91.6% 89.5% 91.3% 89.4% 83.0% 73.4% 67.3% 68.5% 42.1% 22.9% 15.8% 10.2%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total of Yield Maintenance and
Lockout........................ 99.6% 97.5% 97.5% 95.6% 89.1% 77.9% 71.8% 74.0% 47.7% 22.9% 15.8% 10.2%
Percentage Premium:
5.00% or greater .............. 0.0% 2.1% 0.0% 1.9% 2.2% 6.8% 0.8% 0.0% 20.6% 10.3% 20.9% 4.7%
4.00 to 4.99% ................. 0.0% 0.0% 2.1% 0.0% 1.9% 2.9% 7.1% 1.0% 0.0% 1.6% 24.8% 0.9%
3.00 to 3.99% ................. 0.0% 0.0% 0.0% 2.2% 2.5% 2.1% 4.3% 15.5% 6.7% 0.0% 3.8% 23.0%
2.00 to 2.99% ................. 0.0% 0.0% 0.0% 0.0% 1.8% 8.1% 2.1% 6.6% 15.8% 0.8% 0.0% 3.8%
1.00 to 1.99% ................. 0.0% 0.0% 0.0% 0.0% 2.2% 0.8% 5.3% 2.6% 6.7% 10.4% 0.0% 0.0%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total with Percentage Premium . 0.0% 2.1% 2.1% 4.1% 10.6% 20.7% 19.7% 25.7% 49.8% 23.1% 49.5% 32.3%
Open ........................... 0.4% 0.4% 0.3% 0.3% 0.3% 1.4% 8.4% 0.3% 2.5% 54.0% 34.7% 57.5%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total ..........................100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
% of Initial Pool Balance <F2> .100.0% 98.7% 97.2% 95.0% 93.3% 84.9% 81.3% 65.5% 62.8% 59.5% 23.3% 21.8%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<FN>
<F1> This table sets forth an analysis of the percentage of the declining
balance of the Mortgage Pool that, on September 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>
(THE FOLLOWING TABLE HAS BEEN RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
2008 2009 2010 2011
------ ------ ------ ------
<S> <C> <C> <C> <C>
Prepayment Restrictions
- -------------------------------
Lockout ........................ 0.0% 0.0% 0.0% 0.0%
Greater of Yield Maintenance or
Percentage Premium of:
5.00% or greater .............. 0.0% 0.0% 0.0% 0.0%
4.00% to 4.99% ................ 0.0% 0.0% 0.0% 0.0%
3.00% to 3.99% ................ 0.0% 0.0% 0.0% 0.0%
2.00% to 2.99% ................ 0.0% 0.0% 0.0% 0.0%
1.00% to 1.99% ................ 0.0% 0.0% 0.0% 0.0%
0.00% to 0.99% ................ 0.2% 0.0% 0.0% 0.0%
------ ------ ------ ------
Total of Yield Maintenance .... 0.2% 0.0% 0.0% 0.0%
------ ------ ------ ------
Total of Yield Maintenance and
Lockout........................ 0.2% 0.0% 0.0% 0.0%
Percentage Premium:
5.00% or greater .............. 0.0% 0.0% 0.0% 0.0%
4.00 to 4.99% ................. 8.1% 0.0% 0.0% 0.0%
3.00 to 3.99% ................. 1.6% 8.1% 0.0% 0.0%
2.00 to 2.99% ................. 52.2% 1.6% 1.4% 0.0%
1.00 to 1.99% ................. 6.6% 52.5% 1.6% 73.2%
------ ------ ------ ------
Total with Percentage Premium . 68.5% 62.1% 2.9% 73.2%
Open ........................... 31.3% 37.9% 97.1% 26.8%
------ ------ ------ ------
Total .......................... 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
% of Initial Pool Balance <F2> . 11.6% 10.5% 9.5% 0.1%
<FN>
<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-12
<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-C1 (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-1 Certificates;
Class H-2 Certificates;
Class R Certificates; and
Class LR 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 September 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 AND CLASS E
CERTIFICATES ARE OFFERED HEREBY.
The Class A-EC, Class F, Class G, Class H-1,
Class H-2, Class R and Class LR 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.
S-13
<PAGE>
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 ........... September 1, 1996.
Closing Date ........... On or about September , 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 October 25, 1996. 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.
Record Date ............ With respect to each Distribution Date, the
close of business on the last Business Day
of the month preceding the month in wh
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 October,
1996 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 October 17, 1996.
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) two of the Mortgage Loans provide for
Monthly Payments to be due on the 15th day
of each month and (b) Loan #14 (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 and Class E 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
S-14
<PAGE>
herein. See "DESCRIPTION OF THE
CERTIFICATES--Delivery, Form and
Denomination" herein.
Distributions .......... On each Distribution Date, each Class of
Certificates (other than the Class H-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
H-1 and Class H-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 A-EC, Class H-1 and Class H-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 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 A-EC Certificates, the
"Class Interest Distribution Amount" will
equal (i) for any Distribution Date
occurring on or prior to the EC Maturity
Date, the Class A-EC Excess Interest and
(ii) thereafter, zero; 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. With respect
to any Distribution Date and the Class H-2
Certificates, the "Class Interest
Distribution Amount" will equal an amount
equal to the product of the Class H-2
Pass-Through Rate and the Class H-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 respect to such
Distribution Date, all as provided herein.
The Class H-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
S-15
<PAGE>
Certificates (other than the Class A-EC and
Class H-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 H-1
Certificates, to the Class H-2 Certificates)
and to any other outstanding Class that is
pari passu with such Class.
In addition, on each Distribution Date
following the EC Maturity Date, an amount
equal to the excess of Available Funds over
the amounts paid to all Classes of
Certificates in respect of interest,
principal and (other than with respect to
the Class H-1 Certificates) unreimbursed
Realized Losses (together with interest
thereon) on such Distribution Date will be
distributed in reduction of the Certificate
Balances of the Class G Certificates, then
the Class F Certificates, then the Class E
Certificates, then the Class D Certificates,
then the Class C Certificates, then the
Class B Certificates, then the Class A-1,
Class A-2 and Class A-3 Certificates, pro
rata, and finally the Class H-1
Certificates, in each case until the
Certificate Balance of each thereof has been
reduced to zero.
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.
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
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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 Class A-1,
Class A-2, Class A-3 and Class A-EC
Certificates against losses associated with
delinquent and defaulted Mortgage Loans, the
rights of the holders of the Class B, Class
C, Class D, Class E, Class F, Class G, Class
H-1 and Class H-2 Certificates to receive
distributions of interest and principal, as
applicable, will be subordinated to such
rights of the holders of the Class A-1,
Class A-2, Class A-3 and Class A-EC
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 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 addition, each Class of
Regular Certificates will have the benefit
of subordination of the Class LR and Class R
Certificates to the extent of any
distributions to which the Class LR and
Class R 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.
Optional Termination ... Any holder of the Class LR Certificates
representing more than a 50% Percentage
Interest of the Class LR 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--Optional
Termination" herein.
Auction Call Date ...... If the Trust Fund has not been terminated
earlier as described under "DESCRIPTION OF
THE CERTIFICATES--Optional Termination"
herein, the Trustee will
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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 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. 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 two separate real estate mortgage
investment conduits (each, a "Upper-Tier
REMIC" and the "Lower-Tier REMIC") 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-1 and Class H-2 Certificates
(collectively, the "Regular Certificates")
will represent "regular interests" in the
Upper-Tier REMIC and the Class R
Certificates will be designated as the sole
Class of "residual interest" in the
Upper-Tier REMIC. Certain uncertificated
classes of interests will represent "regular
interests" in the Lower-Tier REMIC (the
"Lower-Tier Regular Interests") and the
Class LR Certificates will be designated as
the sole Class of "residual interest" in the
Lower-Tier REMIC.
Because they represent regular interests,
the Class A-1, Class A-2, Class A-3, Class
B, Class C, Class D, Class E, Class F and
Class G 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 with respect to the Class
A-EC, Class H-1 and Class H-2 Certificates
as discussed below, the Certificates are not
expected to be treated for federal income
tax reporting purposes as having been issued
with original issue discount. None of the
payments on the Class A-EC, Class H-1 and
Class H-2 Certificates will qualify as
"qualified stated interest" under the
Treasury regulations relating to the
taxation of instruments with original issue
discount (the "OID Regulations"). If the OID
is not de minimis, a Certificateholder will
be required to include the OID in gross
income as it accrues, which may be prior to
the receipt of cash attributable to such
income. Accordingly, the Class A-EC and
Class H-2 Certificates will be issued with
original issue discount 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). The
Class H-1 Certificates will be issued with
original issue discount in an amount equal
to the excess of the Initial Certificate
Balances thereof over their issue price. For
the purposes of determining the rate of
accrual of market
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<PAGE>
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.
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
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 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 Class
A-1, Class A-2, Class A-3 and Class A-EC
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 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
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<PAGE>
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 CLASS B, CLASS C, CLASS D, CLASS E,
CLASS F, CLASS G, CLASS H-1 AND CLASS H-2
CERTIFICATES DO NOT MEET THE REQUIREMENTS OF
THE FOREGOING EXEMPTION AND, ACCORDINGLY,
THE CLASS B, CLASS C, CLASS D, CLASS E,
CLASS F, CLASS G, CLASS H-1 AND CLASS H-2
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. NEITHER THE
CLASS R CERTIFICATES NOR THE CLASS LR
CERTIFICATES MAY BE PURCHASED BY OR
TRANSFERRED TO A PLAN.
Ratings ................ It is anticipated that the Certificates will
have the following ratings: the Class A-1,
Class A-2 and Class A-3 Certificates each
will be rated "AAA" by each of Duff & Phelps
and S&P; the Class A-EC Certificates will be
rated "AAA" by Duff & Phelps and "AAAr" by
S&P; the Class B Certificates will be rated
"AA" by each of Duff & Phelps and S&P; the
Class C Certificates will be rated "A" by
each of Duff & Phelps and S&P; the Class D
Certificates will be rated "BBB" by each of
Duff & Phelps and S&P; the Class E
Certificates will be rated "BBB-" by each of
Duff & Phelps and S&P; the Class F
Certificates will be rated "BB" by each of
Duff & Phelps and S&P; and the Class G
Certificates will be rated "B" by each of
Duff & Phelps and S&P. The Class H-1, Class
H-2, Class R and Class LR Certificates are
unrated. It is anticipated that S&P's rating
of the Class A-EC Certificates will expire
on the earlier to occur of (i) the EC
Maturity Date and (ii) the first
Distribution Date on which the Class A-EC
Notional Component A is reduced to zero. 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 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
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 and
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
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<PAGE>
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 efficient 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 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 five
Mortgage Loans, representing approximately 6.6% 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.
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<PAGE>
Two of the Hotel Properties, are respectively a Comfort Inn franchise and
a Ramada Inn franchise. Another of the Hotel Properties is currently a
Holiday Inn franchise; provided, however, that such franchise expires as of
December 31, 1996, and such Hotel Property is expected to convert to a
Radisson franchise shortly thereafter. 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 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, SBMCG, 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 SBMCG 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 SBMCG will be in a financial position to
effect such repurchase. See "MIDLAND LOAN SERVICES, L.P.," "MIDLAND
COMMERCIAL FINANCING CORP." and "SMITH BARNEY MORTGAGE CAPITAL GROUP, INC."
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.
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Tax Considerations Related to Foreclosure. The Lower-Tier REMIC 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
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. If and as
principal payments or 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 (other than any amounts distributable pursuant to priority
thirty-fourth of the Available Funds Allocation), 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 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 concentrations of
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 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
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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 becomes defaulted. 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 have generally not been formed with
the intent that they be bankruptcy-remote entities. Such borrowers may be
more likely than bankruptcy-remote entities to become insolvent or the
subject of a voluntary or involuntary bankruptcy since such borrowers are (a)
operating businesses with the associated liabilities and risks of operating
an ongoing business, and (b) the owners of real estate and 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 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.
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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 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
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their respective representations or warranties concerning such Mortgage Loan
in the MCFC Mortgage Loan Purchase Agreement are breached, and (b) SBMCG 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 Smith Barney Mortgage Loan Purchase Agreement are
breached. However, there can be no assurance that either MCFC, Midland or
SBMCG, as applicable, will be in a financial position to effect such
repurchase. See "MIDLAND LOAN SERVICES, L.P.," "MIDLAND COMMERCIAL FINANCING
CORP." and "SMITH BARNEY MORTGAGE CAPITAL GROUP, INC." herein. MCFC and SBMCG
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 or SBMCG,
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 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 H-2 Certificates, such losses result in a
reduction of the Class A-EC Notional Balance or the Class H-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 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.
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
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Loans being higher or lower than anticipated by investors. In addition, in
the event of any repurchase of a Mortgage Loan by MCFC or SBMCG 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 H-2 Certificates, which
have no Certificate Balances, will be sensitive to the amount and timing of
principal distributions thereon (or in reduction of Notional Balance). 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 H-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 H-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 generally 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 such Classes 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 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.
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DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of 143 multifamily and commercial "whole"
mortgage loans (the "Mortgage Loans"). The Mortgage Loans have an aggregate
Cut-off Date Principal Balance of approximately $379,109,545 (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.
Each Mortgage Loan is evidenced by a promissory note (each, a "Note") and
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
Loan secured thereby, a "Retail, Unanchored Loan"). The percentage of the
Initial Pool Balance represented by each type of Mortgaged Property is as
follows:
PERCENTAGE OF INITIAL
PROPERTY TYPE POOL BALANCE NUMBER OF LOANS
- ------------------------ --------------------- ------------------
Congregate Care 4.0% 5
Hotel 6.6% 5
Industrial 3.3% 5
Mini Warehouse 0.6% 2
Mini Warehouse & Office/Warehouse 0.4% 1
Mobile Home Park 4.7% 5
Multifamily 41.4% 64
Nursing Home 1.0% 1
Office 10.7% 13
Office/Retail 2.0% 2
Retail, Anchored 12.5% 12
Retail, Single Tenant 7.5% 17
Retail, Unanchored 5.3% 11
Approximately 90.0% 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, SBMCG, Midland, the Master Servicer, the
Special Servicer, the Trustee or the Fiscal Agent or any of their respective
affiliates. Eighteen of the Mortgage Loans, representing approximately 8.1%
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,
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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 23 of the Mortgage Loans, representing approximately 12.1% 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.
One hundred of the Mortgage Loans (the "Midland Mortgage Loans"),
representing approximately 63.5% 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. One of the Midland Mortgage
Loans (Loan #14) was acquired by Midland from Prudential Securities
Incorporated ("PSI"), with the financing for such acquisition provided to
MCFC by Prudential Securities Credit Corp. ("PSCC"), an affiliate of PSI. See
"--The Midland Mortgage Loan Program--General."
Forty-three of the Mortgage Loans (the "Smith Barney Mortgage Loans"),
representing approximately 36.5% of the Initial Pool Balance, (a) were
originated either by Smith Barney Mortgage Capital Group, Inc. ("SBMCG") (an
affiliate of Smith Barney Inc.), or by correspondents of, or other entities
related to SBMCG, generally in accordance with SBMCG's customary underwriting
criteria and practices, with such exceptions thereto as are customarily
acceptable to commercial mortgage lenders, or (b) were acquired by SBMCG from
various unaffiliated banks, savings institutions or other entities in the
secondary market after evaluating each such Smith Barney Mortgage Loan using
SBMCG's customary underwriting criteria and practices, with such exceptions
thereto as are customarily acceptable to commercial mortgage lenders. SBMCG's
underwriting criteria and practices are described under "--SBMCG Underwriting
and Closing Procedures" herein.
MCFC acquired 97 of the Midland Mortgage Loans, all of which were
originated by Midland, pursuant to a Master Mortgage Loan Purchase Agreement
dated as of June 22, 1994, as amended, between MCFC and Midland. The
remaining three Midland Mortgage Loans were acquired by MCFC from Midland
pursuant to separate purchase agreements. The Smith Barney Mortgage Loans
were acquired by Midland pursuant to a Mortgage Loan Purchase and Sale
Agreement (the "Smith Barney Mortgage Loan Purchase Agreement") dated as of
September , 1996, between Midland and SBMCG.
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 September
, 1996 (the "Loan Purchase Closing Date"), between MCFC and the Depositor.
The Smith Barney Mortgage Loans, together with an assignment of Midland's
rights and remedies against SBMCG in respect of any breaches by SBMCG of
representations or warranties regarding the Smith Barney Mortgage Loans, will
be acquired by the Depositor on or before the Closing Date from Midland
pursuant to a Mortgage Loan Purchase and Sale Agreement (the "Midland
Mortgage Loan Purchase Agreement") dated as of September , 1996, between
the Depositor and Midland. MCFC and Midland 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 of MCFC or Midland with
respect to such Mortgage Loan, and (b) SBMCG will be obligated to repurchase
a Smith Barney Mortgage Loan in the event of a breach of a representation or
warranty made by SBMCG in the Smith Barney Mortgage Loan Purchase Agreement
with respect to such Mortgage Loan. MCFC, Midland and SBMCG each
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has only limited assets, and there can be no assurance that either MCFC,
Midland or SBMCG 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 SBMCG 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 SBMCG 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) one of the Mortgage Loans (Loan #48), representing approximately .7% 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) one of the Mortgage
Loans (Loan #58), representing approximately .6% 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) one of the
Mortgage Loans (Loan #14), representing approximately 1.5% 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. Eighteen of the Mortgage Loans, representing approximately 8.1% 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) one of the Mortgage Loans (Loan #60), which
represents approximately .6% 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) one of the Mortgage Loans (Loan #14), which represents approximately 1.5%
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 for the presence
of any hazardous substances affecting the Mortgaged Property, and (c) two of
the Mortgage Loans (Loan #124 and Loan #126), representing approximately .5%
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. One Mortgage Loan, representing
approximately .6% 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 October 31, 2011;
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. One Mortgaged Loan, representing approximately .7% of the
Initial Pool Balance, is secured by a first lien encumbering both the
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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 October 31, 2017. 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 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.
One Mortgage Loan (Loan #14), representing approximately 1.5% 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 September 15, 1983 deed creating such estate for years executed
by K-Mart Corporation, 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 K-Mart 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 October 1, 2008, 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
five months prior to the termination date of the estate for years).
Purchase Options; Rights of First Refusal. With respect to Loan #19, which
represents approximately 1.3% 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 #26, which represents approximately 1.0%
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 #14,
which represents approximately 1.5% 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 #137, which represents approximately .2% of the Initial
Pool Balance, the former 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 November 20, 2005. With respect to Loan #114, which represents
approximately .3% 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
$10,000,000). 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.
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.
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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 MCFC's 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:
MINIMUM MAXIMUM
PROPERTY TYPE DSCR MAXIMUM LTV AMORTIZATION 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
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
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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 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.
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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;
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.
SBMCG UNDERWRITING AND CLOSING PROCEDURES
Based upon information obtained from SBMCG, which has not been
independently verified for accuracy or completeness by any of the Depositor,
the Underwriters, the Trustee, the Master Servicer, the Special Servicer,
MCFC or Midland, the following is a general summary of the customary
underwriting policies and procedures typically utilized by SBMCG in
connection with its underwriting of the Smith Barney Mortgage Loans.
SBMCG's customary underwriting policies and procedures generally require
an evaluation of the Mortgaged Property, including an inspection, appraisal
(generally dated no more than six months prior to the origination of the
related loan), engineering report and environmental report. Other factors
typically analyzed in connection with a Mortgaged Property include occupancy
rates, size, type, condition (including mechanical systems and appearance),
location (including trade area), accessibility and visibility, property
interest to be mortgaged (fee or leasehold), compliance with applicable laws
(including environmental laws, ADA and zoning), location relative to areas of
flood hazard and potential environmental concerns.
SBMCG generally determines the initial maximum amount of a proposed loan
through an analysis of historical and current financial information provided
by a prospective borrower with respect to the proposed Mortgaged Property.
This economic analysis of a proposed loan is generally based on a pro forma
operating statement developed by SBMCG using actual lease terms, comparable
market data and information contained in the appraisal of the proposed
Mortgaged Property. Gross potential income is underwritten using (a) for
multi family Mortgaged Properties, either the immediately prior 12 months
trailing income or an annualization of the current rent roll, and (b) for
commercial Mortgaged Properties, the lower of actual income based on the
current rent roll or market rental rates. Other income is included on a basis
consistent with current leases and contracts, past operating performance and
current market trends. SBMCG's standard underwriting procedures call for the
use of realistic vacancy factors and lease concessions. The underwriting
standards generally require use of a vacancy rate equal to the greater of 5%,
the vacancy rate in the submarket or the proposed Mortgaged Property's
historical vacancy rate (with allowance for current trends). Furthermore,
SBMCG's standard underwriting procedures indicate that a management fee
(equal to the greater of 5% or prevailing market fee) should generally be
included in pro forma operating expenses, regardless of whether the
prospective borrower includes such items in its calculation of expenses, and
generally require a funded replacement reserve and, in the case of commercial
properties, funded reserves for tenant improvements and leasing commissions.
In addition, SBMCG's customary underwriting policies and procedures generally
require that each proposed Mortgaged Property meet certain minimum criteria,
including occupancy percentage (generally 90% for multi-family properties and
85% for commercial properties), DSCR (generally 1.25 for multi-family
properties and 1.30 for commercial properties) and loan-to-value ratio
(generally 75%). Actual occupancy percentages, debt service
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coverage ratios, loan-to-value ratios and other criteria for the Smith Barney
Mortgage Loans may and do vary from the guidelines described above. See
"--Certain Characteristics of the Mortgage Pool" herein and "Annex A" hereto.
SBMCG's customary underwriting policies and procedures generally require
that the prospective borrower and its key principal(s) be analyzed, including
an analysis of credit information, equity in the proposed Mortgaged Property,
overall financial strength and past experience. SBMCG typically also
evaluates the capabilities of the proposed property management by reviewing
such factors as training, experience, size of staff relative to the features
of the proposed Mortgaged Property, tenant mix of the proposed Mortgaged
Property, management's past performance record, reporting and control
procedures (to determine its ability to recognize and respond to problems)
and accounting procedures (to determine its cash management ability).
In connection with a proposed commercial Mortgaged Property, SBMCG
typically reviews a variety of issues regarding the anticipated tenants
(particularly those contributing more than 10% of income or occupying over
5,000 square feet), including credit worthiness, tenant mix, lease terms and
expiration dates.
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) two of the Mortgage
Loans, representing approximately .4% of the Initial Pool Balance, provide
for Monthly Payments to be due on the 15th day of each month, and (b) one of
the Mortgage Loans, which represents approximately 1.5% 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
#142, which represents approximately .1% 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 #142, 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 3% 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.
Additionally, with respect to one Mortgage Loan, representing approximately
2.1% of the Initial Pool Balance, the related Mortgage Note provides that (a)
the stated interest rate is to increase by 1/8th of 1%, with an immediate
corresponding adjustment in the Monthly Payments, each time the borrower
fails to use union labor in connection with certain work at the Mortgaged
Property, and (b) the principal amount of such Mortgage Loan is to increase
by $1,000.00, which increase is to be added to the applicable Balloon
Payment, each time the borrower fails to deliver timely any required
financial statements, certificates, documents, statements or summaries. Three
of the Mortgage Loans, representing approximately .5% of the Initial Pool
Balance, accrue interest on the basis of actual days elapsed in a 365-day
year, one Mortgage Loan, representing approximately 1.0% 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. One hundred thirty-two of the Mortgage Loans
(the "Balloon Loans"), which represent approximately 94.4% 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. Eleven of the Mortgage
Loans, which represent approximately 5.6% 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 51%.
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 five of the
Mortgage Loans, representing approximately 4.6% 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 eleven
of the Mortgage Loans,
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<PAGE>
representing approximately 11.2% 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 two of the Mortgage
Loans, representing approximately .4% 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 two of the Balloon Loans, representing approximately 1.2% 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. The "Prepayment Lockout/Premium
Analysis" table set forth below 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 September 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:
(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 $75,061.98 are
made under the Quarterly Payment Loan on the first of each month
during its term;
(3) That the Monthly Payments under the two Mortgage Loans that
require Monthly Payments to be made on the 15th 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 September 15, 1996
payment is made on October 1, 1996);
(4) That the stated interest rate for Loan #142 remains fixed at
9.90% and does not adjust on its change date;
(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; and
(7) That Mortgage Loan #60 is comprised of two components, one with
a Cut-off Date Principal Balance of $2,209,140.89, an interest rate
of 11.38% and a Monthly Payment of $24,184.95, and the other with a
Cut-off Date Principal Balance of $78,529.40, an interest rate of
12.88% and a Monthly Payment of $3,242.00.
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<PAGE>
PREPAYMENT LOCKOUT/PREMIUM ANALYSIS
PERCENTAGE OF MORTGAGE POOL BY PREPAYMENT
RESTRICTION ASSUMING NO PREPAYMENTS
<TABLE>
<CAPTION>
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prepayment Restrictions
- -------------------------------
Lockout ........................ 8.0% 8.0% 6.2% 6.2% 6.2% 4.5% 4.5% 5.5% 5.6% 0.0% 0.0% 0.0%
Greater of Yield Maintenance or
Percentage Premium of:
5.00% or greater .............. 50.6% 50.6% 50.6% 49.6% 47.4% 42.6% 39.2% 47.3% 23.0% 12.9% 5.9% 2.6%
4.00% to 4.99% ................ 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
3.00% to 3.99% ................ 6.9% 4.8% 6.7% 4.2% 3.2% 3.5% 3.6% 4.3% 2.6% 2.7% 6.6% 6.8%
2.00% to 2.99% ................ 0.0% 0.0% 0.0% 1.9% 0.0% 2.1% 2.2% 2.6% 2.6% 2.6% 0.0% 0.0%
1.00% to 1.99% ................ 5.4% 5.4% 5.4% 5.4% 7.2% 7.8% 7.9% 8.1% 8.1% 0.4% 0.0% 0.0%
0.00% to 0.99% ................ 28.7% 28.7% 28.7% 28.4% 25.1% 17.5% 14.5% 6.1% 5.9% 4.4% 3.2% 0.8%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total of Yield Maintenance .... 91.6% 89.5% 91.3% 89.4% 83.0% 73.4% 67.3% 68.5% 42.1% 22.9% 15.8% 10.2%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total of Yield Maintenance and
Lockout........................ 99.6% 97.5% 97.5% 95.6% 89.1% 77.9% 71.8% 74.0% 47.7% 22.9% 15.8% 10.2%
Percentage Premium:
5.00% or greater .............. 0.0% 2.1% 0.0% 1.9% 2.2% 6.8% 0.8% 0.0% 20.6% 10.3% 20.9% 4.7%
4.00 to 4.99% ................. 0.0% 0.0% 2.1% 0.0% 1.9% 2.9% 7.1% 1.0% 0.0% 1.6% 24.8% 0.9%
3.00 to 3.99% ................. 0.0% 0.0% 0.0% 2.2% 2.5% 2.1% 4.3% 15.5% 6.7% 0.0% 3.8% 23.0%
2.00 to 2.99% ................. 0.0% 0.0% 0.0% 0.0% 1.8% 8.1% 2.1% 6.6% 15.8% 0.8% 0.0% 3.8%
1.00 to 1.99% ................. 0.0% 0.0% 0.0% 0.0% 2.2% 0.8% 5.3% 2.6% 6.7% 10.4% 0.0% 0.0%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total with Percentage Premium . 0.0% 2.1% 2.1% 4.1% 10.6% 20.7% 19.7% 25.7% 49.8% 23.1% 49.5% 32.3%
Open ........................... 0.4% 0.4% 0.3% 0.3% 0.3% 1.4% 8.4% 0.3% 2.5% 54.0% 34.7% 57.5%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total .......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
% of Initial Pool Balance <F1> . 100.0% 98.7% 97.2% 95.0% 93.3% 84.9% 81.3% 65.5% 62.8% 59.5% 23.3% 21.8%
====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
<FN>
<F1> 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>
(THE FOLLOWING TABLE HAS BEEN RESTUBBED FROM ABOVE)
<TABLE>
<CAPTION>
2008 2009 2010 2011
------ ------ ------ ------
<S> <C> <C> <C> <C>
Prepayment Restrictions
- -------------------------------
Lockout ........................ 0.0% 0.0% 0.0% 0.0%
Greater of Yield Maintenance or
Percentage Premium of:
5.00% or greater .............. 0.0% 0.0% 0.0% 0.0%
4.00% to 4.99% ................ 0.0% 0.0% 0.0% 0.0%
3.00% to 3.99% ................ 0.0% 0.0% 0.0% 0.0%
2.00% to 2.99% ................ 0.0% 0.0% 0.0% 0.0%
1.00% to 1.99% ................ 0.0% 0.0% 0.0% 0.0%
0.00% to 0.99% ................ 0.2% 0.0% 0.0% 0.0%
------ ------ ------ ------
Total of Yield Maintenance .... 0.2% 0.0% 0.0% 0.0%
------ ------ ------ ------
Total of Yield Maintenance and
Lockout........................ 0.2% 0.0% 0.0% 0.0%
Percentage Premium:
5.00% or greater .............. 0.0% 0.0% 0.0% 0.0%
4.00 to 4.99% ................. 8.1% 0.0% 0.0% 0.0%
3.00 to 3.99% ................. 1.6% 8.1% 0.0% 0.0%
2.00 to 2.99% ................. 52.2% 1.6% 1.4% 0.0%
1.00 to 1.99% ................. 6.6% 52.5% 1.6% 73.2%
------ ------ ------ ------
Total with Percentage Premium . 68.5% 62.1% 2.9% 73.2%
Open ........................... 31.3% 37.9% 97.1% 26.8%
------ ------ ------ ------
Total .......................... 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
% of Initial Pool Balance <F1> . 11.6% 10.5% 9.5% 0.1%
====== ====== ====== ======
<FN>
<F1> 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>
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<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
eleven of the Mortgage Loans, representing approximately 3.8% 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 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
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<PAGE>
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 #143, which represents approximately .1% 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 at least equal to 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 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
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<PAGE>
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 one Mortgage Loan, representing approximately .6% of the Initial
Pool Balance, a prior mortgagee has previously made a remedial advance in the
amount of $125,452.21 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 1.5% over the stated interest
rate for such Mortgage Loan, and that such advance will be repaid over the
remaining term of such Mortgage Loans. 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.
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 #1) has a Cut-off Date Principal Balance that represents approximately
4.7% of the Initial Pool Balance provided, however, that three Mortgage Loans
which were made to affiliated entities, when considered together, represent
approximately 7.1% of the Initial Pool Balance. The five largest individual
Mortgage Loans have Cut-off Date Principal Balances that represent in the
aggregate approximately 14.3% of the Initial Pool Balance.
The Mortgage Pool consists of 143 Mortgage Loans to 130 separate
borrowers. Sixteen of the Mortgage Loans were made to a borrower which was
also the borrower in one or more of the other Mortgage Loans. Thirty-six 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 7.1% of the Initial Pool Balance. Twenty-four
Mortgage Loans (representing approximately 11.3% 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.
S-41
<PAGE>
<TABLE>
<CAPTION>
LOAN RELATIONSHIP OF
NUMBERS % BORROWER(S) CROSS-COLLATERALIZED AND CROSS-DEFAULTED
<S> <C> <C> <C>
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #12 and Loan #16 3.2% Same Borrower No
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #27, Loan #32 and Loan 2.6% Same Borrower Loan #27 and Loan #58 are
#58 cross-collateralized with each other,
while Loan #32 is not
cross-collateralized with either such
Loan.
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #93, Loan #94, 2.7% Same Borrower Yes
Loan #99, Loan #127,
Loan #129, Loan #131, Loan
#132, Loan #133, Loan #135,
Loan #136 and Loan #137
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #43 and Loan #76 1.2% Affiliated Entities Yes
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #61, Loan #72 and 1.4% Affiliated Entities No
Loan #101
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #44 and Loan #51 1.5% Affiliated Entities No
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #25, Loan #40, 4.1% Affiliated Entities No
Loan #46, Loan #50 and Loan
#52
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #124 and Loan #126 .4% Affiliated Entities No
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #128, Loan #142 and .4% Affiliated Entities Yes
Loan #143
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #83 and Loan #120 .7% Affiliated Entities Yes
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #118 and Loan #138 .5% Affiliated Entities No
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #139 and Loan #140 .4% Affiliated Entities Yes
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #78 and Loan #96 .7% Affiliated Entities No
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #1, Loan #8 and Loan 7.1% Affiliated Entities No
#73
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #84 and Loan #105 .7% Affiliated Entities No
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #5, Loan #7 and Loan 4.6% Affiliated Entities Loan #5 and Loan #7 are
#64 cross-collateralized with each other,
while Loan #64 is not
cross-collateralized with either such
Loan.
- ---------------------------- -------- ------------------- -----------------------------------------
Loan #33, Loan #74 and Loan 1.7% Affiliated Entities No
#89
- ---------------------------- -------- ------------------- -----------------------------------------
</TABLE>
Geographic Concentration. The Mortgaged Properties are located in 29
states, Puerto Rico and the District of Columbia. Thirteen of the Mortgage
Loans, which represent approximately 13.3% of the Initial Pool Balance, are
secured by liens on Mortgaged Properties located in California; 23 of the
Mortgage Loans, which represent approximately 11.3% of the Initial Pool
Balance, are secured by liens on Mortgaged Properties located in Texas; nine
of the Mortgage Loans, which represent approximately 7.9% of the Initial Pool
Balance, are secured by liens on Mortgaged Properties located in Illinois;
nine of the Mortgage Loans, which represent approximately 7.1% of the Initial
Pool Balance, are secured by liens on Mortgaged Properties located in New
York; nine of the Mortgage Loans, which represent approximately 7.0% of the
Initial
S-42
<PAGE>
Pool Balance, are secured by liens on Mortgaged Properties located in Ohio;
and three of the Mortgage Loans, which represent approximately 6.5% of the
Initial Pool Balance, are secured by liens on Mortgaged Properties located in
Nevada. The remaining Mortgaged Properties are located throughout 23 other
states, Puerto Rico and the District of Columbia, with no more than 4.3% 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) SBMCG or MCFC within seven months of the
respective dates such Mortgaged Loans were acquired by SBMCG or MCFC, and (b)
the Mortgaged Properties have been subject to environmental site assessments
within 32 months preceding the Cut-off Date. No environmental site
assessments were obtained with respect to three of the Mortgage Loans
(representing approximately .5% of the Initial Pool Balance), the
environmental site assessment obtained with respect to one of the Mortgage
Loans (representing approximately .5% 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 two of the
Mortgage Loans (representing approximately .5% of the Initial Pool Balance),
were obtained approximately 28 months and 21 months, respectively, prior to
the respective origination dates of such Mortgage Loans, and approximately 60
months and 53 months, respectively, prior to the Cut-off Date. A search of
available governmental databases containing information regarding properties
with known environmental contamination will be conducted with respect to each
of the Mortgaged Properties in which the applicable environmental site
assessment was dated more than 12 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. With respect to one Mortgage Loan (Loan #88),
representing approximately .4% of the Initial Pool Balance, the related
Mortgaged Property is located within the boundaries of a CERCLIS Site related
to a former gold extraction facility. The related borrower was required to
obtain an acceptable environmental insurance policy. With respect to one
Mortgage Loan (Loan #37), representing approximately .9% of the Initial Pool
Balance, the groundwater at the related Mortgaged Property is contaminated by
petroleum hydrocarbons originating from an adjacent gas station owned by the
borrower. Until such time as the related borrower obtains an acceptable
"no-action" letter from the appropriate governmental authority, such borrower
is required to maintain an acceptable environmental insurance policy.
Investors should understand that the results of the environmental site
assessments do not constitute an assurance or guaranty by the Depositor, the
Originators, MCFC, SBMCG, 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 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
thirteen of the Mortgage Loans, representing approximately 13.8% 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
S-43
<PAGE>
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%).
With respect to one Mortgage Loan (Loan #14), representing approximately
1.5% of the Initial Pool Balance, the related Mortgage Loan documents and an
existing lease with K-Mart Corporation provide that under certain
circumstances set forth therein, K-Mart has the right to require the borrower
to obtain financing for additional improvements K-Mart desires to complete
with respect to the Mortgaged Property, and that the holder of the Mortgage
Loan possesses a right of first refusal to provide the financing for such
improvements. If such holder does not offer to provide such financing upon
terms otherwise available to the borrower from another lender, the borrower
is entitled to obtain such financing from such other lender and the related
Mortgage is to be amended to add any additional real estate obtained with the
proceeds of such new financing as additional Mortgaged Property and to
provide that such Mortgage also secures such new financing on an equal and
ratable basis with the original Mortgage Loan. Although the K-Mart lease
indicates that an intercreditor agreement granting the original lender
control over available remedies upon a default by the borrower is a required
condition to such other financing, the related Mortgage is ambiguous as to
the specific rights accorded the original lender or such other lender(s). The
rights of any such other lender under the related Mortgage could have an
adverse effect on the ability of the Master Servicer or the Special Servicer,
as the case may be, to foreclose on the related Mortgaged Property or
otherwise exercise rights or remedies under such Mortgage following a default
by the related borrower, and thus, could have a negative effect on
distributions to Certificateholders.
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. Twenty-four 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 22 of the Mortgage Loans,
representing approximately 12.3% 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 #14, the related Major Tenant has generally assumed, in addition to the
foregoing, all other responsibilities related to the entire Mortgage
Property. With 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
S-44
<PAGE>
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 SBMCG and net operating income and cash flow reflected on the borrowers'
financial statements represent the adjustments made by MCFC and SBMCG
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 SBMCG 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
SBMCG to determine "Net Operating Income," "Cash Flow," "Underwritten NOI,"
and "Underwritten Cash Flow."
NEITHER "NET OPERATING INCOME," "CASH FLOW," "UNDERWRITTEN NOI" NOR
"UNDERWRITTEN CASH FLOW" IS INTENDED TO BE OR IS A SUBSTITUTE FOR OR AN
IMPROVEMENT UPON PROPERLY DETERMINED 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" OR "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, SBMCG, 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 expenses of operation) 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 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 SBMCG 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 SBMCG 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.
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<PAGE>
(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 SBMCG, as
applicable, in accordance with their underwriting guidelines for similar
properties. Although there are differences in the underwriting guidelines
of MCFC and SBMCG, 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 SBMCG, 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 respect to such Mortgage Loan
during the 12-month period commencing on the Cut-off Date (assuming no
principal prepayments occur).
(7) "DSCR" or "Debt Service Coverage Ratio" 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" 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" 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 SBMCG, 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 Stated Maturity" for any Mortgage Loan is
determined by (a) subtracting 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.
(15) "Remaining Amortization Term" for any Mortgage Loan (except Loan
#14) 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. For Loan #14,
the "Remaining Amortization Term" is deemed to be equal to such Mortgage
Loan's "Remaining Term to Stated Maturity."
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<PAGE>
(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 #1, Loan #2, Loan #24, Loan #62,
Loan #73, Loan #78, Loan #111 and Loan #140 was provided by SBMCG.
(17) The "Occupancy Percentage" and "Occupancy Date" for each Mortgage
Loan are based upon rent information received by MCFC or SBMCG, 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 SBMCG, 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 #14 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 $189,254, while the largest quarterly
loan payment, in the amount of $308,128, is scheduled to occur on October
1, 2007. 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) Loan #60 is comprised of two components: (a) a component with a
Cut-off Date Principal Balance of $2,209,140.89, an interest rate of
11.38% and a Monthly Payment of $24,184.95; and (b) a component with a
Cut-off Date Principal Balance of $78,529.40, an interest rate of 12.88%
and a Monthly Payment of $3,242.00. With respect to the information
regarding this Mortgage Loan in the following tables and Annex A: (1) the
Cut-off Date Principal Balance reflects the sum of both of the Cut-off
Date Principal Balances described above; and (2) the interest rate
reflects the weighted average of both of the interest rates described
above. The "Original Amortization Term" for this Mortgage Loan is based on
such Mortgage Loan's original principal balance and the interest rate and
Monthly Payment described in item (a) above. The "Remaining Amortization
Term" for this Mortgage Loan is equal to the Original Amortization Term
less the number of months from and including such Mortgage Loan's first
scheduled payment date to and including the Cut-off Date. The "Original
Term to Maturity" for this Mortgage Loan is equal to the number of months
from and including such Mortgage Loan's first scheduled payment date to
and including its scheduled maturity date. The "Remaining Term to
Maturity" for this Mortgage Loan is equal to its Original Term to Maturity
less the number of months from and including such Mortgage Loan's first
scheduled payment date to and including the Cut-off Date.
(21) Each of Loan #35, Loan #82 and Loan #87 is secured by two
Multifamily Properties, while Loan #52 is secured by two Congregate Care
Properties. The "Number of Units," "Appraised Value," "Current Occupancy,"
"Underwritten NOI," "Underwritten 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.
(22) The Monthly Payments for each of Loan #128 and Loan #143 are to be
paid on the 15th 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 August 15, 1996.
(23) With respect to Loan #60, 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.
(24) The Mortgaged Property securing Loan #139 was constructed in two
phases, with 16 of the 32 total units being constructed in 1930, with the
remaining 16 units being constructed during the 1960's.
(25) Due to rounding, percentages may not add to 100% and amounts may not
add to the indicated total.
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<PAGE>
RANGE OF CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
RANGE OF CUT-OFF BALANCES BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- ------------------------- -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 500,000 - $ 999,999 $ 24,133,020 6.4% 29 20.3% 9.12% 1.50 119
$ 1,000,000 - $ 1,499,999 $ 45,030,445 11.9% 35 24.5% 9.08% 1.39 129
$ 1,500,000 - $ 1,999,999 $ 22,374,650 5.9% 13 9.1% 9.02% 1.34 135
$ 2,000,000 - $ 2,499,999 $ 33,930,444 9.0% 15 10.5% 9.31% 1.37 108
$ 2,500,000 - $ 2,999,999 $ 21,429,739 5.7% 8 5.6% 9.02% 1.46 146
$ 3,000,000 - $ 3,499,999 $ 33,229,770 8.8% 10 7.0% 8.82% 1.40 136
$ 3,500,000 - $ 3,999,999 $ 30,091,421 7.9% 8 5.6% 9.20% 1.43 119
$ 4,000,000 - $ 4,499,999 $ 17,093,157 4.5% 4 2.8% 9.07% 1.35 121
$ 4,500,000 - $ 4,999,999 $ 9,844,740 2.6% 2 1.4% 9.56% 1.31 118
$ 5,000,000 - $ 5,499,999 $ 26,478,607 7.0% 5 3.5% 8.99% 1.36 124
$ 5,500,000 - $ 5,999,999 $ 11,280,200 3.0% 2 1.4% 10.73% 1.15 141
$ 6,500,000 - $ 6,999,999 $ 27,468,362 7.2% 4 2.8% 8.80% 1.26 136
$ 7,000,000 - $ 7,499,999 $ 14,539,782 3.8% 2 1.4% 8.35% 1.30 112
$ 7,500,000 - $ 7,999,999 $ 7,888,907 2.1% 1 0.7% 9.00% 2.46 111
$ 8,000,000 - $ 8,499,999 $ 16,734,735 4.4% 2 1.4% 8.43% 1.38 93
$ 9,000,000 - $ 9,499,999 $ 9,391,985 2.5% 1 0.7% 9.27% 1.39 83
$10,000,000 - $10,499,999 $ 10,400,000 2.7% 1 0.7% 9.46% 1.42 84
$17,500,000 - $17,999,999 $ 17,769,582 4.7% 1 0.7% 8.78% 1.25 58
$379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY LOAN BALANCE
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
Cut-off Date Principal Balances reflected in the above table the number of
Mortgage Loans and the Aggregate Cut-off Date Principal Balance for each such
range.
S-48
<PAGE>
RANGE OF MORTGAGE RATES
<TABLE>
<CAPTION>
AGGREGATE PCT BY AGGREGATE WEIGHTED
CUT-OFF DATE CUT-OFF DATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
PRINCIPAL PRINCIPAL MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
RANGE OF MORTGAGE RATES BALANCE BALANCE LOANS BY NUMBER RATE DSCR MATURITY
- ----------------------- -------------- ---------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
7.50% - 7.74% $ 6,787,544 1.8% 1 0.7% 7.64% 1.32 76
7.75% - 7.99% $ 1,145,254 0.3% 1 0.7% 7.96% 1.59 78
8.00% - 8.24% $ 35,051,138 9.2% 11 7.7% 8.15% 1.42 110
8.25% - 8.49% $ 8,240,958 2.2% 4 2.8% 8.44% 1.37 112
8.50% - 8.74% $ 63,462,775 16.7% 25 17.5% 8.63% 1.41 116
8.75% - 8.99% $ 61,576,677 16.2% 20 14.0% 8.86% 1.34 107
9.00% - 9.24% $ 51,965,746 13.7% 19 13.3% 9.10% 1.51 131
9.25% - 9.49% $ 86,274,486 22.8% 32 22.4% 9.35% 1.37 124
9.50% - 9.74% $ 39,407,852 10.4% 18 12.6% 9.63% 1.37 141
9.75% - 9.99% $ 15,895,803 4.2% 9 6.3% 9.82% 1.38 113
10.50% - 10.74% $ 1,477,426 0.4% 1 0.7% 10.50% 1.41 64
11.25% - 11.49% $ 2,287,670 0.6% 1 0.7% 11.44% 1.25 32
12.25% - 12.49% $ 5,536,216 1.5% 1 0.7% 12.35% 1.00 139
$379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY MORTGAGE RATE
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
Mortgage Rates reflected in the above table the number of
Mortgage Loans and the Aggregate Cut-off Date Principal Balance for each such
range.
S-49
<PAGE>
RANGE OF REMAINING TERM OF AMORTIZATION (IN MONTHS)
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
AMOUNT (IN MONTHS) BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- ------------------ -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
132 to 144 $ 6,945,004 1.8% 3 2.1% 11.79% 1.07 139
156 to 168 $ 1,750,885 0.5% 2 1.4% 9.40% 1.43 162
168 to 180 $ 8,862,323 2.3% 3 2.1% 8.85% 1.33 176
180 to 192 $ 3,577,656 0.9% 3 2.1% 9.15% 1.25 189
204 to 216 $ 3,208,584 0.8% 2 1.4% 10.67% 1.26 38
228 to 240 $ 51,262,501 13.5% 26 18.2% 8.99% 1.62 142
240 to 252 $ 3,500,000 0.9% 2 1.4% 9.70% 1.47 139
264 to 276 $ 4,755,732 1.3% 5 3.5% 9.06% 1.46 87
276 to 288 $ 8,810,498 2.3% 2 1.4% 8.84% 1.34 104
288 to 300 $189,798,721 50.1% 69 48.3% 9.12% 1.36 127
300 to 312 $ 10,400,000 2.7% 1 0.7% 9.46% 1.42 84
324 to 336 $ 6,149,569 1.6% 4 2.8% 9.44% 1.54 70
336 to 348 $ 9,367,936 2.5% 4 2.8% 8.84% 1.30 86
348 to 360 $ 70,720,139 18.7% 17 11.9% 8.55% 1.35 88
WTD AVG TERM 291 $379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY REMAINING AMORTIZATION
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
Remaining Term of Amortization (in months) reflected in the above table the
number of Mortgage Loans and the Aggregate Cut-off Date Principal Balance
for each such range.
S-50
<PAGE>
RANGE OF MATURITY YEARS
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
YEAR OF MATURITY BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- ---------------- -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1999 $ 2,287,670 0.6% 1 0.7% 11.44% 1.25 32
2001 $ 28,063,505 7.4% 10 7.0% 8.96% 1.34 58
2002 $ 19,590,155 5.2% 5 3.5% 8.21% 1.35 74
2003 $ 41,999,457 11.1% 10 7.0% 9.08% 1.38 82
2004 $ 2,463,859 0.6% 1 0.7% 9.80% 1.37 92
2005 $ 28,843,703 7.6% 7 4.9% 8.70% 1.73 110
2006 $133,535,015 35.2% 53 37.1% 8.98% 1.38 116
2008 $ 51,788,425 13.7% 26 18.2% 9.54% 1.31 141
2009 $ 561,586 0.1% 1 0.7% 9.90% 1.78 156
2010 $ 12,945,175 3.4% 3 2.1% 9.13% 1.41 170
2011 $ 53,453,340 14.1% 23 16.1% 9.18% 1.35 176
2012 $ 3,577,656 0.9% 3 2.1% 9.15% 1.25 189
$379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY MATURITY YEAR
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
Maturity Years reflected in the above table the number of Mortgage Loans
and the Aggregate Cut-off Date Principal Balance for each such range.
S-51
<PAGE>
RANGE OF LOAN ORIGINATION YEARS
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
YEAR OF ORIGINATION BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- ------------------- -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1989 $ 2,287,670 0.6% 1 0.7% 11.44% 1.25 32
1993 $ 7,865,917 2.1% 4 2.8% 11.44% 1.10 129
1994 $ 13,875,880 3.7% 11 7.7% 9.56% 1.48 68
1995 $ 80,781,495 21.3% 20 14.0% 8.57% 1.51 113
1996 $274,298,582 72.4% 107 74.8% 9.09% 1.36 124
$379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY ORIGINATION DATE
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
Loan Origination Years reflected in the above table the number of
Mortgage Loans and the Aggregate Cut-off Date Principal Balance for each such
range.
S-52
<PAGE>
RANGE OF LTVS
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
RANGE OF LTV BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- ------------------ -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
25.0% to less than 30.0% $ 561,586 0.1% 1 0.7% 9.90% 1.78 156
30.0% to less than 35.0% $ 3,494,019 0.9% 1 0.7% 9.28% 1.51 178
40.0% to less than 45.0% $ 13,152,248 3.5% 5 3.5% 8.93% 2.14 120
45.0% to less than 50.0% $ 2,287,670 0.6% 1 0.7% 11.44% 1.25 32
50.0% to less than 55.0% $ 17,694,987 4.7% 14 9.8% 9.18% 1.45 143
55.0% to less than 60.0% $ 24,024,725 6.3% 11 7.7% 9.24% 1.40 114
60.0% to less than 65.0% $ 61,224,759 16.1% 29 20.3% 9.08% 1.42 129
65.0% to less than 70.0% $ 92,572,468 24.4% 32 22.4% 9.11% 1.41 124
70.0% to less than 75.0% $135,537,795 35.8% 45 31.5% 8.97% 1.31 119
75.0% to less than 80.0% $ 28,559,289 7.5% 4 2.8% 8.89% 1.26 72
WTD AVG LTV 66.62% $379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY LTV
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
LTVs reflected in the above table the number of Mortgage Loans and the
Aggregate Cut-off Date Principal Balance for each such range.
S-53
<PAGE>
RANGE OF DSCRS
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
RANGE OF PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
DSCR(X) BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- -------------- -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1.00 -1.04 $ 13,834,109 3.6% 3 2.1% 10.61% 1.00 152
1.15 -1.19 $ 2,984,425 0.8% 1 0.7% 9.24% 1.18 178
1.20 -1.24 $ 4,733,828 1.2% 3 2.1% 9.11% 1.20 158
1.25 -1.29 $103,931,468 27.4% 29 20.3% 9.04% 1.26 106
1.30 -1.34 $ 78,086,139 20.6% 33 23.1% 9.09% 1.32 130
1.35 -1.39 $ 47,874,110 12.6% 21 14.7% 8.91% 1.37 108
1.40 -1.44 $ 36,182,184 9.5% 11 7.7% 9.02% 1.42 113
1.45 -1.49 $ 27,775,520 7.3% 9 6.3% 8.98% 1.47 134
1.50 -1.54 $ 16,417,814 4.3% 5 3.5% 9.25% 1.52 140
1.55 -1.59 $ 12,349,013 3.3% 12 8.4% 8.64% 1.57 117
1.60 -1.64 $ 13,999,973 3.7% 7 4.9% 8.47% 1.62 110
1.65 -1.69 $ 4,856,089 1.3% 2 1.4% 8.25% 1.68 101
1.70 -1.74 $ 608,362 0.2% 1 0.7% 9.25% 1.70 56
1.75 -1.79 $ 561,586 0.1% 1 0.7% 9.90% 1.78 156
1.85 -1.89 $ 1,221,565 0.3% 1 0.7% 9.30% 1.87 175
2.15 -2.19 $ 3,969,881 1.0% 1 0.7% 9.63% 2.19 109
2.25 -2.29 $ 1,834,576 0.5% 2 1.4% 9.14% 2.27 109
2.45 -2.49 $ 7,888,907 2.1% 1 0.7% 9.00% 2.46 111
$379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY DSCR
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
DSCRs reflected in the above table the number of Mortgage Loans and the
Aggregate Cut-off Date Principal Balance for each such range.
S-54
<PAGE>
RANGE OF PROPERTY AGE (IN YEARS)
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
RANGE OF PROPERTY PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
AGE (IN YEARS) BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- ----------------- -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0 to 4 yrs $ 18,162,014 4.8% 4 2.8% 8.67% 1.36 119
5 to 9 yrs $ 60,265,225 15.9% 19 13.3% 9.12% 1.41 125
10 to 14 yrs $104,646,309 27.6% 44 30.8% 8.99% 1.39 108
15 to 19 yrs $ 18,592,541 4.9% 12 8.4% 9.21% 1.37 147
20 to 24 yrs $ 49,025,553 12.9% 18 12.6% 8.91% 1.36 122
25 to 29 yrs $ 51,668,171 13.6% 19 13.3% 9.18% 1.52 115
30 to 34 yrs $ 16,608,533 4.4% 7 4.9% 8.55% 1.33 105
35 to 39 yrs $ 10,748,964 2.8% 4 2.8% 9.39% 1.31 95
40 to 44 yrs $ 7,934,691 2.1% 3 2.1% 9.38% 1.31 129
50 to 54 yrs $ 2,326,842 0.6% 1 0.7% 8.85% 1.38 139
65 to 69 yrs $ 10,678,185 2.8% 5 3.5% 9.00% 1.41 167
70 to 74 yrs $ 5,439,032 1.4% 1 0.7% 8.73% 1.45 173
75 to 79 yrs $ 1,099,450 0.3% 1 0.7% 9.42% 1.25 119
80 to 84 yrs $ 1,189,300 0.3% 1 0.7% 9.16% 1.27 165
90 to 94 yrs $ 17,388,720 4.6% 2 1.4% 9.53% 1.25 122
100 to 104 yrs $ 2,287,670 0.6% 1 0.7% 11.44% 1.25 32
135 to 139 yrs $ 1,048,345 0.3% 1 0.7% 9.76% 1.30 142
WTD AVG AGE 24.21 $379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
PROPERTY AGE
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
Propery Age (in years) reflected in the above table the number of Mortgage
Loans and the Aggregate Cut-off Date Principal Balance for each such range.
S-55
<PAGE>
RANGE OF EFFECTIVE AGE (IN YEARS)
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
RANGE OF EFFECTIVE PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
PROPERTY AGE (IN YEARS) BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- --------------------------- -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
0 to 4 yrs $ 77,474,680 20.4% 21 14.7% 8.81% 1.30 111
5 to 9 yrs $101,556,049 26.8% 31 21.7% 9.11% 1.39 117
10 to 14 yrs $ 89,788,981 23.7% 44 30.8% 9.04% 1.41 124
15 to 19 yrs $ 13,128,874 3.5% 10 7.0% 9.26% 1.34 141
20 to 24 yrs $ 42,367,693 11.2% 15 10.5% 9.10% 1.38 132
25 to 29 yrs $ 36,942,145 9.7% 13 9.1% 9.23% 1.58 115
30 to 34 yrs $ 3,458,977 0.9% 2 1.4% 9.13% 1.44 90
35 to 39 yrs $ 4,883,772 1.3% 2 1.4% 9.53% 1.30 77
40 to 44 yrs $ 7,934,691 2.1% 3 2.1% 9.38% 1.31 129
65 to 69 yrs $ 1,573,684 0.4% 2 1.4% 9.08% 1.34 126
WTD AVG AGE 12.49 $379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY EFFECTIVE AGE
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the ranges of
Effective Age (in years) reflected in the above table the number of Mortgage
Loans and the Aggregate Cut-off Date Principal Balance for each such range.
S-56
<PAGE>
TYPES OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
PROPERTY TYPE BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- --------------------------- -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Congregate Care $ 15,162,905 4.0% 5 3.5% 8.32% 1.61 115
Hotel $ 25,025,238 6.6% 5 3.5% 9.05% 1.79 148
Industrial $ 12,385,839 3.3% 5 3.5% 9.33% 1.30 124
Mini Warehouse $ 2,143,414 0.6% 2 1.4% 9.00% 1.53 158
Mini Warehouse & Office/War $ 1,424,591 0.4% 1 0.7% 9.37% 1.44 115
Mobile Home Park $ 17,680,735 4.7% 5 3.5% 9.28% 1.34 101
Multifamily $157,015,537 41.4% 64 44.8% 8.90% 1.34 111
Nursing Home $ 3,969,881 1.0% 1 0.7% 9.63% 2.19 109
Office $ 40,498,905 10.7% 13 9.1% 9.51% 1.29 125
Office-Retail $ 7,531,161 2.0% 2 1.4% 9.60% 1.42 117
Retail, Anchored $ 47,427,449 12.5% 12 8.4% 9.33% 1.29 114
Retail, Single Tenant $ 28,606,155 7.5% 17 11.9% 8.85% 1.48 132
Retail, Unanchored $ 20,237,736 5.3% 11 7.7% 8.93% 1.35 140
$379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY PROPERTY TYPE
[GRAPHIC OMITTED]
The omitted material is a pie chart that depicts for each of the Types of
Mortgaged Properties reflected in the above table the number of
loans of each such type of property.
S-57
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE PCT BY WEIGHTED
CUT-OFF DATE AGGREGATE NUMBER OF AVERAGE WEIGHTED WEIGHTED
PRINCIPAL CUT-OFF DATE MORTGAGE PERCENT MORTGAGE AVERAGE AVERAGE
PROPERTY LOCATION BALANCE PRINCIPAL LOANS BY NUMBER RATE DSCR MATURITY
- ----------------- -------------- -------------- ----------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
AR $ 1,270,824 0.3% 1 0.7% 8.75% 1.63 55
AZ $ 13,547,171 3.6% 6 4.2% 9.20% 1.36 99
CA $ 50,443,335 13.3% 13 9.1% 9.04% 1.57 114
CO $ 7,023,498 1.9% 4 2.8% 9.70% 1.42 102
DC $ 5,256,830 1.4% 1 0.7% 9.28% 1.27 116
DE $ 4,957,120 1.3% 1 0.7% 9.72% 1.33 118
FL $ 13,611,532 3.6% 7 4.9% 8.82% 1.51 133
GA $ 7,775,667 2.1% 5 3.5% 8.90% 1.34 106
ID $ 2,033,577 0.5% 1 0.7% 9.56% 1.35 117
IL $ 29,811,421 7.9% 9 6.3% 8.68% 1.41 114
IN $ 11,204,479 3.0% 3 2.1% 8.90% 1.28 119
KS $ 4,314,533 1.1% 1 0.7% 8.54% 1.25 107
LA $ 3,174,230 0.8% 1 0.7% 8.92% 1.42 118
MA $ 11,448,345 3.0% 2 1.4% 9.49% 1.41 89
MD $ 1,694,810 0.4% 2 1.4% 9.63% 1.32 118
MI $ 8,259,265 2.2% 4 2.8% 9.00% 1.34 116
MO $ 11,220,432 3.0% 6 4.2% 8.83% 1.46 153
MT $ 1,798,130 0.5% 1 0.7% 9.26% 1.20 178
NH $ 860,407 0.2% 1 0.7% 9.63% 1.35 117
NJ $ 7,036,810 1.9% 4 2.8% 9.09% 1.40 144
NM $ 5,819,167 1.5% 3 2.1% 9.45% 1.28 179
NV $ 24,796,995 6.5% 3 2.1% 9.61% 1.20 81
NY $ 26,774,515 7.1% 9 6.3% 8.93% 1.26 134
OH $ 26,670,232 7.0% 9 6.3% 8.97% 1.38 126
OK $ 16,112,741 4.3% 8 5.6% 8.96% 1.42 135
PA $ 10,997,253 2.9% 6 4.2% 9.37% 1.40 135
PR $ 15,618,835 4.1% 2 1.4% 8.61% 1.37 112
TN $ 1,843,269 0.5% 2 1.4% 8.95% 1.30 176
TX $ 42,868,034 11.3% 23 16.1% 9.02% 1.42 121
VA $ 8,574,882 2.3% 4 2.8% 9.34% 1.35 127
WY $ 2,291,207 0.6% 1 0.7% 9.48% 1.25 142
$379,109,545 100.0% 143 100.0% 9.06% 1.39 119
</TABLE>
DISTRIBUTION BY STATE
[GRAPHIC OMITTED]
The omitted material is a bar graph that depicts for each of the Property
Locations (by state) reflected in the above table the number of
Mortgage Loans and the Aggregate Cut-off Date Principal Balance for each such
location.
S-58
<PAGE>
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 SBMCG in the Smith Barney Mortgage Loan Purchase
Agreement. In (a) the MCFC Mortgage Loan Purchase Agreement, MCFC and Midland
will each represent and warrant (with respect only to each of the Midland
Mortgage Loans and subject to certain specified exceptions), 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 Midland Mortgage Loan Purchase Agreement,
Midland shall assign to the Depositor certain representations and warranties
regarding the Smith Barney Mortgage Loans made by SBMCG in favor of Midland
pursuant to the Smith Barney Mortgage Loan Purchase Agreement, which assigned
representations and warranties, with respect only to each of the Smith Barney
Mortgage Loans and subject to certain specified exceptions, will provide,
among other things, as of the Loan Purchase Closing Date (unless another date
is specified) 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).
(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 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 #124 and Loan #126, 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.
(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,
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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 #60 (modified to provide repayment terms of remedial advance
for real estate taxes) 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 does not contain the standard general exceptions for encroachments,
boundary and other survey matters and for easements not shown by the public
records, except for any of the Mortgaged Properties located in the State of
Texas. Except with respect to Loan #125 (encroachment over a building
restriction line), no material encroachments exist with respect to the
related Mortgaged Property.
(12) Each Mortgage requires that the related Mortgaged Property be insured
by a fire and extended perils insurance policy, 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; and to the Mortgage Loan Seller's and Midland's knowledge, all
insurance required under such Mortgage (including business interruption or
rental continuation coverage, if required) is in full force and effect.
(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 #58
(lease term extends approximately five years beyond the maturity of such
Mortgage 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; and
(D) the related lessor has agreed, in writing, to provide the Mortgage
Loan Seller 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.
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(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.
Instead of the representations and warranties set forth in (14) and (15)
above, SBMCG will represent that none of the Smith Barney Mortgage Loans is
secured by a leasehold interest in the related Mortgaged Property.
(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 #5, Loan #7,
Loan #12, Loan #16, Loan #20, Loan #22, Loan #31, Loan #33, Loan #37, Loan
#48, Loan #79, Loan #104, and Loan #105 (each of which permits subordinate
financing under the limited circumstances set forth in the related Mortgage
Loan documents), and (c) Loan #14 (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;
provided, however, that (1) no Environmental Reports were obtained with
respect to Loan #128, Loan #142 and Loan #143, and (2) the Environmental
Report obtained with respect to Loan #66 did not include asbestos containing
materials nor radon as reviewed categories. 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 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 use and occupancy thereof (excluding applicable
environmental laws which is addressed in (18) above) and all applicable
insurance requirements, except such non-compliance 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 #60, such indemnity
obligation was executed only in favor of the Originator of such Mortgage
Loan, (B) Loan #14) no such indemnification obligation was obtained, and (C)
each of Loan #124 and Loan #126, 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 (i) has been designated or (ii) may be substituted
for the currently designated trustee in accordance with applicable law.
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
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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 #124 and Loan #126, 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
SBMCG, 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) SBMCG in the Smith Barney 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 Smith Barney 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 or Midland (but only with respect
to those Mortgage Loans acquired by the Depositor pursuant to the MCFC
Mortgage Loan Purchase Agreement) and SBMCG (but only with respect to those
Mortgage Loans acquired by the Depositor pursuant to the Smith Barney
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 or
SBMCG, 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 or SBMCG, 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 or SBMCG, 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 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 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 SBMCG, 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 by MCFC, Midland or
SBMCG. Other than as specifically described in the preceding paragraph,
neither MCFC, Midland, SBMCG, 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 SBMCG defaults on their respective
obligations to repurchase or cure, and no assurance can be given that MCFC,
Midland, or SBMCG, as applicable, will fulfill their respective obligations.
If such obligations are not met, as to a Mortgage Loan that is not a
"qualified mortgage," the Upper-Tier REMIC and Lower-Tier REMIC 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 97 of the Mortgage Loans.
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As of June 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 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
June 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 August 2, 1996,
Midland has originated 245 commercial and multifamily mortgage loans, with an
aggregate original principal balance of $525 million, including 97 of the
Mortgage Loans, with an aggregate original 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
Investors Service, L.P. ("Fitch") and 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.
MIDLAND COMMERCIAL FINANCING CORP.
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.
SMITH BARNEY MORTGAGE CAPITAL GROUP, INC.
Smith Barney Mortgage Capital Group, Inc. ("SBMCG") is a Delaware
corporation and a commonly controlled affiliate of Smith Barney Inc. ("SBI").
SBMCG and SBI are wholly owned subsidiaries of Smith Barney Holdings Inc.,
which is a wholly owned subsidiary of Travelers Group Inc. SBMCG is a U.S.
Department of Housing and Urban Development approved non-supervised
mortgagee. In addition, SBMCG is registered as an approved seller/servicer
with the Federal Home Loan Mortgage Corporation and the Federal National
Mortgage Association and is authorized to invest and trade in whole loan
mortgages and mortgage participations. In 1995, SBMCG began participating in
various multifamily and commercial real estate financing activities, which
include financing, trading and holding of mortgage loans such as the Mortgage
Loans from the time of purchase thereof through the time of securitization or
other disposition thereof.
The information concerning SBMCG set forth above has been provided by
SBMCG, and none of the Depositor, the Trustee or the Underwriters makes any
representation or warranty as to the accuracy thereof.
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DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of 14 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-1 Certificates, the Class H-2
Certificates, the Class R Certificates and the Class LR Certificates. ONLY
THE CLASS A-1, CLASS A-2, CLASS A-3, CLASS B, CLASS C, CLASS D AND CLASS E
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.
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 and Sale Agreement
and the Midland Mortgage Loan Purchase and Sale 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 H-2 Certificates are interest only Certificates, have no
Certificate Balances and are not entitled to distributions in respect of
principal. The Class H-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 October, 1996 (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 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 H-2 Notional Balance" as of any date is equal to the Certificate
Balance of the Class H-1 Certificates. The Class A-EC and Class H-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 H-2 Certificates, the initial Class A-EC Notional
Balance or initial Class H-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
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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 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 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) 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 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.
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"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 October, 1996 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 October 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 Class A-1, Class A-2, Class A-3, Class B, Class C, Class D,
Class E, Class F and Class G 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" will equal for any
Distribution Date occurring on or prior to the EC Maturity Date, the Class
A-EC Excess Interest. The Class A-EC Certificates are not entitled to
distributions (other than any Class Interest Shortfalls) following the EC
Maturity Date. The Class H-1 Certificates are principal only Certificates and
have no Class Interest Distribution Amount. With respect to any Distribution
Date and the Class H-2 Certificates, the "Class Interest Distribution Amount"
will equal the product of the Class H-2 Pass-Through Rate and the Class H-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 the excess of the Weighted Average Net Mortgage
Rate over the weighted averages of the Pass-Through Rates of the Class A-1,
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Class A-2, Class A-3, Class B, Class C, Class D and Class E 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 sum of the
Certificate Balances of the Class A-1, Class A-2, Class A-3, Class B, Class
C, Class D and Class E Certificates 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 Principal
Prepayment. 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 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
Special Servicer by up to an amount equal to 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
Principal Prepayment 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 %. The Pass-Through Rate on the
Class C Certificates during any Interest Accrual Period will be %. The
Pass-Through Rate on the Class D Certificates during any Interest Accrual
Period will be %. The Pass-Through Rate on the Class E Certificates
during any Interest Accrual Period will be %. The Pass-Through Rate on
the Class F and Class G Certificates during any Interest Accrual Period will
be equal to the greater of (i) the Weighted Average Net Mortgage Rate and
(ii) %. The Pass-Through Rate on the Class H-2 Certificates during any
Interest Accrual Period will be equal to the Weighted Average Net Mortgage
Rate. The Class H-1 Certificates are principal only certificates and are not
entitled to distributions in respect of interest.
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 "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):
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(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--Optional 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, (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 and (d) in the case of any
Mortgage Loan that does not provide for amortization of principal prior to
its maturity date, no principal is amortized with respect to such Mortgage
Loan.
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 (other
than the Class LR 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:
(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
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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;
(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
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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;
(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-2 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-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;
(xxxiii) Thirty-Third, after the Certificate Balance of the Class G
Certificates has been reduced to zero, to the Class H-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;
(xxxiv) Thirty-Fourth, if such Distribution Date occurs after the EC
Maturity Date, to (i) the Class G Certificates, (ii) the Class F
Certificates, (iii) the Class E Certificates, (iv) the Class D
Certificates, (v) the Class C Certificates, (vi) the Class B Certificates,
(vii) the Class A-3 Certificates, the Class A-2 Certificates and the Class
A-1 Certificates, pro rata, and (viii) the Class H-1 Certificates, in that
order, in reduction of the Certificate Balance of each thereof, any
remaining portion of Available Funds in the Distribution Account, until
the Certificate Balance of each has been reduced to zero; and
(xxxv) Thirty-Fifth, to the Class H-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 H-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.
On each Distribution Date, Available Funds remaining in the Distribution
Account following the distributions to the Certificates pursuant to the
Available Funds Allocation shall be distributed to the Class R Certificates
and Available Funds remaining in the Collection Account shall be distributed
to the Class LR 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 two 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.
On
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each Distribution Date up to and including the EC Maturity Date, any
Prepayment Premiums calculated with reference to a yield maintenance formula
("Yield Maintenance Charges") received in the related Collection Period will
be distributed to the holders of the Offered Certificates outstanding on such
Distribution Date, in the following amounts and order of priority:
(i) First, to the Classes of Offered Certificates (other than the Class
A-EC Certificates) as follows: to each of the Class A-1, Class A-2, Class
A-3, Class B, Class C, Class D and Class E Certificates, for each such
Class 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; after the Certificate
Balances of the Class A-1, Class A-2, Class A-3, Class B, Class C, Class D
and Class E have been reduced to zero, all Yield Maintenance Charges will
be distributed to the holders of the Class A-EC Certificates; and
(ii) Second, any remaining Prepayment Premiums following the distribution
in clause First above, to the Class A-EC Certificates.
With respect to each Distribution Date up to and including the EC Maturity
Date, any Prepayment Premiums received with respect to any of the Mortgage
Loans that are not Yield Maintenance Charges will be allocated solely to the
Class A-EC Certificates. The amount of any Prepayment Premiums received in
any Collection Period subsequent to the Collection Period related to the EC
Maturity Date will be retained by the Master Servicer as additional servicing
compensation.
A "Base Interest Fraction" with respect to any principal prepayment on any
Mortgage Loan and with respect to any Class of Offered Certificates (other
than the Class A-EC 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
payment 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
payment; 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 Distribution Date (other than pursuant to clause
thirty-fourth of the Available Funds Allocation); provided that if more than
one Class of Certificates is entitled to distributions in respect of
principal on such Distribution Date (other than pursuant to clause
thirty-fourth of the Available Funds Allocation), the amount of such Default
Interest will be allocated among such Classes pro rata.
Realized Losses. The Certificate Balance of the Certificates (other than
the Class A-EC, Class H-2, Class R and Class LR 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 of the
Lower-Tier Regular Interests, 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 H-1 Certificates, second, to the Class G Certificates, third, to
the Class F Certificates, fourth, to the Class E Certificates, fifth, to the
Class D Certificates, sixth, to the Class C Certificates, seventh, to the
Class B Certificates and finally to the Class A-1, Class A-2 and Class A-3
Certificates, pro rata. 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 H-1 Certificates will reduce the Class
H-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.
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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.
SUBORDINATION
As a means of providing a certain amount of protection to the holders of
the Class A-1, Class A-2, Class A-3 and Class A-EC Certificates against
losses associated with delinquent and defaulted Mortgage Loans, the rights of
the holders of the Class B, Class C, Class D, Class E, Class F, Class G,
Class H-1 and Class H-2 Certificates to receive distributions of interest and
principal, as applicable, will be subordinated to such rights of the holders
of the Class A-1, Class A-2, Class A-3 and Class A-EC 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
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 H-1 Certificates, second, to the Class G
Certificates, third, to the Class F Certificates, fourth, to the Class E
Certificates, fifth, to the Class D Certificates, sixth, to the Class C
Certificates, seventh, 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 Class LR and Class
R Certificates to the extent of any distributions to which the Class LR and
Class R 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 Class R Certificates and Class LR Certificates will remain outstanding
for as long as the Trust Fund exists. Holders of the Class R Certificates and
Class LR Certificates are not entitled to distributions in respect of
principal, interest or Prepayment Premiums. Holders of the Class R
Certificates and Class LR 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 in the Distribution Account and Collection Account,
respectively, on any Distribution Date and any remaining assets of the
Upper-Tier REMIC and the Lower-Tier REMIC, respectively, 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 LR
CERTIFICATES MAY, UNDER CERTAIN CIRCUMSTANCES, PURCHASE THE REMAINING ASSETS
OF THE TRUST FUND, THEREBY EFFECTING THE TERMINATION OF THE TRUST REMICS. SEE
"--OPTIONAL TERMINATION" HEREIN.
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OPTIONAL TERMINATION
The holder of the Class LR Certificates representing greater than a 50%
Percentage Interest of the Class LR 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.
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, 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"). 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").
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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.
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 and Class E 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. 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 book-entries, thereby
eliminating the need for physical movement of certificates. Participants
include securities brokers and dealers (including the Underwriters), banks,
trust companies and clearing corporations. 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"). The
rights of Beneficial Owners with respect to the Book-Entry Certificates will
be limited to those established by law and agreements between such Beneficial
Owners and the Participants and Indirect Participants representing such
Beneficial Owners.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
Book-Entry Certificates among Participants on whose behalf it acts with
respect to the Book-Entry Certificates. Participants and Indirect
Participants with which Beneficial Owners have accounts with respect to the
Book-Entry Certificates similarly are required to make book-entry transfers
and receive and transmit such payments on behalf of their respective
Beneficial Owners.
Beneficial Owners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Book-Entry Certificates may do so only through Participants and
Indirect Participants. All transfers by Beneficial Owners of their respective
ownership interests in the Book-Entry Certificates will be made in
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accordance with the procedures established by the Participant or brokerage
firm representing each such Beneficial Owner. Each Participant will only
transfer the ownership interests in the Book-Entry Certificates of Beneficial
Owners it represents or of brokerage firms for which it acts as agent in
accordance with DTC's normal procedures. 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.
In addition, Beneficial Owners will receive all distributions of
principal, interest and other sums through Participants. DTC will forward
such distributions to its Participants, which thereafter will forward them to
Indirect Participants or Beneficial Owners. 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 Certificateholders only indirectly through DTC and its
Participants.
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.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement only
at the direction of one or more Participants to whose accounts with DTC the
Book-Entry Certificates are credited. Additionally, DTC has advised the
Depositor that, in the case of actions requiring the direction of the holders
of specified Percentage Interests or Voting Rights of the Certificates, it
will take such actions only at the direction of and on behalf of Participants
whose holdings of Book-Entry Certificates evidence such specified Percentage
Interests or Voting Rights. 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.
Physical Certificates. The Class A-EC, Class F, Class G, Class H-1, Class
H-2, Class R and Class LR Certificates will be issued in fully registered
certificated form only. The Class A-EC, Class F, Class G, Class H-1 and Class
H-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
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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 or Class E 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 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.
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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--Optional 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 and Class H-2 Certificates, the Weighted Average 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 Net Mortgage Rates that
are higher or lower than the current Weighted Average 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 and Class H-2 Certificates and therefore the yield on each such
Class. Furthermore, following the EC Maturity Date, increases or decreases in
the Weighted Average Net Mortgage Rate will increase or decrease the rate of
distributions in reduction of Certificate Balances of certain Classes of
Certificates entitled to receive distributions pursuant to priority
thirty-fourth of the Available Funds Allocation.
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 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 Warranties; Repurchase" and "DESCRIPTION OF THE CERTIFICATES--Optional
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 H-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 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.
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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 SBMCG 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 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 H-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 H-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 H-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 H-1 Certificates derive only
from principal payments on the Mortgage Loans. As a result, the yield on the
Class H-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.
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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 H-1 Certificates, to the extent of
amounts otherwise distributable thereto; second, by the holders of the Class
G Certificates, to the extent of amounts otherwise distributable thereto;
third, by the holders of the Class F Certificates, to the extent of amounts
otherwise distributable thereto; fourth, by the holders of the Class E
Certificates, to the extent of amounts otherwise distributable thereto;
fifth, by the holders of the Class D Certificates to the extent of amounts
otherwise distributable thereto; sixth, by the holders of the Class C
Certificates, to the extent of amounts otherwise distributable thereto;
seventh, 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 F and Class G
Certificates are related to the Weighted Average Net Mortgage Rate, the
Pass-Through Rate on the Class H-2 Certificates is equal to the Weighted
Average Net Mortgage Rate and the Class A-EC Pass-Through Rate, used to
calculate interest distributable on the Class A-EC Certificates prior to the
EC Maturity Date, is derived with reference to the Weighted Average Net
Mortgage Rate. The Weighted Average Net Mortgage Rate will fluctuate over the
lives of the Certificates as a result of scheduled amortization, voluntary
prepayments and liquidations of Mortgage Loans and modifications to the
Mortgage Rate applicable to any Mortgage Loan. If principal payments,
including voluntary and involuntary Principal Prepayments, are made on a
Mortgage Loan with a relatively high 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 Class A-EC, Class F, Class G and Class
H-2 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 F and Class G Certificates is equal to
the greater of (i) the Weighted Average Net Mortgage Rate and (ii) %. If
the Weighted Average Net Mortgage Rate were to fall below %, the
Pass-Through Rate on the Class F and Class G Certificates would be %,
and there will not be sufficient cash flow to make all interest payments due
on each of such Classes and the Class H-2 Certificates. Any such interest
shortfall would affect the Class H-2 Certificates prior to affecting the
Class G Certificates and would affect the Class G Certificates prior to
affecting the Class F 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.
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.
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<PAGE>
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 none of the Mortgage Loans
is prepaid by a borrower before maturity, while CPRs " %," " %," "
%," " %" and " %" assume that prepayments on the relevant 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 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 SBMCG will repurchase any Mortgage Loan and
none of the Master Servicer, the Special Servicer, the Depositor or the
holders of the Class LR 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
October 25, 1996 (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 September , 1996; (viii) that no defaults occur with
respect to any of the Mortgage Loans; (ix) that payments of principal and
interest equal to $75,061.98 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 15th 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 September 15, 1996 payment
is made on October 1, 1996); (xi) that the stated interest rate for Loan #142
remains fixed at 9.90% and does not adjust on its change date; (xii) that all
of the Mortgage Loans accrue interest based upon a 360 day year composed of
twelve 30 day months; (xiii) 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 (xiv) that
Mortgage Loan #60 is comprised of two components, one with a Cut-off Date
Principal Balance of $2,209,140.89, an interest rate of 11.38% and a Monthly
Payment of $24,184.95, and the other with a Cut-off Date Principal Balance of
$78,529.40, an interest rate of 12.88% and a Monthly Payment of $3,242.00.
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, it was assumed that all the
Mortgage Loans prepay at a rate equal to % CPR for the months
beginning on the Due Date in October, 1996, then at a rate equal to %
CPR for the months beginning on the Due Date in October, , then at a
rate equal to % CPR for the months beginning on the Due Date in
October, , then at a rate equal to % CPR for the months beginning
on the Due Date in October, , then at a rate equal to % CPR for the
months beginning on the Due Date in October, , and finally at a rate
equal to % CPR for the period beginning on the Due Date in October,
. In the case of Scenario 3, the prepayment assumptions set forth in
Scenario 2 were assumed and it was further assumed that the Trust Fund will
be terminated pursuant to an auction on the Distribution Date occurring in
October, . See "DESCRIPTION OF THE CERTIFICATES--Auction" herein.
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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 DATE ------------------ ------------------ ----------------
- -----------------
1 2 3 1 2 3 1 2 3
--- --- --- --- --- --- --- --- ---
October 1996 ..........
October 1997 ..........
October 1998 ..........
October 1999 ..........
October 2000 ..........
October 2001 ..........
October 2002 ..........
October 2003 ..........
October 2004 ..........
October 2005 ..........
October 2006 ..........
October 2007 ..........
October 2008 ..........
October 2009 ..........
October 2010 ..........
October 2011 ..........
Weighted Average
Life (1) ...........
- ------------
(1) The weighted average life of each Class is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate 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 referred to in clause (i).
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<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR
EACH DESIGNATED SCENARIO
CLASS B CLASS C CLASS D
SCENARIO SCENARIO SCENARIO
DISTRIBUTION DATE ------------------ ------------------ ----------------
- -----------------
1 2 3 1 2 3 1 2 3
--- --- --- --- --- --- --- --- ---
October 1996 ..........
October 1997 ..........
October 1998 ..........
October 1999 ..........
October 2000 ..........
October 2001 ..........
October 2002 ..........
October 2003 ..........
October 2004 ..........
October 2005 ..........
October 2006 ..........
October 2007 ..........
October 2008 ..........
October 2009 ..........
October 2010 ..........
October 2011 ..........
Weighted Average
Life (1) ...........
(1) The weighted average life of each Class is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate 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 referred to in clause (i).
S-83
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR
EACH DESIGNATED SCENARIO
CLASS H-1 AND
CLASS E CLASS F CLASS G CLASS H-2
SCENARIO SCENARIO SCENARIO SCENARIO
DISTRIBUTION DATE --------------- ------------- ------------ -----------
- -----------------
1 2 3 1 2 3 1 2 3 1 2 3
--- --- --- --- --- --- --- --- --- --- --- ---
October 1996 .......
October 1997 .......
October 1998 .......
October 1999 .......
October 2000 .......
October 2001 .......
October 2002 .......
October 2003 .......
October 2004 .......
October 2005 .......
October 2006 .......
October 2007 .......
October 2008 .......
October 2009 .......
October 2010 .......
October 2011 .......
Weighted Average
Life (1) .......
- ------------
(1) The weighted average life of each Class is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate 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 referred to in clause (i).
Based on the assumptions described in the third paragraph preceding the
above tables, (i) the weighted average life of the Class A-EC Certificates
under the assumptions described above as Scenario 1 would be years, (ii)
the weighted average life of the Class A-EC Certificates under the
assumptions described above as Scenario 2 would be years and (iii) the
weighted average life of the Class A-EC Certificates under the assumptions
described above as Scenario 3 would be years. The weighted average lives
of each such Class set forth above are determined by (a) multiplying the
amount of each distribution that reduces the Class A-EC Notional Balance by
the number of years from the date of purchase to the related Distribution
Date, (b) adding the results and (c) dividing the sum by the aggregate
distributions in reduction of the Notional Balance referred to in clause (a).
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<PAGE>
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of September 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 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
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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 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 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,
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 Mortgage Loan Seller'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 Cut-off 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
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<PAGE>
contrary specific course of action, each of the Master Servicer and the
Special Servicer are required to service and administer the Mortgage Loans 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, 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 in respect of the
related Mortgaged Property, over (ii) an amount equal to 90% of the appraised
value of the related Mortgaged Property as reflected in the updated Appraisal
thereof. 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.
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A "Seriously Delinquent Loan" is any Mortgage Loan that (i) is 90 days or
more delinquent (without regard to any grace period) or (ii) was 90 days or
more delinquent (without regard to any grace period) and as to which the
related borrower has not made, since the most recent date on which such
Mortgage Loan was so delinquent, 24 consecutive Monthly Payments.
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 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 previously advanced, and the Master Servicer
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 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.
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 monthly 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 an account or accounts (the
"Collection Account") into which it will be required to deposit, within one
Business Day of
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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--Optional Termination" and "--Auction"
herein.
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 an 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) an account
or accounts maintained with either a federally or state-chartered depository
institution or trust company 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 or (ii) a 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, 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
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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 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, SBMCG 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 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. 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.
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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
commencing in October, 1997 unless each of the Rating Agencies has confirmed
in writing that a longer period between inspections 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) on any Mortgage Loan and
if to do so is in the best interest of Certificateholders, as determined by
the Special Servicer in its reasonable discretion in accordance with the
servicing standards described herein, inspect each related Mortgaged Property
as soon as practicable thereafter.
REALIZATION UPON MORTGAGE LOANS
Appraisals for Specially Serviced Mortgage Loans. Contemporaneously with
the earliest 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 order an appraisal of the Mortgaged Property or REO Property, as the
case may be, from an independent appraiser who is a member of the American
Institute of Real Estate Appraisers (an "Updated Appraisal"), which appraisal
shall be conducted in accordance with MAI standards.
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) each
of 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 entity appointed to advise upon extensions
(the "Extension Advisor"). The Special Servicer may not grant any extension
that permits such borrower to make payments of interest only for a period, in
the aggregate, of greater than 12 months.
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.
The holders of 66 2/3% 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 elect the Extension Advisor. Upon (i) the
receipt by the Trustee of written requests for an election of an Extension
Advisor from the holders of 66 2/3% of the Voting Rights allocated to each
Class of Regular Certificates, other than the most subordinate such Class of
Regular Certificates, or (ii) the resignation or removal of the person acting
as Extension Advisor, an election of the Extension Advisor will be held
commencing as soon as practicable thereafter. The Extension Advisor may be
removed at any time by the written vote of the holders of 66 2/3% of the
aggregate Voting Rights of all Classes of Regular Certificates, other than
the most subordinate such Class of Regular Certificates. 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 there is no Extension Advisor.
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.
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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 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 Lower-Tier Regular
Interests 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, the Lower-Tier
REMIC 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 the Lower-Tier REMIC, 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 the Lower-Tier
REMIC 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 200, 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 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
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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 Class R and Class LR Certificates, (ii) in the case of any other Class of
P&I Certificates, a percentage equal to the product of (x) % on or prior to
the EC Maturity Date and % 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) on or prior
to the EC Maturity Date, % in the case of the Class A-EC Certificates and 0%
thereafter; (iv) % in the Case of Class H-1 Certificates; and (v) % in the
case of Class H-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 adversely affect in any material respect the interests of
the holders of any Class of Certificates while any such person is the holder
of Certificates aggregating not less than 66 2/3% 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 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.
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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 0.17675%, except for Loan
#14, for which the Servicing Fee will be equal to 1.03%, and for each SBMCG
Mortgage Loan equal to a per annum rate of 0.0735% (the "Servicing Fee 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 prior to the EC Maturity Date 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
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; (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);
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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 circumstances 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, 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 minus (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 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.
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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 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 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 and the Net Default Interest for such
Distribution Date.
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 Class R or Class LR
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.
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On each Distribution Date, the Trustee will forward to each holder of a
Class R or Class LR 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 Class R or
Class LR Certificates on such Distribution Date.
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 Class R or Class LR Certificate a statement containing
the information provided pursuant to the previous paragraph 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.
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, Midland,
MCFC and SBMCG, 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 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
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, any Certificateholder, any person identified to the
Trustee by a 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 Trustee, 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
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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.
Neither the Master Servicer nor the Special Servicer will be responsible
for the accuracy or completeness of any information supplied to it by a
borrower or otherwise for inclusion in any such 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 and the Trustee 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, two separate "real estate mortgage
investment conduit" ("REMIC") elections will be made with respect to the
Trust Fund, creating two 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-1 and
Class H-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.
Two of the Mortgage Loans are secured by Mortgaged Properties located in
Puerto Rico. Such Mortgage Loans represent approximately 4.1% of the Initial
Pool Balance. These Mortgage Loans are structured pursuant to an arrangement
that provides for a term note setting forth the specific loan terms, which
term note is secured by a pledge of a bearer demand note that is secured by
the Mortgaged Property. Puerto Rican counsel has advised the Depositor that
(i) the demand note is only a security device which, together with the
Mortgage, secures the term note, and does not evidence a separate
indebtedness, and (ii) if a default has occurred under the term note, the
Mortgage may be foreclosed in a single unitary action with foreclosure upon
the term note. Based on the advice of Puerto Rican counsel, the Puerto Rican
Mortgage Loans should be deemed "principally secured by real estate" and
should constitute qualified mortgages for purposes of the REMIC rules. SBMCG
has also made a representation and warranty that the Puerto Rican Mortgage
Loans constitute qualified mortgage loans. Accordingly, the Depositor
reasonably believes that the Puerto Rican Mortgage Loans are principally
secured by an interest in real property and, therefore, are qualified
mortgage loans. If, however, the status of the Mortgage Loans as qualified
mortgage loans were successfully challenged, the reasonable belief safe
harbor of Treas. Reg. Section 1.860G-2(a)(3) will apply, which would give the
Trust Fund a period of 90 days after such discovery during which it could
seek to require SBMCG to repurchase such Mortgage Loans as a result of
SBMCG's breach of its representation and warranty. See "DESCRIPTION OF THE
MORTGAGE POOL--Representations and Warranties; Repurchase" herein. No
assurance can be given that SBMCG will fulfill such obligation. If any such
Mortgage Loan were not repurchased by SBMCG within such 90-day period, such
Mortgage Loan would cease to be a qualified mortgage and the Trust Fund would
be disqualified as a REMIC.
Because they represent regular interests, the Class A-1, Class A-2, Class
A-3, Class B, Class C, Class D, Class E, Class F and Class G 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 H-1 and Class H-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 H-2 Certificates constitute
interest only Classes and the Class H-1 Certificates constitute a principal
only Class. These Certificates will be deemed to have been issued with
original issue discount ("OID"). The Trustee intends to treat the Class A-EC
and
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Class H-2 Certificates as having no "qualified stated interest." Accordingly,
the Class A-EC and Class H-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 H-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 H-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 H-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. Although it is unclear whether the Class A-EC, Class
F, Class G and Class H-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
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.
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ERISA CONSIDERATIONS
GENERAL
The Class B, Class C, Class D, Class E, Class F, Class G, Class H-1 and
Class H-2 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.
Neither the Class R Certificates nor the Class LR 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 Class B,
Class C, Class D, Class E, Class F, Class G, Class H-1, Class H-2, Class R
and Class LR 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.
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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 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 Class A-1, Class A-2, Class A-3 and Class A-EC 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");
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(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 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 Class A-1, Class A-2, Class A-3 or Class A-EC 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 Class A-1,
Class A-2, Class A-3 or Class A-EC 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 CLASS B, CLASS C, CLASS D, CLASS E, CLASS F,
CLASS G, CLASS H-1, CLASS H-2, CLASS R AND CLASS LR CERTIFICATES DO NOT MEET
THE REQUIREMENTS OF THE EXEMPTION. ACCORDINGLY, THE CLASS B, CLASS C, CLASS
D, CLASS E, CLASS F, CLASS G, CLASS H-1 AND CLASS H-2 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 RESULT IN A PROHIBITED TRANSACTION. NEITHER
THE CLASS R CERTIFICATES NOR THE CLASS LR CERTIFICATES MAY BE PURCHASED BY OR
TRANSFERRED TO A PLAN.
Before purchasing a Class A-1, Class A-2, Class A-3 or Class A-EC
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 Class A-1, Class
A-2, Class A-3 or Class A-EC 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
Class A-1, Class A-2, Class A-3 or Class A-EC 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.
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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 Class A-1, Class A-2, Class A-3 or Class A-EC 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 what extent the Certificates
constitute a legal investment or are subject to investment, capital or other
restrictions.
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PLAN OF DISTRIBUTION
Prudential Securities Incorporated and Smith Barney Inc. (the
"Underwriters") have agreed, severally and not jointly, pursuant to an
Underwriting Agreement dated September , 1996 (the "Underwriting Agreement")
to purchase from the Depositor the respective principal or notional amounts
of Certificates set forth opposite their names below.
PRINCIPAL OR NOTIONAL
UNDERWRITER AMOUNT
- --------------------------------------- -------------------------
Prudential Securities Incorporated ....
Smith Barney Inc. ...................... $
Total ................................
-------------------------
$
The Certificates will be offered by the Underwriters in negotiated
transactions or otherwise, on varying terms (which may include the sale of
separate financial instruments by the Underwriters or an affiliate) and at
varying prices, in each case to be determined at the time of sale. 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
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.
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RATINGS
It is anticipated that the Certificates will have the following ratings:
the Class A-1, Class A-2 and Class A-3 Certificates will be rated "AAA" by
each of Duff & Phelps and S&P; the Class A-EC Certificates will be rated
"AAA" by Duff & Phelps and will be rated "AAAr" by S&P; the Class B
Certificates will be rated "AA" by each of Duff & Phelps and S&P; the Class C
Certificates will be rated "A" by each of Duff & Phelps and S&P; the Class D
Certificates will be rated "BBB" by each of Duff & Phelps and S&P; the Class
E Certificates will be rated "BBB-" by each of Duff & Phelps and S&P; the
Class F Certificates will be rated "BB" by each of Duff & Phelps and S&P; and
the Class G Certificates will be rated "B" by each of Duff & Phelps and S&P.
The Class H-1, Class H-2, Class R and Class LR Certificates are unrated. It
is anticipated that S&P's rating of the Class A-EC Certificates shall expire
on the earlier to occur of (i) the EC Maturity Date and (ii) the first
Distribution Date on which the Class A-EC Notional Component A is reduced to
zero.
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" rating 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.
S-106
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
DEFINITIONS
- ------------- PAGE
----
1933 ACT ............................................................... S-4
ADVANCE RATE .......................................................... S-88
ADVANCES .............................................................. S-88
ANNUAL DEBT SERVICE ................................................... S-46
ANTICIPATED LOSS ...................................................... S-87
APPRAISED VALUE ....................................................... S-46
ASSUMED MATURITY DATE .................................................. S-1
ASSUMED SCHEDULED PAYMENT ............................................. S-68
AUCTION FEES .......................................................... S-74
AUCTION VALUATION DATE .......................................... S-18, S-74
AVAILABLE FUNDS ....................................................... S-64
AVAILABLE FUNDS ALLOCATION ............................................ S-68
BALLOON AMOUNT ........................................................ S-46
BALLOON LOANS ......................................................... S-36
BALLOON LTV ........................................................... S-46
BALLOON PAYMENT ....................................................... S-36
BENEFICIAL OWNERS ..................................................... S-75
BOOK-ENTRY CERTIFICATE ................................................ S-75
BUSINESS DAY .......................................................... S-14
CASH FLOW ....................................................... S-45, S-46
CASUALTY .............................................................. S-40
CERTIFICATE BALANCE ................................................... S-13
CERTIFICATE REGISTRAR ................................................. S-77
CERTIFICATES ..................................................... S-1, S-13
CLASS A-EC EXCESS INTEREST ....................................... S-2, S-66
CLASS A-EC NOTIONAL BALANCE ..................................... S-64, S-66
CLASS A-EC NOTIONAL COMPONENT A ....................................... S-66
CLASS A-EC PASS-THROUGH RATE .......................................... S-66
CLASS H-2 NOTIONAL BALANCE ............................................ S-64
CLASS INTEREST DISTRIBUTION AMOUNT .............................. S-15, S-66
CLASS INTEREST SHORTFALL .............................................. S-67
CLOSING DATE ..................................................... S-7, S-14
CODE .................................................................. S-99
COLLECTION ACCOUNT .................................................... S-88
COLLECTION PERIOD ............................................... S-14, S-66
COMMISSION ............................................................. S-4
CONDEMNATION .......................................................... S-40
CONDEMNATION PROCEEDS ................................................. S-65
CONGREGATE CARE LOAN .................................................. S-29
CONGREGATE CARE PROPERTY .............................................. S-29
CONSTANT PREPAYMENT RATE .............................................. S-81
CORRECTED MORTGAGE LOAN ............................................... S-96
CPR ................................................................... S-81
CROSS-COLLATERALIZED LOANS ...................................... S-26, S-44
CUT-OFF DATE .......................................................... S-14
CUT-OFF DATE PRINCIPAL BALANCE ................................... S-9, S-29
DEBT SERVICE COVERAGE RATIO ........................................... S-46
DEFAULT INTEREST ................................................ S-40, S-66
DEFAULT RATE .......................................................... S-66
DEFINITIVE CERTIFICATE ................................................ S-75
DELIVERY DATE .......................................................... S-1
S-107
<PAGE>
DEPARTMENT ........................................................... S-101
DEPOSITOR ........................................................ S-2, S-13
DEPOSITORY ............................................................ S-14
DETERMINATION DATE .............................................. S-14, S-66
DISPOSITION FEE ....................................................... S-96
DISQUALIFIED ORGANIZATION ............................................ S-104
DISTRIBUTION ACCOUNT .................................................. S-89
DISTRIBUTION DATE ........................................... S-2, S-7, S-14
DSCR ............................................................. S-9, S-46
DTC .............................................................. S-1, S-14
DUE DATE .............................................................. S-14
DUFF & PHELPS .......................................................... S-3
EC MATURITY DATE .................................................. S-2, S-6
ELIGIBLE BANK ......................................................... S-89
ENVIRONMENTAL CONSULTANT .............................................. S-34
ERISA .......................................................... S-19, S-101
EXEMPTION ............................................................ S-102
EXTENSION ADVISOR ..................................................... S-91
FINAL RECOVERY DETERMINATION .......................................... S-73
FISCAL AGENT ................................................ S-3, S-7, S-14
FITCH ................................................................. S-63
FORM 8-K .............................................................. S-59
HOTEL LOAN ............................................................ S-29
HOTEL PROPERTY ........................................................ S-29
INDIRECT PARTICIPANTS ................................................. S-75
INDUSTRIAL LOAN ....................................................... S-29
INDUSTRIAL PROPERTY ................................................... S-29
INITIAL POOL BALANCE .................................................. S-29
INSURANCE PROCEEDS .................................................... S-65
INTEREST ACCRUAL PERIOD ......................................... S-14, S-67
INTERESTED PERSON ..................................................... S-93
LIQUIDATION PROCEEDS .................................................. S-65
LOAN PORTFOLIO ANALYSIS SYSTEM ........................................ S-98
LOAN PURCHASE CLOSING DATE ............................................ S-30
LOAN-TO-VALUE RATIO ................................................... S-46
LOCKOUT PERIOD ........................................................ S-36
LOWER-TIER REGULAR INTERESTS .......................................... S-18
LOWER-TIER REMIC ................................................. S-3, S-18
LPAS .................................................................. S-98
LTV ................................................................... S-46
MAJOR TENANT .......................................................... S-26
MASTER SERVICER ............................................. S-3, S-7, S-13
MASTER SERVICER MORTGAGE FILE ......................................... S-86
MCFC ............................................................. S-2, S-63
MCFC MORTGAGE LOAN PURCHASE AGREEMENT ................................. S-30
MIDLAND .................................................... S-2, S-30, S-62
MIDLAND MORTGAGE LOAN PURCHASE AGREEMENT .............................. S-30
MIDLAND MORTGAGE LOANS ................................................ S-30
MINI WAREHOUSE & OFFICE/WAREHOUSE LOAN ................................ S-29
MINI WAREHOUSE & OFFICE/WAREHOUSE PROPERTY ............................ S-29
MINI WAREHOUSE LOAN ................................................... S-29
MINI WAREHOUSE PROPERTY ............................................... S-29
MINIMUM AUCTION PRICE ................................................. S-74
S-108
<PAGE>
MOBILE HOME PARK LOAN ................................................. S-29
MOBILE HOME PARK PROPERTY ............................................. S-29
MONTHLY PAYMENT ................................................. S-41, S-65
MORTGAGE .............................................................. S-29
MORTGAGE FILE ......................................................... S-86
MORTGAGE LOAN SELLER .................................................. S-30
MORTGAGE LOANS ........................................................ S-29
MORTGAGE POOL .......................................................... S-2
MORTGAGE RATE ......................................................... S-36
MORTGAGED PROPERTY ............................................... S-2, S-29
MULTIFAMILY LOAN ...................................................... S-29
MULTIFAMILY PROPERTY .................................................. S-29
NET COLLECTIONS ....................................................... S-96
NET MORTGAGE RATE ..................................................... S-67
NET OPERATING INCOME .................................................. S-45
NET REO PROCEEDS ...................................................... S-66
NOI ................................................................... S-45
NOTE .................................................................. S-29
NOTIONAL BALANCES ..................................................... S-64
NURSING HOME LOAN ..................................................... S-29
NURSING HOME PROPERTY ................................................. S-29
OCCUPANCY RATE ........................................................ S-46
OFFERED CERTIFICATES ................................................... S-1
OFFICE LOAN ........................................................... S-29
OFFICE PROPERTY ....................................................... S-29
OFFICE/RETAIL LOAN .................................................... S-29
OFFICE/RETAIL PROPERTY ................................................ S-29
OID ................................................................... S-99
OID REGULATIONS ....................................................... S-18
OPTION ................................................................ S-32
ORIGINATOR ............................................................ S-30
PARTICIPANTS .......................................................... S-75
PASS-THROUGH RATE ..................................................... S-67
PAYING AGENT .......................................................... S-76
PERCENTAGE INTEREST ................................................... S-64
PERMITTED ENCUMBRANCES ................................................ S-60
PERMITTED INVESTMENTS ................................................. S-89
P&I ADVANCE ................................................ S-8, S-16, S-87
P&I CERTIFICATES ....................................................... S-2
PLANS .......................................................... S-19, S-101
POOLED PRINCIPAL DISTRIBUTION AMOUNT .................................. S-16
POOLING AND SERVICING AGREEMENT .................................. S-3, S-13
PREPAYMENT INTEREST SHORTFALL ......................................... S-67
PREPAYMENT INTEREST SURPLUS ........................................... S-67
PREPAYMENT PREMIUM .............................................. S-36, S-66
PRINCIPAL PREPAYMENTS ................................................. S-66
PRIVATE CERTIFICATES .................................................. S-13
PROPERTY ADVANCES ..................................................... S-88
PSCC .................................................................. S-30
PSI ................................................................... S-30
QUARTERLY PAYMENT LOAN ................................................ S-14
RATED FINAL DISTRIBUTION DATE .......................................... S-7
RATING AGENCIES ........................................................ S-3
REALIZED LOSS ......................................................... S-72
S-109
<PAGE>
RECORD DATE ..................................................... S-14, S-64
REGULAR CERTIFICATES ............................................. S-1, S-18
REGULATIONS .......................................................... S-102
REMIC ....................................................... S-3, S-7, S-99
REMITTANCE DATE ....................................................... S-87
REO ACCOUNT ........................................................... S-64
REO MORTGAGE LOAN ..................................................... S-68
REO PROPERTY .......................................................... S-64
REPURCHASE PRICE ...................................................... S-62
RESERVE ACCOUNTS ...................................................... S-41
RESIDUAL CERTIFICATES .................................................. S-1
RESTRICTED GROUP .............................................. S-102, S-103
RETAIL, ANCHORED LOAN ................................................. S-29
RETAIL, ANCHORED PROPERTY ............................................. S-29
RETAIL, SINGLE TENANT LOAN ............................................ S-29
RETAIL, SINGLE TENANT PROPERTY ........................................ S-29
RETAIL, UNANCHORED LOAN ............................................... S-29
RETAIL, UNANCHORED PROPERTY ........................................... S-29
RULES ................................................................. S-75
SBI ................................................................... S-63
SBMCG ...................................................... S-2, S-30, S-63
SCENARIOS ............................................................. S-81
SCHEDULED FINAL DISTRIBUTION DATE ...................................... S-7
SCHEDULED PRINCIPAL BALANCE ........................................... S-73
SENIOR CERTIFICATES .................................................... S-2
SENIOR PRINCIPAL DISTRIBUTION CROSS-OVER DATE ......................... S-71
SERIOUSLY DELINQUENT LOAN ............................................. S-88
SERVICING FEE ......................................................... S-95
SERVICING FEE RATE .................................................... S-95
SIMILAR LAW .......................................................... S-101
SMITH BARNEY MORTGAGE LOAN PURCHASE AGREEMENT ......................... S-30
SMITH BARNEY MORTGAGE LOANS ........................................... S-30
SMMEA ................................................................ S-104
S&P .................................................................... S-3
SPECIAL SERVICER .................................................. S-3, S-7
SPECIAL SERVICING FEE ................................................. S-96
SPECIALLY SERVICED MORTGAGE LOAN ................................ S-95, S-96
SUBORDINATE CERTIFICATES ............................................... S-2
TITLE POLICY .......................................................... S-60
TRUST FUND ............................................................. S-2
TRUST REMICS ........................................................... S-3
TRUSTEE ..................................................... S-3, S-7, S-14
TRUSTEE MORTGAGE FILE ................................................. S-85
UNDERWRITERS .................................................... S-1, S-105
UNDERWRITING AGREEMENT ............................................... S-105
UNDERWRITTEN CASH FLOW .......................................... S-45, S-46
UNDERWRITTEN NOI ................................................ S-45, S-46
UNSCHEDULED PAYMENTS .................................................. S-65
UPDATED APPRAISAL ..................................................... S-91
UPPER-TIER REMIC ................................................. S-3, S-18
VOTING RIGHTS ......................................................... S-94
WEIGHTED AVERAGE NET MORTGAGE RATE ............................... S-6, S-67
WORKOUT FEE ........................................................... S-96
YIELD MAINTENANCE CHARGES ............................................. S-72
YIELD MAINTENANCE PERIOD .............................................. S-37
ZONING LAWS ........................................................... S-25
S-110
<PAGE>
<TABLE>
<CAPTION>
ANNEX A
LOAN TERMS ORIGINAL ORIGINAL REMAIN. REMAIN.
LOAN ORIGINAL CUT-OFF DATE INTEREST AMORT. TERM TO MAT. AMORT. TERM TO
NO. PROPERTY NAME BALANCE BALANCE RATE TERM MATURITY DATE TERM MATURITY
- ---- -------------------------------- ---------- ------------ -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Sunrise Village Apartments 17,790,000 17,769,582 8.78% 360 60 7/1/01 358 58
2 1010 Massachusetts Avenue 10,400,000 10,400,000 9.46% 300 84 9/1/03 300 84
3 Harbour Point Estates 9,400,000 9,391,985 9.27% 300 84 8/1/03 299 83
4 Acacia Park Resort Apartments 8,500,000 8,448,972 8.16% 360 84 11/30/02 351 75
5 Plaza Centro I I 8,350,000 8,285,763 8.70% 300 120 1/1/06 292 112
6 Holiday Inn Maingate-Anaheim Hotel 8,000,000 7,888,907 9.00% 240 120 12/1/05 231 111
7 Builder's Square 7,400,000 7,333,071 8.50% 284 120 1/1/06 276 112
8 Hessel on the Park Apartments 7,250,000 7,206,711 8.19% 360 120 12/1/05 351 111
9 Banco Mercantil Building 7,000,000 6,988,720 9.63% 300 180 7/1/11 298 178
10 Tiberon Trails Apartments 7,000,000 6,987,466 9.00% 300 120 7/1/06 298 118
11 Arcadia Shopping Center 6,850,000 6,787,544 7.64% 300 84 12/31/02 292 76
12 Raphael Hotel 6,800,000 6,704,632 8.92% 240 180 12/1/10 231 171
13 Promenade At Lebanon East 5,754,000 5,743,984 9.17% 300 144 7/1/08 298 142
14 Rainbow Dunes Neighborhood
Shopping Center 5,650,000 5,536,216 12.35% 172 172 4/1/08 139 139
15 Country Creek Apartments 5,500,000 5,493,791 8.86% 360 84 7/1/03 358 82
16 Raphael Hotel 5,500,000 5,439,032 8.73% 240 180 2/1/11 233 173
17 1411 K Street, N.W. 5,275,000 5,256,830 9.28% 300 120 5/1/06 296 116
18 The Gates Apartments 5,250,000 5,237,709 8.72% 360 84 5/1/03 356 80
19 Gottschalks 5,100,000 5,051,244 9.39% 300 180 10/1/10 289 169
20 The Centre at Dover 4,965,000 4,957,120 9.72% 300 120 7/1/06 298 118
21 32000 Aurora Road 4,900,000 4,887,620 9.39% 300 120 6/1/06 297 117
22 Hechinger Backlick Plaza 4,420,000 4,412,937 9.68% 300 120 7/1/06 298 118
23 Mariposa Plaza 4,325,000 4,321,434 9.47% 300 144 8/1/08 299 143
24 The Boardwalk Apartments 4,350,000 4,314,533 8.54% 360 120 8/1/05 347 107
25 Lime Plaza Retirement Facility 4,060,000 4,044,252 8.56% 300 120 5/1/06 296 116
26 Mountain Shadows Care Center 4,000,000 3,969,881 9.63% 300 120 10/1/05 289 109
27 Hunt Club 3,942,000 3,935,241 9.26% 300 120 7/1/06 298 118
28 Mill Towne Center 3,900,000 3,886,876 9.42% 300 120 5/1/06 296 116
29 Central Valley Plaza Office
Building 3,900,000 3,881,177 8.61% 300 144 4/1/08 295 139
30 County Square 3,650,000 3,644,285 9.80% 300 120 7/1/06 298 118
31 Foothills Shadows Apartments 3,625,000 3,618,498 8.99% 300 120 7/1/06 298 118
32 Wellington House Apartments 3,625,000 3,615,146 8.95% 300 120 6/1/06 297 117
33 The Shoppes of Hinesville 3,550,000 3,540,318 8.93% 300 120 5/31/06 297 117
34 Brandywood Apartments 3,500,000 3,494,019 9.28% 300 180 7/1/11 298 178
35 North Country Commons 3,500,000 3,483,052 8.59% 300 120 4/1/06 295 115
36 Pacific Skies Estates Mobile
Home Park 3,410,000 3,406,345 9.11% 360 84 7/1/03 358 82
37 Harbor Plaza Shopping Center 3,400,000 3,376,136 8.42% 300 120 2/1/06 293 113
38 Williamsville Place 3,400,000 3,341,137 8.21% 180 180 3/1/11 174 174
39 Pezrow Building 3,315,000 3,306,498 9.30% 300 180 6/1/11 297 177
40 Crossroads Retirement Village 3,300,000 3,289,049 8.12% 360 120 4/1/06 355 115
41 Crestwood Village North Apts 3,282,000 3,272,271 8.68% 360 120 4/1/06 355 115
42 Classic Heights Apartments 3,180,000 3,174,230 8.92% 300 120 7/1/06 298 118
43 Los Cerros Apartments 3,100,000 3,087,033 9.62% 240 180 6/1/11 237 177
44 The Mainridge Apartments 3,000,000 2,984,425 9.24% 180 180 7/1/11 178 178
45 Hoodview Apartments 2,835,000 2,830,203 9.34% 300 120 7/1/06 298 118
46 Holland Lake Place Personal
Care Center 2,800,000 2,786,397 8.57% 300 120 4/1/06 295 115
47 Britains Lane Commerce Park 2,600,000 2,595,398 9.07% 300 144 7/1/08 298 142
48 Comfort Inn, East 2,600,000 2,592,667 9.50% 240 180 7/1/11 238 178
49 Squire's Landing Apartments 2,560,000 2,552,383 9.08% 240 144 7/1/08 238 142
50 TownSquare Retirement Community 2,560,000 2,551,504 8.12% 360 120 4/1/06 355 115
51 Westridge Garden Apartments 2,550,000 2,536,761 9.24% 180 180 7/1/11 178 178
52 Cardinal Retirement Village 2,500,000 2,491,703 8.12% 360 120 4/1/06 355 115
53 Terrace Garden Apartments 2,500,000 2,463,859 9.80% 360 120 5/1/04 332 92
54 15985,15866 Sturgeon Street &
37950 Commerce 2,433,750 2,423,369 9.36% 300 144 4/1/08 295 139
55 Ramada Inn Allentown 2,400,000 2,400,000 9.82% 240 120 9/1/06 240 120
56 Hampton House Villas 2,400,000 2,384,867 8.46% 360 120 10/31/05 350 110
57 Kay Bee Toys Store 2,345,000 2,326,842 8.85% 240 144 4/1/08 235 139
58 Windjammer Apartments 2,300,000 2,296,056 9.26% 300 120 7/1/06 298 118
59 Pioneer Mobile Home Park 2,295,000 2,291,207 9.48% 300 144 7/1/08 298 142
60 413 West Broadway 2,400,000 2,287,670 11.44% 300 120 4/14/99 212 32
61 Sun Tree Park Duplexes 2,200,000 2,194,243 9.18% 300 180 6/1/11 297 177
62 Esplanade Apartments 2,200,000 2,177,190 9.88% 360 84 12/1/01 339 63
63 The Chase Apartments 2,100,000 2,086,593 8.03% 300 120 3/1/06 294 114
64 Tri City Plaza 2,050,000 2,042,761 9.13% 300 84 5/1/03 296 80
65 Cherry Plaza Shopping Center 2,038,583 2,033,577 9.56% 300 120 6/1/06 297 117
66 Heritage Apartments 2,063,800 2,030,506 9.25% 360 84 5/1/01 332 56
67 Quail Creek Apartments 1,900,000 1,896,758 9.29% 300 180 7/1/11 298 178
68 Quail Hollow Apartments 1,865,565 1,862,355 8.80% 360 84 6/1/03 357 81
69 Colonnade Apartments 1,815,000 1,811,804 9.10% 300 144 7/1/08 298 142
70 Brush Meadow Apartments 1,800,000 1,798,130 9.26% 360 180 7/1/11 358 178
71 Pepper Place Apartments 1,800,000 1,796,872 9.18% 300 120 7/1/06 298 118
72 Park Forest Apartments 1,800,000 1,795,259 9.14% 300 180 6/1/11 297 177
73 Champaign House Apartments 1,800,000 1,789,252 8.19% 360 120 12/1/05 351 111
74 Pooler Square Shopping Center 1,685,000 1,680,404 8.93% 300 120 5/31/06 297 117
75 Academy Place & Times Square 1,665,000 1,657,622 9.13% 300 144 4/1/08 295 139
76 Gold Street Apartments 1,600,000 1,593,308 9.62% 240 180 6/1/11 237 177
77 Baileys Crossroads U-Store 1,600,000 1,579,781 8.78% 240 180 1/1/11 232 172
78 Corte Linda Apartments 1,580,000 1,567,040 8.51% 360 85 9/1/02 347 72
79 Century Center V 1,550,000 1,546,064 9.36% 300 84 6/1/03 297 81
80 Coronado Square Shopping Center 1,500,000 1,498,830 9.80% 300 120 8/1/06 299 119
81 Clearview Mobile Home Park 1,500,000 1,491,197 9.25% 240 144 5/1/08 236 140
82 Regency / Bel Rose Apartments 1,500,000 1,477,426 10.50% 300 84 1/1/02 280 64
83 565 85th Street 1,480,000 1,473,252 9.33% 192 192 7/1/12 190 190
84 Phoenix Place Apartments 1,481,250 1,473,192 8.05% 360 84 1/1/03 352 76
85 Claremont Apartments 1,462,500 1,453,764 9.11% 240 120 5/1/06 236 116
86 La Pico Plaza 1,450,000 1,447,667 9.64% 300 144 7/1/08 298 142
87 College Court Apartments 1,435,000 1,428,471 8.97% 300 144 4/1/08 295 139
88 Old Mill Business Center 1,435,000 1,424,591 9.37% 240 120 4/1/06 235 115
89 The Market Place 1,425,000 1,418,431 8.89% 300 120 3/31/06 295 115
90 West Court Ranches Apartments 1,412,000 1,408,268 9.12% 300 144 6/1/08 297 141
91 Prism Plaza Office Building 1,394,000 1,391,761 9.65% 300 120 7/1/06 298 118
92 Peninsula/Bricklyn Apartments 1,378,000 1,375,661 9.32% 300 144 7/1/08 298 142
93 Frank's Nursery & Crafts #628 1,379,474 1,364,126 8.70% 240 120 2/1/06 233 113
94 Frank's Nursery & Crafts #623 1,373,432 1,358,151 8.70% 240 120 2/1/06 233 113
95 Kash N' Karry Store No. 891 1,337,500 1,331,738 9.30% 300 180 4/1/11 295 175
96 Woodridge Manor Apartments 1,320,000 1,309,173 8.51% 360 85 9/1/02 347 72
97 Diplomat Townhouse Apartments 1,300,000 1,289,552 8.43% 300 120 12/31/05 292 112
98 Willow Creek Apartments 1,310,000 1,270,824 8.75% 300 84 4/1/01 271 55
99 Frank's Nursery & Crafts #101 1,280,990 1,266,737 8.70% 240 120 2/1/06 233 113
100 Commons of Orchard Park 1,250,000 1,245,622 8.95% 270 180 6/1/11 267 177
101 Springfield Duplexes 1,250,000 1,239,625 8.23% 300 180 1/1/11 292 172
102 Kash N' Karry Store No. 702 1,226,850 1,221,565 9.30% 300 180 4/1/11 295 175
103 Stonebridge Plaza Shopping Center 1,200,000 1,190,402 8.46% 300 120 1/1/06 292 112
104 St. Regis Apartments 1,200,000 1,189,300 9.16% 168 168 6/1/10 165 165
105 Emerald Point Apartments 1,150,000 1,145,254 7.96% 360 84 3/1/03 354 78
106 Westgate Apartment Complex 1,150,000 1,138,826 8.75% 192 192 5/1/12 188 188
107 Cypress Hills Patio Homes 1,145,000 1,133,399 8.18% 240 120 3/1/06 234 114
108 Four Corners Medical Center 1,133,000 1,131,177 9.64% 300 120 7/1/06 298 118
109 1001 Dove Street 1,105,000 1,103,267 9.79% 300 144 7/1/08 298 142
110 Atascocita Village Mobile
Home Park 1,100,000 1,100,000 9.45% 240 180 9/1/11 240 180
111 The Roosevelt Apartments 1,100,000 1,099,450 9.42% 360 120 8/1/06 359 119
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LOAN TERMS ORIGINAL ORIGINAL REMAIN. REMAIN.
LOAN ORIGINAL CUT-OFF DATE INTEREST AMORT. TERM TO MAT. AMORT. TERM TO
NO. PROPERTY NAME BALANCE BALANCE RATE TERM MATURITY DATE TERM MATURITY
- ---- -------------------------------- ---------- ------------ -------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
112 The Richards Building 1,050,000 1,048,345 9.76% 300 144 7/1/08 298 142
113 Arlington Medical Plaza 1,050,000 1,047,396 9.50% 300 144 6/1/08 297 141
114 Madison Avenue Building 1,050,000 1,044,005 8.72% 300 144 3/1/08 294 138
115 Harbor Plaza 1,000,000 998,442 9.83% 300 144 7/1/08 298 142
116 Mustang Crossing Apts I I I 1,010,000 990,827 9.00% 360 84 2/1/01 329 53
117 The Cave Creek Plaza 990,000 988,394 9.59% 300 120 7/1/06 298 118
118 The Concordia Place Apartments 1,000,000 973,894 9.38% 300 84 5/1/01 272 56
119 Acme-Kent Plaza 975,000 967,352 8.58% 300 144 1/1/08 292 136
120 402-416 East 25th Street 970,000 965,578 9.33% 192 192 7/1/12 190 190
121 Hawthorne Service Center 950,000 944,742 8.91% 300 144 3/1/08 294 138
122 Creative Containers Warehouse 936,000 933,387 9.58% 240 144 7/1/08 238 142
123 University Gardens Apartments 931,000 929,358 9.09% 300 120 7/1/06 298 118
124 The Broadmoor Apartments 930,000 926,617 8.95% 300 180 5/1/11 296 176
125 Mount Vernon Apartments 975,000 920,913 8.75% 240 84 1/1/01 208 52
126 St. Regis Apartments 920,000 916,653 8.95% 300 180 5/1/11 296 176
127 Frank's Nursery & Crafts #99 892,829 882,895 8.70% 240 120 2/1/06 233 113
128 Claybourne Apartments 1,000,000 880,492 9.60% 179 180 4/15/08 139 140
129 Frank's Nursery & Crafts #167 883,802 873,969 8.70% 240 120 2/1/06 233 113
130 South Willow Street Plaza 862,500 860,407 9.63% 300 120 6/1/06 297 117
131 Frank's Nursery & Crafts #106 867,548 857,895 8.70% 240 120 2/1/06 233 113
132 Frank's Nursery & Crafts #140 862,893 853,292 8.70% 240 120 2/1/06 233 113
133 Frank's Nursery & Crafts #163 857,318 847,779 8.70% 240 120 2/1/06 233 113
134 Kash N' Karry Store No. 886 847,400 843,749 9.30% 300 180 4/1/11 295 175
135 Frank's Nursery & Crafts #265 753,432 745,049 8.70% 240 120 2/1/06 233 113
136 Frank's Nursery & Crafts #139 734,319 726,149 8.70% 240 120 2/1/06 233 113
137 Frank's Nursery & Crafts #135 730,026 721,904 8.70% 240 120 2/1/06 233 113
138 Jackson Manor Apartments 675,000 664,377 9.38% 360 84 5/1/01 332 56
139 Briarcliff Apartments 675,000 657,031 9.25% 300 84 5/1/01 272 56
140 Greenwood Apartments 625,000 608,362 9.25% 300 84 5/1/01 272 56
141 Budget Self Storage 566,000 563,633 9.62% 240 120 6/1/06 237 117
142 Greenhill Apartments 600,000 561,586 9.90% 180 180 9/1/09 156 156
143 Velma Court Apartments 600,000 528,296 9.60% 179 180 4/15/08 139 140
$381,493,761 $379,109,545 9.06% 298 125 291 119
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ANNEX A
ANNEX A
COLLATERAL DESCRIPTION LARGEST TENANT
LOAN BALLOON YEAR YEAR PCT OF LEASE EXP
NO. BALANCE PROPERTY TYPE PROPERTY CITY STATE UNITS/SF BUILT RENOVATED LARGEST TENANT SF PROPERTY DATE
- ---- -------- -------------- ------------- ----- ---------- ----- --------- -------------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 17,027,211 Multifamily Las Vegas NV 489Unit 1984 1995 0 N/A
2 9,382,394 Office Boston MA 187,143SF 1902 1990 Public Health
Commission 70,469 37.7% 11/1/97
3 8,457,259 Mobile Home Park Chicago IL 654Unit 1970 0 N/A
4 7,877,636 Multifamily San
Bernardino CA 304Unit 1988 0 N/A
5 6,860,582 Retail, Anchored Caguas PR 98,806SF 1995 Office Max Inc. 23,500 23.8% 1/31/2010
6 5,682,071 Hotel Anaheim CA 313Unit 1968 0 N/A
7 5,864,631 Retail, Single
Tenan Caguas PR 109,800SF 1995 Builder's Square 109,800 100.0% 8/31/2019
8 6,384,664 Multifamily Champaign IL 285Unit 1965 1990 0 N/A
9 4,749,239 Office New York NY 13,349SF 1904 1994 Banco Mercantil 13,349 100.0%
10 5,791,746 Multifamily Merrillville IN 376Unit 1974 0 N/A
11 6,005,532 Retail, Anchored Arcadia NY 178,248SF 1974 1994 Wal-Mart 93,488 52.4% 7/14/2012
12 2,935,968 Hotel Kansas City MO 123Unit 1927 1975 0 N/A
13 4,453,000 Retail, Anchored Lebanon PA 104,092SF 1989 Festival Foods 51,577 49.5% 1/31/2010
14 3 Retail, Anchored Las Vegas NV 105,245SF 1983 K Mart
Corporation 105,245 100.0% 10/1/2008
15 5,141,797 Multifamily Garland TX 298Unit 1983 0 N/A
16 2,352,868 Hotel Chicago IL 172Unit 1925 1995 0 N/A
17 4,392,221 Office Washington DC 64,543SF 1959 1991 Dept. of
Treasury 16,489 25.5% 12/19/96
18 4,899,874 Multifamily Marina CA 134Unit 1986 0 N/A
19 3,429,389 Retail, Single
Tenan Antioch CA 90,537SF 1989 Gottschalks 90,537 100.0%
20 4,173,905 Retail, Anchored Dover DE 113,687SF 1989 Hechingers 60,585 53.3% 6/30/2014
21 4,089,935 Industrial Solon OH 326,480SF 1954 Handl-it, Inc. 157,208 48.2% 4/30/99
22 3,712,575 Retail, Anchored Springfield VA 85,850SF 1970 Hechinger's 49,500 57.7% 1/31/2008
23 3,375,384 Retail, Fountain
Unanchored Valley CA 39,600SF 1987 Hogue Hospital 8,250 20.8% 8/31/2005
24 3,857,170 Multifamily Kansas City KS 372Unit 1968 1994 0 N/A
25 3,324,687 Congregate Care Lakeland FL 126Unit 1984 0 N/A
26 3,446,873 Nursing Home Escondido CA 105Beds 1989 0 N/A
27 3,280,837 Multifamily Sylvania OH 210Unit 1970 0 N/A
28 3,257,403 Office-Retail Tempe AZ 80,854SF 1985 Dialamerica 15,287 18.9% 10/31/2005
29 2,969,179 Office San Diego CA 79,956SF 1982 Westland
Insurance Broke 11,413 14.3% 8/31/97
30 3,073,634 Office-Retail Fontana CA 71,740SF 1988 Dept of Public
Social Se 41,740 58.2% 10/31/2005
31 2,998,609 Multifamily Tucson AZ 144Unit 1985 0 N/A
32 2,995,849 Multifamily Sylvania
Township OH 87Unit 1989 0 N/A
33 2,932,511 Retail, Anchored Hinesville GA 76,123SF 1989 Food Lion 25,000 32.8% 12/3/2008
34 2,343,742 Multifamily Pasadena TX 698Unit 1972 0 N/A
35 2,868,172 Multifamily Stillwater OK 244Unit 1971 1989 N/A 0 N/A
36 3,197,173 Mobile Home Park Pacifica CA 93Unit 1959 0 N/A
37 2,774,808 Retail,
Unanchored Delray Beach FL 45,189SF 1982 Bullhead, Inc. 8,000 17.7% 4/1/2006
38 0 Retail,
Unanchored Amherst NY 84,425SF 1984 Leaps & Bounds 14,990 17.8% 12/9/2003
39 2,221,543 Office Ramsey NJ 73,700SF 1972 1985 Pezrow
Companies, Inc. 73,700 100.0% 5/30/2011
40 2,902,022 Congregate Care Columbus OH 120Unit 1983 0 N/A
41 2,917,624 Multifamily Indianapolis IN 214Unit 1973 0 N/A
42 2,626,261 Multifamily Baton Rouge LA 203Unit 1975 0 N/A
43 1,383,602 Multifamily Los Alamos NM 105Unit 1970 0 N/A
44 0 Multifamily Houston TX 264Unit 1978 1995 0 N/A
45 2,363,708 Multifamily Killeen TX 150Unit 1975 0 N/A
46 2,293,438 Congregate Care Weatherford TX 81Beds 1989 0 N/A
47 2,006,385 Industrial Columbus OH 149,900SF 1988 Midco Products
Inc 12,000 8.0% 9/30/98
48 1,153,965 Hotel Oregon OH 78Unit 1988 0 N/A
49 1,576,727 Multifamily Stillwater OK 162Unit 1983 0 N/A
50 2,251,266 Congregate Care Belleville IL 76Unit 1984 0 N/A
51 0 Multifamily Houston TX 256Unit 1978 1995 0 N/A
52 2,198,502 Congregate Care Findlay OH 150Unit 1983 0 N/A
53 2,266,288 Multifamily Westminister CO 180Unit 1973 0 N/A
54 1,893,588 Industrial Roseville MI 85,413SF 1969 1985 Summit Systems, 41,752 48.9% 2/28/2021
and Ste Inc.
55 1,744,109 Hotel Whitehall PA 122Unit 1969 1990 0 N/A
56 2,124,821 Multifamily Essexville MI 150Unit 1976 0 N/A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COLLATERAL DESCRIPTION LARGEST TENANT
LOAN BALLOON YEAR YEAR PCT OF LEASE EXP
NO. BALANCE PROPERTY TYPE PROPERTY CITY STATE UNITS/SF BUILT RENOVATED LARGEST TENANT SF PROPERTY DATE
- ---- ---------- ----------------- ------------- ----- --------- ----- --------- -------------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
57 1,432,347 Retail, Single
Tenan Astoria NY 7,100SF 1945 1990 Kay Bee Toys 7,100 100.0% 10/31/2005
58 1,914,237 Multifamily Springfield
Towns OH 100Unit 1973 0 N/A
59 1,791,595 Mobile Home Park Green River WY 307Unit 1979 0 N/A
60 2,088,859 Office New York NY 26,300SF 1892 1989 Tootsi
Plohound Corp 4,400 16.7% 4/30/2000
61 1,467,603 Multifamily Moore OK 96Unit 1984 0 N/A
62 2,079,687 Multifamily Phoenix AZ 132Unit 1984 1993 0 N/A
63 1,697,321 Multifamily Fort Worth TX 124Unit 1985 0 N/A
64 1,840,646 Retail, Anchored Saginaw MI 144,991SF 1963 1989 Kessel Food
Market #10 42,537 29.3% 7/1/2006
65 1,707,893 Retail, Anchored Meridian ID 68,652SF 1975 Coast to Coast 20,055 29.2% 7/31/2004
66 1,938,044 Multifamily Tulsa OK 136Unit 1966 0 N/A
67 1,272,800 Multifamily Oklahoma City OK 126Unit 1974 0 N/A
68 1,742,822 Multifamily Dallas TX 120Unit 1984 0 N/A
69 1,401,817 Multifamily Beaumont TX 122Unit 1969
70 1,439,243 Multifamily Billings MT 60Unit 1994 0 N/A
71 1,495,413 Multifamily Richardson TX 88Unit 1980 N/A
72 1,198,926 Multifamily Oklahoma City OK 224Unit 1974 1988 0 N/A
73 1,585,158 Multifamily Champaign IL 84Unit 1965 1994 0 N/A
74 1,391,910 Retail, Anchored Pooler GA 44,000SF 1989 Food Lion 25,000 56.8% 10/7/2009
75 1,287,069 Office Colorado
Springs CO 56,115SF 1981 Intermountain
Mortgage 12,497 22.3% 3/31/98
76 714,117 Multifamily Los Alamos NM 76Unit 1953 0 N/A
77 686,141 Mini Warehouse Baileys
Crossroad VA 688Unit 1986 0 N/A
78 1,469,103 Multifamily Phoenix AZ 117Unit 1986 1994 0 N/A
79 1,396,352 Industrial Harris County TX 49,640SF 1984 AdPlex, Inc. 13,698 27.6% 5/31/2001
80 1,263,137 Retail,
Unanchored Universal City TX 65,287SF 1988 The Natural
Edge, Inc. 12,222 18.7% 6/30/96
81 929,486 Mobile Home Park West Wendover NV 164Unit 1983 1986 0 N/A
82 1,372,054 Multifamily Littleton CO 81Unit 1961 0 N/A
83 0 Multifamily Brooklyn NY 68Unit 1927 1990 Dr. Harvey Freed 10/31/97
84 1,370,741 Multifamily Dallas TX 120Unit 1972 1991 0 N/A
85 1,042,032 Multifamily Dallas TX 172Unit 1956 0 N/A
86 1,136,917 Retail,
Unanchored Reseda CA 20,191SF 1986 ARA Dance Studio 2,608 12.9% 4/1/99
87 1,104,177 Multifamily Bryan TX 108Unit 1963 0 N/A
88 1,029,981 Mini Warehouse
& Off Colorado Springs CO 72,584SF 1985 Back Talk
Systems, Inc. 4,320 6.0% 10/31/98
89 1,176,044 Retail, Anchored Live Oak FL 34,555SF 1988 Food Lion 25,000 72.3% 2/28/2009
90 1,091,184 Multifamily Flint Township MI 99Unit 1972 0 N/A
91 1,170,138 Office Virginia Beach VA 31,587SF 1986 United Property
Mgmt 8,630 27.3% 8/31/99
92 1,070,958 Multifamily Tampa FL 112Unit 1986 0 N/A
93 971,277 Retail, Single
Tenan Bridgewater NJ 20,656SF 1985 Frank's Nursery
& Crafts 20,656 100.0%
94 967,023 Retail, Single
Tenan Staten Island NY 14,560SF 1984 Franks Nursery
& Crafts 14,560 100.0%
95 896,324 Retail, Single
Tenan Sebring FL 33,896SF 1985 Kash N' Karry 33,896 100.0% 3/31/2021
96 1,227,351 Multifamily Glendale AZ 72Unit 1984 0 N/A
97 1,061,214 Multifamily College Park GA 124Unit 1971 0 N/A
98 1,169,529 Multifamily Little Rock AR 133Unit 1974 0 N/A
99 901,935 Retail, Single
Tenan Deptford NJ 18,739SF 1984 Frank's Nursery
& Crafts 18,739 100.0%
100 704,289 Retail,
Unanchored Orchard Park NY 29,631SF 1977 Barzman, Kasimov,
& Viet 7,278 24.6% 10/31/2005
101 802,874 Multifamily Oklahoma City OK 62Unit 1979 0 N/A
102 822,172 Retail, Single
Tenan Crystal River FL 40,895SF 1987 Kash N' Karry 40,895 100.0% 3/31/2021
103 980,297 Retail,
Unanchored Chesapeake VA 18,150SF 1988 Szechuan Inn, Inc 2,180 12.0% 11/29/97
104 0 Multifamily Kansas City MO 85Unit 1914 1995 0 N/A
105 1,062,916 Multifamily Irving TX 76Unit 1965 1988 0 N/A
106 0 Multifamily Alamogordo NM 56Unit 1986 0 N/A
107 793,739 Multifamily Kansas City MO 74Unit 1968 0 N/A
108 950,848 Office Silver Spring MD 20,150SF 1968 1995 Shapiro &
Bernstein, MD 3,271 16.2% 2/28/2000
109 869,923 Office Newport Beach CA 26,072SF 1976 BTA Advisory
Service 2,501 9.6% 7/15/99
110 487,074 Mobile Home Park Houston TX 231Unit 1971
111 990,951 Multifamily Township
of Montc NJ 27Unit 1920 1996 0 N/A
112 825,959 Office Boston MA 15,594SF 1859 1980 Mass. Rep. St.
Comm. 4,600 29.5% 12/31/96
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COLLATERAL DESCRIPTION LARGEST TENANT
LOAN BALLOON YEAR YEAR LARGEST PCT OF LEASE EXP
NO. BALANCE PROPERTY TYPE PROPERTY CITY STATE UNITS/SF BUILT RENOVATED TENANT SF PROPERTY DATE
- ---- -------- ------------- ------------- ----- --------- ----- --------- -------------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
113 820,136 Office Arlington TX 59,886SF 1975 Physician Rel
--Charles 6,601 11.0% 4/1/2001
114 802,025 Retail,
Unanchored Temecula CA 31,446SF 1990 SK Furniture 16,050 51.0% 2/28/2001
115 788,103 Office San Pedro CA 32,756SF 1978 City Attorneys 3,935 12.0% 6/1/97
116 945,769 Multifamily Richmond TX 132Unit 1978 1993 0 N/A
117 829,944 Retail,
Anchored Phoenix AZ 21,320SF 1978 Pro Lock 2,880 13.5% 1/31/2001
118 901,065 Multifamily Austin TX 73Unit 1969 1992 0 N/A
119 741,625 Retail, Franklin
Unanchored Township OH 23,400SF 1984 Dot's Inc. 4,800 20.5% 5/31/97
120 0 Multifamily Brooklyn NY 57Unit 1963 1995 0 N/A
121 729,713 Retail,
Unanchored Indianapolis IN 36,188SF 1987 Sommer Awning
Company 5,034 13.9% 6/30/96
122 586,758 Industrial El Paso TX 50,300SF 1980 Creative
Container, Inc. 50,300 100.0% 12/31/2000
123 771,887 Multifamily Odessa TX 160Unit 1980 0 N/A
124 614,904 Multifamily Memphis TN 48Unit 1928 1984 0 N/A
125 801,221 Multifamily Oklahoma
City OK 92Unit 1968 0 N/A
126 608,292 Multifamily Memphis TN 46Unit 1928 0 N/A
127 628,634 Retail, Single Brookhaven PA 18,739SF 1983 Franks Nursery
Tenan & Crafts 18,739 100.0%
128 0 Multifamily Pittsburgh PA 56Unit 1967 0 N/A
129 622,278 Retail, Single
Tenan Schaumburg IL 19,000SF 1986 Franks Nursery
& Crafts 19,000 100.0%
130 723,680 Retail,
Unanchored Manchester NH 23,473SF 1983 Jazzercise 4,805 20.5% 10/31/96
131 610,834 Retail, Single Libertyville IL 18,670SF 1985 Franks Nursery
Tenan & Crafts 18,670 100.0%
132 607,556 Retail, Single
Tenan Lake Zurich IL 18,670SF 1986 Franks Nursery
& Crafts 18,670 100.0%
133 603,631 Retail, Single
Tenan Crystal Lake IL 18,670SF 1986 Franks Nursery
& Crafts 18,670 100.0%
134 567,884 Retail, Single
Tenan Spring Hill FL 33,896SF 1984 Kash N' Karry 33,896 100.0% 3/31/2021
135 530,486 Retail, Single
Tenan St. Peters MO 20,550SF 1992 Franks Nursery
& Crafts 20,550 100.0%
136 517,028 Retail, Single
Tenan St. Charles MO 18,968SF 1986 Franks Nursery
& Crafts 18,968 100.0%
137 514,006 Retail, Single
Tenan Bridgeton MO 18,968SF 1986 Franks Nursery
& Crafts 18,968 100.0%
138 634,744 Multifamily Greenville TX 32Unit 1984 0 N/A
139 607,128 Multifamily Atlanta GA 32Unit 1930 0 N/A
140 562,155 Multifamily Atlanta GA 32Unit 1960 1992 0 N/A
141 409,079 Mini Warehouse Waldorf MD 205Unit 1985 0 N/A
142 0 Multifamily Pittsburgh PA 55Unit 1971 0 N/A
143 0 Multifamily Pittsburgh PA 46Unit 1967 0 N/A
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ANNEX A
COLLATERAL VALUE COLLATERAL OPERATING PERFORMANCE
UNDER- UNDER- ANNUAL UNDER-
APPRAISED APPRAIS. APPRAIS. BALLOON APPRAIS. CURRENT OCCUPANCY WRITTEN WRITTEN DEBT WRITTEN
VALUE DATE LTV BALANCE BALLOON OCCUPANCY AS OF DATE NOI CASH FLOW SERVICE DSCR
- ---------- -------- -------- ---------- -------- --------- ---------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
22,500,000 1/9/96 79.0% 17,027,211 75.7% 93.66% 1/6/96 2,226,465 2,104,215 1,684,024 1.25
15,900,000 5/1/96 65.4% 9,382,394 59.0% 97.00% 6/21/96 1,668,350 1,542,428 1,086,905 1.42
16,500,000 5/23/96 56.9% 8,457,259 51.3% 75.99% 6/10/96 1,376,777 1,344,077 967,556 1.39
11,500,000 8/28/95 73.5% 7,877,636 68.5% 95.72% 3/31/96 1,091,187 1,030,387 760,062 1.36
13,400,000 9/26/95 61.8% 6,860,582 51.2% 97.47% 3/18/96 1,209,636 1,146,758 820,387 1.40
19,200,000 7/26/95 41.1% 5,682,071 29.6% 73.10% 4/30/96 2,121,500 2,121,500 863,736 2.46
10,400,000 9/26/95 70.5% 5,864,631 56.4% 100.00% 3/31/96 965,274 965,274 726,930 1.33
9,650,000 5/30/95 74.7% 6,384,664 66.2% 94.39% 4/10/96 896,905 822,805 649,936 1.27
10,700,000 5/17/96 65.3% 4,749,239 44.4% 100.00% 741,510 741,510 741,510 1.00
9,780,000 2/14/96 71.4% 5,791,746 59.2% 90.16% 6/26/96 893,431 893,431 704,925 1.27
9,200,000 7/27/95 73.8% 6,005,532 65.3% 100.00% 3/25/96 860,181 813,837 614,956 1.32
9,800,000 11/10/95 68.4% 2,935,968 30.0% 81.50% 12/31/95 1,077,300 1,077,300 729,983 1.48
7,700,000 5/24/96 74.6% 4,453,000 57.8% 100.00% 6/19/96 786,386 757,791 587,508 1.29
7,800,000 12/14/95 71.0% 3 0.0% 100.00% 12/14/95 774,125 759,813 757,016 1.00
8,600,000 6/1/96 63.9% 5,141,797 59.8% 95.97% 5/13/96 768,956 768,956 524,416 1.47
9,000,000 11/22/95 60.4% 2,352,868 26.1% 66.70% 12/31/95 845,402 845,402 582,407 1.45
7,200,000 3/5/96 73.0% 4,392,221 61.0% 92.52% 6/30/96 791,453 689,320 543,401 1.27
6,800,000 11/28/95 77.0% 4,899,874 72.1% 99.25% 2/29/96 655,228 621,728 494,272 1.26
7,700,000 9/12/95 65.6% 3,429,389 44.5% 100.00% 9/12/95 733,489 708,331 530,030 1.34
6,750,000 5/21/96 73.4% 4,173,905 61.8% 95.28% 7/31/96 718,288 703,476 529,689 1.33
6,265,000 4/17/96 78.0% 4,089,935 65.3% 82.73% 5/10/96 755,758 658,670 509,245 1.29
6,700,000 5/21/96 65.9% 3,712,575 55.4% 92.06% 6/30/96 639,479 611,142 470,062 1.30
6,060,000 4/4/96 71.3% 3,375,384 55.7% 100.00% 1/1/96 634,244 598,423 452,367 1.32
6,100,000 3/17/95 70.7% 3,857,170 63.2% 90.05% 3/31/96 591,354 502,074 402,854 1.25
6,000,000 2/27/96 67.4% 3,324,687 55.4% 79.37% 6/1/96 601,899 601,899 394,278 1.53
5,800,000 1/1/95 68.4% 3,446,873 59.4% 97.14% 6/30/95 946,963 925,963 423,720 2.19
5,550,000 5/17/96 70.9% 3,280,837 59.1% 98.10% 6/24/96 506,900 506,900 405,429 1.25
5,600,000 3/18/96 69.4% 3,257,403 58.2% 94.47% 4/1/96 682,043 612,325 406,290 1.51
5,800,000 9/8/95 66.9% 2,969,179 51.2% 97.88% 3/26/96 616,861 499,898 380,322 1.31
6,500,000 5/24/96 56.1% 3,073,634 47.3% 86.67% 3/1/96 605,744 517,484 391,852 1.32
4,900,000 1/10/96 73.8% 2,998,609 61.2% 94.44% 6/3/96 459,111 459,111 364,753 1.26
5,120,000 4/17/96 70.6% 2,995,849 58.5% 93.10% 3/15/96 459,297 459,297 363,562 1.26
4,850,000 2/1/96 73.0% 2,932,511 60.5% 97.37% 2/29/96 473,777 443,576 355,458 1.25
10,130,000 2/26/96 34.5% 2,343,742 23.1% 74.64% 6/3/96 545,430 545,430 360,550 1.51
5,310,000 2/9/96 65.6% 2,868,172 54.0% 96.72% 5/26/96 492,274 492,274 340,746 1.44
4,725,000 4/27/96 72.1% 3,197,173 67.7% 100.00% 4/15/96 415,792 415,792 332,495 1.25
4,550,000 10/25/95 74.2% 2,774,808 61.0% 94.96% 6/11/96 481,852 442,795 326,336 1.36
4,600,000 10/13/95 72.6% 0 0.0% 85.29% 7/24/96 627,598 568,667 394,868 1.44
6,100,000 4/10/96 54.2% 2,221,543 36.4% 100.00% 4/26/96 545,823 452,467 342,042 1.32
5,400,000 1/30/96 60.9% 2,902,022 53.7% 97.50% 5/1/96 490,440 490,440 293,890 1.67
4,750,000 12/21/95 68.9% 2,917,624 61.4% 100.00% 3/20/96 445,146 391,646 307,727 1.27
4,350,000 5/9/96 73.0% 2,626,261 60.4% 88.18% 5/17/96 450,464 450,464 318,149 1.42
4,950,000 3/18/96 62.4% 1,383,602 28.0% 92.38% 7/1/96 450,823 450,823 349,673 1.29
4,700,000 5/17/96 63.5% 0 0.0% 92.05% 5/31/96 436,681 436,681 370,294 1.18
3,850,000 6/8/96 73.5% 2,363,708 61.4% 92.00% 5/24/96 426,616 426,616 293,457 1.45
4,000,000 3/3/96 69.7% 2,293,438 57.3% 91.36% 6/1/96 440,313 440,313 272,143 1.62
3,775,000 6/11/96 68.8% 2,006,385 53.1% 95.20% 6/10/96 368,366 342,679 263,326 1.30
4,200,000 11/2/95 61.7% 1,153,965 27.5% 81.74% 5/31/96 441,459 441,459 290,825 1.52
4,155,000 5/8/96 61.4% 1,576,727 37.9% 99.38% 5/8/96 453,980 453,980 277,978 1.63
3,800,000 1/16/96 67.1% 2,251,266 59.2% 100.00% 5/1/96 371,708 371,708 227,988 1.63
4,700,000 5/17/96 54.0% 0 0.0% 95.70% 5/1/96 428,300 428,300 314,750 1.36
5,900,000 1/23/96 42.2% 2,198,502 37.3% 98.00% 5/1/96 365,255 365,255 222,644 1.64
3,660,000 3/19/94 67.3% 2,266,288 61.9% 88.89% 3/26/96 407,986 353,986 258,849 1.37
3,245,000 2/12/96 74.7% 1,893,588 58.4% 100.00% 2/21/96 363,119 340,249 252,327 1.35
3,700,000 4/24/96 64.9% 1,744,109 47.1% 64.92% 6/30/96 418,485 418,485 274,500 1.52
3,460,000 9/8/95 68.9% 2,124,821 61.4% 92.67% 4/1/96 330,512 297,512 220,631 1.35
3,350,000 2/13/96 69.5% 1,432,347 42.8% 100.00% 6/5/96 349,064 344,991 250,475 1.38
3,070,000 5/24/96 74.8% 1,914,237 62.4% 100.00% 6/24/96 299,881 299,881 236,552 1.27
3,200,000 5/30/96 71.6% 1,791,595 56.0% 81.11% 6/26/96 299,841 299,841 240,233 1.25
4,600,000 5/7/96 49.7% 2,088,859 45.4% 91.63% 5/1/96 414,177 410,232 329,123 1.25
3,120,000 2/12/96 70.3% 1,467,603 47.0% 100.00% 4/17/96 295,892 295,892 224,811 1.32
3,350,000 8/16/94 65.0% 2,079,687 62.1% 97.73% 2/29/96 328,930 289,330 229,244 1.26
3,250,000 2/1/96 64.2% 1,697,321 52.2% 95.97% 5/22/96 268,843 268,843 194,999 1.38
3,050,000 11/30/95 67.0% 1,840,646 60.3% 54.17% 3/1/96 322,519 274,554 208,637 1.32
3,200,000 2/1/96 63.5% 1,707,893 53.4% 98.10% 5/1/96 314,606 289,180 214,754 1.35
3,000,000 12/29/93 67.7% 1,938,044 64.6% 93.38% 12/15/95 336,915 296,115 203,741 1.45
2,690,000 5/22/96 70.5% 1,272,800 47.3% 97.62% 6/3/96 255,224 255,224 195,885 1.30
2,750,000 9/12/95 67.7% 1,742,822 63.4% 92.50% 3/31/96 257,585 233,585 176,917 1.32
2,420,000 6/5/96 74.9% 1,401,817 57.9% 96.72% 6/28/96 245,959 245,959 184,271 1.33
2,500,000 6/15/96 71.9% 1,439,243 57.6% 96.67% 4/30/96 213,552 213,552 177,854 1.20
2,650,000 6/5/96 67.8% 1,495,413 56.4% 94.32% 6/24/96 221,076 221,076 183,936 1.20
3,175,000 3/19/96 56.5% 1,198,926 37.8% 91.07% 3/22/96 243,029 243,029 183,342 1.33
2,400,000 5/30/95 74.6% 1,585,158 66.0% 92.86% 4/10/96 222,316 201,736 161,363 1.25
2,325,000 2/2/96 72.3% 1,391,910 59.9% 95.68% 4/17/96 232,247 218,427 168,717 1.29
2,878,000 1/17/96 57.6% 1,287,069 44.7% 79.01% 6/1/96 272,755 248,284 169,454 1.47
2,575,000 3/18/96 61.9% 714,117 27.7% 100.00% 7/25/96 239,756 239,756 180,476 1.33
2,550,000 10/10/95 62.0% 686,141 26.9% 84.45% 3/30/96 270,469 270,469 170,040 1.59
2,100,000 12/5/94 74.6% 1,469,103 70.0% 98.29% 3/31/95 272,925 246,249 145,920 1.69
2,300,000 3/21/96 67.2% 1,396,352 60.7% 88.43% 5/1/96 227,170 201,585 160,701 1.25
2,570,000 6/18/96 58.3% 1,263,137 49.1% 81.20% 6/30/96 272,685 214,642 161,035 1.33
2,250,000 2/12/96 66.3% 929,486 41.3% 99.39% 4/8/96 221,873 221,873 164,856 1.35
2,290,000 11/11/94 64.5% 1,372,054 59.9% 98.77% 12/1/95 263,796 239,496 169,953 1.41
2,100,000 12/11/95 70.2% 0 0.0% 100.00% 5/16/96 244,560 224,160 178,413 1.26
1,975,000 8/1/95 74.6% 1,370,741 69.4% 91.67% 3/31/96 234,080 210,080 131,047 1.60
1,950,000 3/29/96 74.6% 1,042,032 53.4% 93.60% 4/25/96 212,902 212,902 159,146 1.34
1,992,000 5/17/96 72.7% 1,136,917 57.1% 90.95% 3/31/96 217,245 200,949 153,720 1.31
2,300,000 3/26/96 62.1% 1,104,177 48.0% 88.89% 6/9/96 205,149 205,149 144,156 1.42
2,650,000 10/18/95 53.8% 1,029,981 38.9% 95.27% 7/25/96 247,707 228,286 159,054 1.44
1,900,000 11/8/95 74.7% 1,176,044 61.9% 100.00% 3/25/96 197,445 188,070 142,217 1.32
2,030,000 3/18/96 69.4% 1,091,184 53.8% 96.97% 4/26/96 192,985 192,985 143,588 1.34
2,250,000 4/17/96 61.9% 1,170,138 52.0% 92.16% 3/1/96 220,792 184,928 147,900 1.25
2,150,000 5/31/96 64.0% 1,070,958 49.8% 100.00% 5/1/96 183,798 183,798 142,411 1.29
2,350,000 8/20/95 58.0% 971,277 41.3% 100.00% 8/20/95 231,555 228,611 145,759 1.57
2,350,000 8/19/95 57.8% 967,023 41.1% 100.00% 8/19/95 230,540 227,553 145,121 1.57
2,000,000 3/25/96 66.6% 896,324 44.8% 100.00% 3/25/96 206,802 204,768 138,003 1.48
1,950,000 1/28/95 67.1% 1,227,351 62.9% 83.33% 3/31/96 144,859 126,355 121,908 1.04
2,540,000 9/28/95 50.8% 1,061,214 41.8% 89.52% 3/1/96 213,578 182,578 124,880 1.46
1,815,000 3/7/94 70.0% 1,169,529 64.4% 88.72% 3/1/96 254,536 210,646 129,241 1.63
2,080,000 8/25/95 60.9% 901,935 43.4% 100.00% 8/25/95 215,023 212,246 135,353 1.57
1,680,000 10/12/95 74.1% 704,289 41.9% 89.07% 11/15/95 192,124 171,484 129,259 1.33
1,830,000 10/24/95 67.7% 802,874 43.9% 98.39% 5/28/96 167,726 167,726 118,067 1.42
2,325,000 3/25/96 52.5% 822,172 35.4% 100.00% 3/25/96 239,295 236,841 126,587 1.87
1,825,000 11/25/95 65.2% 980,297 53.7% 100.00% 6/10/96 172,744 156,251 115,565 1.35
1,700,000 5/3/96 70.0% 0 0.0% 97.65% 3/4/96 193,563 193,563 152,397 1.27
1,600,000 12/12/95 71.6% 1,062,916 66.4% 90.79% 3/31/96 177,281 160,181 100,875 1.59
1,620,000 1/19/96 70.3% 0 0.0% 98.21% 5/28/96 159,952 159,952 133,784 1.20
1,550,000 1/3/96 73.1% 793,739 51.2% 98.65% 5/28/96 152,692 152,692 116,471 1.31
2,100,000 5/17/96 53.9% 950,848 45.3% 100.00% 6/25/96 193,795 156,195 120,114 1.30
2,170,000 6/3/96 50.8% 869,923 40.1% 100.00% 3/31/96 202,514 154,967 118,536 1.31
1,720,000 6/3/96 64.0% 487,074 28.3% 80.09% 4/4/96 167,987 167,987 122,611 1.37
1,550,000 1/11/96 70.9% 990,951 63.9% 100.00% 6/21/96 145,902 137,802 110,223 1.25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
COLLATERAL VALUE COLLATERAL OPERATING PERFORMANCE
UNDER- UNDER- ANNUAL UNDER-
APPRAISED APPRAIS. APPRAIS. BALLOON APPRAIS. CURRENT OCCUPANCY WRITTEN WRITTEN DEBT WRITTEN
VALUE DATE LTV BALANCE BALLOON OCCUPANCY AS OF DATE NOI CASH FLOW SERVICE DSCR
- ---------- -------- -------- ---------- -------- --------- ---------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1,620,000 4/22/96 64.7% 825,959 51.0% 100.00% 1/16/96 174,565 146,114 112,372 1.30
2,450,000 4/5/96 42.8% 820,136 33.5% 80.38% 4/1/96 224,379 157,409 110,086 1.43
1,410,000 11/1/95 74.0% 802,025 56.9% 100.00% 6/4/96 152,811 140,947 103,333 1.36
1,850,000 5/17/96 54.0% 788,103 42.6% 81.49% 5/17/96 209,815 160,587 107,609 1.49
1,450,000 9/1/93 68.3% 945,769 65.2% 89.39% 3/31/96 259,986 220,386 97,520 2.26
1,600,000 6/4/96 61.8% 829,944 51.9% 100.00% 2/21/96 154,178 136,846 104,539 1.31
1,435,000 4/4/94 67.9% 901,065 62.8% 95.89% 3/31/96 160,562 138,662 103,803 1.34
1,600,000 10/23/95 60.5% 741,625 46.4% 91.45% 8/22/96 142,828 127,971 94,843 1.35
1,450,000 12/11/95 66.6% 0 0.0% 100.00% 5/16/96 166,313 152,063 116,933 1.30
1,500,000 10/29/95 63.0% 729,713 48.6% 96.68% 6/1/96 159,110 126,087 94,967 1.33
1,300,000 6/14/96 71.8% 586,758 45.1% 100.00% 1/1/96 153,729 142,151 105,284 1.35
1,450,000 5/7/96 64.1% 771,887 53.2% 95.63% 3/31/96 127,559 127,559 94,445 1.35
1,620,000 10/25/95 57.2% 614,904 38.0% 100.00% 3/25/96 117,979 117,979 93,273 1.26
1,250,000 5/3/93 73.7% 801,221 64.1% 94.57% 3/27/96 162,469 134,869 103,394 1.30
1,590,000 10/25/95 57.7% 608,292 38.3% 97.83% 5/23/96 123,406 123,406 92,270 1.34
1,430,000 8/25/95 61.7% 628,634 44.0% 100.00% 8/25/95 149,868 147,945 94,339 1.57
2,037,000 2/13/93 43.2% 0 0.0% 98.21% 2/23/96 188,783 177,583 126,350 1.41
1,700,000 8/21/95 51.4% 622,278 36.6% 100.00% 8/21/95 151,900 149,848 93,385 1.60
1,170,000 4/2/96 73.5% 723,680 61.9% 91.64% 1/30/96 134,919 123,044 91,365 1.35
1,600,000 8/18/95 53.6% 610,834 38.2% 100.00% 8/18/95 145,624 143,709 91,668 1.57
1,600,000 8/18/95 53.3% 607,556 38.0% 100.00% 8/18/95 144,843 142,927 91,176 1.57
1,600,000 8/18/95 53.0% 603,631 37.7% 100.00% 8/18/95 143,908 141,992 90,587 1.57
1,925,000 3/25/96 43.8% 567,884 29.5% 100.00% 3/25/96 202,218 200,185 87,435 2.29
1,340,000 8/17/95 55.6% 530,486 39.6% 100.00% 8/17/95 126,469 124,804 79,610 1.57
1,240,000 8/17/95 58.6% 517,028 41.7% 100.00% 8/17/95 123,261 121,639 77,590 1.57
1,325,000 8/18/95 54.5% 514,006 38.8% 100.00% 8/18/95 122,540 120,901 77,137 1.57
884,000 4/11/94 75.2% 634,744 71.8% 100.00% 3/28/96 101,960 90,760 67,372 1.35
1,050,000 3/20/94 62.6% 607,128 57.8% 93.75% 3/31/96 103,520 93,920 69,367 1.35
950,000 3/20/94 64.0% 562,155 59.2% 93.75% 3/31/96 118,921 109,321 64,229 1.70
885,000 4/2/96 63.7% 409,079 46.2% 88.29% 1/19/96 86,320 86,320 63,843 1.35
1,946,000 8/1/94 28.9% 0 0.0% 100.00% 6/17/96 147,600 136,600 76,946 1.78
976,000 2/13/93 54.1% 0 0.0% 97.83% 2/23/96 105,147 95,947 75,810 1.27
</TABLE>
(RESTUBBED TABLE CONTI NUED FROM ABOVE)
<TABLE>
<CAPTION>
ANNEX A
PREPAYMENT PROVISIONS
GREATER
THAN OF YM
YIELD OR %
LOCKOUT MAINTENANCE PREPAYMENT PREMIUM PERIOD
1994 CASH 1995 CASH PERIOD PERIOD PREMIUM (YEARS)
1994 NOI FLOW 1995 NOI FLOW (YEARS) (YEARS) DURING YM FOLLOWING % PREMIUM AFTER YM
-------- --------- --------- --------- ------- ----------- ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2,173,001 2,117,510 2,260,558 2,123,017 0 4.75 0
1,235,091 1,183,245 1,426,294 1,236,294 0 6.5 0
1,396,414 1,396,414 1,407,000 1,407,000 0 4 2.5 3%,2%,1% (6 months)
956,602 956,602 1,295,267 1,295,267 0 5 1.5 2%,1% (6 months)
0 0 0 0 9.5 0 0
2,246,172 2,246,172 2,568,611 2,568,611 4.9167 5.0833 2.00% 0 0%
0 0 0 0 9.5 0 0
896,843 743,623 910,155 777,593 0 7 2.5 3%,2%,1% (6 months)
0 0 12 3.00% 2 2%,1%
926,132 926,132 966,841 966,841 2 7
704,996 704,996 794,247 794,247 0 6.5 0
1,223,540 1,223,540 1,406,936 1,406,936 0 9 5.00% 5 5%,4%,3%,2%,1%
647,234 611,083 727,591 720,801 0 4 5.00% 5 5%,4%,3%,2%,1%
0 14.33 0.00% 0
537,570 522,036 903,048 750,880 0 5 5.00% 1 5.00%
1,057,743 1,057,743 1,176,471 1,176,471 0 9 5.00% 5 5%,4%,3%,2%,1%
904,648 901,810 819,088 799,451 0 8 5.00% 1 5%
563,068 563,068 659,803 636,055 0 5 1.5 2%,1% (6 months)
0 0 10 5.00% 0 0%
596,824 596,824 549,623 549,623 0 8 3.00% 1 3%
588,688 588,688 886,178 886,178 0 9 1.00% 0 0
688,045 636,676 688,928 440,297 0 8 5.00% 1 3.00%
598,178 585,082 415,979 385,499 0 6 5.00% 4 4%,3%,2%,1%
447,145 447,145 565,464 565,464 0 7 2.5 3%,2%,1% (6 months)
366,811 366,811 411,237 411,237 0 8 5.00% 1 5%
1,002,180 981,180 975,953 975,953 0 7 1.00% 2 2%,1%
0 564,447 352,066 0 8 5.00% 1 5.00%
374,093 105,672 486,085 -84,140 0 5 5.00% 4 5%, 4%, 3%, 2%
429,984 336,723 473,834 88,842 0 8 5.00% 2 3%,1%
625,703 589,336 630,548 545,823 0 5 5.00% 4 The Yield Maintenance Am
500,222 500,222 493,878 482,897 0 8 5.00% 1 5.00%
0 519,264 519,264 0 8 5.00% 1 5%
337,961 337,961 427,764 427,764 0 9.5 0
428,266 358,609 714,772 714,772 0 9 5.00% 5 5%,4%,3%,2%,1%
545,447 356,027 589,837 481,567 0 8 5.00% 1 5%
452,339 404,483 416,481 368,181 0 6 5.00% 0 0
631,751 597,380 464,964 456,713 0 3 5.00% 5 5%,4%,3%,2%,1%
342,090 265,461 135,059 135,059 0 12 5.00% 0 0%
758,506 746,899 864,097 598,113 0 9 5.00% 5 5%,4%,3%,2%,1%
455,827 455,827 570,607 570,607 0 8 5.00% 1 5%
357,143 332,588 404,060 373,732 0 7 2.5 3%,2%,1% (6 months)
384,638 384,638 451,656 451,656 0 8 5.00% 1 5%
527,158 527,158 539,086 539,086 0 8 5.00% 5 5%,4%,3%,2%,1%
526,014 350,072 501,465 358,922 0 9 5.00% 5 5%,4%,3%,2%,1%
450,963 413,656 459,157 377,602 0 6 5.00% 3 5%,4%,3%
301,833 301,833 334,449 334,449 0 8 5.00% 1 5%
315,976 315,976 367,140 360,606 0 10 5.00% 1 5%
576,880 576,880 587,289 587,289 0 8 5.00% 1 5%
493,926 342,844 507,651 392,723 0 10 5.00% 1 5.00%
163,543 163,543 454,610 454,610 0 8 5.00% 1 5%
414,998 320,759 460,710 386,094 0 9 5.00% 5 5%,4%,3%,2%,1%
444,222 444,222 538,497 538,497 0 8 5.00% 1 5%
356,006 320,006 470,876 470,876 0 5 3.00% 4.75 5%,4%,3%,2%,1% (9 months)
396,735 360,210 518,553 461,262 0 10 5.00% 1 5%
510,736 510,736 753,275 753,275 0 9 0.5 2%
319,474 296,324 302,318 302,318 0 7 2.5 3%,2%,1% (6 months)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PREPAYMENT PROVISIONS
GREATER
THAN OF YM
YIELD OR %
LOCKOUT MAINTENANCE PREPAYMENT PREMIUM PERIOD
1994 CASH 1995 CASH PERIOD PERIOD PREMIUM (YEARS)
1994 NOI FLOW 1995 NOI FLOW (YEARS) (YEARS) DURING YM FOLLOWING % PREMIUM AFTER YM
- -------- --------- --------- --------- ------- ----------- ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
362,908 287,669 280,211 265,696 0 8 5.00% 2 3%,2%
0 342,290 342,290 0 8 5.00% 1 5.00%
137,748 137,748 326,299 304,318 0 5 5.00% 5 5%,4%,3%,2%,1%
387,147 387,147 450,404 450,404 0 10 0
319,224 302,830 198,839 168,307 0 5 5.00% 5 5%,4%,3%,2%,1%
245,257 197,280 357,627 333,037 0 5 3.00% 1.5 2%,1% (6 months)
251,653 220,753 274,183 250,758 0 5 5.00% 4.5 5%,4%,3%,2%,1% (6 months)
360,944 359,096 362,819 362,819 0 5 1.5 2%,1% (6 months)
156,636 145,247 281,491 263,607 0 8 5.00% 1 5%
320,638 238,398 338,666 338,666 0 3 3.00% 3.75 5%,4%,3%,1% (9 months)
143,096 121,450 304,093 -66,812 0 9 5.00% 5 5%,4%,3%,2%,1%
263,484 263,484 263,249 263,249 0 6.5 0
276,648 231,708 273,506 238,545 0 9 5.00% 2 5%, 4%
169,129 162,006 0 9 5.00% 5 5%,4%,3%,2%,1%
242,721 242,721 239,609 238,694 0 5 5.00% 4 4%,3%,2%,1%
231,407 195,753 314,440 194,771 0 5 5.00% 5 5%,4%,3%,2%,1%
223,245 136,444 249,645 173,151 0 7 2.5 3%,2%,1% (6 months)
233,958 233,958 237,613 237,613 0 9.5 0
321,644 304,107 311,999 278,237 0 10 5.00% 1 5%
288,862 236,396 288,468 288,468 0 8 5.00% 5 5%,4%,3%,2%,1%
301,287 301,287 263,405 263,405 0 5 5.00% 5 5%,4%,3%,2%,1%
250,437 250,437 310,549 310,549 0 5 1.5833 2%,1% (7 months)
154,789 114,688 246,968 246,968 0 6 5.00% 0
205,682 30,146 210,633 97,264 0 8 5.00% 1 5%
235,734 235,734 244,813 244,813 0 10 5.00% 1 5%
258,151 238,792 279,091 279,091 0 5 3.00% 1.5 2%,1% (6 months)
294,503 294,503 286,391 286,391 0 11 4.5 5%,4%,3%,2%,1% (6 months)
231,472 231,472 241,556 241,556 0 5 1.5 2%,1% (6 months)
195,287 185,257 242,468 162,901 0 8 5.00% 1 5%
210,649 210,649 248,441 248,441 0 10 5.00% 1 5%
236,443 203,518 261,285 226,149 0 10 5.00% 1 5%
301,713 293,281 301,274 295,830 0 3 5.00% 5 5%,4%,3%,2%,1%
206,362 206,362 203,321 203,321 0 7 2.5 3%,2%,1% (6 months)
235,919 235,919 219,599 191,941 0 4 5.00% 5 5%,4%,3%,2%,1%
208,285 206,098 339,692 327,119 0 8 5.00% 1 5%
196,345 152,525 212,258 196,656 0 10 5.00% 1 5%
0 0 9.5 1.00% 0
0 0 9.5 1.00% 0 0%
0 0 10.9167 5.00% 3 5%,4%,3%
169,679 169,679 0 0 0 5 1.5833 2%,1% (7 months)
171,680 143,215 190,889 140,590 0 7 2.5 3%,2%,1% (6 months)
160,998 130,940 289,642 289,642 0 3 3.00% 3.75 5%,4%,3%,1% (9 months)
0 0 9.5 1.00% 0
129,704 129,704 0 12 5.00% 0 0%
182,859 146,136 200,044 162,638 0 5 5.00% 5 5%,4%,3%,2%,1%
0 0 10.9167 5.00% 3 5%,4%,3%
161,758 161,758 202,396 202,396 0 8 5.00% 0 0%
110,133 110,133 0 5 5.00% 5 5%,4%,3%,2%,1%
179,201 179,201 188,265 188,265 0 5 1.5 2%,1% (6 months)
169,647 152,677 167,986 139,794 0 9 5.00% 5 5%,4%,3%,2%,1%
194,535 120,535 150,418 97,983 0 10 1.00% 0 0%
181,751 140,592 204,169 173,593 0 6 5.00% 3 4%,3%,2%
85,147 85,147 204,356 201,021 0 10 5.00% 1 5%
79,050 78,700 156,933 156,758 0 9 5.00% 5 5%,4%,3%,2%,1%
140,494 128,494 157,536 157,536 0 7 2.5 3%,2%,1% (6 months)
135,036 126,886 204,225 198,845 0 10 5.00% 1 5%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PREPAYMENT PROVISIONS
GREATER
THAN OF YM
YIELD OR %
LOCKOUT MAINTENANCE PREPAYMENT PREMIUM PERIOD
1994 CASH 1995 CASH PERIOD PERIOD PREMIUM (YEARS)
1994 NOI FLOW 1995 NOI FLOW (YEARS) (YEARS) DURING YM FOLLOWING % PREMIUM AFTER YM
- -------- --------- --------- --------- ------- ----------- ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
204,076 204,076 219,751 218,148 0 10 5.00% 1 5%
0 0 10 5.00% 1 5%
0 10 5.00% 1 5%
214,937 175,337 249,940 234,277 0 3 3.00% 3.75 5%,4%,3%,1% (9 months)
157,400 124,851 153,194 120,938 0 8 5.00% 1 5%
120,875 107,187 173,686 173,686 0 3 3.00% 3.75 5%,4%,3%,1% (9 months)
153,891 115,349 137,625 137,625 0 4 5.00% 5 5%,4%,3%,2%,1%
185,796 185,796 192,717 192,717 0 11 4.5 5%,4%,3%,2%,1% (6 months)
153,541 135,007 164,428 157,233 0 10 5.00% 1 5%
125,389 69,530 161,500 128,673 0 10 5.00% 1 5%
140,226 140,226 184,620 140,457 0 8 5.00% 1 5%
130,416 130,416 129,334 129,334 0 5 5.00% 5 5%,4%,3%,2%,1%
175,916 175,916 189,016 189,016 0 3 3.00% 3.75 5%,4%,3%,1% (9 months)
141,549 141,549 131,522 131,522 0 5 5.00% 5 5%,4%,3%,2%,1%
0 0 9.5 1.00% 0 0%
101,067 101,067 0 0 0 0 0
0 0 9.5 1.00% 0 0%
134,426 134,426 154,921 150,925 0 6 5.00% 3 4%,3%,2%
0 0 9.5 1.00% 0 0%
0 0 9.5 1.00% 0 0%
0 0 9.5 1.00% 0 0%
0 10.9167 5.00% 3 5%,4%,3%
0 0 9.5 1.00% 0 0%
0 0 9.5 1.00% 0 0%
0 0 9.5 1.00% 0 0%
102,937 91,737 100,835 100,835 0 3 3.00% 3.75 5%,4%,3%,1% (9 months)
131,228 121,628 105,086 81,286 0 3 3.00% 3.75 5%,4%,3%,1% (9 months)
117,845 108,245 105,142 105,142 0 3 3.00% 3.75 5%,4%,3%,1% (9 months)
97,785 97,785 95,038 95,038 0 8 5.00% 1 5%
0 0 0 0 0 15 0 No YM in month 120
79,540 79,540 0 0 0 0 0
</TABLE>
<PAGE>
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 August 28, 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
2
<PAGE>
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.
3
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each Series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such Series. An Index of
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... The master servicer (the "Master
Servicer"), if any, for each Series
of Certificates, which may be an
affiliate of the Depositor, will be
named in the related Prospectus
Supplement. See "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.
4
<PAGE>
............. 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; 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."
5
<PAGE>
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 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
6
<PAGE>
............. 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, 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.
7
<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
8
<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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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) each such
obligation or security will have a fixed dollar amount of principal due at
maturity which cannot vary or change; (c) 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 or supplement any
provisions therein that may be inconsistent with any other provisions therein,
(iii) to amend
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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. 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 Property will
be payable out of amounts
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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 reckless 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 reckless 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 a majority 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 a majority of the
aggregate Voting Rights of the Certificates of any Class 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.
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Certificate Guarantee Insurance
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.
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Mortgagor Bankruptcy Bond
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.
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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, 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
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on the junior loan. Absent a provision in the senior mortgage or the existence
of a recorded request for notice 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
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of its obligations under the note or mortgage and, by reason thereof, the
indebtedness has been accelerated, 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
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petition; and (ii) the price paid for the foreclosed property did not represent
"fair consideration" ("reasonably 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
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properly conducted foreclosure sale, those having an interest that is
subordinate to that of the foreclosing mortgagee have an equity of redemption
and may redeem the property by paying the entire debt with interest. In
addition, in some states, when a foreclosure action has been commenced, the
redeeming party must pay certain costs of such action. Those having an equity of
redemption must generally be made parties and joined in the foreclosure
proceeding in order for their equity of redemption to be cut off and terminated.
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,
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the ground lessee breaches or defaults in its obligations under the ground lease
or there is a bankruptcy of the ground lessee or the ground lessor. 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
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connection with a bankruptcy proceeding involving a mortgagor, Section 362 of
the Bankruptcy Code 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
"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.
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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.
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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
Cash Flow Bond Method....................................63
CERCLA...............................................13, 42
Certificateholders.......................................16
Certificates...........................................1, 4
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, 30
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
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
Property Protection Expenses.............................17
PTCE.....................................................67
Rating Agency.........................................7, 15
Ratio Strip Certificates.................................63
Registration Statement....................................2
Regular Certificates..................................7, 51
Regular Interests.........................................7
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....................................20
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
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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-13
Risk Factors .......................................... S-21
Description of the Mortgage Pool ...................... S-29
Midland Loan Services, L.P. ........................... S-62
Midland Commercial Financing Corp. .................... S-63
Smith Barney Mortgage Capital Group, Inc. ............ S-63
Description of the Certificates ....................... S-64
Yield and Maturity Considerations ..................... S-78
The Pooling and Servicing Agreement .................. S-85
Material Federal Income Tax Consequences ............. S-99
ERISA Considerations ................................. S-101
Legal Investment ..................................... S-104
Plan of Distribution ................................. S-105
Use of Proceeds ...................................... S-105
Legal Matters ........................................ S-105
Ratings .............................................. S-106
Index of Significant Definitions ..................... S-107
Annex A ................................................ A-1
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
$ (APPROXIMATE)
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 AND CLASS E
Commercial Mortgage
Pass-Through Certificates
Series 1996-C1
[GRAPHIC OMITTED]
PROSPECTUS SUPPLEMENT
PRUDENTIAL SECURITIES INCORPORATED
SMITH BARNEY INC.
SEPTEMBER , 1996
