As filed with the Securities Exchange Commission on July 12, 1996
Registration No. 333-3885
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
MIDLAND REALTY ACCEPTANCE CORP.
(Exact name of registrant as specified in its charter)
Missouri 43-1745475
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Midland Realty Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
(816) 435-5000
(Address, including zip code, and telephone number, including area code
of registrant's principal executive offices)
Alan L. Atterbury
Midland Realty Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
(816) 435-5000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------------------
Copy to:
William A. Hirsch, Esq. Marie L. Martineau, Esq.
Morrison & Hecker L.L.P. O'Melveny & Myers LLP
2600 Grand Avenue 153 East 53rd Street
Kansas City, Missouri 64108 New York, New York 10022
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement as determined by
market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box.
If any of the securities being registered on this form are to
be offered on a delayed or continuous basis pursuant to Rule 415
under the Securities Act of 1933, other than securities offered
only in connection with dividend or interest reinvestment plans,
please check the following box. X
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box.
<PAGE>
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
CROSS REFERENCE SHEET
Showing Location of Items in Prospectus
Required by Items of Form S-3
Item Caption in Prospectus
1. Forepart of Registration Statement and Outside Front Cover
Page of Prospectus........... Forepart of Registration
Statement and Outside Front
Cover Page**
2. Inside Front and Outside Back Cover Pages of Prospectus
Inside Front and Outside Back
Cover Pages**
3. Summary Information, Risk Factors and Ratio of Earnings to
Fixed Charges................ Risk Factors; The Depositor**
4. Use of Proceeds.............. Use of Proceeds**
5. Determination of Offering Price*
6. Dilution..................... *
7. Selling Security Holders..... *
8. Plan of Distribution......... Plan of Distribution**
9. Description of Securities to BeOutsideeFront Cover Page;
Description of the Certificates;
The Mortgage Pools; Servicing of
the Mortgage Loans; Enhancement;
Certain Legal Aspects of the
Mortgage Loans; Material Federal
Income Tax Consequences; ERISA
Considerations; Legal
Investment**
10. Interest of Named Experts and C*unsel
11. Material Changes............. *
12. Incorporation of Certain Information by Reference
Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities... *
- -----------------
* Omitted, since item is not applicable or answer is negative.
** To be completed or provided from time to time by Prospectus
Supplement.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS SUPPLEMENT, DATED JULY 12, 1996
SUBJECT TO COMPLETION
PROSPECTUS SUPPLEMENT
(To Prospectus dated July ___, 1996)
$[ ] (Approximate)
Midland Realty Acceptance Corp. (Depositor)
Midland Commercial Financing Corp. (Mortgage Loan Seller)
Midland Loan Services, L.P. (Servicer)
Commercial Mortgage Pass-Through Certificates, Series 1996-C1
The Commercial Mortgage Pass-Through Certificates, Series [ ] (the
"Certificates") will consist of [ ] Classes of Certificates, designated as the
Class A Certificates, the Class B Certificates, the Class C Certificates, [the
Class [EC] Certificates], [the Class [PO] Certificates], [the Class [IO]
Certificates], (collectively, the "Regular Certificates"), the Class R
Certificates and the Class LR Certificates (together, the "Residual
Certificates"). Only the Class A, Class B and Class [ ] 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 SELLER, 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 consider the factors discussed under "RISK
FACTORS" at page S-24 in this Prospectus Supplement and Page 8 of the Prospectus
before purchasing any of the Offered Certificates.
================================================================
Initial Related Final
Certificate Pass-Through Distribution
Class Balance (1) Rate (2) Date (3)
- ----------------------------------------------------------------
Class A ...... $ %
- ----------------------------------------------------------------
Class B ...... $ %
- ----------------------------------------------------------------
Class [ ].... $ %
----
================================================================
(1) Approximate, subject to an upward or downward
variance of up to 5%.
(2) In addition to distributions of principal and
interest, holders of certain Classes of Certificates will be entitled to
receive a portion of the Prepayment Premiums received from the borrowers as
described herein. See "DESCRIPTION OF THE
CERTIFI-CATES--Distribution--Prepayment Premiums" herein.
(3) 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.
The Offered Certificates will be purchased by Prudential Securities Incorporated
(the "Underwriter") from the Depositor and will be offered by the Underwriter
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 Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to its 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")]
[definitive fully registered form at the offices of the Underwriter], on or
about , 1996 (the "Delivery Date"), against payment therefor in immediately
available funds.
Prudential Securities Incorporated
July ___, 1996
<PAGE>
(continued from previous page)
The Certificates will represent beneficial ownership interests in a trust
fund (the "Trust Fund") to be created by Midland Realty Acceptance Corp. (the
"Depositor"). The Trust Fund will consist primarily of a pool (the "Mortgage
Pool") of [ ] fixed-rate mortgage loans, with original terms to maturity of not
more than [ ] years (the "Mortgage Loans"), 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,] [self-storage facilities,] [light industrial/industrial properties,]
[hotels,] [mobile home parks] and [mixed use properties.] The Mortgage Loans
will be sold to the Depositor by the Mortgage Loan Seller 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
"DESCRIPTION OF THE MORTGAGE POOL" herein.
The Class A, Class B and Class C 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
[EC] Certificates will be entitled to distributions of Class [EC] Excess
Interest, on each Distribution Date occurring on or prior to [ ] (the "EC
Maturity Date"). "Class [EC] Excess Interest" is an amount equal to the Class
[EC] Pass-Through Rate multiplied by the Class [EC] Notional Balance. The Class
[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 [IO] Certificates will be entitled to
distributions of interest at the Class [IO] Pass-Through Rate on the Class [IO]
Notional Balance.] [The Class [PO] 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 [ ], 1996 (each, a "Distribution Date").
Distributions allocable to interest on the Certificates will be made as
described herein under "DESCRIPTION OF THE CERTIFICATES--Distributions" herein.
The rights of the holders of the Class B and Class C Certificates (the
"Subordinate Certificates") to receive distributions of principal and interest
will be subordinate to such rights of the holders of the Class A Certificates
(the "Senior Certificates"); the rights of the holders of the Class C
Certificates to receive such distributions will be subordinate to such rights of
the holders of the Class B Certificates. In addition, each Class of 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. [Describe subordination provisions of
Class [EC] Certificates, Class [IO] Certificates and Class [PO] Certificates, if
applicable.] 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 [EC], Class [IO] and Class [PO]
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 [EC] Certificates or the Class [IO] Certificates,
which reduce the Class [EC] Notional Balance or the Class [IO] 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. [Each of the Mortgage Loans generally
S-2
<PAGE>
provides that for a specified amount of time during which a prepayment is
permitted, it must be accompanied by payment of a Prepayment Premium. Prepayment
Premiums are distributable to the Regular Certificates as described herein 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 [ ], 1996 (the "Pooling and Servicing Agreement"), by and
among the Depositor, Midland Loan Services, L.P., as servicer (the "Master
Servicer"), [ ], as special servicer (the "Special Servicer"), LaSalle National
Bank, as trustee (the "Trustee"), and ABN AMRO Bank N.V., as fiscal agent (the
"Fiscal Agent"). The obligations of the Master Servicer with respect to the
Certificates will be limited to its contractual servicing obligations and the
obligation under certain circumstances to make Advances with respect to the
Mortgage Loans. See "THE POOLING AND SERVICING AGREEMENT" herein.
It is a condition to the issuance of the Certificates that the Class A
Certificates, the Class B Certificates and the Class [ ] Certificates be rated [
] by each of [________________________________] (the "Rating Agencies"). The
Class [ ], Class R and Class LR
Certificates are unrated.
Elections will be made to treat designated portions of the Trust Fund (such
portions of the Trust Fund, the "Trust REMICs"), and the Trust REMICs will
qualify, as 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,
Class B, Class C, [Class [EC]], [Class [IO]] and [Class [PO]] 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. Prospective investors in the Class R Certificates and Class LR
Certificates are cautioned that their respective REMIC taxable income and the
liability thereon will exceed, and may substantially exceed, cash distributions
to such holders during certain periods, in which event such holders must have
sufficient alternative sources of funds to pay such tax liability. It is likely
that the Class R Certificates and Class LR Certificates will be considered
"noneconomic residual interests," certain transfers of which may be disregarded
for federal income tax purposes. The Class R Certificates and Class LR
Certificates may not be purchased by or transferred to, among others, (i) a
"Disqualified Organization," (ii) except under certain limited circumstances, a
person who is not a "U.S. Person," (iii) a Plan or (iv) any person or entity who
the transferor knows or has reason to know will be unwilling or unable to pay
when due any federal, state or local taxes with respect thereto. Holders of the
Class R Certificates and Class LR Certificates will be required to include the
taxable income or loss of the Upper-Tier REMIC and Lower-Tier REMIC,
respectively, in determining their federal taxable income. It is anticipated
that all or a substantial portion of the taxable income of the Upper-Tier REMIC
and Lower-Tier REMIC includible by the Class R Certificateholders and Class LR
Certificateholders, respectively, will be treated as "excess inclusion" income
subject to special limitations for federal income purposes. 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.
S-3
<PAGE>
There is currently no secondary market for the Certificates. The
Underwriter has advised that it currently intends to make a secondary market in
the Certificates, but it is under no obligation to do so. There can be no
assurance that such a market will develop or, if it does develop, that it will
continue or will provide investors with a sufficient level of liquidity of
investment. See "RISK FACTORS--Limited Liquidity" herein.
This Prospectus Supplement does not contain complete information about the
offering of the Offered Certificates. Additional Information is contained in the
Prospectus and investors are urged to read both this Prospectus Supplement and
the Prospectus in full. Sales of the Offered Certificates may not be consummated
unless the purchaser has received both this Prospectus Supplement and the
Prospectus.
Until 90 days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and
Prospectus. This is in addition to the obligation of dealers acting as
underwriters to deliver a Prospectus Supplement and Prospectus with respect to
their unsold allotments and subscriptions.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY [OVER-ALLOT OR]
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 carefully read, and should rely solely
on, the detailed information appearing elsewhere in this Prospectus Supplement
and the Prospectus relating to the securities referred to herein in making their
investment decision. The following Executive Summary does not include all
relevant information relating to the Offered Certificates or 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 fully review this Prospectus Supplement and the
Prospectus. Capitalized terms used and not otherwise defined herein have the
respective meanings assigned to them in this Prospectus Supplement and the
Prospectus.
- --------------------------------------------------------------------
Approximate Approximate
Percent Credit
of
Total Support
-------------------------------------------------
___% Class([Rating]) _____%
-------------------------------------------------
___% Class([Rating]) _____%
-------------------------------------------------
___% Class([Rating]) _____%
-------------------------------------------------
----------
Not offered hereby: Classes C and
[__].
Ratings:
----------------------------.
----------
[Insert Class [EC], Class [PO] and Class [IO] Certificates where
appropriate]
- --------------------------------------------------------------------
======================================================================
Initial
Aggregate
Certificate Cash
Principal Weighted Flow
or % of CertificAverage or
Class Rating Notional Total DescriptiInterestLife Principal
Amount Rate (years) Window
(1) (years)
(1)
- ----------------------------------------------------------------------
Senior Certificates
- ----------------------------------------------------------------------
[Fixed]
[Variable]
A $_____________% Rate ____% _____ ____-____
- ----------------------------------------------------------------------
Subordinate Certificates
- ----------------------------------------------------------------------
[Fixed]
[Variable]
B $_____________% Rate ____% _____ ____-____
- ----------------------------------------------------------------------
[Fixed]
[Variable]
C $_____________% Rate ____% _____ ____-____
======================================================================
(1) Based on Scenario 1, which assumes a 0% CPR. See
"YIELD CONSIDERATIONS--Weighted Average Life of the Regular
Certificates".
[Insert Class [EC], Class [PO] and Class [IO] Certificates
where appropriate]
S-5
<PAGE>
Securities:
Distribution Dates Distributions on the Certificates
will be made monthly on the 25th
day of the month, or, if such day
is not a Business Day, the next
succeeding Business Day commencing
on _______ 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 [EC] Certificates)],
[_________________], which is
the Distribution Date
occurring two years after the
latest Assumed Maturity Date
of any of the Mortgage Loans.
The "Assumed Maturity Date" of
(i) any Mortgage Loan that is
not a Balloon Loan is the
maturity date of such Mortgage
Loan and (ii) 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.
Termination ..... [___]% optional termination. See
"The POOLING AND SERVICING
AGREEMENT--Optional Termination"
herein.
Master Servicer.. Midland Loan Services, L.P. See
"THE MASTER SERVICER" herein.
Special Servicer. _______________. See "THE SPECIAL
SERVICER" herein.
Trustee.......... LaSalle National Bank. See "POOLING
AND SERVICING AGREEMENT--The Trustee"
herein.
Fiscal Agent..... ABN AMRO Bank N.V. See "POOLING AND
SERVICING AGREEMENT--The Fiscal Agent" herein.
Legal Status..... Class A, Class B and Class [__] Certificates
are publicly registered securities; no other Class is
offered hereby. See also "DESCRIPTION OF THE
CERTIFICATES--General" 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 Certificates should
qualify for an exemption from the
prohibited transaction provisions of
ERISA. The Class B and Class C
Certificates may be acquired by
employee benefit plans subject to
ERISA only if an exemption from the
prohibited transaction provisions of
ERISA is applicable. [Describe
ERISA status of Class [EC], Class
[IO] and Class [PO] Certificates, if
applicable.] See "ERISA
CONSIDERATIONS" herein.
S-6
<PAGE>
SMMEA............ None of the Offered Certificates are
mortgage-related securities pursuant
to the Secondary Mortgage Market
Enhancement Act of 1984.
Denominations.... [The Class [__] and Class [__] Certificates will be issued
in minimum denominations of Certificate Balance [or
Notional Balance, as applicable,] of [$100,000] and
multiples of [$1,000] in excess thereof. [The Class [__]
and Class [__] Certificates will be issued in minimum
denominations of Certificate Balance [or Notional Balance,
as applicable,] of [$100,000] and multiples of $1 in excess
thereof.
DTC Eligibility.. Class ___ and Class ___ Certificates
are being delivered through the
facilities of The Depository Trust
Company ("DTC").
Closing Date..... On or about __________ ___, 1996.
Certificate Terminology:
Senior Certificates Class A. [Insert Class [EC],
Class [IO] and Class [PO], if
applicable.]
Subordinate Certificates Classes B and C. [Insert
Class [EC], Class [IO] and
Class [PO], if applicable.]
Offered Certificates Class A, Class B and Class
[__] Certificates.
Non-Offered Certificates The Class C and [___]
Certificates.
Structural Summary:
Interest Payments Interest collected on Mortgage Loans will be
distributed (subject to reduction by allocations of excess
Prepayment Interest Shortfalls and certain losses of
interest, as further described herein) to the holders of
the Class A, Class B and Class C Certificates, in that
order. [Insert Class [EC], Class [IO] and Class [PO], if
appropriate.] See "DESCRIPTION OF THE
CERTIFICATES--Distributions" herein.
Principal Payments The Pooled Principal Distribution
Amount will be distributed to the
holders of the Class A, Class B and
Class C Certificates, in that
order, and in each case, until the
aggregate Certificate Principal
Balance of the applicable Class of
Certificates has been reduced to
zero. [Insert Class [EC], Class
[IO] and Class [PO], if
appropriate.] See "DESCRIPTION OF
THE CERTIFICATES--Distributions""
herein.
Credit Enhancement.. The Class A Certificates are credit
enhanced by the Classes of
Subordinate Certificates, which
consist of the Class B and Class C
Certificates. [Insert Class [EC],
Class [IO] and Class [PO], if
appropriate.]
S-7
<PAGE>
............... 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 [___] and Class [___]
Certificates) in reverse
alphabetical order starting with the
Class C Certificates. [Insert Class
[EC], Class [IO] and Class [PO], if
appropriate.]
Advances............ Subject to the limitations described
herein, the Master Servicer is
required to make advances (each such
amount, a "P&I Advance") in respect
of delinquent Monthly Payments on
the Mortgage Loans. The Master
Servicer will not be required to
advance the full amount of any
Balloon Payment not made by the
related borrower on its due date,
but will advance an amount equal to
the monthly payment (or portion
thereof not received) deemed to be
due on the Mortgage Loan after such
default, calculated based on the
original amortization schedule of
such Mortgage Loan with interest as
described herein. 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.
Investor Reporting.. [Describe reports to be delivered to
Certificateholders].
............... See "THE POOLING AND SERVICING
AGREEMENT--Reports to
Certificateholders" herein.
Collateral Overview;
Loan Details...... See Annex A and Annex B hereto for certain
characteristics of Mortgage Loans on a loan-by-loan basis.
All numerical information provided herein with respect to
the Mortgage Loans is provided on an approximate basis. All
weighted average information regarding the Mortgage Loans
reflects weighting of the Mortgage Loans by their Cut-off
Date Principal Balances. The "Cut-off Date Principal
Balance" of each Mortgage Loan is equal to the unpaid
principal balance thereof as of the Cut-off Date, after
application of all payments of principal due on or before
such date, whether or not received. See also "DESCRIPTION
OF THE MORTGAGE POOL" for additional statistical
information regarding the Mortgage Loans.
Characteristics
Cut-off Date Principal Balance $__________
Number of Mortgage Loans.... ____
Weighted Average Mortgage Interest Rate ___%
Weighted Average Maturity... ___ months
Weighted Average Seasoning (1) ___ months
S-8
<PAGE>
Weighted Average DSCR (2)... ___x
Average Loan Balance........ $__________
Balloon Mortgage Loans (3).. ___%
(1) Calculated from the first payment date to the Cut-Off
Date.
(2) 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.
(3) By Cut-off Date Principal Balance.
Cut-off Date Principal Balances
Cut-off Date Principal Balance
2,000,001- 3,000,000............ ___%
3,000,001- 4,000,000............ ___%
4,000,001- 5,000,000............ ___%
5,000,001- 6,000,000............ ___%
6,000,001- 7,000,000............ ___%
7,000,001- 7,000,000............ ___%
7,000,001- 8,000,000............ ___%
8,000,001- 9,000,000............ ___%
9,000,001-10,000,000............ ___%
10,000,001-or greater............ ___%
Geographical Distribution (1)
State
.................... ____%
.................... ____%
.................... ____%
.................... ____%
.................... ____%
.................... ____%
.................... ____%
(1).................................By Cut-off Date
Principal Balance.
S-9
<PAGE>
Debt Service Coverage Ratios (1)(2)
Range of Debt Service Coverage Ratios
0.75x-1.00x......................... ___%
1.01-1.10x.......................... ___%
1.11-1.20x.......................... ___%
1.21-1.30x.......................... ___%
1.31-1.40x.......................... ___%
1.41-1.50x.......................... ___%
1.51-1.60x.......................... ___%
1.61-1.70x.......................... ___%
1.71-1.80x.......................... ___%
1.81-1.90x.......................... ___%
1.91-2.00x.......................... ___%
2.01-2.25x.......................... ___%
2.26-2.50x.......................... ___%
2.51x or greater.................... ___%
(1).................................By Cut-off Date
Principal Balance.
(2).................................Calculated based on
the ratio of
Underwritten Cash
Flow to Annual Debt
Service. See
"DESCRIPTION OF THE
MORTGAGE POOL--Certain
Characteristics of
the Mortgage Loans"
herein for more
information relating
to the calculation of
debt service coverage
ratios.
Property Types (1)
Property Types
[Retail]............................ ___%
[Office Building]................... ___%
[Multifamily]....................... ___%
[Nursing Home]...................... ___%
[Congregate Care]................... ___%
[Retail/Office]..................... ___%
[Self-Storage]...................... ___%
[Light Industrial/Industrial]....... ___%
[Hotel]............................. ___%
[Mobile Home]....................... ___%
[Retail/Multifamily]................ ___%
[Office/Multifamily/Retail]......... ___%
[Office/Warehouse].................. ___%
S-10
<PAGE>
(1)By Cut-off Date Principal Balance.
Seasoning (1)(2)
Age in Months
0- 24............................. ___%
25- 60............................. ___%
61-120............................. ___%
121-300............................. ___%
(1).................................By Cut-off Date
Principal Balance.
(2).................................Calculated from the
first payment to the
Cut-off Date.
Balloon Mortgage Loans--Months to Final Scheduled Maturity (1)
Remaining Term in Months
0- 6............................. ___%
7- 12............................. ___%
13- 24............................. ___%
25- 48............................. ___%
49- 60............................. ___%
61- 84............................. ___%
85-120............................. ___%
121-180............................. ___%
181-240............................. ___%
(1).................................By Cut-off Date
Principal Balance.
Delinquency Status as of _____________, 199__ (1)
Status
[No Delinquencies].................. ___%
(1).................................By Cut-off Date
Principal Balance.
S-11
<PAGE>
Year of Origination (1)
Year
1974 or earlier..................... ___%
1975-1985........................... ___%
1986-1987........................... ___%
1988................................ ___%
1989................................ ___%
1990................................ ___%
1991................................ ___%
1992................................ ___%
1993................................ ___%
1994................................ ___%
1995................................ ___%
1996................................ ___%
(1).................................By Cut-off Date
Principal Balance.
Modified Mortgage Loans Since ___________, 199__ (1)
Modified Mortgage Loans............. ___%
(1) By Cut-off Date Principal Balance.
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.
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 1996-1 (the
"Certificates").
The Certificates...... $[ ] initial aggregate
principal balance ("Certificate
Balance") of Class A Certificates;
................. $[ ] initial
Certificate Balance of Class B
Certificates;
................. $[ ] initial
Certificate Balance of Class C
Certificates;
................. [Class [EC] Certificates];
................. [Class [IO] Certificates];
................. [Class [PO] 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 [ ], 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,
Class B and Class [ ]
---
Certificates are offered hereby.
................. The Class C, Class [ ], 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"). See "THE
DEPOSITOR" in the Prospectus.
S-13
<PAGE>
Master Servicer....... Midland Loan Services, L.P., a
Missouri limited partnership.
See "THE MASTER SERVICER" herein.
Special Servicer...... [__________________], a
[____________________]. See "THE
SPECIAL SERVICER" herein.
Trustee............... LaSalle National Bank, a
nationally chartered bank. See
"THE POOLING AND SERVICING
AGREEMENT--The Trustee" herein.
Fiscal Agent.......... ABN AMRO Bank N.V., a Netherlands
banking corporation, and the
corporate parent of the Trustee.
See "THE POOLING AND SERVICING
AGREEMENT--The Fiscal Agent"
herein.
Cut-off Date.......... [ ],
1996 [(except with respect to [
] loans for which the Cut-off
Date is [ ]),
1996].
Closing Date.......... On or about [
], 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
[ ], 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 which such Distribution
Date
occurs.
Interest Accrual Period With respect to any
Distribution Date, the
calendar month preceding the
month in which such
Distribution Date occurs.
Interest for each Interest
Accrual Period is calculated
based on a 360-day year
consisting of twelve 30-day
months.
Collection Period..... With respect to each Distribution
Date and any Mortgage Loan, the
period beginning on the day
following the Determination Date
in the month preceding the month
in which such Distribution Date
occurs (or, in the case of the
Distribution Date occurring in
[ ], 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 15th day of any month, or if
such 15th day is not a Business
Day, the Business Day immediately
preceding such 15th day,
commencing on [ ],
1996.
S-14
<PAGE>
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 [ ] of
--
the Mortgage Loans, is the first
day of the month, [and which
date, for [ ] of the Mortgage
---
Loans, is the [ ] day of the
---
month].
Denominations......... The Class [ ] and Class [ ]
--- ---
Certificates will be issued in
minimum denominations of
Certificate Balance [or Notional
Balance, as applicable,] of
$100,000 and multiples of $1,000
in excess thereof and will be
registered in the name of a
nominee of The Depository Trust
Company ("DTC" and, together with
any successor depository selected
by the Depositor, the
"Depository") and beneficial
interests therein will be held by
investors through the book-entry
facilities of the Depository.
The Depositor has been informed
by DTC that its nominee will be
Cede & Co. Beneficial owners will
hold and transfer their
respective ownership interests in
and to such Book-Entry
Certificates through the
book-entry facilities of DTC and
will not be entitled to
definitive, fully registered
Certificates except in the
limited circumstances set forth
herein. [The Class [ ] and
---
Class [ ] Certificates will be
---
issued in minimum denominations
of Certificate Balance [or
Notional Balance, as applicable,]
of $100,000 and multiples $1 in
excess thereof and will be
issuable in definitive physical
registered form. The Residual
Certificates will each be
issuable in registered definitive
physical form, in minimum
denominations of 5% Percentage
Interest and integral multiples
of a 1% Percentage Interest in
excess thereof. See "DESCRIPTION
OF
................. THE CERTIFICATES--Delivery, Form
and Denomination" herein.
Distributions......... The per annum rate at which
interest accrues (the
"Pass-Through Rate") on the Class
[ ] and [ ] Certificates
---- ---
during any Interest Accrual
Period will be equal to [ ]%
---
and [ ]%, respectively. [With
---
respect to each Interest Accrual
Period up to and including
[ ] (the "EC
----------------------
Maturity Date"), the Class [EC]
Certificates will be entitled to
an amount equal to
[_____________________]. The
Class [EC] Certificates are not
entitled to distributions (other
than any Class Interest
Shortfalls) following the EC
Maturity Date.] [The
Pass-Through Rate on the Class [
] 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
[IO] Certificates during any
Interest Accrual Period will be
equal to the [Weighted Average
Net Mortgage Rate].] [The Class
[PO] Certificates are
principal-only certificates and
are not entitled to distributions
in respect of interest.]
S-15
<PAGE>
................. On each Distribution Date, each
Class of Certificates [(other
than the Class [EC] 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 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 Interest
Distribution Amount and Class
Interest Shortfall for each other
outstanding Class of
Certificates, if any, bearing an
earlier sequential designation of
such Class, (ii) Payment of the
Pooled Principal Distribution
Amount for such Distribution Date
to each outstanding Class of
Certificates having an earlier
sequential 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 designation.
References herein to the earlier
(or later) sequential designation
of such Classes of Certificates
means such Classes in
alphabetical order (or such
Classes in reverse alphabetical
order); [provided, however, that
the Class [ ] and Class [ ]
--- ---
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 [EC], Class [IO]
and Class [PO] 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
[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 [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 [IO] Certificates, the
"Class Interest Distribution
Amount" will equal an amount
equal to the product of the Class
[IO] Pass-Through Rate and the
Class [IO] 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
S-16
<PAGE>
................. 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 the Servicing Fee
and Special Servicing Fee with
respect to such Distribution
Date, all as provided herein.
[The Class [PO] 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 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 [EC] and Class [IO]
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
required distributions of
interest to such Class [(or, with
respect to the Class [IO]
Certificates, to the Class [PO]
Certificates)] and interest and
principal payable to any other
outstanding Class that has an
equal or higher priority that is
entitled to distributions on such
Distribution Date.
................. [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 [PO] Certificates)]
unreimbursed Realized Losses
(together with interest thereon)
on such Distribution Date will be
distributed in reduction of the
Certificate Balances of the Class
C Certificates, then the Class B
Certificates, then the Class A
Certificates [and finally the
Class [PO] 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
S-18
<PAGE>
................. 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.
................. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" herein.
Advances.............. Subject to the limitations
described herein, the Master
Servicer is required to make
advances (each such amount, a
"P&I Advance") in respect of
delinquent Monthly Payments on
the Mortgage Loans. The Master
Servicer will not be required to
advance the full amount of any
Balloon Payment not made by the
related borrower on its due date,
but will advance an amount equal
to the monthly payment (or
portion thereof not received)
deemed to be due on the Mortgage
Loan after such default,
calculated based on the original
amortization schedule of such
Mortgage Loan with interest as
described herein. With respect
to any Distribution Date and any
Seriously Delinquent Loan, P&I
Advances will only be made if and
to the extent that Available
Funds for such Distribution Date
(exclusive of any P&I Advance
with respect to any Seriously
Delinquent Loans) are not
sufficient to make full
distributions in accordance with
the Available Funds Allocation to
each Class of Certificates whose
Certificate Balance would not be
reduced by Anticipated Losses
with respect to all Seriously
Delinquent Loans. Therefore,
neither (i) the most subordinate
Class (or Classes) of
Certificates outstanding at any
time nor (ii) any other Class of
Certificates whose Certificate
Balance would be reduced if
Realized Losses occurred in the
amount of anticipated losses with
respect to all Seriously
Delinquent Loans will receive
distributions on any Distribution
Date on which one or more
Mortgage Loans is a Seriously
Delinquent Loan unless Available
Funds for such Distribution Date
(exclusive of any P&I Advances
with respect to any Seriously
Delinquent Loans) exceed the
amount necessary to make full
distributions in accordance with
the Available Funds Allocation to
each Class of Certificates that
is senior to such Class. See
"THE POOLING AND SERVICING AGREE-
MENT--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.
S-19
<PAGE>
Subordination ........ As a means of providing a certain
amount of protection to the
holders of the Class A
Certificates against losses
associated with delinquent and
defaulted Mortgage Loans, the
rights of the holders of the
Class B and Class C Certificates
to receive distributions of
interest and principal, as
applicable, will be subordinated
to such rights of the holders of
the Class A 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
alphabetical designation.
[describe subordination
provisions of Class [EC]
Certificates, Class [IO]
Certificates and Class [PO]
Certificates, if applicable.]
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 alphabetical
designations; [provided that
Realized Losses are allocated pro
rata to the Class [ ]
---
Certificates and the Class [ ]
---
Certificates.] See "DESCRIPTION
OF THE
CERTIFICATES--Subordination"
herein. Shortfalls in Available
Funds resulting from additional
Master Servicer or Special
Servicer compensation, interest
on Advances, extraordinary
expenses of the Trust Fund or
otherwise will be allocated in
the same manner as Realized
Losses. No other form of credit
enhancement is offered for the
benefit of the holders of the
Offered Certificates.
The Residual Certificates The holders of the Class R
and Class LR Certificates
will not be entitled to
distributions of interest
or principal. The holders
of the Class R 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
after the distribution to
the holders of the Regular
Certificates and to the
Trustee as holder of the
Lower- Tier Regular
Interests, respectively,
of all amounts that they
are entitled to receive on
such Distribution Date.
Optional Termination.. The Special Servicer, the Master
Servicer, the Depositor and any
holder of the Class LR
Certificates representing more
than a 50% Percentage Interest of
the Class LR Certificates 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,
S-19
<PAGE>
................. 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 "THE POOLING AND
SERVICING AGREEMENT--Optional
Termination" herein.
Auction............... If the Trust Fund has not been
earlier terminated as described
under "THE POOLING AND SERVICING
AGREEMENT--Optional Termination"
herein, the Trustee will on the
Distribution Date occurring in
[ ] of each year
----------------
from and including [ ] and on
----
any date after the Distribution
Date occurring in
[ ] 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
expenses, the Trustee shall
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 Certificate Balances of
all Certificates outstanding on
the Auction Valuation Date plus
expenses. See "POOLING AND
SERVICING AGREEMENT--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
"REMIC" or, in the alternative,
the "Upper-Tier REMIC" and the
"Lower-Tier REMIC") for federal
income tax purposes. The Class
A, Class B, Class C, [Class
[EC]], [Class [IO]] and [Class
[PO]] 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
S-20
<PAGE>
................. will be designated as the sole
Class of "residual interest" in
the Lower-Tier REMIC.
................. The Regular Certificates will be
treated as newly originated debt
instruments for federal income
tax purposes. Beneficial owners
of the Offered Certificates will
be required to report income
thereon in accordance with the
accrual method of accounting.
[The Class [EC] and Class [IO]
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).] [The Class [PO]
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.]
[It is anticipated that the Class
[__] Certificates will be issued
with original issue discount in
an amount equal to their Initial
Certificate Balances plus [__]
days of interest at the initial
Pass-Through Rate thereon over
their respective issue prices
(including accrued interest).]
[It is further anticipated that
the Class [__] Certificates will
be issued at a premium for
federal income tax purposes.]
See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" herein.
................. The Prepayment Assumption that
will be used for purposes of
accruing original issue discount
with respect to the Regular
Certificates and determining
whether such original issue
discount with respect to the
Regular Certificates is de
minimis, and that may be used by
a holder to amortize premium, is
described herein as Scenario [3]
under the heading "YIELD
CONSIDERATIONS--Weighted Average
Life of the Regular
Certificates." No representation
is made as to the rate, if any,
at which the Mortgage Loans will
prepay.
................. [Although not free from doubt, it
is anticipated that any
Prepayment Premiums allocable to
the Regular Certificates will be
ordinary income to a
Certificateholder as such amounts
accrue. See "DESCRIPTION OF THE
CERTIFI- CATES--Distributions"
herein.]
................. Holders of the Class R and Class
LR Certificates will be required
to include the taxable income or
loss of the Upper-Tier REMIC and
the Lower-Tier REMIC,
respectively, in determining
their federal taxable income. It
is anticipated that all or a
substantial portion of the
taxable income of the Upper-Tier
REMIC and the Lower-Tier REMIC
includible by the Class R and
Class LR Certificateholders,
respectively, will be named as
"excess inclusion" income subject
to special limitations for
federal income tax purposes.
Further, significant restrictions
apply to the transfer of the
Class R and Class LR
Certificates. The Class R
Certificates will, and Class LR
Certificate may, be considered
S-21
<PAGE>
................. "noneconomic residual interests,"
certain transfers of which may be
disregarded for federal income
tax purposes.
ERISA Considerations.. The United States Department of
Labor has issued to the
Underwriter 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 Certificates by
employee benefit plans and
certain other retirement
arrangements, including
individual retirement accounts
and Keogh plans, which are
subject to ERISA and the Code
(all of which are hereinafter
referred to as "Plans"),
collective investment funds in
which such Plans are invested and
insurance companies using assets
of separate accounts or general
accounts which include assets of
Plans (or which are deemed
pursuant to ERISA to include
assets of 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 [EC],
CLASS [PO] AND CLASS [IO]],
CERTIFICATES ARE SUBORDINATED TO
ONE OR MORE OTHER CLASSES OF
CERTIFICATES AND, ACCORDINGLY,
THE CLASS B, CLASS C, CLASS [EC],
CLASS [PO] AND CLASS [IO]],
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.
Ratings............... It is a condition to the issuance
of the Certificates that: the
Class A Certificates, the Class B
Certificates and the Class [___]
Certificates each be rated
[______________] by each of
[__________________]. The Class
[ ], Class R and Class LR
----
Certificates are unrated. A
security rating is not a
recommendation to buy, sell or
hold securities and may be
subject to revision or withdrawal
at any time by the assigning
rating organization. A security
rating does not address the
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<PAGE>
................. 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. 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
[Description will vary based on the particular Mortgage Pool.]
Prospective holders of Certificates should consider, among other things,
the following factors in connection with the purchase of the Certificates.
Prospective Investors should also consider the factors listed under "RISK
FACTORS" in the Prospectus.
The Mortgage Loans; Investment in Commercial and
Multifamily Mortgage Loans
Borrower Default; Non-recourse Mortgage Loans. The Mortgage Loans, the
proceeds of which are the sole source of payments on the Certificates, are not
insured or guaranteed by any governmental entity, by any private mortgage
insurer or by the Depositor, the Mortgage Loan Seller, the Master Servicer, the
Special Servicer, the Trustee, the Fiscal Agent or any of their respective
affiliates.
Certain of the Mortgage Loans are non-recourse loans, which means that in
the event of a borrower default, 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. Consequently, payment of each
Mortgage Loan prior to maturity is dependent primarily on the sufficiency of the
net operating income of the related Mortgaged Property and payment at maturity
(whether at scheduled maturity or, in the event of a default under the Mortgage
Loan, upon the acceleration of such maturity) is dependent primarily upon the
then market value of the Mortgaged Property.
Commercial and Multifamily Lending Generally. Commercial and multifamily
lending generally is viewed as exposing a lender to a greater risk of loss than
one-to-four family residential lending. Commercial and multifamily lending
typically involves larger loans to single obligors than one-to-four family
residential lending and therefore provides lenders with less diversification of
risk and has the potential for greater losses resulting from the delinquency
and/or default of individual loans. The repayment of loans secured by commercial
or multifamily properties is typically dependent upon the successful operation
of such properties. As noted above, certain of the Mortgage Loans are
non-recourse loans, the payment of which is dependent primarily upon the
sufficiency of the net operating income of the related Mortgaged Property and
the market value of such Mortgaged Property.
Commercial and multifamily property values and net operating income are
subject to volatility. There can be no assurance that historical operating
results will be comparable to future operating results. Net operating income may
be reduced, and the borrower's ability to repay a Mortgage Loan impaired, as a
result of an increase in vacancy rates for the Mortgaged Property, a decline in
rental rates as leases are renewed or entered into with new tenants, an increase
in operating expenses of the Mortgaged Property and/or an increase in capital
expenditures needed to maintain the Mortgaged Property and make needed
improvements. The income from and market value of a Mortgaged Property may be
adversely affected by such factors as changes in the general economic climate,
local conditions such as an oversupply of space or a reduction in demand for
real estate in the area, attractiveness to tenants and guests, perceptions
regarding a property's safety, convenience and services, and competition from
other available space. Real estate values and income are also affected by such
factors as government regulations and changes in real estate, zoning or tax
laws, a property owner's willingness and ability to provide capable management,
changes in interest rate levels, the availability of financing and potential
liability under environmental and other laws. See "DESCRIPTION OF THE MORTGAGE
POOL--Investment in Commercial and Multifamily Mortgage Loans" herein.
a. Aging and Deterioration of Commercial and
Multifamily Properties. The age, construction quality
and design of a particular property may affect the
occupancy level as well as the rents
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<PAGE>
that may be charged for individual leases or, in the case of [the Congregate
Care Properties], [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 increase over time in the form of
increased maintenance and capital improvements. Even good construction will
deteriorate over time if the property managers do not schedule and perform
adequate maintenance in a timely fashion. If, during the term of a Mortgage
Loan, properties of a similar type are built in the area where the property
securing such Mortgage Loan is located or other similar properties in such area
are substantially updated and refurbished during that time, the value of such
property could be reduced.
b. Leases. 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. If a significant portion of a Mortgaged Property is leased to a
single tenant, the consequences of a failure of such tenant to perform its
obligations under the related lease, or the failure of the borrower to relet
such portion of such Mortgaged Property in the event that such tenant vacates
(either as a result of a default by the tenant or the expiration of the term of
the lease), will be more pronounced than if such Mortgaged Property were leased
to a greater number of tenants. Upon the occurrence of an event of default by a
tenant, delays and costs in enforcing the lessor's rights could occur. Repayment
of the Mortgage Loans may be affected by the expiration or termination of space
leases and the ability of the related borrowers to renew the leases or relet the
space on economically favorable terms. No assurance can be given that leases
that expire can be renewed, or that the space covered by leases that expire or
are terminated can be leased at comparable rents, or on comparable terms, or in
any timely manner, or at all. Certain tenants at the Mortgaged Properties may be
entitled to terminate their leases or reduce rents under their leases if an
anchor tenant ceases operations at the related Mortgaged Property. In such
cases, there can be no assurance that any such anchor tenants will maintain
operations at the related Mortgaged Properties. See "DESCRIPTION OF THE MORTGAGE
POOL----Tenant Matters" herein.
c. Competition. Other [multifamily residences], [retail centers],
[office buildings], [nursing homes], [congregate care facilities], [warehouse
facilities], [industrial properties], [self-storage facilities], [hotels] and
[mobile home parks] located in the areas of the Mortgaged Properties compete
with the Mortgaged Properties of such types to attract [residents], [retailers],
[customers], [tenants] and [guests]. In addition, tenants at the Mortgaged
Properties that have retail space face competition from discount shopping
centers and clubs, factory outlet centers, direct mail and telemarketing.
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 property manager of such
Mortgaged Property. The property manager is 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 Homes and Congregate Care Facilities. Certain
of the Mortgage Loans are secured by Mortgages on either congregate care
facilities or nursing homes. Congregate care facilities provide housing and
limited services such as meal programs to the "well elderly," while nursing
homes provide long term around-the-clock residential health care services to
residents who require a lower level of care than that provided by an acute care
hospital, but a higher level of care than that provided in a non- institutional
home-like setting. Loans secured by liens on properties of these types pose
additional risks not associated with loans secured by liens on other types of
income-producing real estate.
Providers of long-term nursing care and other medical services are subject
to federal and state laws that relate to the adequacy of medical care,
distribution of pharmaceuticals, rate setting, equipment, personnel,
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<PAGE>
operating policies and additions to facilities and services and, to the extent
they are dependent on patients whose fees are reimbursed by private insurers, to
the reimbursement policies of such insurers. In addition, facilities where such
care or other medical services are provided are subject to periodic inspection
by governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation in
the Medicaid and Medicare reimbursement programs. The failure of a borrower
under a Nursing Home Loan to maintain or renew any required license or
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.
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. Additionally, the continued operation
of a nursing home facility subsequent to a foreclosure is dependent upon the
proposed operator satisfying all applicable legal requirements, such as
maintaining the required license to operate such facility and/or dispense
required pharmaceuticals.
Congregate care retirement residences generally do not require licensing by
state or federal regulatory agencies and do not qualify for payments under the
federal Medicare program or state Medicaid programs. However, congregate care
retirement residences are required to be licensed by a state or municipal
authority to provide food service. The failure of a borrower under a Congregate
Care Loan to maintain or renew any required license could impair its ability to
generate operating income.
The operators of such nursing homes and congregate care facilities are
likely to compete on a local and regional basis with others that operate similar
facilities. Some of their competitors may be better capitalized, 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.
The successful operation of a Nursing Home Property or Congregate Care Property
will generally depend upon the number of competing facilities in the local
market, as well as upon other factors such as its age, appearance, reputation
and management, the types of services it provides and, where applicable, the
quality of care and the cost of that care. See "DESCRIPTION OF THE MORTGAGE
POOL--Risks Particular to Nursing Homes and Congregate Care Facilities" herein.]
[Risks Particular to Self-Storage Facilities. Certain of the Mortgage Loans
are secured by Mortgages on self-storage facilities. The conversion of
self-storage facilities to alternative uses generally requires substantial
capital expenditures. Thus, if the operation of any of the Self-Storage
Properties becomes unprofitable due to decreased demand, competition, age of
improvements or other factors such that the related borrower becomes unable to
meet its obligations on the related Mortgage Loan, the liquidation value of that
Self-Storage Property may be substantially less, relative to the amount owing on
the related Mortgage Loan, than would be the case if the Self-Storage Property
were readily adaptable to other uses. Tenant privacy, anonymity and efficient
access may heighten environmental risks. The environmental assessments discussed
herein did not include an inspection of the contents of the self-storage units
included in the Self-Storage Properties and there is no assurance that all of
the units included in the Self-Storage Properties are free from hazardous
substances or other pollutants or contaminants or will remain so in the future.
See "DESCRIPTION
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<PAGE>
OF THE MORTGAGE POOL----Environmental Risks" and "--Risks
Particular to Self-Storage Facilities" herein.]
[Risks Particular to Hotel Properties. Certain of the Mortgage Loans are
secured by Mortgages on Hotel Properties. These Mortgaged Properties are subject
to operating risks common to the hotel industry. These risks include, among
other things, competition from other hotels, over-building in the hotel industry
that has adversely affected occupancy and daily room rates, 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. The hotel industry is seasonal in nature. This seasonality can be
expected to cause periodic fluctuations in the related borrower's revenues.
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, which termination could have a material adverse
effect upon the operations and value of the related hotel because of the loss of
associated name recognition, marketing support and decentralized reservation
systems provided by the franchisor; (ii) the transferability of a hotel's
operating, liquor and other licenses to the entity acquiring a hotel either
through purchase or foreclosure is subject to the vagaries of local law
requirements; and (iii) because of the expertise and knowledge required to run
hotel operations, foreclosure and a change in ownership (and consequently of
management) may have an especially adverse effect on the perception of the
public and the industry (including franchisors) concerning the quality of a
hotel's operations. See "DESCRIPTION OF THE MORTGAGE POOL--Risks Particular to
Hotel Properties" herein.]
[Risks Particular to Mobile Home Parks. Certain of the Mortgage Loans are
secured by Mortgages on Mobile Home Park Properties. A mobile home park is a
residential subdivision designed and improved with home sites that are leased to
residents for the placement of mobile homes and related improvements. Mobile
homes are detached, single-family homes that are produced off-site by
manufacturers and installed within the community. The number of competitive
mobile home parks in a particular area could have a material adverse effect on
the related borrower's ability to lease sites at the property and on the rents
charged for such sites. In addition, other forms of multi-family residential
properties and single-family housing provide housing alternatives to potential
residents of mobile home parks.
Laws and regulations have been adopted by certain states and municipalities
specifically regulating the ownership and operation of mobile home parks.
Included as part of certain of these laws and regulations are provisions
imposing restrictions on the timing or amount of rental increases and granting
to residents a right of first refusal on sales of their community by the owner
to a third party. Laws and regulations relating to the ownership and operation
of mobile home parks could adversely affect a related borrower by limiting its
ability to increase rents or recover increases in operating expenses or by
making it more difficult in certain circumstances to refinance the related
Mortgage Loan or to sell the Mortgaged Property for purposes of making any
Balloon Payment due upon the maturity of such Mortgage Loan. See "DESCRIPTION OF
THE MORTGAGE POOL--Risks Particular to Mobile Home Parks" herein.]
Concentration of Mortgage Loans and Borrowers. In general, concentrations
in a mortgage pool of loans with larger-than-average balances can result in
losses that are more severe, relative to the size of the pool than would be the
case if the aggregate balance of such pool were more evenly distributed.
Concentrations of Mortgage Loans with the same borrower or related borrowers can
also pose increased risks. For example, if one borrower that owns or controls
several Mortgaged Properties experiences financial difficulty resulting from the
unprofitability of one Mortgaged Property, such financial difficulty could cause
defaults with respect to the Mortgage Loans secured by the other Mortgaged
Properties owned or controlled
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<PAGE>
by that borrower. Such borrower could attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting Monthly Payments
for an indefinite period on all of the related Mortgage Loans. See "DESCRIPTION
OF THE MORTGAGE POOL--Concentration of Mortgage Loans and Borrowers" herein.
Tax Considerations Related to Foreclosure. If the Trust Fund were to
acquire a Mortgaged Property subsequent to a default on the related Mortgage
Loan pursuant to a foreclosure or deed-in-lieu of foreclosure, the Special
Servicer would be required under certain circumstances to retain an independent
contractor to operate and manage such Mortgaged Property. Any net income from
such operation and management, other than 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 non-customary in the area and for the type of
building involved, will subject the Lower-Tier REMIC to federal (and possibly
state or local) tax on such income at the highest marginal corporate rate
(currently 35%), thereby reducing net proceeds available for distribution to
Certificateholders. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Regular Interests," "--Taxation of the REMIC" and "--Taxation of Holders of
Residual Certificates" in the Prospectus.
Risk of Different Timing of Mortgage Loan Amortization. If and as principal
payments or prepayments are made on the Mortgage Loans at different rates,
depending upon the amortization schedule and maturity of each Mortgage Loan, the
remaining Mortgage Pool will be subject to more concentrated risk with respect
to the diversity of types of properties and with respect to 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 Class
or Classes has been reduced to zero [(other than any amounts distributable
pursuant to priority [ ] of the Available Funds Allocation)], Classes that have
a later sequential designation are more likely to be exposed to the risk of
concentration discussed in the preceding paragraph than Classes with higher
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, acts of nature
(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--Geographic Concentration". herein.
Environmental Risks. 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 environmental condition of nonresidential
properties may be affected by the business operation of tenants and occupants of
the properties. 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.
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<PAGE>
Secured lenders may be exposed 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 potential that the borrower may default on a
Mortgage Loan due to the borrower'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.
Under the laws of certain states and federal law, failure of a property
owner to perform remediation of certain environmental conditions can give rise
to a lien on the related property to ensure the reimbursement of remedial costs
incurred by state and federal regulatory agencies. In several states such lien
has priority over 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 as collateral for the related Mortgage Loan and could make
impracticable the foreclosure by the Special Servicer on such Mortgaged Property
in the event of a default by the borrower of its obligations under the related
Mortgage Loan.
The cost of any required remediation and the owner's liability therefor as
to any property is generally not limited under such enactments 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 liable, as
an "owner" or "operator," for the costs of responding to a release or threat of
a release of hazardous substances on or from a borrower's property if the lender
is deemed to have participated in the management of the borrower, regardless of
whether a previous owner caused the environmental damage. One court has held
that a lender will be deemed to have participated in the management of the
borrower if the lender participates 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 "DESCRIPTION OF THE MORTGAGE POOL--Environmental
Risks" herein and "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Environmental
Risks" in the Prospectus.
Balloon Payments; Optional Acceleration. Balloon Loans involve a greater
risk of default to the lender 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 "DESCRIPTION OF THE MORTGAGE POOL--Balloon Payments; Optional
Acceleration" herein.
[The Mortgage Loan documents with respect to certain of the Mortgage Loans
grant the lender an option to accelerate the maturity of such Mortgage Loans.
Under the Pooling and Servicing Agreement, the Master Servicer or the Special
Servicer, as applicable, will be required to exercise each such option to
accelerate the maturity of each such Mortgage Loan on the earliest date
permitted under the related Mortgage Loan Documents. See "THE POOLING AND
SERVICING AGREEMENT--Servicing of the Mortgage Loans; Collection of Payments"
herein. Notwithstanding such exercise, there can be no assurance that the
related borrowers will repay such Mortgage Loans upon the acceleration of the
maturity dates thereunder. As noted above, the ability of a borrower to make
such a 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 payment. Furthermore, there can be
no assurance that a related borrower will not
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<PAGE>
raise equitable or other legal defenses to the enforcement by the Master
Servicer of the maturity acceleration provisions described above. See "CERTAIN
LEGAL ASPECTS OF THE MORTGAGE LOANS--Enforceability of Certain Provisions" in
the Prospectus.]
Other Financing. In general, the borrowers are prohibited from encumbering
the related Mortgaged Property with additional secured debt or the lender's
approval is required for such an encumbrance, except as set forth herein.
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
junior 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 borrower may have greater incentives to repay the
junior 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 "DESCRIPTION OF THE MORTGAGE POOL--Balloon Payments; Optional Acceleration"
herein and "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Secondary Financing;
Due-on-Encumbrance Provisions" in the Prospectus.
Bankruptcy of Borrowers. The borrowers have generally not been formed with
the intent that they be bankruptcy-remote entities and 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. [Unlike the case in some other types of
securitized offerings, the borrowers are operating businesses that contract with
other entities to perform services or purchase goods for or related to the
Mortgaged Properties and may, because of these activities, be more susceptible
to suit by various claimants than the borrowers involved in such other
offerings. Investors should be aware that, particularly in view of the
operational nature of the Mortgaged Properties, the borrowers may become
insolvent or become the subject of a voluntary or involuntary bankruptcy case.]
See "DESCRIPTION OF THE MORTGAGE POOL--Bankruptcy of Borrowers" herein and
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--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 guarantees
of present or future value. Moreover, appraisals seek to establish the amount a
typical motivated buyer would pay a typical motivated seller. Such amount could
be significantly higher than the amount obtained from the sale of a Mortgaged
Property under a distress or liquidation sale. 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. See "DESCRIPTION OF THE MORTGAGE
POOL--Limitations of Appraisals and Engineering Reports" and "--Borrower Escrows
and Reserve Accounts" herein.
[Zoning Compliance. Due to changes in applicable building and zoning
ordinances and codes ("Zoning Laws") affecting certain of the Mortgaged
Properties that have come into effect since the construction of improvements on
such Mortgaged Properties and to other reasons, certain improvements may not
comply fully with current Zoning Laws, including, without limitation, density,
use, parking and set back requirements. In such cases, the Originator has
received assurances that such improvements qualify as permitted non-conforming
uses. Such changes may limit the ability of the related borrower to rebuild or
utilize the premises "as is" in the event of a substantial casualty loss with
respect thereto. See "DESCRIPTION OF THE MORTGAGE POOL--Zoning Compliance"
herein.]
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Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. To the extent the Mortgaged Properties do not comply with the
ADA, borrowers are likely to incur costs of complying with the ADA.
Noncompliance could result in the imposition of fines by the federal government
or an award of damages to private litigants. See "DESCRIPTION OF THE MORTGAGE
POOL--Costs of Compliance with Americans with Disabilities Act" herein and
"CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Americans With Disabilities Act"
in the Prospectus.
[Limitations on Enforceability of Cross-Collateralization. Certain of the
Mortgage Loans, each of which were made to a borrower that is affiliated with
the borrower under another Mortgage Loan (the "Cross-Collateralized Loans"), 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.
Such arrangements, however, 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. See "DESCRIPTION OF THE MORTGAGE
POOL--Limitations on Enforceability of Cross-Collateralization" herein.
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.]
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 retail tenant or owner-occupier, a "Major Tenant"). Generally, such
Major Tenants do not have investment-grade credit ratings, and there can be no
assurance that such Major Tenants will continue to perform their obligations
under their respective leases (or, in the case of owner-occupied Mortgaged
Properties, under the related Mortgage Loan documents). Any default by a Major
Tenant could adversely affect the related borrower's ability to make payments on
the related Mortgage Loan. See "DESCRIPTION OF THE MORTGAGE POOL--Tenant
Matters" herein.
[Contracts for Deed and Purchase Options. Certain of
the Mortgage Loans are secured, wholly or in part, by
[first] mortgage liens: (i) on the related borrower's
interest in an Installment Contract with respect to all
or part of the related Mortgaged Property; and/or (ii)
subject to an existing option to purchase all or part of
the related Mortgaged Property. Mortgage Loans secured,
wholly or in part, by a Mortgage encumbering
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the related borrower's interest in an Installment Contract may expose a lender
to a greater risk of loss than a Mortgage Loan secured by a Mortgage encumbering
a fee interest, including, without limitation, the potential that upon a default
by the borrower under the Installment Contract, the vendor under such contract
may be entitled to enforce a forfeiture of the borrower's interest in the
Mortgaged Property, thereby depriving the lender of its security. Examples of
protections that may be obtained by a lender in order to minimize this risk
include obtaining the agreement of the vendor under the Installment Contract to
provide the lender with: (i) notice of any defaults by the borrower; (ii) the
right to cure such defaults, with adequate cure periods; (iii) if a default is
not susceptible of cure by the lender, the right to acquire the interest of the
borrower through foreclosure or otherwise prior to any termination of the
Installment Contract; (iv) the ability to assign the Installment Contract to a
purchaser at a foreclosure sale and for a release of its liabilities thereunder;
(v) the right to enter into an Installment Contract with the vendor on the same
terms and conditions as the old Installment Contract in the event of a
termination thereof; and (vi) 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 Mortgage
may prohibit the vendor from treating the Installment Contract as terminated in
the event of the vendor's bankruptcy and rejection of the ground lease by the
trustee for the debtor-vendor, and may assign to the lender the
debtor-borrower's right to reject the Installment Contract pursuant to Section
365 of the Bankruptcy Code (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 Installment Contract is to have
the vendor enter into a mortgage encumbering the fee estate in addition to the
mortgage encumbering the borrower's interest under the Installment Contract.
Additional protection is afforded to the lender, because if the Installment
Contract is terminated, the lender may nonetheless possess rights contained in
the fee mortgage. Without the protections described in this paragraph, a lender
holding a mortgage encumbering a borrower's interest under an Installment
Contract may be more likely to lose the collateral. No assurance can be given
that any or all of the above described provisions will be obtained in connection
with any particular Mortgage Loan. See "DESCRIPTION OF THE MORTGAGE
POOL--Contracts for Deed and Purchase Options" herein and "CERTAIN LEGAL ASPECTS
OF THE MORTGAGE LOANS--Installment Contracts" in the Prospectus.
Mortgage Loans secured, wholly or in part, by a Mortgage which is subject
to an existing option to purchase all or part of the related Mortgaged Property
may expose a lender to the risk that its mortgage lien may be eliminated upon
the effective exercise of such option. This risk may be minimized if the
agreement of the holder of the purchase option to subordinate its option to the
lien of the related Mortgage can be obtained, or if the purchase price to be
obtained by the borrower upon an exercise of such option is appropriately
assigned to the lender, is adequate to fully satisfy the indebtedness remaining
under the Mortgage Loan or is at least equivalent to the fair market value of
the Mortgaged Property. No assurance can be given that any or all of the above
described provisions will be obtained in connection with any particular Mortgage
Loan. See "DESCRIPTION OF THE MORTGAGE POOL--Contracts for Deed and Purchase
Options" herein.]
[Ground Leases. Certain of the Mortgage Loans may be secured, wholly or in
part, by [first] mortgage liens encumbering the related borrower's leasehold
interest under a ground lease. Such 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 lender of
its security. The ground lease may terminate if, among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the 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 lender,
in order to minimize such risk are the right of the lender 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 lender, 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 lender
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or a purchaser at a foreclosure sale and for a release of the assigning ground
lessee's liabilities thereunder; the right of the lender 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 lender 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 lender, because if the ground lease is
terminated, the lender may nonetheless possess rights contained in the fee
mortgage. Without the protections described in this paragraph, a lender holding
a leasehold mortgage 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. See "DESCRIPTION OF THE MORTGAGE POOL--Ground Leases" herein and "CERTAIN
LEGAL ASPECTS OF THE MORTGAGE LOANS--Leasehold Risks" in the Prospectus.]
[Borrower Escrows and Reserve Accounts. In a number of the Mortgage Loans,
the borrower was required to establish 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 against delinquencies in
Monthly Payments. The required reserves are intended to provide the lender with
an available source of funds to pay such items, and to minimize any negative
impact upon the Mortgaged Property which would occur if the borrower failed to
pay the same. See "DESCRIPTION OF THE MORTGAGE POOL--Borrower Escrows and
Reserve Accounts" herein.]
Modifications. [None] of the Mortgage Loans have been modified in any
material manner since their origination in connection with any default or
threatened default on the part of the related borrower. [Describe any other
modifications that have been made.] Any future modifications would be subject to
the conditions and requirements contained in the Pooling and Servicing
Agreement. See "DESCRIPTION OF THE MORTGAGE POOL--Modifications" herein.
Litigation. There may be legal proceedings pending and, from time to time,
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 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, have a negative effect on the distributions
to Certificateholders. See "DESCRIPTION OF THE MORTGAGE POOL--Litigation"
herein.
Repurchase of Mortgage Loans
As more fully described under "DESCRIPTION OF THE MORTGAGE POOL--General"
and "THE POOLING AND SERVICING AGREEMENT--Representations and Warranties;
Repurchase", the Mortgage Loan Seller will be obligated to repurchase a Mortgage
Loan if certain of its representations or warranties concerning such Mortgage
Loan are breached, however, there can be no assurance that it will be in a
financial position to effect such repurchase. See "THE MORTGAGE LOAN SELLER"
herein. [The Mortgage Loan Seller generally will have the right to require the
Originator to repurchase such Mortgage Loan if a representation or warranty in
the agreement pursuant to which the Mortgage Loan Seller acquired such Mortgage
Loan is also breached. Since Midland is both the Originator of [___] of the
Mortgage Loans and the Master Servicer, the ability of Midland to perform its
obligations as Master Servicer under the Pooling
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and Servicing Agreement may be jeopardized if it incurs significant liabilities
as an Originator for the repurchase of Mortgage Loans as to which there has been
a breach of a representation or warranty.]
Prepayment and Yield Considerations
The yield to maturity on the Regular Certificates will depend on, among
other things, (i) the allocation and timing of any delinquencies, defaults,
losses or other shortfalls experienced on the Mortgage Loans and the allocation
thereof to the various Classes of Certificates, (ii) the rate and timing of
principal payments (including both voluntary and involuntary prepayments, such
as prepayments resulting from casualty or condemnation, defaults and
liquidations) on the Mortgage Loans and the allocation thereof to reduce the
Certificate Balances [(or Notional Balances)] of the Certificates and (iii) the
accrual of interest on unreimbursed Advances, the accrual of Special Servicing
Fees [and Disposition Fees] and the incurrence of other servicing expenses as to
which the right of payment or reimbursement from the Trust Fund is senior to the
rights of Certificateholders.
All but [ ] of the Mortgage Loans are Balloon Loans that will have
substantial payments (that is, Balloon Payments) due at their stated maturities
unless previously prepaid. Balloon Loans involve a greater risk of default to
the lender 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 CONSIDERATIONS--Regular Certificates--Balloon Payments" herein.
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 and defaults on the Mortgage Loans. Losses on
the Mortgage Loans will be allocated to the Certificates in reverse order of
their alphabetical Class designations, beginning with the Class C Certificates,
until the Certificate Balance thereof has been reduced to zero, prior to any
allocation of losses to the next most subordinate Class. [Losses allocated to
the Class [PO] Certificates will reduce the Class [IO] Notional Balance.] 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 [EC] or Class [IO] Certificates, such losses result in a
reduction of the Class [EC] Notional Balance or the Class [IO] 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.
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 life of such Classes and may reduce or increase the
weighted average life of the other Classes of Certificates.
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
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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, with respect to any Distribution Date, P&I Advances will only be
made with respect to any Seriously Delinquent Loan if and to the extent that
Available Funds for such Distribution Date (exclusive of any Advance with
respect to any Seriously Delinquent Loan) are not sufficient to make full
distributions in accordance with the Available Funds Allocation to each Class of
Certificates whose Certificate Balance would not be reduced by Anticipated
Losses with respect to all Seriously Delinquent Loans. Therefore, neither (i)
the most subordinate Class (or Classes) of Certificates outstanding at any time
nor (ii) any other Class of Certificates whose Certificate Balance would be
reduced if Realized Losses occurred in the amount of Anticipated Losses with
respect to all Seriously Delinquent Loans will receive distributions on any
Distribution Date on which one or more Mortgage Loans is a Seriously Delinquent
Loan unless Available Funds for such Distribution Date (exclusive of any P&I
Advances with respect to any Seriously Delinquent Loans) exceed the amount
necessary to make full distributions in accordance with the Available Funds
Allocation to each Class of Certificates that is senior to such Class. 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 actual rate of
prepayment of principal on the Mortgage Loans cannot be predicted. The
investment performance of the Certificates may vary materially and adversely
from the investment expectations of investors due to the rate of prepayments on
the Mortgage Loans being higher or lower than anticipated by investors. In
addition, in the event of any repurchase of a Mortgage Loan by the Mortgage Loan
Seller from the Trust Fund under the circumstances described under "THE POOLING
AND SERVICING AGREEMENT--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. See "YIELD
CONSIDERATIONS" herein.
In general, the yield on Certificates purchased at a premium or at a
discount [and the yield on the Class [EC] and Class [IO] 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 [EC] and Class [IO] Certificates will be especially
sensitive to the occurrence of high rates of principal distributions.]
Conversely, if a Certificate is purchased at a discount [(especially the Class
[PO] 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.
[All] of the Mortgage Loans require the payment of Prepayment Premiums in
connection with voluntary prepayments during a certain period following the
origination thereof. The requirement that voluntary prepayments be accompanied
by Prepayment Premiums expires prior to the maturity date of [each] Mortgage
Loan. [In addition, [ ] of the Balloon Loans, representing approximately [ ]% of
the Initial Pool Balance, permit the related borrowers to make voluntary
prepayments sufficient to amortize fully the principal balance thereof over the
remaining term thereof without the payment of Prepayment Premiums. Such
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borrowers have [not] made any such voluntary prepayments since the origination
of such Balloon Loans.] The prepayment terms of each of the Mortgage Loans are
more particularly described herein under the heading "DESCRIPTION OF THE
MORTGAGE POOL--Certain Terms and Conditions of the Mortgage Loans."
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.
Prepayment Premiums, to the extent actually collected from borrowers, will
be allocated among the Certificates as described under "DESCRIPTION OF THE
CERTIFICATES--Distributions--Prepayment Premiums" herein. No assurance can be
given that the distribution of Prepayment Premiums to any Class of Certificates
will offset any diminution in yield resulting from the increased level of
principal distributions caused by any borrower prepayments. [The Class [ ]
Certificates are not entitled to receive any distributions in respect of
Prepayment Premiums.] [In addition, the Class [ ] Certificates are unlikely to
receive any distributions in respect of Prepayment Premiums.]
[Investors in the Class [EC] and Class [IO] Certificates should consider
the risk that the occurrence of voluntary and involuntary principal prepayment
on the Mortgage Loans could result in the failure of such investors to recover
fully their initial investments.]
[Weighted Average Net Mortgage Rate. The Pass-Through Rate on each of the
Class [ ] and Class [__] Certificates is equal to the greater of (i) the
Weighted Average Net Mortgage Rate and (ii) [ ]%. The Weighted Average Net
Mortgage Rate will be affected by modifications to the Mortgage Rate applicable
to any Mortgage Loan. If the Weighted Average Net Mortgage Rate were to fall
below [ ]%, the Pass-Through Rate on the Class [ ] and Class [___] 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 [IO] Certificates. Any such
interest shortfall would affect the Class [IO] Certificates prior to affecting
the Class [ ] Certificates and would affect the Class [ ] Certificates prior to
affecting the Class [ ] Certificates. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" 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 losses being allocated 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 and Disposition Fees, which may result in losses being
allocated to the Regular Certificates that would not otherwise have resulted
absent such compensation. See "THE POOLING AND SERVICING AGREEMENT--Special
Servicing" herein.
Residual Certificates. The Class R and Class LR Certificates are not
entitled to regular distributions. The Class R and Class LR Certificates will
only be entitled to distributions after the Certificate Balances of all other
Classes of Certificates have been reduced to zero and only to the extent of any
funds remaining in
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the Distribution Account and Collection Account, respectively. In the case of
the Class LR Certificates, the existence of any funds remaining in the
Collection Account may result from the allocation of Available Funds to the
Lower-Tier Regular Interests as described in the Available Funds Allocation. See
"DESCRIPTION OF THE CERTIFICATES--Distributions" herein. No assurance can be
given that any funds will remain in the Collection Account for distribution to
the Class LR Certificates. In the case of the Class R Certificates, no funds are
expected to remain in the Distribution Account for distribution thereto.
Therefore, the Class R and Class LR Certificateholders' REMIC taxable income and
the tax liability thereon will substantially exceed cash distributions to such
holders during certain periods. There can be no assurance as to the amount by
which such taxable income or such tax liability will exceed cash distributions
in respect of the Class R Certificates and Class LR Certificates during any such
period and no representation is made with respect thereto. Due to the special
tax treatment of residual interests, the after-tax return of the Class R
Certificates and Class LR Certificates may be significantly lower than would be
the case if the Class R Certificates and Class LR Certificates were taxed as
debt instruments, or may be negative. See "YIELD CONSIDERATIONS" herein.
Limited Liquidity
There is currently no secondary market for the Regular Certificates. The
Underwriter has advised that it currently intends to make a secondary market in
the Regular Certificates, but it is under no obligation to do so. Accordingly,
there can be no assurance that a secondary market for the Regular Certificates
will develop. Moreover, if a secondary market does develop, there can be no
assurance that it will provide holders of Regular Certificates with liquidity of
investment or that it will continue for the life of the Regular Certificates.
The Regular Certificates will not be listed on any securities exchange.
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of [ ] multifamily and commercial "whole"
mortgage loans (the "Mortgage Loans"). The Mortgage Loans have an aggregate
Cut-off Date Principal Balance of approximately $[ ] (the "Initial Pool
Balance"), subject to a variance of plus or minus [ ]%. 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 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 [except as discussed below,] by a mortgage, deed of trust, deed to
secure debt or other similar security instrument (a "Mortgage") that creates a
first lien on a fee simple or leasehold estate in real property (a "Mortgaged
Property"), improved by [(a) an apartment building or complex consisting of five
or more rental units (a "Multifamily Property," and any Mortgage Loan secured
thereby, a "Multifamily Loan")]; [(b) a nursing home (a "Nursing Home Property,"
and any Mortgage Loan secured thereby, a "Nursing Home Loan")]; [(c) a
congregate care facility (a "Congregate Care Property," and any Mortgage Loan
secured thereby, a "Congregate Care Loan")]; [(d) a retail property (a "Retail
Property," and any Mortgage Loan secured thereby, a "Retail Loan")]; [(e) an
office building (an "Office Building Property," and any Mortgage Loan secured
thereby, an "Office Building Loan"]; [(f) a retail/office property (a
"Retail/Office Property," and any Mortgage Loan secured thereby, a
"Retail/Office Loan")]; [(g) a self-storage facility (a "Self-Storage Property,"
and any Mortgage Loan secured thereby, a "Self-Storage Loan")]; [(h) a light
industrial/industrial property (a "Light Industrial/Industrial Property," and
any Mortgage Loan secured thereby, a "Light Industrial/Industrial Loan")]; [(i)
a hotel (a "Hotel Property," and any Mortgage Loan secured thereby, a "Hotel
Loan")]; [(j) a mobile home park (a "Mobile Home Park Property," and any
Mortgage Loan secured
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thereby,"a "Mobile Home Park Loan")]; [(k) a retail/multifamily property (a
"Retail/Multifamily Property," and any Mortgage Loan secured thereby, a
"Retail/Multifamily Loan")]; [(l) an office/multifamily/retail property (an
"Office/Multifamily/Retail Property" and any Mortgage Loan secured thereby, an
"Office/Multifamily/Retail Loan")]; or [(m) an office/warehouse property (an
"Office/Warehouse Property," and any Mortgage Loan secured thereby, an
"Office/Warehouse Loan")]. [Describe any mortgage loans secured by second or
third liens.] The percentage of the Initial Pool Balance represented by each
type of Mortgaged Property is as follows:
Percentage of
Property Type Initial Pool Balance
[Multifamily] %
[Nursing Home] %
[Congregate Care] %
[Retail] %
[Self-Storage] %
[Office Building] %
[Light Industrial/Industrial] %
[Retail/Office] %
[Hotel] %
[Mobile Home Park] %
[Retail/Multifamily] %
[Office/Multifamily/Retail] %
[Office/Warehouse] %
Approximately [ ]% of the Initial Pool Balance represents the refinancing of
existing mortgage indebtedness.
None of the Mortgage Loans is insured or guaranteed by the United States of
America, any governmental agency or instrumentality, any private mortgage
insurer or by the Depositor, the Mortgage Loan Seller, the Master Servicer, the
Special Servicer, the Trustee or the Fiscal Agent or any of their respective
affiliates. [ ] of the Mortgage Loans are fully recourse loans, while [ ] of the
Mortgage Loans are non-recourse loans. In the event of a borrower default under
a non-recourse Mortgage Loan, recourse generally may be had only against the
specific Mortgaged Property or Mortgaged Properties securing such Mortgage Loan
and such limited other assets as have been pledged to secure such Mortgage Loan,
and not against the borrower's other assets. However, generally, upon the
occurrence of certain circumstances as set forth in the Mortgage Loan documents,
typically including, without limitation, fraud, intentional misrepresentation,
waste, misappropriation of tenant security deposits or rent, and in some cases
failure to maintain any required insurance or misappropriation of any insurance
proceeds or condemnation awards, recourse generally may be had against the
borrower for damages sustained by the mortgagee. [With respect to [ ] of the
Mortgage Loans representing approximately ___% of the Initial Pool Balance, the
corporate parent company of the related borrower has unconditionally guaranteed
the payment of the related Mortgage Loan. However, guarantors may have limited
assets and there can be no assurance that any guarantor will have sufficient
assets to support obligations under the related guaranty.] See "--Investment in
Commercial and Multifamily Mortgage Loans--Borrower Default; Non-Recourse
Mortgage Loans" herein.
[Describe originators of Mortgage Loans and how the Mortgage Loans will be
acquired by the Mortgage Loan Seller.] The originators of the Mortgage Loans are
referred to herein collectively as the "Originators" and individually as an
"Originator."
The Depositor will purchase the Mortgage Loans to be included in the
Mortgage Pool on or before the Closing Date from the Mortgage Loan Seller
pursuant to a Mortgage Loan Purchase and Sale Agreement
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<PAGE>
(the "Mortgage Loan Purchase and Sale Agreement") to be dated as of [ ] (the
"Loan Purchase Closing Date"), between the Mortgage Loan Seller and the
Depositor. The Mortgage Loan Seller will be obligated to repurchase a Mortgage
Loan in the event of a breach of a representation or warranty of the Mortgage
Loan Seller with respect to such Mortgage Loan, as described under "THE POOLING
AND SERVICING AGREEMENT--Representations and Warranties; Repurchase" herein.
[The Mortgage Loan Seller has only limited assets with which to fulfill any
repurchase obligations that may arise.] There can be no assurance that the
Mortgage Loan Seller 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 such obligation if the Mortgage Loan Seller fails to
do so. The Depositor will assign the Mortgage Loans in the Mortgage Pool,
together with the Depositor's rights and remedies against the Mortgage Loan
Seller 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. [ ] of the Mortgage Loans
are secured by fee simple interests in the related Mortgaged Property; [ ]
Mortgage Loans are secured solely by a leasehold interest in the related
Mortgaged Property; and [ ] Mortgage Loans are secured by a leasehold interest
in a portion of the related Mortgaged Property and a fee simple interest in a
portion of the related Mortgaged Property. [ ] of the Mortgage Loans are fully
recourse loans, while [ ] 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 exists in the nature of
[letters of credit,] [the establishment of one or more reserve or escrow
accounts for necessary repairs and replacements, tenant improvements and leasing
commissions, real estate taxes, assessments and insurance premiums, deferred
maintenance and/or scheduled capital improvements or as reserves against
delinquencies in Monthly Payments (such accounts, "Reserve Accounts")], [a
pledge of all of the ownership interests in a borrower] or [the assignment of
the proceeds of purchase options]. The aggregate amount on deposit in the
Reserve Accounts as of the Cut-off Date was approximately $[ ]. [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.
However, the borrowers generally have limited assets [(and, with respect to [ ]
of the Mortgage Loans, the related borrowers' indemnification obligations are
non-recourse obligations)] and there can be no assurance that any borrower will
have sufficient assets to support any such indemnification obligations that may
arise. See "--Investment in Commercial and Multifamily Mortgage
Loans--Environmental Risks" herein. [Each] Mortgage constitutes a first lien on
a Mortgaged Property, subject generally only to (i) liens for real estate and
other taxes and special assessments, (ii) 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, such exceptions having been
acceptable to the Mortgage Loan Seller in connection with the purchase of the
related Mortgage Loan, and (iii) such other exceptions and encumbrances on the
Mortgaged Property as are reflected in the related title insurance policies.
[Describe any Mortgage Loans secured by second or third liens.]
Underwriting Standards
[Describe underwriting standards]
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<PAGE>
Certain Terms and Conditions of the Mortgage Loans
[Generally describe material provisions of Mortgage Loans, including due
dates, interest rates, amortization, prepayment provisions, "due-on-encumbrance"
or "due-on-sale" provisions, events of default and required insurance.]
Certain Characteristics of the Mortgage Pool
As of the Cut-off Date, the Mortgage Loans had the following
characteristics: (a) Mortgage Rates ranging from approximately [ ]% per annum to
[ ]% per annum; (b) a weighted average Mortgage Rate of approximately [ ]% per
annum; (c) approximate principal balances ranging from $[ ] to $[ ]; (d) an
average principal balance of approximately $[ ]; (e) original terms to scheduled
maturity ranging from approximately [ ] months to [ ] months; (f) remaining
terms to scheduled maturity ranging from approximately [ ] months to [ ] months;
(g) a weighted average remaining term to scheduled maturity of approximately [ ]
months; (h) Cut-off Date Loan-to-Value ("LTV") Ratios ranging from approximately
[ ]% to [ ]%; (i) a weighted average Cut-off Date LTV Ratio of approximately [
]%; (j) Cut-off Date Debt Service Coverage Ratios ranging from approximately [
]x to [ ]x; and (k) a weighted average Cut-off Date Debt Service Coverage Ratio
of approximately [ ]x.
The following tables and Annex A set forth certain information with respect
to the Mortgage Loans and the Mortgaged Properties. The statistics in the
following tables and Annex A were primarily derived from information provided to
the Depositor by the Originator or the Mortgage Loan Seller, which information
may have been obtained from the borrowers without independent verification
except as noted. [Financial statements supplied by the borrowers, and on the
basis of which certain information contained in the following charts and Annex A
was derived, were not prepared in accordance with generally accepted accounting
principles.] For purposes of the tables and Annex A:
(1) "Underwritten Cash Flow" means, with respect to any Mortgage Loan,
the cash flow available for debt service for a 12-month period, as
determined by the Originator in accordance with the standards of a prudent
commercial mortgage lender based upon recent information supplied by the
related borrower prior to the origination of such mortgage loan, and
generally adjusted, if determined appropriate by the Originator, to: (a)
deduct any non-cash items such as depreciation or amortization; (b) deduct
capital expenditures; (c) reflect a more appropriate occupancy rate; (d)
reflect replacement, capital expenditure and other reserves required by the
related Mortgage Loan documents; (e) reflect a market rate management fee;
(f) reflect market rental rates; (g) exclude certain percentage rent,
delinquent rents and non-recurring income; (h) reflect an allowance for
tenant improvements and leasing commissions; and (i) reflect such other
adjustments determined appropriate by the Originator. The Depositor has not
made any attempt to verify the accuracy of any operating statements or
other information provided by each borrower. In addition, "Underwritten
Cash Flow" is not intended to be and is not 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 "Underwritten Cash
Flow" set forth herein intended to represent such future net cash flow.
(2) "[199__] Net Operating Income" is the net operating income for a
Mortgaged Property as established by financial statements provided by the
borrowers as of December 31, [199 ]. [199__] Net Operating Income does not
necessarily reflect accrual of certain costs such as taxes and capital
expenditures and does not reflect non-cash items such as depreciation or
amortization. In some cases, capital expenditures may have been treated by
a borrower as an expense and the Depositor does
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<PAGE>
not represent that the borrowers' financial statements were prepared in
accordance with generally accepted accounting principles. The Depositor has not
made any attempt to verify the accuracy of any operating statements or other
information provided by each borrower or to reflect changes in net operating
income that may have occurred since the date of the last operating statements
provided by each borrower for the related Mortgaged Property. "[199__] Net
Operating Income" was generally not determined in accordance with generally
accepted accounting principles and is not intended to be and is not 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.
(3) "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 [one year] prior to the origination date of the related
Mortgage Loan and reviewed by [the Originator/Mortgage Loan Seller].
(4) "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).
(5) "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.
(6) "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.
(7) "Balloon LTV" for any Mortgage Loan is calculated in the same
manner as LTV, except that the principal balance used to calculate the
Balloon LTV has been adjusted to give effect to the amortization of such
Mortgage Loan scheduled to take place prior to its maturity date.
(8) "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.
(9) "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 within a recent period.
(10) "Adjusted Annualized Year To Date Net Operating Income" as used
herein, means the year to date net operating income as determined by [the
Originator/Mortgage Loan Seller] divided by the number of months shown and
multiplied by 12, adjusted by extraordinary expenditures during the period
covered by the year to date financial information. Certain of such
adjustments are described in the Financial Comments column in the table in
Annex A.
(11) 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
Range of Number Percent Aggregate Pct by Weighted Weighted
Cut-off of by Number Cut-off Aggregate Average Average
Balances Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Range of Mortgage Rates
Range of Number Percent Aggregate Pct by Weighted Weighted
Mortgage of by Number Cut-off Aggregate Average Average
Rates Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
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<PAGE>
Range of Remaining Term of Amortization (in Months)
Range of Number of Percent Aggregate Pct by Weighted Weighted
Remaining Mortgage by Cut-off Aggregate Average Average
Amort (In Loans Number Date Cut-off Date Mortgage DSCR(x)
Months) Principal Principal Rate
Balance Balance
Wtd Avg Term:
Range of Maturity Years
Year of Number Percent Aggregate Pct by Weighted Weighted
Maturity of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
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<PAGE>
Range of Loan Origination Years
Year of Number of Percent Aggregate Pct by Weighted Weighted
Origi- Mortgage by Number Cut-off Aggregate Average Average
nation Loans Date Cut-off Mortgage DSCR(x)
Principal Date Rate
Balance Principal
Balance
Range of LTVs
Range of Number Percent Aggregate Pct by Weighted Weighted
LTV of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Wtd Avg LTV: %
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<PAGE>
Range of DSCRs
Range of Number Percent Aggregate Pct by Weighted Weighted
DSCR(x) of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Wtd Avg DSCR:
Range of Property Age (in Years)
Range of Number Percent Aggregate Pct by Weighted Weighted
Effective of by Number Cut-off Aggregate Average Average
Age of Mortgage Date Cut-Off Date Mortgage DSCR(x)
Property Loans Principal Principal Rate
Balance Balance
Wtd Avg Age:
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<PAGE>
Types of Mortgaged Properties
Number Percent Aggregate Pct by Weighted Weighted
of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Property Balance Balance
Type
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<PAGE>
Geographic Distribution of the Mortgaged Properties
Number Percent Aggregate Pct by Weighted Weighted
of by Number Cut-off Aggregate Average Average
Mortgage Date Cut-off Date Mortgage DSCR(x)
Loans Principal Principal Rate
Balance Balance
Property
Location
Prepayment Lock-out/Premium Analysis (1)
Percentage of Mortgage Pool by Prepayment
Restriction Assuming No Prepayments
--------------------------------------------------
--------------------------------------------------
Curre12 24 36 48 60 72 84 96 108 120
_____Mo. Mo. Mo. Mo. Mo. Mo. Mo. Mo. Mo. _______
Prepayment 1996 ________________________________________2006
Restrictions 19971998 19992000 20012002 20032004 2005
Lock-Out
Yield
Maintenance
Greater of
Yield
Maintenance
or
Percentage
Premium of:
5.00%
and greater
4.00%
to 4.99%
3.00%
to 3.99%
2.00%
to 2.99%
1.00%
to 1.99%
Percentage
Premium:
5.00%
and greater
4.00 to
4.99%
3.00 to
3.99%
2.00 to
2.99%
1.00 to
1.99%
Open
- -------------------------------------------------------------
TOTALS 100.0100.100.0100.100.0100.100.0100.100.0100.100.00%
Mortgage
Pool
Balance
(in
millions)
% of
Initial
Pool
Balance (2)
- ------------------
(1) This table sets forth an analysis of the percentage
of the declining balance of the Mortgage Pool that,
on __________ ___, in each of the years indicated,
will be within a Lock-out Period or in which
Principal Prepayments must be accompanied by the
indicated Prepayment Premium or yield maintenance
charge. The table was prepared generally on the basis
of Scenario 1 described herein, except that it was
assumed in preparing the table that no Mortgage Loan
will be prepaid, voluntarily or involuntarily. See
Annex B for more detailed information regarding
prepayment provisions of the Mortgage Loans.
(2) Represents the percentage of the Initial Pool Balance that will remain
outstanding at the indicated date based upon the assumptions used in
preparing this table.
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<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 [or
mortgage loan participations] may be included in the Mortgage Pool prior to the
issuance of the Certificates, unless including such mortgage loans [or mortgage
loan participations] 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 fifteen days after the initial issuance of the Certificates. The Form 8-K
will be available to Certificateholders of the related Series 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.
Investment in Commercial and Multifamily Mortgage Loans
[Disclosure will vary based on the particular Mortgage
Pool.]
Borrower Default; Non-recourse Mortgage Loans. The Mortgage Loans are not
insured or guaranteed by any governmental entity, by any private mortgage
insurer or by the Depositor, the Mortgage Loan Seller, the Master Servicer, the
Special Servicer, the Trustee, the Fiscal Agent or any of their respective
affiliates. However, as more fully described under "--General" above and "THE
POOLING AND SERVICING AGREEMENT--Representations and Warranties; Repurchase,"
the Mortgage Loan Seller will be obligated to repurchase a Mortgage Loan if
certain of its representations or warranties concerning such Mortgage Loan are
breached. However, there can be no assurance that it will be in a financial
position to effect such repurchase. See "THE MORTGAGE LOAN SELLER" herein. [The
Mortgage Loan Seller generally will have the right to require the Originator to
repurchase such Mortgage Loan if a representation or warranty in the agreement
pursuant to which the Mortgage Loan Seller acquired such Mortgage Loan is also
breached. Since Midland is both the Originator of [___] of the Mortgage Loans
and the Master Servicer, the ability of Midland to perform its obligations as
Master Servicer under the Pooling and Servicing Agreement may be jeopardized if
it incurs significant liabilities as an Originator for the repurchase of
Mortgage Loans as to which there has been a breach of a representation or
warranty.]
[ ] of the Mortgage Loans are fully recourse loans, while [___] of the
Mortgage Loans are non-recourse loans, which means that in the event of a
borrower default, recourse may be had only against the specific Mortgaged
Property and other assets, if any, that have been pledged to secure such
Mortgage Loan, and not to any other of the borrower's assets. Consequently,
payment of each Mortgage Loan prior to maturity is dependent primarily on the
sufficiency of the net operating income of the related Mortgaged Property and
payment at maturity (whether at scheduled maturity or, in the event of a default
under the Mortgage Loan, upon the acceleration of such maturity) is dependent
primarily upon the then market value of the Mortgaged Property.
[With respect to [ ] of the Mortgage Loans
representing approximately [ ]% of the Initial Pool
Balance, [the Originator] obtained the unconditional
guaranty of the corporate parent company of the related
borrower of the obligations of such borrower in
connection with such Mortgage Loan. The Master Servicer
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<PAGE>
or the Special Servicer, as applicable, on behalf of the Trustee and
Certificateholders, will be entitled to enforce the terms of such guaranty. The
guaranty is intended to encourage the performance by the related borrower or the
guarantor of the obligations to which the guaranty relates. However, the
guarantor under such guaranty may have limited assets and there can be no
assurance that such guarantor will have sufficient assets to support its
obligation under such guaranty. In addition, any action to enforce such guaranty
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.]
Commercial and Multifamily Lending Generally. Commercial and multifamily
lending generally is viewed as exposing a lender to a greater risk of loss than
one-to-four family residential lending. Commercial and multifamily lending
typically involves larger loans to single obligors than one-to-four family
residential lending and therefore provides lenders with less diversification of
risk and has the potential for greater losses resulting from the delinquency
and/or default of individual loans. The repayment of loans secured by commercial
or multifamily properties is typically dependent upon the successful operation
of such properties. As noted above, [ ] of the Mortgage Loans are non-recourse
loans, the payment of which is dependent primarily upon the sufficiency of the
net operating income of the related Mortgaged Property and the market value of
such Mortgaged Property.
Commercial and multifamily property values and net operating income are
subject to volatility. There can be no assurance that historical operating
results will be comparable to future operating results. Net operating income may
be reduced, and the borrower's ability to repay a Mortgage impaired, as a result
of an increase in vacancy rates for the Mortgaged Property, a decline in rental
rates as leases are renewed or entered into with new tenants, an increase in
operating expenses of the Mortgaged Property and/or an increase in capital
expenditures needed to maintain the Mortgaged Property and make needed
improvements. The income from and market value of a Mortgaged Property may be
adversely affected by such factors as changes in the general economic climate,
local conditions such as an oversupply of space or a reduction in demand for
real estate in the area, attractiveness to tenants and guests, perceptions
regarding a property's safety, convenience and services, and competition from
other available space. Real estate values and income are also affected by such
factors as government regulations and changes in real estate, zoning or tax
laws, a property owner's willingness and ability 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 property may affect the
occupancy level as well as the rents that may be charged for individual leases
or, in the case of [the Congregate Care Properties], [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 increase over time in the form of increased maintenance and capital
improvements. Even good construction will deteriorate over time if the property
managers do not schedule and perform adequate maintenance in a timely fashion.
If, during the term of a Mortgage Loan, properties of a similar type are built
in the area where the property securing such Mortgage Loan is located or other
similar properties in such area are substantially updated and refurbished during
that time, the value of such property could be reduced.
b. Leases. 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. If a significant portion of a Mortgaged Property is leased to a
single tenant, the consequences of a failure of such tenant to perform its
obligations under the related lease, or the failure of the borrower to relet
such portion of such Mortgaged Property in the event that such tenant vacates
(either
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<PAGE>
as a result of a default by the tenant or the expiration of the term of the
lease), will be more pronounced than if such Mortgaged Property were leased to a
greater number of tenants. See "--Tenant Matters" herein. Upon the occurrence of
an event of default by a tenant, delays and costs in enforcing the lessor's
rights could occur. Repayment of the Mortgage Loans may be affected by the
expiration or termination of space leases and the ability of the related
borrowers to renew the leases or relet the space on economically favorable
terms. No assurance can be given that leases that expire can be renewed, or that
the space covered by leases that expire or are terminated can be leased at
comparable rents, or on comparable terms, or in any timely manner, or at all.
Certain tenants at the Mortgaged Properties may be entitled to terminate their
leases or reduce rents under their leases if an anchor tenant ceases operations
at the related Mortgaged Property. In such cases, there can be no assurance that
any such anchor tenants will maintain operations at the related Mortgaged
Properties.
c. Competition. Other [multifamily residences], [retail centers],
[office buildings], [nursing homes], [congregate care facilities], [warehouse
facilities], [industrial properties], [self-storage facilities], [hotels] and
[mobile home parks] located in the areas of the Mortgaged Properties compete
with the Mortgaged Properties of such types to attract [residents], [retailers],
[customers], [tenants] and [guests]. In addition, tenants at the Mortgaged
Properties that have retail space face competition from discount shopping
centers and clubs, factory outlet centers, direct mail and telemarketing.
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 property manager of such
Mortgaged Property. The property manager is 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 Homes and Congregate Care Facilities. The
Mortgage Pool contains [ ] Mortgage Loans, Loan ##[ ], which represent
approximately [ ]% of the Initial Pool Balance, secured by Mortgages on
congregate care facilities. The Mortgage Pool contains [ ] Mortgage Loans, Loan
##[ ], which represent approximately [ ]% of the Initial Pool Balance, secured
by Mortgages on nursing homes. Nursing homes provide long term around-the-clock
residential health care services to residents who require a lower level of care
than that provided by an acute care hospital, but a higher level of care than
that provided in a non-institutional home-like setting. Congregate care
facilities provide housing and limited services such as meal programs to the
"well elderly." Loans secured by liens on properties of these types pose
additional risks not associated with loans secured by liens on other types of
income-producing real estate.
Providers of long-term nursing care and other medical services are subject
to federal and state laws that relate to the adequacy of medical care,
distribution of pharmaceuticals, rate setting, equipment, personnel, operating
policies and additions to facilities and services and, to the extent they are
dependent on patients whose fees are reimbursed by private insurers, to the
reimbursement policies of such insurers. In addition, facilities where such care
or other medical services are provided are subject to periodic inspection by
governmental authorities to determine compliance with various standards
necessary to continued licensing under state law and continued participation in
the Medicaid and Medicare reimbursement programs. The failure of a borrower
under a Nursing Home Loan to maintain or renew any required license or
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.
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
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<PAGE>
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.
Additionally, the continued operation of a nursing home facility subsequent to a
foreclosure is dependent upon the proposed operator satisfying all applicable
legal requirements, such as processing the required license to operate such
facility and/or dispense required pharmaceuticals.
Congregate care retirement residences generally do not require licensing by
state or federal regulatory agencies and do not qualify for payments under the
federal Medicare program or state Medicaid programs. However, congregate care
retirement residences are required to be licensed by a state or municipal
authority to provide food service. The failure of a borrower under a Congregate
Care Loan to maintain or renew any required license could impair its ability to
generate operating income.
The operators of such nursing homes and congregate care facilities are
likely to compete on a local and regional basis with others that operate similar
facilities. Some of their competitors may be better capitalized, 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.
The successful operation of a Nursing Home Property or Congregate Care Property
will generally depend upon the number of competing facilities in the local
market, as well as upon other factors such as its age, appearance, reputation
and management, the types of services it provides and, where applicable, the
quality of care and the cost of that care.]
[Risks Particular to Self-Storage Facilities. The Mortgage Pool contains [
] Mortgage Loans, Loan ##[______], which represent approximately [ ]% of the
Initial Pool Balance, secured by Mortgages on self-storage facilities. The
conversion of self-storage facilities to alternative uses generally requires
substantial capital expenditures. Thus, if the operation of any of the
Self-Storage Properties becomes unprofitable due to decreased demand,
competition, age of improvements or other factors such that the related borrower
becomes unable to meet its obligations on the related Mortgage Loan, the
liquidation value of that Self-Storage Property may be substantially less,
relative to the amount owing on the related Mortgage Loan, than would be the
case if the Self-Storage Property were readily adaptable to other uses. Tenant
privacy, anonymity and efficient access may heighten environmental risks. The
environmental assessments discussed herein did not include an inspection of the
contents of the self-storage units included in the Self-Storage Properties and
there is no assurance that all of the units included in the Self-Storage
Properties are free from hazardous substances or other pollutants or
contaminants or will remain so in the future. See "--Environmental Risks"
below.]
[Risks Particular to Hotel Properties. [ ] of the Mortgage Loans, Loan ##[
], representing approximately [ ]% of the Initial Pool Balance, are secured by
Mortgages on Hotel Properties. These Mortgaged Properties are subject to
operating risks common to the hotel industry. These risks include, among other
things, competition from other hotels, over-building in the hotel industry that
has adversely affected occupancy and daily room rates, 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. The
hotel industry is seasonal in nature. This seasonality can be expected to cause
periodic fluctuations in the related borrower's revenues.
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
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by the franchisor, the manager or the operator; (ii) the transferability of a
hotel's operating, liquor and other licenses to the entity acquiring a hotel
either through purchase or foreclosure is subject to the vagaries of local law
requirements; and (iii) because of the expertise and knowledge required to run
hotel operations, foreclosure and a change in ownership (and consequently of
management) may have an especially adverse effect on the perception of the
public and the industry (including franchisors) concerning the quality of a
hotel's operations.]
[[ ] of the Hotel Properties, Loan ##[ ], are [ ] franchises. The
continuation of the franchise 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 independent 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 decentralized reservation systems provided by the franchisor.]
[Risks Particular to Mobile Home Parks. [ ] of the Mortgage Loans, Loan ##[
], representing approximately [ ]% of the Initial Pool Balance, are secured by
Mortgages on Mobile Home Park Properties. A mobile home park is a residential
subdivision designed and improved with home sites that are leased to residents
for the placement of mobile homes and related improvements. Mobile homes are
detached, single- family homes that are produced off-site by manufacturers and
installed within the community. [All] of the Mobile Home Park Properties are
located in developed areas that include other mobile home parks. The number of
competitive mobile home parks in a particular area could have a material adverse
effect on the related borrower's ability to lease sites at the property and on
the rents charged for such sites. In addition, other forms of multi-family
residential properties and single-family housing provide housing alternatives to
potential residents of mobile home parks.
Laws and regulations have been adopted by certain states and municipalities
specifically regulating the ownership and operation of mobile home parks.
Included as part of certain of these laws and regulations are provisions
imposing restrictions on the timing or amount of rental increases and granting
to residents a right of first refusal on sales of their community by the owner
to a third party. Laws and regulations relating to the ownership and operation
of mobile home parks could adversely affect a related borrower by limiting its
ability to increase rents or recover increases in operating expenses or by
making it more difficult in certain circumstances to refinance the related
Mortgage Loan or to sell the Mortgaged Property for purposes of making any
Balloon Payment due upon the maturity of such Mortgage Loan.]
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 has
a Cut-off Date Principal Balance that represents approximately [ ]% of the
Initial Pool Balance; [provided, however, that [ ] of the Mortgage Loans, which
are cross-collateralized and cross-defaulted, when considered together, have a
Cut-off Date Principal Balance that represents approximately [ ]% of the Initial
Pool Balance]. The [ ] largest Mortgage Loans have Cut-off Date Principal
Balances that represent in the aggregate approximately [ ]% of the Initial Pool
Balance.
[The Mortgage Pool consists of [ ] Mortgage Loans to [ ] separate
borrowers. [ ] of the Mortgage Loans were made to borrowers that are affiliated
with the borrower of another Mortgage Loan.
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However, no set of Mortgage Loans made to a single group of affiliated borrowers
constitutes more than approximately [ ]% of the Initial Pool Balance. [ ] of
such Mortgage Loans (which together represent approximately [ ]% of the Initial
Pool Balance) are cross-collateralized and cross-defaulted with the Mortgage
Loan made to the related affiliated borrower. See "--Limitations on
Enforceability of Cross-Collateralization" below. In addition, with respect to [
] of the Mortgage Loans, the sole tenant of the related Mortgaged Property is
affiliated with the related borrower under each such Mortgage Loan.]
In general, concentrations in a mortgage pool of loans with
larger-than-average balances can result in losses that are more severe, relative
to the size of the pool than would be the case if the aggregate balance of such
pool were more evenly distributed. Concentrations of Mortgage Loans with the
same borrower or related borrowers can also pose increased risks. For example,
if one borrower that owns or controls several Mortgaged Properties experiences
financial difficulty resulting from the unprofitability of one Mortgaged
Property, such financial difficulty could cause defaults with respect to the
Mortgage Loans secured by the other Mortgaged Properties owned or controlled by
that borrower. Such borrower could attempt to avert foreclosure by filing a
bankruptcy petition that might have the effect of interrupting Monthly Payments
for an indefinite period on all of the related Mortgage Loans.
Tax Considerations Related to Foreclosure. If the Trust Fund were to
acquire a Mortgaged Property subsequent to a default on the related Mortgage
Loan pursuant to a foreclosure or deed-in-lieu of foreclosure, the Special
Servicer would be required under certain circumstances to retain an independent
contractor to operate and manage such Mortgaged Property. Any net income from
such operation and management, other than 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 non-customary in the area and for the type of
building involved, will subject the Lower-Tier REMIC to federal (and possibly
state or local) tax on such income at the highest marginal corporate rate
(currently 35%), thereby reducing net proceeds available for distribution to
Certificateholders. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Regular Interests," "--Taxation of the REMIC" and "--Taxation of Holders of
Residual Certificates" in the Prospectus.
Risk of Different Timing of Mortgage Loan Amortization. If and as principal
payments or prepayments are made on the Mortgage Loans at different rates,
depending upon the amortization schedule and maturity of each Mortgage Loan, the
remaining Mortgage Pool will be subject to more concentrated risk with respect
to the diversity of types of properties and with respect to 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 Class
or Classes has been reduced to zero [(other than any amounts distributable
pursuant to priority [ ] of the Available Funds Allocation)], Classes that have
a later sequential designation are more likely to be exposed to the risk of
concentration discussed in the preceding paragraph than Classes with higher
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, acts of nature
(which may result in uninsured losses) and other factors that are beyond the
control of the borrowers. The Mortgaged Properties are located in [ ] states
[and the District of Columbia.] [ ] of the Mortgage Loans, which represent
approximately [ ]% of the Initial Pool Balance, are secured by liens on
Mortgaged Properties located in [___________], [ ] of the Mortgage Loans, which
represent approximately [ ]% of the Initial Pool Balance, are secured by liens
on Mortgaged Properties located in [ ]. The remaining Mortgaged Properties are
located throughout [ ] other states [and the District of Columbia,] and not more
than [ ]% of the Initial Pool Balance is secured by Mortgaged Properties located
in any individual state among those other states [or the District of Columbia].
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<PAGE>
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.
Environmental Risks. 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 environmental condition of nonresidential
properties may be affected by the business operation of tenants and occupants of
the properties. 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.
Secured lenders may be exposed 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 potential that the borrower may default on a
Mortgage Loan due to the borrower'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.
Under the laws of certain states and federal law, failure of a property
owner to perform remediation of certain environmental conditions can give rise
to a lien on the related property to ensure the reimbursement of remedial costs
incurred by state and federal regulatory agencies. In several states such lien
has priority over 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 as collateral for the related Mortgage Loan and could make
impracticable the foreclosure by the Special Servicer on such Mortgaged Property
in the event of a default by the borrower of its obligations under the related
Mortgage Loan.
The cost of any required remediation and the owner's liability therefor as
to any property is generally not limited under such enactments 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 liable, as
an "owner" or "operator," for the costs of responding to a release or threat of
a release of hazardous substances on or from a borrower's property if the lender
is deemed to have participated in the management of the borrower, regardless of
whether a previous owner caused the environmental damage. One court has held
that a lender will be deemed to have participated in the management of the
borrower if the lender participates 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.
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
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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 transfer all information regarding 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 Originator required testing for radon gas only in
connection with the origination of certain of the Multifamily Loans.]
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.
[The Originator required testing for lead-based paint only in connection with
the origination of Multifamily Loans with respect to Mortgaged Properties with
improvements constructed prior to [ ]].
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.
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 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.
[All] of the Mortgaged Properties have been subject to environmental site
assessments within [___] months preceding the Cut-off Date. Environmental site
assessments with respect to [each] Mortgaged Property were obtained by the
applicable Originator within [ ] months prior to the respective date of
origination of the related Mortgage Loan. Other than as described below, the
assessments did not reveal the existence of conditions or circumstances
respecting the Mortgaged Properties 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 clean-up, remedial action or other response with
respect to hazardous materials on or affecting such Mortgaged Properties under
any applicable
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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, which funds will not
be released until such clean-up, remediation or compliance actions have been
taken, (ii) an environmental insurance policy in an amount satisfactory to the
Originator has been obtained by the related borrower or an indemnity for such
costs has been obtained from a potentially culpable party or (iii) such clean
up, remediation or compliance actions have been completed in compliance with
applicable environmental law prior to the closing of such Mortgage Loan.
Investors should understand that the results of the environmental site
assessments do not constitute an assurance or guarantee by the Depositor, the
Mortgage Loan Seller, the borrowers, the 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.
[In the case of [ ] of the Mortgaged Properties, the environmental
assessments revealed the existing or potential environmental conditions
described below.] [Describe any known environmental conditions.]
Balloon Payments; Optional Acceleration. All but [ ] of the Mortgage Loans
are Balloon Loans that will have substantial payments (that is, Balloon
Payments) due at their stated maturities, unless previously prepaid. Balloon
Loans involve a greater risk of default to the lender 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.
[The Mortgage Loan documents with respect to [ ] of the Mortgage Loans
grant the mortgagee an option to accelerate the maturity of such Mortgage Loans.
[Describe terms of such options.] Under the Pooling and Servicing Agreement, the
Master Servicer or the Special Servicer, as applicable, will be required to
exercise each such option to accelerate the maturity of each such Mortgage Loan
on the earliest date permitted under the related Mortgage Loan Documents. See
"THE POOLING AND SERVICING AGREEMENT--Servicing of the Mortgage Loans;
Collection of Payments" herein. Notwithstanding such exercise, there can be no
assurance that the related borrowers will repay such Mortgage Loans upon the
acceleration of the maturity dates thereunder. As noted above, the ability of a
borrower to make such a 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 payment. Furthermore, there
can be no assurance that a related borrower will not raise equitable or other
legal defenses to the enforcement by the Master Servicer of the maturity
acceleration provisions described above. See "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS--Enforceability of Certain Provisions" in the Prospectus.]
Other Financing. [As of the origination date of [ ] of the Mortgage Loans,
representing approximately [ ]% of the Initial Pool Balance, the related
Mortgaged Properties were subject to subordinate mortgage liens in the principal
amount of $[ ] held by a third party unrelated to the related borrower,
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which liens were fully subordinated to such Mortgage Loans. The related Mortgage
Loan documents for such Mortgage Loans prohibit any payments under such
subordinate financing during any period of a default under the related Mortgage
Loan.] [As of the respective origination dates of [ ] of the Mortgage Loans, the
related Mortgaged Properties were subject to subordinate wraparound mortgage
liens held by a prior owner of the related Mortgaged Properties, which liens
were fully subordinated to the related Mortgage Loans]. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Secondary Financing; Due-on-Encumbrance
Provisions" in the Prospectus.
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, except as set forth herein. However, a
violation of such prohibition may not become evident until the related Mortgage
Loan otherwise becomes defaulted. [The Mortgage Loan documents with respect to [
] of the Mortgage Loans permit the related borrower to grant a subordinate
mortgage in favor of a third party.] [Describe any limitations on such right.]
See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Secondary Financing;
Due-on-Encumbrance" in the Prospectus.
In cases in which one or more junior 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 borrower may
have greater incentives to repay the junior 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.
Delinquencies. As of the Cut-off Date, no Mortgage
Loan was more than [ ] days delinquent in respect of
any Monthly Payment.
Bankruptcy of Borrowers. The borrowers have generally not been formed with
the intent that they be bankruptcy-remote entities and 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. [Unlike the case in some other types of
securitized offerings, the borrowers are operating businesses that contract with
other entities to perform services or purchase goods for or related to the
Mortgaged Properties and may, because of these activities, be more susceptible
to suit by various claimants than the borrowers involved in such other
offerings. Investors should be aware that, particularly in view of the
operational nature of the Mortgaged Properties, the borrowers may become
insolvent or become the subject of a voluntary or involuntary bankruptcy case.]
See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--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 guarantees
of present or future value. Moreover, appraisals seek to establish the amount a
typical motivated buyer would pay a typical motivated seller. Such amount could
be significantly higher than the amount obtained from the sale of a Mortgaged
Property under a distress or liquidation sale. Information regarding the values
of the Mortgaged Properties as of the Cut-off Date is presented under "--Certain
Characteristics of the Mortgage Pool" above 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.
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[Zoning Compliance. Due to changes in applicable building and zoning
ordinances and codes ("Zoning Laws") affecting certain of the Mortgaged
Properties that have come into effect since the construction of improvements on
such Mortgaged Properties and to other reasons, certain improvements may not
comply fully with current Zoning Laws, including, without limitation, density,
use, parking and set back requirements. In such cases, the Originator has
received assurances that such improvements qualify as permitted non-conforming
uses. Such changes may limit the ability of the related borrower to rebuild or
utilize the premises "as is" in the event of a substantial casualty loss with
respect thereto.]
[Describe generally any known non-conforming uses.]
Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations
are required to meet certain federal requirements related to access and use by
disabled persons. To the extent the Mortgaged Properties do not comply with the
ADA, borrowers are likely to incur costs of complying with the ADA.
Noncompliance could result in the imposition of fines by the federal government
or an award of damages to private litigants. See "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS--Americans With Disabilities Act" in the Prospectus.
[Limitations on Enforceability of Cross-Collateralization. [ ] of the
Mortgage Loans, each of which was made to a borrower that is affiliated with the
borrower under another Mortgage Loan (the "Cross-Collateralized Loans"
identified in Annex A as 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.
Such arrangements, however, 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. With respect to the Cross-Collateralized
Loans, (a) Loan # and Loan # were both made to the same borrower and (b) Loan #
and Loan # were made to affiliated borrowers. 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.]
Tenant Matters. [ ] Retail
Properties, which represent security for approximately
[ ]% of the Initial Pool Balance, are leased wholly or
in large part to a single tenant or are wholly or in
large part owner-occupied (each such retail tenant or
owner-occupier, a "Major Tenant"). Generally, such Major
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Tenants do not have investment-grade credit ratings, and there can be no
assurance that such Major Tenants will continue to perform their obligations
under their respective leases (or, in the case of owner-occupied Mortgaged
Properties, under the related Mortgage Loan documents). Any default by a Major
Tenant could adversely affect the related borrower's ability to make payments on
the related Mortgage Loan. The following chart contains certain information with
respect to such Major Tenants, including, if available, the credit rating and
trading symbol (to the extent applicable) of each such Major Tenant.
===================================================================
Cut-off
Lease Date
Type of Expiratio Comments Principal
Loan # Property Name Lease Date n Balance
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- -------------------------------------------------------------------
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- -------------------------------------------------------------------
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- -------------------------------------------------------------------
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[As used in the foregoing chart, the term "Triple Net" generally means a lease
under which the tenant is required to pay all real estate taxes and assessments,
liability and casualty insurance premiums and non-structural (and in certain
cases, structural) maintenance costs in respect of the related Mortgaged
Property. The related borrower's obligation as landlord under each Triple Net
lease may vary significantly from lease to lease.]
Contracts for Deed and Purchase Options. [Describe
terms of any contracts for deeds or purchase options
granted to borrowers.]
[Ground Leases. [ ] Mortgage Loans, representing approximately [ ]% of the
Initial Pool Balance, are secured, wholly or in part, by [first] mortgage liens
on the related borrower's leasehold interest in all or part of the related
Mortgaged Property. The related ground leases expire no earlier than [ ]. With
respect to [all] such ground leases, the related ground lessor has agreed to
afford [the mortgagee] certain notices and rights with respect to such ground
leases, 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--Leasehold Risks" in the Prospectus.]
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[Borrower Escrows and Reserve Accounts. In a number of the Mortgage Loans,
the related borrower was required to establish 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 against delinquencies in
Monthly Payments.]
Modifications. [None] of the Mortgage Loans have been modified in any
material manner since their origination in connection with any default or
threatened default on the part of the related borrower. [Describe any other
modifications that have been made.] Any future modifications would be subject to
the conditions and requirements contained in the Pooling and Servicing
Agreement.
Litigation. There may be legal proceedings pending and, from time to time,
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 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.
THE MORTGAGE LOAN SELLER
The Mortgage Loan Seller 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.
The information concerning the Mortgage Loan Seller set forth above has
been provided by the Mortgage Loan Seller, and none of the Depositor, the
Trustee or the Underwriter makes any representation or warranty as to the
accuracy thereof.
THE MASTER SERVICER
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 which provides loan servicing and asset management
for large pools of commercial and multifamily real estate assets and which
originates commercial real estate loans. Midland's address is 210 West 10th
Street, 6th Floor, Kansas City, Missouri 64105.
As of [ ], 1996, Midland and its affiliates were responsible for the
servicing of approximately [ ] commercial and multifamily loans with an
aggregate principal balance of approximately $[ ] billion, the collateral for
which is located in all 50 states. With respect to such loans, approximately [ ]
loans with an aggregate principal balance of approximately $[ ] billion pertain
to commercial and multifamily mortgage-backed securities issued in [ ]
securitization transactions. 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 has been approved as a master and special servicer for investment
grade commercial and multifamily mortgage-backed securities by Fitch and
Standard & Poor's. Midland is ranked "Above Average" as a commercial mortgage
servicer and asset manager by Standard & Poor's, and "Acceptable" as a master
servicer and "Above Average" as a special servicer by Fitch. Standard & Poor's
rates commercial mortgage
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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 the Master Servicer set forth above has been
provided by Midland and none of the Depositor, the Trustee or the Underwriter
makes any representation or warranty as to the accuracy thereof.
THE SPECIAL SERVICER
It is anticipated that [____________] (the "Special Servicer"), a
[____________] corporation and a wholly owned subsidiary of [______________],
will serve as the Special Servicer and in such capacity will be responsible for
servicing the Specially Serviced Mortgage Loans. The principal executive office
of the Special Servicer are located at [_______________].
[Describe the Special Servicer]
The information concerning the Special Servicer set forth above has been
provided by the Special Servicer and none of the Depositor, the Trustee, the
Master Servicer or the Underwriter makes any representation or warranty as to
the accuracy thereof.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of [___] Classes to be designated as the Class A
Certificates, the Class B Certificates, the Class C Certificates, [the Class
[EC] Certificates,] [the Class [PO] Certificates,] [the Class [IO]
Certificates,] the Class R Certificates and the Class LR Certificates. Only the
Class A, Class B and Class [___] 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 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 [EC] and Class
[IO]
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Certificates are interest-only Certificates, have no Certificate Balances and
are not entitled to distributions in respect of principal.] [The Class [PO]
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 [_______________], 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 [EC] Notional Balance" as of any date is equal to
the sum of the Certificate Balances of the Class [____], Class [____] and Class
[____] Certificates.] [The "Class [IO] Notional Balance" as of any date is equal
to the Certificate Balance of the Class [IO] Certificates.] [The Class [EC] and
Class [IO] 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 [EC] and Class [IO]
Certificates, the initial Class [EC] Notional Balance or initial Class [IO]
Notional Balance)] of the related Class.
The aggregate distribution to be made on the Regular Certificates on any
Distribution Date will equal the Available Funds. The "Available Funds" for a
Distribution Date will be the sum of all previously undistributed Monthly
Payments or other receipts on account of principal and interest on or in respect
of the Mortgage Loans (including Unscheduled Payments and Net REO Proceeds, if
any) received by the Master Servicer in the related Collection Period, including
all P&I Advances made by the Master Servicer, the 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, 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;
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(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 Mortgage 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) with respect to Distribution Dates after the EC Maturity Date,
Prepayment Premiums received in the related Collection Period;] and
(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.
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.
"Unscheduled Payments" are all Liquidation Proceeds, Condemnation Proceeds
and Insurance Proceeds payable under the Mortgage Loans, the Repurchase Price of
any Mortgage Loans that are repurchased or purchased pursuant to the Pooling and
Servicing Agreement and any other payments under or with respect to the Mortgage
Loans not scheduled to be made, including Principal Prepayments, but excluding
Prepayment Premiums.
"Prepayment Premiums" are payments received on a Mortgage Loan as the
result of a Principal Prepayment thereon, not otherwise due thereon in respect
of principal or interest, which are intended to be a disincentive to prepayment.
"Net REO Proceeds" with respect to any REO Property and any related
Mortgage Loan are all revenues received by the Special Servicer with respect to
such REO Property or REO Mortgage Loan that do not constitute Liquidation
Proceeds, net of any insurance premiums, taxes, assessments and other costs and
expenses permitted to be paid from the related REO Account pursuant to the
Pooling and Servicing Agreement.
"Principal Prepayments" are payments of principal made by a borrower on a
Mortgage Loan which are received in advance of the scheduled Due Date for such
payments and which are not accompanied by an
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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 [____________], 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 15th day of any month, or if such 15th day
is not a Business Day, the Business Day immediately preceding such 15th day,
commencing on [_____________], 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, Class B and Class C 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 [EC]
Certificates, the "Class Interest Distribution Amount" will equal for any
Distribution Date occurring on or prior to the EC Maturity Date, the Class [EC]
Excess Interest. The Class [EC] Certificates are not entitled to distributions
(other than any Class Interest Shortfalls) following the EC Maturity Date.] [The
Class [PO] Certificates are principal only Certificates and have no Class
Interest Distribution Amount.] [With respect to any Distribution Date and the
Class [IO] Certificates, the "Class Interest Distribution Amount" will equal the
product of the Class [IO] Pass- Through Rate and the Class [IO] 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
any Prepayment Interest Shortfall not covered by the Servicing Fee or the
Special Servicing Fee as described below for such Distribution Date (pro rata
according to each respective Class's Class Interest Distribution Amount
determined without regard to this sentence).
["Class [EC] Excess Interest": With respect to any
Distribution Date, an amount equal to the Class [EC]
Pass-Through Rate multiplied by the Class [EC] Notional
Balance.]
["Class [EC] Notional Balance": As of any date of
determination, an amount equal to the sum of the
Certificate Balances of the Class [C] Certificates and
the Class [PO] Certificates.]
["Class [EC] Pass-Through Rate": With respect to any Interest Accrual
Period, 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 P&I
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 P&I Certificates [and the Class [PO] Certificates]
as of the first day of such Interest Accrual Period) [and the Class [IO] Pass
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Through Rate (weighted on the basis of a fraction equal to the Class [IO]
Notional Balance divided by the sum of the Certificate Balances of the P&I
Certificates and the Class [PO] Certificates, each as of the first day of such
Interest Accrual Period)]. For purposes of this definition, the Pass-Through
Rates of the Class [___] and Class [___] Certificates will be equal to the
Weighted Average Net Mortgage Rate.]
"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, 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 sentence) 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.
"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, 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 Certificates
during any Interest Accrual Period will be [______]%. 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 [EC] Certificates
during any Interest Accrual Period will be the Class [EC] Pass-Through Rate.]
[The Pass- Through Rate on the Class [IO] Certificates during any Interest
Accrual Period will be equal to the Weighted Average Net Mortgage Rate.] [The
Pass-Through Rate on the Class [___] and Class [___] Certificates during any
Interest Accrual Period will be equal to the greater of (i) the Weighted Average
Net Mortgage Rate and (ii) [____]%. [The Class [PO] 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, prior to any default thereunder, is the Mortgage Rate for such
Mortgage Loan 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.
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"Class Interest Shortfall" means on any Distribution Date for any Class of
Certificates, the excess, if any, of the amount of interest required to be
distributed to the holders of such Class of Certificates on such Distribution
Date over the amount of interest actually distributed to such holders. No
interest will accrue on unpaid Class Interest Shortfalls.
The "Pooled Principal Distribution Amount" for any Distribution Date will
be equal to the sum of (without duplication):
(i) the principal component of all scheduled Monthly Payments (other
than Balloon Payments) that become due (regardless of whether received) on the
Mortgage Loans during the related Collection Period;
(ii) the principal component of all Assumed Scheduled Payments, as
applicable, deemed to become due (regardless of whether received) during the
related Collection Period with respect to any Balloon Loan that is delinquent in
respect of its Balloon Payment;
(iii) the Scheduled Principal Balance of each Mortgage Loan that was,
during the related Collection Period, repurchased from the Trust Fund in
connection with the breach of a representation or warranty as described herein
under "THE POOLING AND SERVICING AGREEMENT--Representations and Warranties;
Repurchase" or purchased from the Trust Fund as described herein under "THE
POOLING AND SERVICING AGREEMENT--Optional Termination;"
(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" with respect to any Mortgage Loan that is
delinquent in respect of its Balloon Payment (including any REO Mortgage Loan as
to which the Balloon Payment would have been past due), is an amount equal to
the sum of (a) the principal portion of the Monthly Payment that would have been
due on such Mortgage Loan on the related Due Date based on the original
amortization schedule thereof, assuming such Balloon Payment had not become due,
after giving effect to any modification and (b) interest at the applicable Net
Mortgage Rate on the principal balance that would have remained after giving
effect to deemed principal payments pursuant to clause (a) hereof on prior Due
Dates.
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 Certificates up to an amount equal to the
Class Interest Distribution Amount of such Class for such Distribution Date;
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(ii) Second, to the Class A 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;
(iii) Third, to the Class A 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, to the Class A Certificates for the unreimbursed amounts
of Realized Losses, if any, together with simple interest thereon at a rate
equal to [_____]% per annum from the date on which such unreimbursed Realized
Loss was allocated (or the date on which interest was last paid) to, but not
including, the Distribution Date on which distributions in respect of such
unreimbursed Realized Loss are made pursuant to this subparagraph, up to an
amount equal to the aggregate of such unreimbursed Realized Losses previously
allocated to the Class A Certificates and interest thereon, provided that any
distribution pursuant to this subparagraph will be deemed to be distributed
first in respect of any such interest and then in respect of any such
unreimbursed Realized Loss;
(v) Fifth, to the Class B Certificates, up to an amount equal to the
Class Interest Distribution Amount of such Class for such Distribution Date;
(vi) Sixth, 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;
(vii) Seventh, after the Certificate Balance of the Class A
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;
(viii) Eighth, to the Class B Certificates, for the unreimbursed
amounts of Realized Losses, if any, together with simple interest thereon at a
rate equal to [____]% 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 will be deemed to be distributed
first in respect of any such interest and then in respect of any such
unreimbursed Realized Loss;
(ix) Ninth, to the Class C Certificates, up to an amount equal to the
Class Interest Distribution Amount of such Class for such Distribution Date;
(x) Tenth, 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;
(xi) Eleventh, 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;
(xii) Twelfth, to the Class C Certificates, for the unreimbursed
amounts of Realized Losses, if any, together with simple interest thereon at a
rate equal to [____]% 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
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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 will be deemed to be distributed
first in respect of any such interest and then in respect of any such
unreimbursed Realized Loss;
[If applicable, the following would be included in the above list where
appropriate based on such Classes' level of subordination.]
[[_____] [____________], to the Class [IO] Certificates, up to an
amount equal to the Class Interest Distribution Amount of such Class for such
Distribution Date;]
[[_____] [____________], to the Class [IO] 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;]
[[_____] [_____________], after the Certificate Balance of the Class
[____] Certificates has been reduced to zero, to the Class [PO] 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;]
[[______] [_____________], if such Distribution Date occurs after the
EC Maturity Date, to (i) the Class C Certificates, (ii) the Class B
Certificates, (iii) the Class A Certificates and (iv) the Class [PO]
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;]
[[______] [_____________], to the Class [PO] Certificates, for the
unreimbursed amounts of Realized Losses, if any, together with simple interest
thereon at a rate equal to [_____]% 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 [PO] Certificates and interest
thereon, provided that any distribution pursuant to this subparagraph will be
deemed to be distributed first in respect of any such interest and then in
respect of any such unreimbursed Realized Loss.]
[[_____] [____________], to the Class [EC] 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;]
[[_____] [____________], to the Class [EC] Certificates up to an amount
equal to the Class Interest Distribution Amount of such Class for such
Distribution Date;]
On each Distribution Date, Available Funds remaining in the Distribution
Account following the distributions to the Certificates pursuant to the
Available Funds Allocation will be distributed to the Class R Certificates and
Available Funds remaining in the Collection Account will be distributed to the
Class LR Certificates.
[Distributions of Principal on the Class [__]-1 and
Class [__]-2 Certificates. On each Distribution Date
prior to the earlier of (i) the [Senior] Principal
Distribution Cross-Over Date and (ii) the final
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Distribution Date in connection with the termination of the Trust Fund, all
distributions of principal to the Class [__]-1 Certificates and the Class [__]-2
Certificates will be paid, first, to holders of the Class [__]-1 Certificates
until the Certificate Balance of such Certificates is reduced to zero, and
thereafter, to holders of the Class [__]-2 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 [__]-1 Certificates and the Class
[__]-2 Certificates will be paid to holders of such two 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
[__]-1 Certificates and Class [__]-2 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 [__]-1 and Class [__]-2 Certificates on such Distribution Date has
been made.]
Prepayment Premiums. Each Mortgage Loan generally provides 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 each
Distribution Date up to and including the EC Maturity Date, Prepayment Premiums
with respect to any Unscheduled Payments received on Yield Maintenance Loans in
the related Collection Period, if such Collection Period occurred during the
Yield Maintenance Period for such Yield Maintenance Loan, will be distributed to
the holders of the Certificates outstanding on such Distribution Date, in the
following amounts and order of priority:
(i) First, to the Class of Certificates which is entitled to
distributions in respect of principal on such Distribution Date (other than
pursuant to clause [______________] of the Available Funds Allocation), an
amount equal to the excess of (A) the present value (discounted at the Discount
Rate) of the principal and interest distributions that would have been paid in
respect of such Class of Certificates from the Distribution Date occurring in
the following month until the Certificate Balance of such Class of Certificates
would have been reduced to zero had the related prepayment not occurred (and
assuming no other prepayments were made and no delinquencies or defaults occur),
less (B) the present value (discounted at the Discount Rate) of the principal
and interest distributions that will be paid in respect of such Class of
Certificates from the Distribution Date occurring in the following month until
the Certificate Balance of such Class of Certificates is reduced to zero
following such prepayment (assuming no further prepayments are made and no
delinquencies or defaults occur) less (C) the amount of such prepayment;
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 [_____________] of the Available Funds Allocation), the
amount set forth herein will be calculated for each such Class, and the amount
of Prepayment Premiums will be allocated among such Classes, pro rata in
accordance with the amounts so calculated, up to an amount equal to the sum of
such amounts so calculated; and
(ii) Second, any remaining Prepayment Premiums following the
distribution in clause First above, to the Class [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 Loans and any Prepayment Premiums received with
respect to the Yield Maintenance Loans after the related Yield Maintenance
Periods will be allocated solely to the Class [EC] Certificates.] The amount of
any Prepayment Premiums with respect to any Unscheduled Payments received in any
Collection Period [subsequent to the
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Collection Period related to the [EC] Maturity Date] will be distributed as
Available Funds pursuant to the Available Funds Allocation.
A "Yield Maintenance Loan" is any Mortgage Loan as to which the related
Note requires the payment of Prepayment Premiums calculated with reference to a
yield maintenance formula.
The "Yield Maintenance Period" with respect to each Yield Maintenance Loan
is the period following its origination during which the related Note requires
the payment of Prepayment Premiums calculated with reference to a yield
maintenance formula.
The "Discount Rate" is the rate determined by the Trustee to be the rate
interpolated and rounded to the nearest one-thousandth of a percent, if
necessary, in the secondary market on the United States Treasury security with a
maturity equal to the then computed weighted average life of the related Class
of Certificates (rounded to the nearest month) (without taking into account the
related prepayment and assuming (i) no further prepayments on the Mortgage Loans
and (ii) no delinquencies or defaults with respect to payments on Mortgage
Loans) plus 0.50% per annum.
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.
Realized Losses. The Certificate Balance of the Certificates (other than
the [Class [EC]], [Class [IO]], 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 C
Certificates, second, to the Class B Certificates and third, to the Class A
Certificates. [Insert Class [PO] Certificates where appropriate.] 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
[PO] Certificates will reduce the Class [IO] Notional Balance.] [Realized Losses
allocated to any Class of Certificates will reduce the Class [EC] Notional
Balance.] Shortfalls in Available Funds resulting from additional servicing
compensation (including interest on Advances not covered by Default Interest,
extraordinary expenses of the Trust Fund or otherwise) will be allocated in the
same manner as Realized Losses.
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 Monthly Payments due thereon on or before such
Due Date. With respect to any Mortgage Loan, from and after the date on which
the Master Servicer makes a determination that it has recovered all amounts that
it reasonably expects to be finally recoverable (a "Final Recovery
Determination"), the Scheduled Principal Balance thereof will be zero.
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Subordination
As a means of providing a certain amount of protection to the holders of
the Class A Certificates against losses associated with delinquent and defaulted
Mortgage Loans, the rights of the holders of the Class B Certificates to receive
distributions of interest and principal, as applicable, will be subordinated to
such rights of the holders of the Class A 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 Class of 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 C Certificates, second, to the Class B Certificates and,
finally, to the Class A Certificates, in each case in reduction of the
Certificate Balance of such Class until the Certificate Balance thereof is
reduced to zero. [Insert Class [EC] Certificates, [IO] Certificates and Class
[PO] Certificates where appropriate.]
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
Class 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 "THE
POOLING AND SERVICING AGREEMENT-- Optional Termination" herein.
Delivery, Form and Denomination
Book-Entry Certificates. No Person acquiring a Class [ ] or Class [ ]
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.
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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 Underwriter), 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 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.
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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 [ ], Class R and Class LR Certificates
will be issued in fully registered certificated form only. The Class [ ]
Certificates will be issued in denominations of $100,000 initial Certificate
Balance [or Notional Balance, as applicable,] and integral multiples of $1 in
excess thereof, except one Certificate of each such Class may be issued that
represents a different initial Certificate Balance [or Notional Balance] to
accommodate the remainder of the initial Certificate Balance [or Notional
Balance]. The Residual Certificates will be issued in definitive, physical,
registered form in Percentage Interests of 5% and integral multiples of a 1%
Percentage Interest in excess thereof.
Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i)(A) the Depositor advises the Certificate Registrar in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to any Class of the Book-Entry
Certificates and (B) the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, advises the Trustee and Certificate Registrar
that it elects to terminate the book-entry system through DTC with respect to
any Class of the Book-Entry Certificates.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Certificate Registrar will be required to notify all affected
Beneficial Owners through DTC of the availability of Definitive Certificates.
Upon surrender by DTC of the physical certificates representing the affected
Book-Entry Certificates and receipt of instructions for re-registration, the
Certificate Registrar will reissue the Book- Entry Certificates as Definitive
Certificates to the Beneficial Owners. Upon the issuance of Definitive
Certificates for purposes of evidencing ownership of the Class [_____], Class
[_____] or Class [_____] Certificates, the registered holders of such Definitive
Certificates will be recognized as Certificateholders
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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
three 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.
YIELD CONSIDERATIONS
Regular Certificates
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 "THE POOLING AND SERVICING
AGREEMENT--Representations and Warranties; Repurchase," "--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
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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 Balances [(or Notional Balance)] of the Class of
Certificates to which such Certificate belongs [and (iii) with respect to the
Class [EC], Class [ ] and Class [IO] 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 [EC] Certificates. Such disproportionate principal
payments will also affect the Pass-Through Rates of the Class [ ] and Class [IO]
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 [ ] 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 will be distributable in its entirety in respect of
the Class A 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 "THE POOLING AND SERVICING
AGREEMENT--Representations and Warranties; Repurchase," "--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 [EC] and Class [IO] 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. 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 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 [PO] 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 [EC] and Class [IO]
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 [EC] and Class [IO] Certificates, applied
in reduction of the Notional Balance)], the greater will be the
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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 prepayments. 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 [PO] Certificates derive
only from principal payments on the Mortgage Loans. As a result, the yield on
the Class [PO] 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. 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. With
particular reference to the Class A Certificates, the [ ] Mortgage Loans listed
below have a maturity date within the next [ ] years, with a Balloon Payment
required on each such maturity date. If the Balloon Payments with respect to
each of these Mortgage Loans are not paid by each of the related borrowers as
scheduled, the average life of the Class A Certificates could be especially
affected.
Cut-off
Date Appraisal
PrincipaBalloon Property AppraisedBalloon Original
Loan # Property Balance Balance Type LTV LTV Maturity
Name
- ----------------------------------------------------------------------
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
collections of amounts payable on the Mortgage Loans (to the extent not
advanced) will generally be borne: first, by the holders of the Class C
Certificates, to the extent of amounts otherwise distributable thereto; second,
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 Certificates.
[Insert Class [PO] Certificates in the appropriate place, if applicable.]
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.
Certain Relevant Factors. The Mortgage Loans are not insured or guaranteed
in whole or in part by any governmental agency or any other person or entity. In
addition, [ ] of the Mortgage Loans are non- recourse loans. 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, actual losses may be higher
than those originally anticipated by investors. As otherwise described herein,
most of the Mortgage Loans, by number and by Cut-off Date Principal Balance, are
Balloon Loans. The ability of the borrowers to pay the Balloon Payment at the
maturity of the Balloon Loans will
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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.
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, prevailing interest rates, the terms of the Mortgage Loans
(for example, the provisions requiring the payment of Prepayment Premiums and
amortization terms that require Balloon Payments), 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, possible changes in tax laws and other opportunities for
investment.
The rate of prepayment on the Mortgage Pool is likely to be affected by
prevailing market interest rates for mortgage loans of a comparable type, term
and risk level. When prevailing market interest rates are below a mortgage note
rate, a borrower may have an increased incentive to refinance its Mortgage Loan.
In addition, as prevailing market interest rates decline, the related borrowers
may have an increased incentive to refinance 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). [ All] of the Mortgage Loans require that prepayments be accompanied
by the payment of a Prepayment Premium, at least for a specified period
following the origination thereof. See Annex B and "DESCRIPTION OF THE MORTGAGE
POOL--Certain Terms and Conditions of the Mortgage Loans" herein. A 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, in certain jurisdictions such a
requirement may be unenforceable. See "RISK FACTORS--Prepayment and Yield
Considerations" herein and "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Enforceability of Certain Provisions" in the Prospectus.
Depending on prevailing market rates of interest, the outlook for market
interest rates and economic conditions generally, some borrowers may sell
Mortgaged Properties in order to realize their equity therein, to meet cash flow
needs or to make other investments. In addition, some borrowers may be motivated
by federal and state tax laws (which are subject to change) to sell Mortgaged
Properties prior to the exhaustion of tax depreciation benefits.
Neither the Depositor nor the Mortgage Loan Seller 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.
[Pass-Through Rate. The Pass-Through Rates on the Class [ ] and Class [ ]
Certificates are related to the Weighted Average Net Mortgage Rate, the
Pass-Through Rate on the Class [IO] Certificates is equal to the Weighted
Average Net Mortgage Rate and the Class [EC] Pass-Through Rate, used to
calculate interest distributable on the Class [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
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as a whole, the Pass-Through Rates applicable to the Class [EC], Class [ ],
Class [ ] and Class [IO] 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 [ ], Class [ ] and Class [IO]
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 [ ] and Class [ ] 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 [IO] Certificates. Any such interest
shortfall would affect the Class [IO] Certificates prior to affecting the Class
[ ] Certificates and would affect the Class [ ] Certificates prior to affecting
the Class [ ] 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).
Interest Shortfalls. As described under "DESCRIPTION OF THE
CERTIFICATES--Distributions" herein, if the portion of the Available Funds
distributable in respect of interest on any Class of Regular Certificates on any
Distribution Date is less than the amount of interest required to be paid to the
holders of such Class, the shortfall will be distributable to holders of such
Class of Certificates 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.
Weighted Average Life of the Regular Certificates
Weighted average life refers to the average amount of time that will elapse
from the date of determination to the date of distribution to the investor of
each dollar distributed in reduction of principal balance [or notional balance]
of such security. The weighted average life of the Regular Certificates will be
influenced by, among other things, the rate at which principal of the Mortgage
Loans is paid, which may be in the form of scheduled amortization, Balloon
Payments, prepayments or liquidations.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the "Constant Prepayment
Rate" or "CPR" model. The CPR model represents an assumed constant rate of
prepayment each month, expressed as an annual rate, relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. CPR of "O%" assumes that none of the Mortgage Loans is prepaid
by a borrower before maturity, while CPRs "0.5%," "1.5%," "4.2%," "5.0%" and
"15.0%" 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
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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) the Mortgage Loan Seller will not 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 [ ], 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; and (vii) the Regular Certificates will be purchased on
[_____________].
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. In the case of
Scenario 2, it was assumed that all the Mortgage Loans prepay at a rate equal to
0% CPR for the 48 months beginning on the Due Date in [____________________],
1996, then at a rate equal to 0.5% CPR for the 12 months beginning on the Due
Date in [ ], 2000, then at a rate equal to 1.5% CPR for the 24 months beginning
on the Due Date in [ ], 2001, then at a rate equal to 4.2% CPR for the 24 months
beginning on the Due Date in [ ], 2003, then at a rate equal to 5.0% CPR for the
24 months beginning on the Due Date in [ ], 2005, and finally at a rate equal to
15.0% CPR for the period beginning on the Due Date in [ ], 2007. 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 [ ]. See "THE POOLING AND
SERVICING AGREEMENT--Auction" herein.
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Percentage of Initial Certificate Balance
Outstanding for
Each Designated Scenario
CLASS A CLASS B CLASS C
SCENARIO SCENARIO SCENARIO
DISTRIBUTION 1 2 3 1 2 3 1 2 3
- ------------- - - - - - - - - -
DATE
Initial
Percentage
Weighted
Average Life
1
- -----------------------
1The weighted average life of each Class is determined by (i) multiplying the
amount of each distribution in reduction of the Certificate Balance 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 [EC] Certificates under
the assumptions described above as Scenario 1 would be [ ] years, (ii) the
weighted average life of the Class [EC] Certificates under the assumptions
described above as Scenario 2 would be [ ] years and (iii) the weighted average
life of the Class [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 [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).]
Mortgage Defaults
Effect on Subordinate Certificates. The aggregate amount of distributions
on the Subordinate Certificates offered hereby, the yield to maturity of such
Subordinate Certificates, the rate of principal payments on such Subordinate
Certificates and the weighted average life of such Subordinate Certificates will
be affected by the rate and the timing of delinquencies and defaults on the
Mortgage Loans. If a purchaser
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of a Subordinate Certificate of any Class calculates its anticipated yield based
on an assumed rate of default and amount of losses on the Mortgage Loans that is
lower than the default rate and amount of losses actually experienced and such
additional losses are allocable to such Class of Certificates, such purchaser's
actual yield to maturity will be lower than that so calculated and could be
negative. The timing of any loss on a liquidated Mortgage Loan will also affect
the actual yield to maturity of the Subordinate Certificates to which a portion
of such loss is allocable, even if the rate of defaults and severity of losses
are consistent with an investor's expectations. In general, the earlier a loss
borne by an investor occurs, the greater is the effect on such investor's yield
to maturity.
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. MOREOVER, BECAUSE THE SUBORDINATE CERTIFICATES ARE
SUBORDINATED TO THE SENIOR CERTIFICATES, REALIZED LOSSES WILL BE ALLOCATED FIRST
TO THE CLASS C CERTIFICATES, UNTIL THE CERTIFICATE BALANCE THEREOF IS REDUCED TO
ZERO, SECOND TO THE CLASS B CERTIFICATES, UNTIL THE CERTIFICATE BALANCE THEREOF
IS REDUCED TO ZERO AND THIRD TO THE CLASS A CERTIFICATES, UNTIL THE CERTIFICATE
BALANCE THEREOF IS REDUCED TO ZERO. 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 INVESTOR'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. [Describe subordination provisions of Class [EC], Class
[IO] and Class [PO] Certificates, if applicable.]
As described under "THE POOLING AND SERVICING AGREEMENT--Advances" herein,
(i) the Master Servicer, the Trustee and the Fiscal Agent will be entitled to
receive interest on unreimbursed Advances at the Advance Rate and (ii) and the
Special Servicer will be entitled to receive servicing compensation for
Specially Serviced Mortgage Loans and REO Mortgage Loans as described herein
under "THE POOLING AND SERVICING AGREEMENT--Special Servicing." The Master
Servicer's and the Special Servicer's rights to receive such payment of interest
and compensation are prior to the rights of Certificateholders to receive
distributions on the Certificates and, consequently, may result in losses being
allocated to the Subordinate Certificates that would not otherwise have resulted
absent the accrual of such interest or such additional compensation.
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.
Regardless of whether losses ultimately result, delinquencies and defaults
on the Mortgage Loans may significantly delay the receipt of payments by the
holder of a Subordinate Certificate, to the extent that Advances or the
subordination of another Class of Certificates does not fully offset the effects
of any such delinquency or default. With respect to any Distribution Date, P&I
Advances will only be made with respect to any Seriously Delinquent Loan if and
to the extent that Available Funds for such Distribution Date (exclusive of any
P&I Advance with respect to any Seriously Delinquent Loan) are not sufficient to
make full distributions in accordance with the Available Funds Allocation to
each Class of Certificates whose Certificate Balance would not be reduced by
Anticipated Losses with respect to all Seriously Delinquent Loans. Therefore,
neither (i) the most subordinate Class (or Classes) of Certificates outstanding
at any time nor (ii) any other Class of Certificates whose Certificate Balance
would be reduced if Realized Losses occurred in the amount of Anticipated Losses
with respect to all Seriously Delinquent Loans will receive distributions on any
Distribution Date on which one or more Mortgage Loans is a Seriously Delinquent
Loan unless Available Funds for such Distribution Date (exclusive of any P&I
Advances with respect to any Seriously Delinquent
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Loans) exceed the amount necessary to make full distributions in accordance with
the Available Funds Allocation to each Class of Certificates that is senior to
such Class. See "THE POOLING AND SERVICING AGREEMENT--Advances" herein.
Residual Certificates
As indicated under "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" herein, the
Class R and Class LR Certificates are not entitled to regular distributions. The
Class R 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. In the case of the Class LR Certificates, the existence of
any Available Funds remaining in the Collection Account may result from the
allocation of Available Funds to the Lower-Tier Regular Interests as described
in the Available Funds Allocation. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" herein. No assurance can be given that any
Available Funds will remain in the Collection Account for distribution to the
Class LR Certificates. In the case of the Class R Certificates, no Available
Funds are expected to remain in the Distribution Account for distribution
thereto. Therefore, the Class R and Class LR Certificateholders' REMIC taxable
income and the tax liability thereon will substantially exceed cash
distributions to such holders during certain periods. There can be no assurance
as to the amount by which such taxable income or such tax liability will exceed
cash distributions in respect of the Class R Certificates and Class LR
Certificates during any such period and no representation is made with respect
thereto. Due to the special tax treatment of residual interests, the after-tax
return of the Class R Certificates and Class LR Certificates may be
significantly lower than would be the case if the Class R Certificates and Class
LR Certificates were taxed as debt instruments, or may be negative.
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of [ ], 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: _________________________ at telephone number
.
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"):
[Describe documents to be included in Trustee Mortgage
File.]
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 [ ] 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
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documents promptly upon receipt thereof). The Trustee is obligated to review the
Trustee Mortgage File for each Mortgage Loan within [ ] 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.
Representations and Warranties; Repurchase
In the Pooling and Servicing Agreement, the Depositor will assign certain
representations and warranties made by the Mortgage Loan Seller in the Mortgage
Loan Purchase and Sale Agreement to the Trustee for the benefit of
Certificateholders.
In the Mortgage Loan Purchase and Sale Agreement, the Mortgage Loan Seller
(with respect to each of the Mortgage Loans) will represent and warrant, among
other things, that (subject to certain exceptions specified in the Mortgage Loan
Purchase and Sale Agreement), as of the date of the Mortgage Loan Purchase and
Sale Agreement (unless another date is specified):
[Describe material representations and warranties.]
The Pooling and Servicing Agreement requires that the Custodian, the Master
Servicer, the Special Servicer or the Trustee notify the Mortgage Loan Seller
upon its becoming aware of any breach of certain representations or warranties
of the Mortgage Loan Seller in the Mortgage Loan Purchase and Sale Agreement, 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 Mortgage Loan
Purchase and Sale Agreement provides that, with respect to any such Mortgage
Loan, within [ ] days after notice of such breach from the Custodian, the Master
Servicer, the Special Servicer or the Trustee, the Mortgage Loan Seller will
either (a) repurchase such Mortgage Loan at its outstanding principal balance,
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, 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 relating to such Mortgage Loan and the
amount of any expenses reasonably incurred by the Master Servicer, the Special
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 [ ] day period, so long as the Mortgage Loan Seller has commenced and is
diligently proceeding with the cure of such breach, such [ ] day period will be
extended for an additional [ ] days; provided, further, that no such extension
will be applicable unless the Mortgage Loan Seller 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 the Mortgage Loan Seller
believes such breach will be cured within such [ ] 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 [ ] day
period in the preceding sentence will apply.
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The obligation of the Mortgage Loan Seller to repurchase or cure
constitutes the sole remedy available to holders of Certificates or the Trustee
for a breach of a representation or warranty by the Mortgage Loan Seller.
Neither the Depositor nor the Master Servicer or Special Servicer will be
obligated to purchase a Mortgage Loan if the Mortgage Loan Seller defaults on
its obligation to repurchase or cure and no assurance can be given that the
Mortgage Loan Seller will fulfill its obligation. If such obligation is not met,
as to a Mortgage Loan that is not a "qualified mortgage," the Upper-Tier REMIC
and Lower-Tier REMIC may be disqualified.
Servicing of the Mortgage Loans; Collection of Payments
The Pooling and Servicing Agreement requires the Master Servicer and the
Special Servicer to service and administer the Mortgage Loans (or in the case of
the Special Servicer, the Specially Serviced Mortgage Loans and REO Mortgage
Loans) on behalf of the Trust Fund solely in the best interests of and for the
benefit of all of the Certificateholders and the Trustee in accordance with the
terms of the Pooling and Servicing Agreement and the Mortgage Loans. In
furtherance of and to the extent consistent with the foregoing, except to the
extent that the Pooling and Servicing Agreement provides for a contrary specific
course of action, each of the Master Servicer and the Special Servicer are
required to service and administer the Mortgage Loans in the same manner as it
services and administers similar mortgage assets in 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 with a view to the
maximization of timely and complete recovery of principal and interest on the
Mortgage Loans 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, 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, any liability by reason of
willful misfeasance, bad faith, fraud or negligence 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 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 the extent such
procedures are consistent with the Pooling and Servicing Agreement, to follow
collection procedures as would be 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.
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With respect to each Mortgage Loan that provides for prepayment at the
option of the mortgagee, the Master Servicer or the Special Servicer, as
applicable, will exercise such option at the earliest possible date as provided
in the related Note and Mortgage Loan documents.
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. With respect to any
Distribution Date and any Seriously Delinquent Loan, P&I Advances will only be
made if and to the extent that Available Funds for such Distribution Date
(exclusive of any P&I Advance with respect to any Seriously Delinquent Loan) are
not sufficient to make full distributions in accordance with the Available Funds
Allocation to each Class of Certificates whose Certificate Balance would not be
reduced by the Anticipated Loss with respect to all Seriously Delinquent Loans.
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. On each Remittance Date the
Master Servicer is obligated to determine the excess, if any, of (x) an amount
equal to the sum of the following amounts with respect to such Seriously
Delinquent Loan: (i) the outstanding principal balance thereof that is due and
payable; (ii) the interest portion of any unreimbursed P&I Advances with respect
thereto; (iii) any unreimbursed Property Advances with respect thereto; and (iv)
any currently payable or delinquent property taxes with respect thereto over (y)
the appraised value of each Seriously Delinquent Loan (based on an appraisal
obtained upon such Mortgage Loan becoming 90 days delinquent or as otherwise
required pursuant to the Pooling and Servicing Agreement) (the aggregate of such
amounts for all Seriously Delinquent Loans, the "Anticipated Loss"). Therefore,
neither (i) the most subordinate Class (or Classes) of Certificates outstanding
at any time nor (ii) any other Class of Certificates whose Certificate Balance
would be reduced if Realized Losses occurred in the amount of the Anticipated
Loss with respect to all Seriously Delinquent Loans will receive distributions
on any Distribution Date on which one or more Mortgage Loans is a Seriously
Delinquent Loan unless Available Funds for such Distribution Date (exclusive of
any P&I Advances with respect to any Seriously Delinquent Loans) exceed the
amount necessary to make full distributions in accordance with the Available
Funds Allocation to each Class of Certificates that is senior to such Class. In
the event that more than one Mortgage Loan is a Seriously Delinquent Loan, any
such P&I Advances will be designated by the Master Servicer to have been made,
first, with respect to Seriously Delinquent Loans (excluding any REO Mortgage
Loans) as to which the related borrower is delinquent only in the payment of
Monthly Payments; second, with respect to Seriously Delinquent Loans (excluding
any REO Mortgage Loans) as to which the related Borrower is delinquent in the
payment of a Balloon Payment; and third, with respect to Seriously Delinquent
Loans that are REO Mortgage Loans; provided however, that any such designation
will be made first to those Seriously Delinquent Loans in respect of which the
Master Servicer reasonably determines that such P&I Advance is most likely to be
recoverable.
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 Property
Protection Expenses and delinquent real estate taxes, assessments and hazard
insurance premiums and to cover other similar costs and expenses necessary to
protect and preserve the security of the related Mortgage. "Property Protection
Expenses" comprise certain costs and expenses
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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. 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 clause, 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 will have the same
effect as a Realized Loss.
Accounts
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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 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; (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 Protection Expenses or 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 "--Representations and Warranties;
Repurchase," "--Realization Upon Mortgage Loans," "--Optional Termination" [and
"--Auction."]
The foregoing requirements for deposits in the Collection Account will be
exclusive, and any payments in the nature of late payment charges, late fees,
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. 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
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("Permitted Investments"). See "DESCRIPTION OF THE
CERTIFICATES--Accounts" in the Prospectus for a listing of
Permitted Investments.
Withdrawals from the Collection Account
The Master Servicer may make withdrawals from the Collection Account for
the following purposes: (i) to remit on or before each Remittance Date to the
Distribution Account an amount equal to Available Funds and any Prepayment
Premiums for such Distribution Date; (ii) to pay or reimburse the Master
Servicer, the Trustee or the Fiscal Agent, as applicable, for Advances made by
it and interest on Advances, the Master Servicer's right to reimburse itself for
items described in this clause (ii) being limited as described herein under
"--Advances"; (iii) to pay on or before each Remittance Date to the Master
Servicer and Special Servicer the fee portion of the servicing compensation in
respect of the related Distribution Date to be paid, in the case of the
Servicing Fee, from interest received on the related Mortgage Loan, and to pay
from time to time, to the Master Servicer, any interest or investment income
earned on funds deposited in the Collection 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,
the Mortgage Loan Seller 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 the
pay 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
enforcement thereof would result in a loss of insurance coverage under any
related insurance policy 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
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(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 and receives written confirmation
from [S&P] that forbearance to enforce such provision will not result, in and of
itself, in a downgrading, withdrawal or qualification of the rating then
assigned by [S&P] to any Class of Certificates. Notwithstanding the foregoing,
the Master Servicer or the Special Servicer, as applicable, may forbear from
enforcing any "due-on-encumbrance" provision in connection with any junior or
senior lien on the Mortgaged Property imposed in connection with any bankruptcy
proceeding involving the Mortgaged Property.
Inspections; Appraisals
The Master Servicer (or the Special Servicer with respect to Specially
Serviced Mortgage Loans or REO Property) is required (at its own expense) to
inspect each Mortgaged Property at such times and in such manner as are
consistent with the servicing standards described herein, but will in any event
(i) inspect each Mortgaged Property at least once every 12 months commencing in
[__________], 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, 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
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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 obtain an appraisal
of the Mortgaged Property or REO Property, as the case may be, from an
independent appraiser who is a member of the Appraisal Institute (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 successive extensions of up to 12 months 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, initially, Midland
Loan Services, L.P. (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 may be replaced at any time by the holders of 662/3%
of the Voting Rights allocated to each Class of Regular Certificates, other than
the most subordinate such Class of Regular Certificates, but may not be the
Special Servicer. The Extension Advisor (if other than Midland Loan Services,
L.P.) 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.
Standards for Conduct Generally in Effecting Foreclosure or the Sale of
Defaulted Loans. In connection with any foreclosure or other acquisition, any
costs and expenses incurred in any such proceedings will be advanced by the
Master Servicer as a Property Advance, unless the Master Servicer determines
that such Advance would constitute a nonrecoverable Advance.
If the Special Servicer elects to proceed with a non-judicial foreclosure
in accordance with the laws of the state in which the Mortgaged Property is
located, the Special Servicer will not be required to pursue a deficiency
judgment against the related borrower, or any other liable party if the laws of
the state do not permit such a deficiency judgment after a non-judicial
foreclosure or if the Special Servicer determines, in its best judgment, that
the likely recovery if a deficiency judgment is obtained will not be sufficient
to warrant the cost, time, expense and/or exposure of pursuing the deficiency
judgment and such determination is evidenced by an officer's certificate
delivered to the Trustee.
Notwithstanding any provision to the contrary, the Special Servicer will
not, on behalf of the Trust Fund, obtain title to a Mortgaged Property as a
result of or in lieu of foreclosure or otherwise, and will not otherwise acquire
possession of, or take any other action with respect to, any Mortgaged Property
if, as a result of any such action, the Trustee, for the Trust Fund or the
holders of Certificates, would be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or "operator" of, such
Mortgaged 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,
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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 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 only by collections net of expenses.
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. 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
CONSEQUEN-CES--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.
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 a person not affiliated with the Special Servicer, 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
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Servicer, as applicable), if the highest offeror is affiliated with the Special
Servicer. 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.
Optional Termination
The Special Servicer, and, if the Special Servicer does not exercise its
option, the holder of the Class LR Certificates representing greater than a 50%
Percentage Interest of the Class LR Certificates, 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; (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; and (D) unreimbursed Advances with interest thereon at
the Advance Rate 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 Mortgage
Rate. See "DESCRIPTION OF THE CERTIFICATES--Additional Rights of the Residual
Certificates" herein.
Auction
On each of (i) the Distribution Date occurring in [ ] of each year from and
including [ ] and (ii) any date after the Distribution Date occurring in [ ] 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
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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 Balance of
all Certificates outstanding on the Auction Valuation Date (the "Aggregate
Certificate Balance") plus estimated Auction Fees and other 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 the Aggregate Certificate Balance plus
estimated Auction Fees and other expenses. In determining the Aggregate
Certificate Balance, 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 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). Such sale
will effect a termination of the Trust Fund and an early retirement of the then
outstanding Certificates. The Trustee will be entitled to be reimbursed from the
Collection Account for expenses that it or any auction agent incurs in
connection with an auction, including all fees and reasonable expenses of legal
counsel and other professionals ("Auction Fees").
Any auction will be conducted in accordance with auction procedures to be
developed by the auction agent in connection with such auction, provided that
such procedures will include at a minimum provisions substantially to the effect
that: (i) no due diligence of the Master Servicer's, the Special Servicer's or
the Trustee's records with respect to the Mortgage Loans may be conducted by any
bidder prior to being notified that it has submitted the highest bid; (ii) the
auction agent is entitled to require that the highest bidder provide a
non-refundable good faith deposit sufficient to reimburse the Trustee and the
auction agent for all expenses in connection with the evaluation of such bid and
in connection with such highest bidder's due diligence; (iii) each bidder may be
required to enter into a confidentiality agreement with the Master Servicer, the
Special Servicer, the auction agent and the Trustee prior to being permitted to
conduct due diligence; (iv) borrowers on any of the Mortgage Loans will be
prohibited from submitting bids; and (v) in the event that the highest bidder
withdraws, the next highest bidder will be permitted to conduct due diligence of
the Master Servicer's, the Special Servicer's or the Trustee's records with
respect to the Mortgage Loans as if it were the highest bidder.
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.
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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
aggregate Voting Rights of at least 51% may remove the Trustee and the Fiscal
Agent upon written notice to the Master Servicer, the Special Servicer, the
Depositor and the Trustee. Any resignation or removal of the Trustee and the
Fiscal Agent and appointment of a successor trustee and, if such trustee is not
rated by each Rating Agency in one of its two highest long-term debt rating
categories, fiscal agent will not become effective until acceptance of the
appointment by the successor trustee and, if necessary, fiscal agent.
The "Voting Rights" assigned to each Class shall be [describe voting rights
of each 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 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 intentional
misconduct of the Trustee and those for which it is 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 and certain related parties 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.
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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 in respect of the assignment of the Mortgage Loans to the Trust Fund,
or any funds deposited in or withdrawn from the Collection Account or any other
account maintained by or on behalf of the Master Servicer, other than with
respect to any funds held by the Trustee.
If no Event of Default has occurred 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 falls to make any required Advance, the Trustee, as
acting or successor Master Servicer, will be required to make such Advance to
the extent that such Advance is not deemed to be nonrecoverable. The Trustee
will be entitled to rely conclusively on any determination by the Master
Servicer that an Advance, if made, would be nonrecoverable. The Trustee will be
entitled to reimbursement for each Advance made by it in the same manner and to
the same extent as the Master Servicer. See "--Advances" herein.
The Fiscal Agent
ABN AMRO Bank N.V., a Netherlands banking corporation and the corporate
parent of the Trustee, will act as Fiscal Agent for the Trustee and will be
obligated to make any Advance required to be made, and not made, by the Trustee
under the Pooling and Servicing Agreement, provided that the Fiscal Agent will
not be obligated to make any Advance that it deems to be nonrecoverable. The
Fiscal Agent will be entitled to rely conclusively on any determination by the
Master Servicer that an Advance, if made, would not be recoverable. The Fiscal
Agent will be entitled to reimbursement for each Advance made by it in the same
manner and to the same extent as the Trustee and the Master Servicer. See
"--Advances" herein.
The Fiscal Agent may not resign except in the event of the resignation or
removal of the Trustee or upon determination that it may no longer perform such
obligations and duties under applicable law. Any such determination is required
to be evidenced by an opinion of counsel to such effect delivered to the
Depositor and 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
Mortgage Loan equal to a per annum rate of [ ]% (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
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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, loan service transaction fees, extension fees,
demand fees, modification fees, assumption fees, beneficiary statement charges
and similar fees and charges and (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] 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
It is anticipated that [_______________________] will initially be
appointed as special servicer (the "Special Servicer") to, among other things,
oversee the resolution of non-performing Mortgage Loans and act as disposition
manager of REO Properties. However, the holders of a majority of the Voting
Rights of the most subordinate Class of outstanding Regular Certificates will be
entitled to remove the Special Servicer without cause and appoint a successor
Special Servicer. Any termination fee payable to the Special Servicer upon
termination without cause will be paid by such holders, and will not be an
expense of the Trust Fund. Each of the Rating Agencies must confirm in writing
to the Trustee and the Master Servicer that the appointment of such successor
Special Servicer will not cause any qualification, withdrawal or downgrading of
the initial ratings assigned to any Class of rated Certificates.
The duties of the Special Servicer relate primarily to Specially Serviced
Mortgage Loans and to any REO Property. The Pooling and Servicing Agreement will
define a "Specially Serviced Mortgage Loan" to include any Mortgage Loan with
respect to which: (i) the related borrower is 60 or more days delinquent in the
payment of principal and interest (regardless of whether in respect thereof P&I
Advances have been reimbursed); (ii) the borrower under which has expressed to
the Master Servicer an inability to pay or a hardship in paying the Mortgage
Loan in accordance with its terms; (iii) the Master Servicer has received notice
that the borrower has become the subject of any bankruptcy, insolvency or
similar proceeding, admitted in writing the inability to pay its debts as they
come due or made an assignment for the benefit of creditors; (iv) the Master
Servicer has received notice of a foreclosure or threatened foreclosure of any
lien on the Mortgaged Property securing the Mortgage Loan; (v) a default of
which the Master Servicer has notice (other than a failure by the borrower to
pay principal or interest) and which materially and adversely affects the
interests of the Certificateholders has occurred and remained unremedied for the
applicable grace period specified in the Mortgage Loan (or, if no grace period
is specified, 60 days); provided, that a default requiring a Property Advance
will be deemed to materially and adversely affect the interests of
Certificateholders; (vi) the borrower has failed to make a Balloon Payment
(except in the case where the Master Servicer and the Special Servicer agree in
writing that such Mortgage Loan is likely to be paid in full within 30 days
after such default); or (vii) the Master Servicer proposes to commence
foreclosure or other workout arrangements; provided, however, that a Mortgage
Loan will cease to be a Specially Serviced Mortgage Loan (a) with respect to the
circumstances described in clauses (i) and (vi) above, when the borrower
thereunder has brought the Mortgage Loan current (with respect to the
circumstances described in clause (vi), pursuant to any workout recommended by
the Special Servicer) and thereafter made three consecutive full and timely
monthly payments, (b) with respect to the circumstances described in clauses
(ii) and (iv) above, when such circumstances cease to exist in the good faith
judgment of the Special Servicer and with respect to the circum- stances
described in clauses (iii) and (vii), when such circumstances cease to exist or
(c) with respect to the
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circumstances described in clause (v) above, when such default is cured;
provided, in either 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, 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 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 occurs within 12 months following the date
on which the Mortgage Loan initially became a Specially Serviced Mortgage Loan
or (y) 1.0%, if such sale occurs after such 12-month period. 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
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.
Reports to Certificateholders
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:
[Describe reports to be delivered to
Certificateholders.]
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 Certificate a statement setting forth the amounts, if any,
actually distributed to such Certificateholder 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.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, one or more separate "real estate mortgage
investment conduit" ("REMIC") elections will be made with respect to the Trust
Fund, creating one or more 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
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of 1986 (the "Code") and (ii) (a) the Class A, Class B, Class C, [Class [EC],
Class [IO] and Class [PO]] 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.
Except as discussed below, the Offered Certificates are not expected to be
treated for federal income tax reporting purposes as having been issued with
original issue discount. There is a possibility of interest being deferred on,
and to the extent deferred added to the Certificate Balance of, the Offered
Certificates as a result of negative principal amortization on the Mortgage
Loans. Therefore, it is possible that none of the interest on the Offered
Certificates will qualify as "qualified stated interest" under the Treasury
regulations relating to the taxation of instruments with original issue discount
(the "OID Regulations") and only original issue discount will be treated as
accruing on the Offered Certificates. 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 [4.2%] CPR. No representation is made as to whether the Mortgage
Loans will prepay at that rate or any other rate. [Although it is unclear
whether the Class [ ] and Class [ ] 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 [EC], Class [PO] and Class [IO]] Certificates
may not be purchased by or transferred to an employee benefit plan or other
retirement arrangement, including an individual retirement account or a Keogh
plan, which is subject to 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"), or a
collective investment fund in which such Plans are invested, 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) 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. 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 [EC], Class
[PO], Class [IO]], 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 CONSIDERATIONS" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to the
Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Depositor, the
Underwriter, 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
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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 Underwriter, 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 the
Underwriter 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 the Underwriter. 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 Certificates, underwritten by
the Underwriter, 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;
S-100
<PAGE>
(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 Underwriter, the Master Servicer, the Special
Servicer (if any), any obligor with respect to the Mortgage Loans
included in the Trust Fund constituting more than 5% of the aggregate
unamortized balance of the assets in the Trust Fund, or any affiliate
of such parties (the "Restricted Group");
(5) The sum of all payments made to and retained by the
Underwriter 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 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
S-101
<PAGE>
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
Certificates by Plans sponsored by the Depositor, the Underwriter, 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 [EC], CLASS [IO], CLASS
[PO]], CLASS R AND CLASS LR CERTIFICATES DO NOT MEET THE REQUIREMENTS OF THE
EXEMPTION. ACCORDINGLY, THE CLASS B, CLASS C, CLASS [EC], CLASS [PO] AND CLASS
[IO]], 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 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 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 Certificate should also carefully review with its own legal advisors the
applicability of the fiduciary duty and prohibited transaction provisions of
ERISA and the Code to such investment.
Exempt Plan
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA or Code Section 4975. However, such a governmental plan may be subject to
a Similar Law. A fiduciary of a governmental plan should make its own
determination as to the need for and the availability of any exemptive relief
under any Similar Law.
The sale of Class A Certificates to a Plan is in no respect a
representation by the Depositor, the Underwriter 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.
S-102
<PAGE>
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.
PLAN OF DISTRIBUTION
Prudential Securities Incorporated (the "Underwriter") has agreed, pursuant
to an Underwriting Agreement dated [ ], 1996 (the "Underwriting Agreement") to
purchase the Certificates from the Depositor. The Certificates will be offered
by the Underwriter in negotiated transactions or otherwise, on varying terms
(which may include the sale of separate financial instruments by the Underwriter
or an affiliate) and at varying prices, in each case to be determined at the
time of sale. The Underwriter 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
Underwriter or purchasers of the Certificates for whom they may act as agent.
Any dealers that participate with the Underwriter in the distribution of the
Certificates purchased by the Underwriter may be deemed to be underwriters, and
any discounts or commissions received by them or the Underwriter and any profit
on the resale of Certificates by them or the Underwriter may be deemed to be
underwriting discounts or commissions under the 1933 Act.
The Underwriting Agreement provides that the obligations of the Underwriter
are subject to certain conditions precedent and the Underwriter will be
obligated to purchase all of the Certificates if any are purchased. The
Depositor has agreed to indemnify the Underwriter against certain liabilities,
including liabilities under the 1933 Act, or contribute to payments that the
Underwriter may be required to make in respect thereof.
The Depositor also has been advised by the Underwriter that it currently
expects to make a market in the Certificates, however, it has no obligation to
do so. Any market making may be discontinued at any time, and there can be no
assurance that an active public market for the 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.
[Prudential Realty Funding, Inc., an affiliate of Prudential Securities
Incorporated, has provided a warehouse line of credit (most of which is
non-recourse) to the Mortgage Loan Seller 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 the Mortgage Loan Seller in
connection with the sale of such Mortgage Loans to the Depositor, Prudential
Realty Funding, Inc. receives interest on amounts borrowed under the warehouse
line of credit and will share
S-103
<PAGE>
in any profits realized by the Mortgage Loan
Seller in connection with the sale of such Mortgage Loans to the Depositor.
Prudential Securities Incorporated 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 Underwriter by O'Melveny & Myers LLP.
RATINGS
It is a condition to issuance of the Certificates that the Class A
Certificates, the Class B Certificates [and the Class [ ] Certificates] be rated
[ ] by each of the Rating Agencies.
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 [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 [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
[ ] rating received on the Class [EC] Certificates.]
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-104
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Definitions Page
1933 Act................................................S-4
[199__] Net Operating Income.....................S-40, S-41
ACMs...................................................S-54
ADA..............................................S-31, S-58
Adjusted Annualized Year To Date Net Operating Income..S-41
Advance Rate...........................................S-86
Advances...............................................S-85
Aggregate Certificate Balance..........................S-93
Annual Debt Service....................................S-41
Anticipated Loss.......................................S-85
Appraised Value........................................S-41
Assumed Maturity Date..............................S-1, S-6
Assumed Scheduled Payment..............................S-66
Auction Fees...........................................S-93
Auction Valuation Date...........................S-20, S-92
Available Funds........................................S-62
Available Funds Allocation.............................S-66
Balloon Amount.........................................S-41
Balloon LTV............................................S-41
Bankruptcy Code..................................S-32, S-33
Beneficial Owners......................................S-71
Book-Entry Certificate.................................S-71
Business Day...........................................S-14
Certificate Balance....................................S-13
Certificate Registrar..................................S-74
Certificates......................................S-1, S-13
Class A-EC Notional Balance............................S-62
Class Interest Distribution Amount...............S-16, S-64
Class Interest Shortfall...............................S-66
Class [EC] Excess Interest........................S-2, S-64
Class [EC] Notional Balance............................S-64
Class [EC] Pass-Through Rate...........................S-64
Class [IO] Notional Balance............................S-62
Closing Date...........................................S-14
Code...................................................S-98
Collection Account.....................................S-87
Collection Period................................S-14, S-64
Commission..............................................S-4
Condemnation Proceeds..................................S-63
Congregate Care Loan...................................S-37
Congregate Care Property...............................S-37
Constant Prepayment Rate...............................S-78
CPR....................................................S-78
Cross-Collateralized Loans.......................S-31, S-58
Cut-off Date...........................................S-14
Cut-off Date Principal Balance....................S-8, S-37
Debt Service Coverage Ratio............................S-41
Default Interest.......................................S-64
S-105
<PAGE>
Default Rate...........................................S-64
Definitive Certificate.................................S-72
Delivery Date...........................................S-1
Department.............................................S-99
Depositor.........................................S-2, S-13
Depository.............................................S-15
Determination Date...............................S-14, S-64
Discount Rate..........................................S-70
Disposition Fee........................................S-97
Disqualified Organization........................S-3, S-102
Distribution Account...................................S-87
Distribution Date...........................S-2, S-14, S-62
DSCR..............................................S-9, S-41
DTC..........................................S-1, S-7, S-15
Due Date...............................................S-15
EC Maturity Date..................................S-2, S-15
Eligible Bank..........................................S-87
EPA....................................................S-55
ERISA............................................S-22, S-99
Exemption.............................................S-100
Extension Advisor......................................S-90
Final Recovery Determination...........................S-70
Fiscal Agent......................................S-3, S-14
Form 8-K...............................................S-48
Hotel Loan.............................................S-37
Hotel Property.........................................S-37
Indirect Participants..................................S-72
Initial Pool Balance...................................S-37
Insurance Proceeds.....................................S-63
Interest Accrual Period..........................S-14, S-65
Lead Paint Act.........................................S-55
Light Industrial/Industrial Loan.......................S-37
Light Industrial/Industrial Property...................S-37
Liquidation Proceeds...................................S-63
Loan Portfolio Analysis System.........................S-93
Loan Purchase Closing Date.............................S-39
Loan-to-Value Ratio....................................S-41
Lower-Tier Regular Interests...........................S-20
Lower-Tier REMIC..................................S-3, S-20
LPAS...................................................S-93
LTV..............................................S-40, S-41
Major Tenant.....................................S-31, S-58
Master Servicer...................................S-3, S-13
Master Servicer Mortgage File..........................S-82
Midland................................................S-60
Mobile Home Park Loan..................................S-38
Mobile Home Park Property..............................S-37
Monthly Payment........................................S-63
Mortgage...............................................S-37
Mortgage File..........................................S-83
Mortgage Loan Purchase and Sale Agreement..............S-39
S-106
<PAGE>
Mortgage Loans....................................S-2, S-37
Mortgage Pool...........................................S-2
Mortgaged Property................................S-2, S-37
Multifamily Loan.......................................S-37
Multifamily Property...................................S-37
Net Mortgage Rate......................................S-65
Net REO Proceeds.......................................S-63
Note...................................................S-37
Notional Balances......................................S-62
Nursing Home Loan......................................S-37
Nursing Home Property..................................S-37
Occupancy Rate.........................................S-41
Offered Certificates....................................S-1
Office Building Loan...................................S-37
Office Building Property...............................S-37
Office/Multifamily/Retail Loan.........................S-38
Office/Multifamily/Retail Property.....................S-38
Office/Warehouse Loan..................................S-38
Office/Warehouse Property..............................S-38
OID Regulations........................................S-98
Originators............................................S-38
P&I Advance.................................S-8, S-18, S-85
P&I Certificates........................................S-2
Participants...........................................S-72
Pass-Through Rate................................S-15, S-65
Paying Agent...........................................S-72
Percentage Interest....................................S-62
Permitted Investments..................................S-88
Plan.............................................S-22, S-99
Pooled Principal Distribution Amount.............S-17, S-66
Pooling and Servicing Agreement.............S-3, S-13, S-82
Prepayment Interest Shortfall..........................S-65
Prepayment Interest Surplus............................S-65
Prepayment Premiums....................................S-63
Principal Prepayments..................................S-63
Private Certificates...................................S-13
Property Advances......................................S-85
Property Protection Expenses...........................S-85
Rating Agencies.........................................S-3
Realized Loss..........................................S-70
Record Date......................................S-14, S-62
Regular Certificates..............................S-1, S-20
Regulations...........................................S-100
REMIC..................................S-3, S-6, S-20, S-97
Remittance Date........................................S-85
REO Account............................................S-61
REO Mortgage Loan......................................S-66
REO Property...........................................S-61
Repurchase Price.......................................S-83
Reserve Accounts.......................................S-39
Residual Certificates...................................S-1
S-107
<PAGE>
Restricted Group...............................S-100, S-102
Retail Loan............................................S-37
Retail Property........................................S-37
Retail/Multifamily Loan................................S-38
Retail/Multifamily Property............................S-38
Retail/Office Loan.....................................S-37
Retail/Office Property.................................S-37
Rules..................................................S-72
Scenarios..............................................S-79
Scheduled Principal Balance............................S-70
Self-Storage Loan......................................S-37
Self-Storage Property..................................S-37
Senior Certificates.....................................S-2
Senior Principal Distribution Cross-Over Date..........S-69
Seriously Delinquent Loan..............................S-85
Servicing Fee..........................................S-95
Servicing Fee Rate.....................................S-95
Similar Law............................................S-99
SMMEA.................................................S-103
Special Servicer......................S-3, S-14, S-61, S-96
Special Servicing Fee..................................S-97
Specially Serviced Mortgage Loan.......................S-96
Subordinate Certificates................................S-2
Triple Net.............................................S-59
Trust Fund..............................................S-2
Trust REMICs............................................S-3
Trustee...........................................S-3, S-14
Trustee Mortgage File..................................S-82
U.S. Person.............................................S-3
Underwriter......................................S-1, S-103
Underwriting Agreement................................S-103
Underwritten Cash Flow.................................S-40
Unscheduled Payments...................................S-63
Updated Appraisal......................................S-90
Upper-Tier REMIC..................................S-3, S-20
USTs...................................................S-55
Voting Rights..........................................S-94
Weighted Average Net Mortgage Rate.....................S-65
Yield Maintenance Loan.................................S-70
Yield Maintenance Period...............................S-70
Zoning Laws......................................S-30, S-58
<PAGE>
<TABLE>
<CAPTION>
Annex A
Table A: Collateral Properties
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Net Most
Loan Property Property Year Year Rentable Current Recent Rent
# Name Type Built Renovated Sq.Ft. Units Occup. Roll
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
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</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
Annex A
Table B: Property Locations and LTVs
======================================================================================
Apprais.
Loan PropertyPropertyState Cut-Off Date Appraised Appraised Appraised Balloon Balloon
# Name City Balance Value Date LTV Balance LTV
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</TABLE>
A-2
<PAGE>
<TABLE>
<CAPTION>
Annex A
Table C: Collateral Debt Service and YTD or Trailing NOI
=============================================================================================================
Property Ann Debt Underwrit. Underwrit. NOI/Debt Underwrit Cash Flow/ Trailing Trail. 12 Annual'd Annual'd
Loan Name Service Value NOI Service Cash Flow Debt Service 199_NOI 199_CF 12 NOI NOI as of YTD NOI CF
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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</TABLE>
A-3
<PAGE>
Annex A
Table C: Collateral Debt Service and YTD or Trailing NOI
===============================================================================
Adjust 95
YTD YTD Adjusted Ann Annual'd Cash
Loan NOI 9_ YTD NOI Flow Financial Comments
Mths
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A-4
<PAGE>
A-5
<PAGE>
<TABLE>
<CAPTION>
Annex A
Table D: Mortgage Loan Terms
========================================================================================
Original
Loan Property Original Cut-Off-Date Interest Amort Term Mat. Remain. Remain. Balloon
# Name Balance Balance Rate Term to Mat. Date Amort. Term Balance
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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</TABLE>
A-6
<PAGE>
<TABLE>
<CAPTION>
Annex A
Table E: Retail Subcategories
=======================================================================
Cut-Off-Date
Loan # Property Name Retail Sub Categories Balance
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<S> <C> <C> <C>
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=======================================================================
</TABLE>
====================================================
Type of Retail % of Cut-Off Date Balance
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A-7
<PAGE>
<TABLE>
<CAPTION>
Annex B
Prepayment Provisions
====================================================================================
Penalty
Yield Prepayment Premium
Cut-Off Date Lockout Maint. Premium During following YM % Premium
Loan # Property Balance Period Period YM (in After YM
Name years)
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<S> <C> <C> <C> <C> <C> <C> <C>
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</TABLE>
B-1
<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 July ___, 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) 435-5000.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to the Trust Fund for each Series, there are incorporated herein
by reference all documents and reports filed or caused to be filed by the
Depositor with respect to such Trust Fund pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, after the date of
this Prospectus and prior to the termination of the offering of the Offered
Certificates evidencing an interest in such Trust Fund. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus is delivered in connection with the offering of one or more Classes
of Certificates, upon request, a copy of any or all such documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such Classes of such Certificates, other than
the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). The Depositor has determined that
its financial statements are not material to the offering of any of the Offered
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Certificates. See "FINANCIAL INFORMATION." Requests to
the Depositor should be directed to: Midland Realty
Acceptance Corp., 210 West 10th Street, 6th Floor, Kansas
City, Missouri 64105, Attention: E. J. Burke, telephone
number (816) 435-5000.
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.
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<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
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<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
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<PAGE>
on other Classes of Certificates, including Classes of Offered Certificates, of
such Series may be more sensitive to prepayments on Mortgage Loans. A Series of
Certificates may include one or more Classes offered at a significant premium or
discount. Yields on such Classes of Certificates will be sensitive, and in some
cases extremely sensitive, to prepayments on Mortgage Loans. With respect to
interest only or disproportionately interest weighted Classes purchased at a
premium, such Classes may not return their purchase prices under rapid repayment
scenarios. See "YIELD 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
9
<PAGE>
governmental rules, regulations and fiscal policies, including environmental
legislation; natural disasters; and other factors beyond the control of the
Master Servicer or the Special Servicer, if any.
Additional risk may be presented by the type and use of a particular mortgaged
property. For instance, mortgaged properties that operate as hospitals, nursing
homes or convalescent homes may present special risks to mortgagees due to the
significant governmental regulation of the ownership, operation, maintenance,
control and financing of health care institutions. Mortgages encumbering
mortgaged properties that are owned by the mortgagor under a condominium form of
ownership are subject to the declaration, by-laws and other rules and
regulations of the condominium association. Hotel and motel properties are often
operated pursuant to franchise, management or operating agreements that may be
terminable by the franchiser or operator. Moreover, the transferability of a
hotel's operating, liquor and other licenses upon a transfer of the hotel,
whether through purchase or foreclosure, is subject to local law requirements.
In addition, mortgaged properties that are multifamily residential properties or
cooperatively owned multifamily properties may be subject to rent control laws,
which could impact the future cash flows of such properties. Any such risks will
be more fully described in the related Prospectus Supplement under the captions
"RISK FACTORS" and "DESCRIPTION OF THE MORTGAGE POOL."
If applicable, certain legal aspects of the Mortgage
Loans for a Series of Certificates may be described in the
related Prospectus Supplement. See also "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS."
Certain Tax Considerations of Variable Rate Certificates
There are certain tax matters as to which counsel to the Depositor is unable
to opine at the time of the issuance of the Prospectus due to uncertainty in the
law. Specifically, the treatment of Interest Weighted Certificates and Variable
Rate Regular Interests are subject to unsettled law which creates uncertainty as
to the exact method of income accrual which should control. The REMIC will
accrue income using a method which is consistent with certain regulations;
however, there can be no assurance that such method will be controlling.
Nonrecourse Mortgage Loans
It is anticipated that a substantial portion of the Mortgage Loans included in
any Trust Fund will be nonrecourse loans or loans for which recourse may be
restricted or unenforceable. As to such Mortgage Loans, in the event of
mortgagor default, recourse may be had only against the specific multifamily or
commercial property and such other assets, if any, as have been pledged to
secure the Mortgage Loan. With respect to those Mortgage Loans that provide for
recourse against the mortgagor and its assets generally, there can be no
assurance that such recourse will ensure a recovery in respect of a defaulted
Mortgage Loan greater than the liquidation value of the related Mortgaged
Property.
Delinquent and Non-Performing Mortgage Loans
If so provided in the related Prospectus Supplement, the Trust Fund for a
particular Series of Certificates may include Mortgage Loans that are past due
or are non-performing. If so specified in the related Prospectus Supplement, the
servicing of such Mortgage Loans will be performed by a Special Servicer. Credit
Enhancement, if provided with respect to a particular Series of Certificates,
may not cover all losses related to such delinquent or non-performing Mortgage
Loans, and investors should consider the risk that the inclusion of such
Mortgage Loans in the Trust Fund may adversely affect the rate of defaults and
prepayments on Mortgaged Properties and the yield on the Certificates of such
Series.
Junior Mortgage Loans
Certain of the Mortgage Loans may be junior mortgage loans. The primary risk
to holders of mortgage loans secured by junior liens is the possibility that a
foreclosure of a related senior lien would extinguish the junior lien and that
adequate funds will not be received in connection with such foreclosure to pay
the debt held by the holder of such junior mortgage loan after satisfaction of
all related senior liens. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Junior Mortgages; Rights of Senior Mortgagees or
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Beneficiaries" and "--Foreclosure" for a discussion of additional risks to
holders of mortgage loans secured by junior liens.
Balloon Payments
Certain of the Mortgage Loans as of the Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Mortgage
loans with balloon payments involve a greater degree of risk because the ability
of a mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related mortgaged property in a
timely manner. The ability of a mortgagor to accomplish either of these goals
will be affected by a number of factors, including the level of available
mortgage rates at the time of sale or refinancing, the mortgagor's equity in the
related mortgaged property, the financial condition and operating history of the
mortgagor and the related mortgaged property, tax laws, rent control laws (with
respect to certain multifamily properties and mobile home parks), reimbursement
rates (with respect to certain hospitals, nursing homes and congregate care
facilities), renewability of operating licenses, prevailing general economic
conditions and the availability of credit for commercial or multifamily, as the
case may be, real properties generally.
Extensions and Modifications of Defaulted Mortgage Loans;
Additional Servicing Fees
In order to maximize recoveries on defaulted Mortgage Loans, a Master Servicer
or Special Servicer, if any, will be permitted (within the parameters specified
in the related Prospectus Supplement) to extend and modify Mortgage Loans that
are in default or as to which a payment default is reasonably foreseeable,
including in particular with respect to balloon payments. In addition, a Master
Servicer or a Special Servicer, if any, may receive workout fees, management
fees, liquidation fees or other similar fees based on receipts from or proceeds
of such Mortgage Loans. Although a Master Servicer or Special Servicer, if any,
generally will be required to determine that any such extension or modification
is reasonably likely to produce a greater recovery amount than liquidation,
there can be no assurance that such flexibility with respect to extensions or
modifications or payment of a workout fee will increase the amount of receipts
from or proceeds of Mortgage Loans that are in default or as to which a payment
default is reasonably foreseeable.
Risks Related to the Mortgagor's Form of Entity and
Sophistication
Mortgage loans made to partnerships, corporations or other entities may entail
risks of loss from delinquency and foreclosure that are greater than those of
mortgage loans made to individuals. For example, an entity, as opposed to an
individual, may be more inclined to seek legal protection from its creditors,
such as a mortgagee, under the bankruptcy laws. Unlike individuals involved in
bankruptcies, various types of entities generally do not have personal assets
and creditworthiness at stake. The bankruptcy of a mortgagor may impair the
ability of the mortgagee to enforce its rights and remedies under the related
mortgage. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Foreclosure-Bankruptcy Law." The mortgagor's sophistication may increase
the likelihood of protracted litigation or bankruptcy in default situations. The
more sophisticated a mortgagor is, the more likely it will be aware of its
rights, remedies and defenses against its mortgagee and the more likely it will
have the resources to make effective use of all of its rights, remedies and
defenses.
Credit Enhancement Limitations
The Prospectus Supplement for a Series of Certificates will describe any
Credit Enhancement in the related Trust Fund, which may include letters of
credit, insurance policies, surety bonds, limited guarantees, reserve funds or
other types of credit support, or combinations thereof. Use of Credit
Enhancement will be subject to the conditions and limitations described herein
and in the related Prospectus Supplement and is not expected to cover all
potential losses or risks or guarantee repayment of the entire principal balance
of the Certificates and interest thereon.
A Series of Certificates may include one or more Classes of Subordinate
Certificates (which may include Offered Certificates), if so provided in the
related Prospectus Supplement. Although subordination is intended to reduce the
risk to holders of Senior Certificates of delinquent distributions or ultimate
losses, the amount
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of subordination will be limited and may decline or be reduced to zero under
certain circumstances. In addition, if principal payments on one or more Classes
of Certificates of a Series are made in a specified order of priority, any
limits with respect to the aggregate amount of claims under any related Credit
Enhancement may be exhausted before the principal of the lower priority Classes
of Certificates of such Series has been repaid. As a result, the impact of
significant losses and shortfalls on the Mortgaged Properties may fall primarily
upon those Classes of Certificates having a lower priority of payment. Moreover,
if a form of Credit Enhancement covers more than one Series of Certificates,
holders of Certificates of one Series will be subject to the risk that such
Credit Enhancement will be exhausted by the claims of the holders of
Certificates of one or more other Series.
The amount, type and nature of Credit Enhancement, if any, established with
respect to a Series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating Classes of the Certificates of such
Series. Such criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. Such analysis is often the basis
upon which each Rating Agency determines the amount of Credit Enhancement
required with respect to each such Class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. No assurance can be given
with respect to any Mortgage Loan that the appraised value of the related
Mortgaged Property has remained or will remain at its level as of the
origination date of such Mortgage Loan. Moreover, there is no assurance that
appreciation of real estate values generally will limit loss experiences on
commercial or multifamily properties. If the commercial or multifamily
residential real estate markets should experience an overall decline in property
values such that the outstanding principal balances of the Mortgage Loans in a
particular Trust Fund and any secondary financing on the related Mortgaged
Properties become equal to or greater than the value of the Mortgaged
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced by institutional lenders for similar
mortgage loans. In addition, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by mortgagors of
scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the rates of delinquencies, foreclosures and losses with respect to
any Trust Fund. To the extent that such losses are not covered by Credit
Enhancement, such losses will be borne, at least in part, by the holders of one
or more Classes of the Certificates of the related Series. See "Limited Nature
of Ratings," "DESCRIPTION OF THE CERTIFICATES" and "CREDIT ENHANCEMENT."
Risks to Subordinated Certificateholders
If so provided in the related Prospectus Supplement, a Series of Certificates
may include one or more Classes of Subordinate Certificates (which may include
Offered Certificates). If losses or shortfalls in collections on Mortgaged
Properties are realized, the amount of such losses or shortfalls will be borne
first by one or more Classes of the Subordinate Certificates. The remaining
amount of such losses or shortfalls, if any, will be borne by the remaining
Classes of Certificates in the priority and subject to the limitations specified
in such Prospectus Supplement. In addition to the foregoing, any Credit
Enhancement, if applicable, may be used by the Certificates of a higher priority
of payment before the principal of the lower priority Classes of Certificates of
such Series has been repaid. Therefore, the impact of significant losses and
shortfalls on the mortgaged properties may fall primarily upon those Classes of
Certificates with a lower payment priority.
Taxable Income in Excess of Distributions Received
A holder of a certificate in a Class of Subordinate Certificates could be
allocated taxable income attributable to accruals of interest and original issue
discount in excess of cash distributed to such holder if mortgage loans were in
default giving rise to delays in distributions. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Regular Interests--Treatment of Subordinate
Certificates" herein.
Due-on-Sale Clauses and Assignments of Leases and Rents
Mortgages may contain a due-on-sale clause, which permits the mortgagee to
accelerate the maturity of the mortgage loan if the mortgagor sells, transfers
or conveys the related mortgaged property or its interest
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in the mortgaged property. Mortgages may also include a debt-acceleration
clause, which permits the mortgagee to accelerate the debt upon a monetary or
non-monetary default of the mortgagor. Such clauses are generally enforceable
subject to certain exceptions. The courts of all states will enforce clauses
providing for acceleration in the event of a material payment default. The
equity courts of any state, however, may refuse the foreclosure of a mortgage or
deed of trust when an acceleration of the indebtedness would be inequitable or
unjust or the circumstances would render the acceleration unconscionable.
The related Prospectus Supplement will describe whether and to what extent the
Mortgage Loans will be secured by an assignment of leases and rents pursuant to
which the mortgagor typically assigns its right, title and interest as landlord
under the leases on the related Mortgaged Property and the income derived
therefrom to the mortgagee as further security for the related Mortgage Loan,
while retaining a license to collect rents for so long as there is no default.
In the event the mortgagor defaults, the license terminates and the mortgagee is
entitled to collect rents. Such assignments are typically not perfected as
security interests prior to the mortgagee's taking possession of the related
mortgaged property and/or appointment of a receiver. Some state laws may require
that the mortgagee take possession of the mortgaged property and obtain a
judicial appointment of a receiver before becoming entitled to collect the
rents. In addition, if bankruptcy or similar proceedings are commenced by or in
respect of the mortgagor, the mortgagee's ability to collect the rents may be
adversely affected, See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Leases and
Rents."
Environmental Risks
Real property pledged as security for a mortgage loan may be subject to
certain environmental risks. Under the laws of certain states, contamination of
a property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), a mortgagee may be liable as an "owner" or
"operator" for costs of addressing releases or threatened releases of hazardous
substances that require remedy at a property, if agents or employees of the
mortgagee have become sufficiently involved in the operations of the mortgagor,
regardless of whether the environmental damage or threat was caused by a prior
owner. A mortgagee also risks such liability on foreclosure of the mortgage.
Each Agreement will generally provide that the Master Servicer or the Special
Servicer, if any, acting on behalf of the Trust Fund, may not acquire title to a
Mortgaged Property securing a Mortgage Loan or take over its operation unless
the Master Servicer or Special Servicer, as applicable, has previously
determined, based upon a report prepared by a person who regularly conducts
environmental audits, that: (i) the Mortgaged Property is in compliance with
applicable environmental laws, and there are no circumstances present at the
Mortgaged Property relating to the use, management or disposal of any hazardous
substances, hazardous materials, wastes or petroleum based materials for which
investigation, testing, monitoring, containment, clean-up or remediation could
be required under any federal, state or local law or regulation; or (ii) if the
Mortgaged Property is not so in compliance or such circumstances are so present,
then it would be in the best economic interest of the Trust Fund to acquire
title to the Mortgaged Property and further to take such actions as would be
necessary and appropriate to effect such compliance and/or respond to such
circumstances, which may include obtaining an environmental insurance policy.
The related Prospectus Supplement may impose additional restrictions on the
ability of the Master Servicer or the Special Servicer, if any, to take any of
the foregoing actions. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Environmental Risks."
ERISA Considerations
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations that govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
Series. See "ERISA CONSIDERATIONS."
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Certain Federal Tax Considerations Regarding Residual
Certificates
Holders of Residual Certificates will be required to report on their federal
income tax returns as ordinary income their pro rata share of the taxable income
of the REMIC, regardless of the amount or timing of their receipt of cash
payments, as described in "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Holders of Residual Certificates." Accordingly, under certain circumstances,
holders of Offered Certificates that constitute Residual Certificates may have
taxable income and tax liabilities arising from such investment during a taxable
year in excess of the cash received during such period. The requirement that
holders of Residual Certificates report their pro rata share of the taxable
income and net loss of the REMIC will continue until the Certificate Balances of
all Classes of Certificates of the related Series have been reduced to zero,
even though holders of Residual Certificates have received full payment of their
stated interest and principal. A portion (or, in certain circumstances, all) of
such Certificateholder's share of the REMIC taxable income may be treated as
"excess inclusion" income to such holder that (i) generally, will not be subject
to offset by losses from other activities, (ii) for a tax-exempt holder, will be
treated as unrelated business taxable income and (iii) for a foreign holder,
will not qualify for exemption from withholding tax. Individual holders of
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, Residual Certificates are subject
to certain restrictions on transfer. In particular, the transfer of a Residual
Interest to certain "Disqualified Organizations" is prohibited. If transfer
occurs in violation of such prohibition, a tax is imposed on the transfer. In
addition, the transfer of a "noneconomic residuary interest" by a Residual
Certificateholder will be disregarded under certain circumstances with the
transferor remaining liable for any taxable income derived from the Residual
Interest by the transferee Residual Certificateholder. See "MATERIAL FEDERAL
INCOME TAX CONSE- QUENCES--Restrictions on Ownership and Transfer of Residual
Certificates." Because of the special tax treatment of Residual Certificates,
the taxable income arising in a given year on Residual Certificates will not be
equal to the taxable income associated with investment in a corporate bond or
stripped instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Certificates may be significantly
less than that of a corporate bond or stripped instrument having similar cash
flow characteristics.
Control
Under certain circumstances, the consent or approval of the holders of a
specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of a Series or a similar means of allocating decision-making under
the related Agreement, which will be specified in the related Prospectus
Supplement ("Voting Rights"), will be required to direct, and will be sufficient
to bind all Certificateholders of such Series to, certain actions, including
amending the related Agreement in certain circumstances. See "SERVICING OF THE
MORTGAGE LOANS--Events of Default," "--Rights Upon Event of Default" and
"DESCRIPTION OF THE CERTIFICATES--Amendment."
Book-Entry Registration
The related Prospectus Supplement may provide that one or more Classes of the
Certificates initially will be represented by one or more certificates
registered in the name of the nominee for The Depository Trust Company, and will
not be registered in the names of the Certificateholders or their nominees.
Because of this, unless and until definitive certificates are issued, beneficial
owners of the Certificates of such Class or Classes will not be recognized by
the Trustee as "Certificateholders" (as that term is to be used in the related
Agreement). Hence, until such time as definitive certificates are issued, the
beneficial owners will be able to exercise the rights of Certificateholders only
indirectly through The Depository Trust Company and its participating
organizations. See "DESCRIPTION OF THE CERTIFICATES--General."
THE DEPOSITOR
Midland Realty Acceptance Corp. was incorporated in the State of Missouri on
May 14, 1996 as a wholly owned, limited purpose finance subsidiary of Midland
Loan Services, L.P. The principal executive offices of the Depositor are located
at 210 West 10th Street, 6th Floor, Kansas City, Missouri 64105. Its telephone
number is (816) 435-5000.
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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. 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 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
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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, subject to certain conditions set forth
therein, to modify, waive or amend certain of the terms of any Mortgage Loan
without the consent of the Trustee or any Certificateholder.
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 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
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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
(i) 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 or (ii) imposed by any taxing
authority which loss, liability or expense is not specifically reimbursable
pursuant to the terms of the Agreement and which results from a breach of the
Agreement (other than a breach with respect to which the Master Servicer or
Special Servicer, as applicable, would have no liability under the standard set
forth in the first sentence of this paragraph) by the Master Servicer or the
Special Servicer, if any, or any of their respective agents. 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
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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 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
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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
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
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of Certificates have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
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.
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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 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
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misrepresentation had occurred, (ii) a Reserve Fund, (iii) a letter of credit or
(iv) some other method. The amount and terms of any such coverage will be set
forth in the Prospectus Supplement.
Mortgagor Bankruptcy Bond
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
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of the beneficiary. The Mortgage Loans (other than Installment Contracts) will
consist of (or, in the case of mortgage pass-through certificates, be supported
by) loans secured by mortgages.
The real property covered by a mortgage is most often the fee estate in land
and improvements. However, a mortgage may encumber other interests in real
property such as a tenant's interest in a lease of land, 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
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related property in the foreclosure of the senior mortgage or satisfies the
defaulted senior loan. As discussed more fully below, in many states a junior
mortgagee may satisfy a defaulted senior loan in full, or may cure such default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. Absent a provision in the senior mortgage
or the existence of a recorded request for notice 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.
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Foreclosure
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage and, by reason thereof, the indebtedness has been
accelerated, 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
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its reasoning. The court in Durrett held that even a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under the federal
Bankruptcy Code, as amended from time to time (11 U.S.C.) (the "Bankruptcy
Code"), and, therefore, could be rescinded in favor of the bankrupt's estate,
if: (i) the foreclosure sale was held while the debtor was insolvent and not
more than one year prior to the filing of the bankruptcy petition; and (ii) the
price paid for the foreclosed property did not represent "fair consideration"
("reasonably 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."
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Rights of Redemption. The purposes of a foreclosure are to enable the
mortgagee to realize upon its security and to bar the mortgagor, and all persons
who have an interest in the property that is subordinate to the mortgage being
foreclosed, from any exercise of their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage has
been sold in accordance with a properly conducted foreclosure sale, those having
an interest that is subordinate to that of the foreclosing 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.
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Leasehold Risks. Certain of the Mortgage Loans may be secured by a mortgage
encumbering the mortgagor's leasehold interest under a ground lease. Leasehold
mortgages are subject to certain risks not associated with mortgages encumbering
a fee ownership interest in the mortgaged property. The most significant of
these risks is that the ground lease creating the leasehold estate could
terminate, thereby depriving the leasehold mortgagee of its security. The ground
lease may terminate if, among other reasons, the ground lessee breaches or
defaults in its obligations under the ground lease or there is a bankruptcy of
the 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
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is never repaid. Other types of significant modifications to the terms of the
mortgage may be acceptable to the bankruptcy court, often depending on the
particular facts and circumstances of the specific case.
Federal bankruptcy law may also interfere with or affect the ability of a
mortgagee to enforce an assignment of rents and leases or a security interest in
hotel revenues related to the mortgaged property. In connection with a
bankruptcy proceeding involving a mortgagor, Section 362 of the Bankruptcy Code
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
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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 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
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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 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
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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 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.
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 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
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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.
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
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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 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.
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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 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."
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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 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
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them of the purchase, holding and disposition of Certificates or the federal tax
consequences to them resulting from their individual circumstances or status or
resulting from their being subject to special treatment under the federal income
tax laws.
Taxation of the REMIC and its Holders
General. If a REMIC election is made with respect to a Series of Certificates,
then the arrangement by which the Certificates of that Series are issued will be
treated as one or more REMICs as long as all of the provisions of the applicable
Agreement are complied with and the statutory and regulatory requirements
concerning REMICs are satisfied. In such a case, Morrison & Hecker L.L.P.,
counsel to the Depositor, will deliver its opinion to the effect that the
arrangement by which the Certificates of that Series are issued will be treated
as one or more REMICs as long as all of the provisions of the applicable
Agreement are complied with and the statutory and regulatory requirements
concerning REMICs are satisfied. Certificates will be designated as "Regular
Interests" or "Residual Interests" in the REMICs, as specified in the related
Prospectus Supplement.
Qualification as a REMIC
In order for a Series of Certificates to qualify as a REMIC, there must be
ongoing compliance on the part of the Trust Fund with the requirements set forth
in the Code. The Trust Fund must fulfill an asset test, which requires that no
more than a de minimis portion of its assets, as of the close of the third
calendar month beginning after the "Startup Day" (which for purposes of this
discussion is the date of issuance of the Certificates) and at all times
thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The REMIC Regulations provide a "safe harbor" pursuant
to which the de minimis requirement is met if at all times the aggregate
adjusted basis of the nonqualified assets is less than one percent of the
aggregate adjusted basis of all the REMIC's assets. An entity that fails to meet
the safe harbor may nevertheless demonstrate that it holds no more than a de
minimis amount of nonqualified assets. A REMIC also must provide "reasonable
arrangements" to prevent its residual interest from being held by "disqualified
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
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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 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
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"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.
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)
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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 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.
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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 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
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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 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
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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.
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
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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 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.
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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 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
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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 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
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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
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
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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.
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.
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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 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
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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 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
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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 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
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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 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.
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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 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
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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 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.
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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.
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.
67
<PAGE>
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.
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
68
<PAGE>
and sales by them of Certificates. Certificateholders should consult with their
legal advisors in this regard prior to any such reoffer and sale.
LEGAL MATTERS
Certain legal matters relating to the Certificates offered hereby will be
passed upon for the Depositor by Morrison & Hecker L.L.P., Kansas City,
Missouri, and for the Underwriters as specified in the related Prospectus
Supplement.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any Class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
69
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Definitions Page
1933 Act..................................................2
1986 Act.................................................54
ADA......................................................48
Agreement.............................................6, 15
Bankruptcy Code......................................38, 40
Cash Flow Bond Method....................................63
CERCLA...............................................13, 42
Certificateholders.......................................16
Certificates...........................................1, 4
Classes...................................................1
Closing Date.............................................21
Code......................................................7
Code Plans...............................................65
Collection Account....................................5, 17
Commission................................................2
Compound Interest Certificates...........................51
Credit Enhancement....................................5, 31
Cut-off Date..........................................6, 16
Department...............................................66
Depositor.................................................1
Disqualified Organization................................59
Distribution Account..................................5, 17
Distribution Date.....................................6, 16
Enhancement Act..........................................68
ERISA.................................................7, 65
ERISA Plans..............................................65
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......................................44
GNMA.....................................................16
Hazardous Materials......................................43
HUD......................................................23
Installment Contracts.................................4, 20
Interest Weighted Certificate........................53, 63
IRS......................................................51
Master Servicer.......................................4, 24
Master Servicer Remittance Date..........................17
Mortgage..........................................4, 20, 34
Mortgage Loan.........................................4, 20
Mortgage Loan File.......................................22
Mortgage Loan Groups.....................................21
Mortgage Loan Schedule...................................22
Mortgage Loan Seller.....................................23
Mortgage Loans............................................1
Mortgage Pool..........................................1, 4
Mortgaged Property....................................4, 20
70
<PAGE>
Mortgagee................................................34
Mortgagor................................................34
Multiple Variable Rate...................................53
NCUA.....................................................46
Negative Adjustment......................................63
Nonresidents.............................................65
Note.....................................................21
Offered Certificates......................................1
OID......................................................51
Pass-Through Certificates................................61
Pass-Through Rate.........................................2
Permitted Investments....................................18
Plans....................................................65
Policy Statement.........................................68
Prepayment Assumption....................................52
Property Protection Expenses.............................17
PTCE.....................................................67
Rating Agency.........................................7, 15
Ratio Strip Certificates.................................62
Registration Statement....................................2
Regular Certificates..................................7, 51
Regular Interests.....................................7, 49
Regulations..............................................66
Relief Act...............................................45
REMIC.....................................................1
REMIC Regulations........................................59
REO Account..............................................17
Reserve Account..........................................15
Reserve Fund.............................................32
Residual Certificate.....................................57
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.....................................51
Special Servicer..........................................4
Special Servicing Fee....................................27
Specially Serviced Mortgage Loans........................24
Startup Day..........................................49, 57
Stripped Certificates....................................61
Subordinate Certificates.................................31
Tiered REMICs............................................50
TIN......................................................64
Title V..................................................46
Title VIII...............................................46
Trust Fund............................................1, 15
Trustee...............................................4, 20
UCC......................................................35
Underwriter's Exemption..................................67
Voting Rights............................................14
71
<PAGE>
No dealer, salesperson or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or the Underwriter. 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-24
Description of the Mortgage Pool ......................S-37
The Mortgage Loan Seller...............................S-60
The Master Servicer ...................................S-60
The Special Servicer ..................................S-61
Description of the Certificates .......................S-61
Yield Considerations...................................S-74
The Pooling and Servicing Agreement ...................S-82
Material Federal Income Tax Consequences ..............S-97
ERISA Considerations ..................................S-99
Legal Investment .....................................S-103
Plan of Distribution .................................S-103
Use of Proceeds...................................... S-104
Legal Matters ........................................S-104
Ratings ..............................................S-104
Index of Significant Definitions .....................S-105
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................ 48
State Tax Considerations................................ 65
ERISA Considerations.................................... 65
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 Commercial
Financing Corp.
Mortgage Loan Seller
Midland Loan Services, L.P.
Servicer
Class __, Class __, Class __, Class __
Commercial Mortgage
Pass-Through Certificates
Series 1996-C1
-------------------------
PROSPECTUS SUPPLEMENT
-------------------------
Prudential Securities Incorporated
July ___, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the SEC
registration and filing fees, are estimated:
SEC Registration Fee...........................$344.83
NASD Filing Fee................................. N/A
*Legal Fees and Expenses...................$260,000.00
*Accounting Fees and Expenses..............$ 70,000.00
*Trustee's Fees and Expenses (including counsel fees)$ 60,000.00
*Blue Sky Qualification Fees and Expenses..$ 15,000.00
*Printing and Engraving Fees...............$ 60,000.00
*Rating Agency Fees........................$650,000.00
*Miscellaneous............................$ 100,000.00
Total....................................$1,215,344.83
*Estimates based on the offering of a single Series
of Certificates
Item 15. Indemnification of Directors and Officers
Section 355 of the General and Business Corporation Law of Missouri
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses, costs and fees (including attorney's fees), judgements, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if the person indemnified acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. If the person indemnified is not wholly successful in such action,
suit or proceeding, but is successful, on the merits or otherwise, in one or
more but less than all claims, issues or matters in such proceeding, he or she
may be indemnified against expenses actually and reasonably incurred in
connection with each successfully resolved claim, issue or matter. In the case
of an action or suit by or in the right of the corporation, no indemnification
may be made in respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine that despite the adjudication of liability such person
is fairly and reasonably entitled to indemnity for such expenses which the court
shall deem proper. Section 355 provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to above or in the defense of any claim,
issue or matter therein, he or she shall be indemnified against expenses
(including attorney's fees) actually and reasonably incurred by him or her in
connection therewith.
Section 355 of the General and Business Corporation Law of Missouri further
provides that a corporation may give any further indemnity, in addition to the
indemnity set forth above to any person who is or was a director, officer,
employee or agent, or to any person who is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, provided such further
indemnity is either (i) authorized, directed, or provided for in the
<PAGE>
articles of incorporation of the corporation or any duly adopted amendment
thereof or (ii) is authorized, directed, or provided for in any bylaw or
agreement of the corporation which has been adopted by a vote of the
shareholders of the corporation, and provided further that no such indemnity
shall indemnify any person from or on account of such person's conduct which was
finally adjudged to have been knowingly fraudulent, deliberately dishonest or
willful misconduct. The Articles of Incorporation of the Registrant contain a
provision requiring the Registrant to indemnify each such person to the extent
his or her conduct is not adjudged to have been knowingly fraudulent,
deliberately dishonest or willful misconduct.
Reference is made to the form of Underwriting Agreement filed as
Exhibit 1.1 hereto for provisions relating to the indemnification of directors,
officers and controlling persons against certain liabilities including
liabilities under the Securities Act of 1933, as amended. Pursuant to the
Underwriting Agreement, the Underwriter will indemnify and hold harmless the
Registrant and each person, if any, who controls the Registrant within the
meaning of Section 15 of the Securities Act of 1933, as amended, or Section 20
of the Securities Act of 1934, as amended, against any and all losses, claims,
damages or liabilities, joint or several, to which they may become liable under
the Securities Act of 1933, as amended, the Securities Act of 1934, as amended,
or other federal or state law or regulation, at common law or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in the prospectus or prospectus supplement or in
any amendment or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading, in
light of the circumstances under which they were made, but only with reference
to written information furnished to the Registrant by or on behalf of the
Underwriter (including in electronic media) specifically for use in connection
with the preparation of the documents referred to in the foregoing indemnity.
Midland Loan Services, L.P. ("Midland") and Prudential Securities
Incorporated have entered into a Securitization Agreement which governs the
disposition of certain mortgage loans originated by Midland or for which an
affiliate of Prudential has provided warehouse financing to acquire such
mortgage loans (the "mortgage loans"). Pursuant to the Securitization Agreement,
Prudential has generally agreed to indemnify and hold harmless the Registrant
and each person, if any, who controls the Registrant within the meaning of
Section 15 of the Securities Act of 1933, as amended, or Section 20 of the
Securities Act of 1934, as amended, against any and all losses, claims, damages
or liabilities, joint or several, to which they may become liable under the
Securities Act of 1933, as amended, the Securities Act of 1934, as amended, or
other federal or state law or regulation, at common law or otherwise, on the
ground that any information furnished by Prudential or any affiliate thereof in
writing specifically for use in connection with the preparation of the documents
provided to potential investors in connection with any disposition of the
mortgage loans contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading.
Unless otherwise specified, the Agreement relating to each Series will
provide that neither the Registrant nor any partner, director, officer, employee
or agent of the Registrant will be liable to the Trust Fund or the
Certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement, or for errors in judgment,
provided, however, that neither the Registrant nor any such person will be
protected against liability for a breach of its representations and warranties
under the Agreement or that would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in the performance of its duties or by
reason of reckless disregard of its obligations and duties thereunder. The
Agreement relating to each Series will further provide that the Registrant and
any director, officer, employee or agent of the Registrant will be entitled to
indemnification by the Trust Fund for any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Certificates,
other than loss, liability or expense (i) incurred by reason of its respective
willful misfeasance, bad faith, fraud or negligence in the performance of duties
thereunder or by reason of reckless disregard of its respective obligations and
duties thereunder or (ii) imposed by any taxing authority which loss, liability
or expense is not specifically reimbursable pursuant to the terms of the
Agreement or which results from a breach (other than a breach with respect to
which the Master Servicer or Special Servicer, as applicable, would have no
liability under the standard set forth in the first sentence of this paragraph)
by the Master Servicer, the Special Servicer or its agents of its respective
obligations under the Agreement.
II-2
<PAGE>
Item 16. Exhibits and Financial Statements
(a) Exhibit
1.1*** Form of Underwriting Agreement.
4.1* Form of Pooling and Servicing Agreement.
5.1** Opinion of Morrison & Hecker L.L.P. as to legality
(including consent of such firm).
8.1** Opinion of Morrison & Hecker L.L.P. as to certain tax
matters (including consent of such firm).
23.1** Consent of Morrison & Hecker L.L.P. (included in
Exhibits 5.1 and 8.1).
24.1* Power of Attorney (included at page II-5).
- ------------------
* Previously filed.
** Filed herewith.
*** To be filed by amendment.
(b) Financial Statements
All financial statements, schedules and historical financial information
have been omitted as they are not applicable.
Item 17. Undertakings
A. Undertaking pursuant to rule 415.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low
or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
and
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in this Registration Statement.
II-3
<PAGE>
(2) That, for the purpose of determining any liability under the Securities Act
of 1933 each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
B. Undertaking Concerning Filings Incorporating
Subsequent Exchange Act Documents by
Reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 (including that the security rating
requirement will be met by the time of sale of any securities registered
hereunder) and has duly caused this Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Kansas City, State of Missouri, on the 11th day of
July, 1996.
MIDLAND REALTY ACCEPTANCE CORP.
By: /s/ Leon E.
Bergman
Leon E. Bergman, Executive Vice
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Position Date
/s/ Alan L. Atterbury* July 11, 1996
Alan L. Atterbury Director and President
(Principal Executive Officer)
/s/ Leon E. Bergman July 11, 1996
Leon E. Bergman Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Clarence A. Krantz* July 11, 1996
Clarence A. Krantz Director
/s/ William V. Morgan* July 11, 1996
William V. Morgan Director
*By:/s/ Leon E. July 11, 1996
Bergman
Leon E. Bergman,
Attorney in Fact
DARIS0FE.KCM/pc
II-5
MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City, Missouri 64108-4606
Telephone 816-691-2600
Telefax 816-474-4208
July 2, 1996
Midland Realty Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
Re: Mortgage Pass-Through Certificates
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-3 (Registration No. 33-03885) (the
"Registration Statement") to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"). The
Registration Statement covers Mortgage Pass-Through Certificates
("Certificates") to be sold by Midland Realty Acceptance Corp. ("Seller") in one
or more series (each, a "Series") of Certificates. Each Series of Certificates
will be issued under a pooling and servicing agreement ("Pooling and Servicing
Agreement") between Seller and a servicer (the "Servicer"), a trustee (the
"Trustee") and possibly a special servicer (the "Special Servicer") and a fiscal
agent (the "Fiscal Agent") to be identified in the Prospectus Supplement for
such Series of Certificates. A form of Pooling and Servicing Agreement is
included as an exhibit to the Registration Statement. Capitalized terms used and
not otherwise defined herein have the respective meanings given them in the
Registration Statement or the Accord identified in the following paragraph.
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this Opinion Letter should be
read in conjunction therewith. The opinions expressed herein are given only with
respect to the present status of the substantive laws of the state of Missouri
(not including the choice-of-law rules under Missouri law). We express no
opinion as to any matter arising under the laws of any other jurisdiction.
Washington, D.C./Phoenix, Arizona/Overland Park, Kansas/Wichita, Kansas
<PAGE>
Midland Realty Acceptance Corp.
July 2, 1996
Page 2
In rendering the opinions set forth below, we have examined and relied on
the following: (1) the Registration Statement and the Prospectus and the form of
Prospectus Supplement included therein; (2) the form of the Pooling and
Servicing Agreement included as an exhibit to the Registration Statement; and
(3) such other documents, materials, and authorities as we have deemed necessary
in order to enable us to render our opinions set forth below.
Based on and subject to the foregoing and other qualifications set forth
below, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of Certificates has
been duly and validly authorized, executed and delivered by the Seller, the
Servicer, the Trustee and, if applicable, the Special Servicer and the Fiscal
Agent, such Pooling and Servicing Agreement will constitute a valid and legally
binding agreement of Seller, enforceable against Seller in accordance with its
terms.
2. When (a) a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by the Seller, the
Servicer, the Trustee and, if applicable, the Special Servicer and the Fiscal
Agent, (b) the Mortgage Loans and other consideration constituting the Trust
Fund for the Series have been deposited with the Trustee, (c) the Certificates
of such Series have been duly executed, authenticated, delivered and sold as
contemplated in the Registration Statement and (d) the consideration for the
sale of such Certificates has been fully paid to the Seller, such Certificates
will be legally and validly issued, fully paid and nonassessable, and the duly
registered holders of such Certificates will be entitled to the benefits of such
Pooling and Servicing Agreement.
The General Qualifications apply to the opinions set forth in paragraphs 1
and 2 above, and in addition, such opinions are subject to the qualification
that certain remedial, waiver and other similar provisions of a Pooling and
Servicing Agreement for a Series of Certificates or of the Certificates of such
Series may be rendered unenforceable or limited by applicable laws, regulations
or judicial decisions, but such laws, regulations and judicial decisions will
not render such Pooling and Servicing Agreement or such Certificates invalid as
a whole and will not make the remedies available thereunder inadequate for the
practical realization of the principal benefits intended to be provided thereby,
except for the economic consequences of any judicial, administrative or other
delay or procedure which may be imposed by applicable law.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
This consent is not to be construed as an admission that we are a person whose
consent is required to be filed with the Registration Statement under the
provisions of the Act.
Very truly yours,
MORRISON & HECKER L.L.P.
/s/ Kenneth S. Starkey, Jr.
Kenneth S. Starkey, Jr.
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MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City, Missouri 64108-4606
Telephone 816-691-2600
Telefax 816-691-4208
July 2, 1996
Midland Realty Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
Re: Mortgage Pass-Through Certificates
Ladies and Gentlemen:
We have acted as your counsel in connection with the proposed issuance of
Mortgage Pass-Through Certificates (the "Certificates") pursuant to the
Registration Statement on Form S-3 (Registration No. 33-03885) (the
"Registration Statement") to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"). The
Registration Statement covers Mortgage Pass-Through Certificates
("Certificates") to be sold by Midland Realty Acceptance Corp. ("Seller") in one
or more series (each, a "Series") of Certificates. Each Series of Certificates
will be issued under a pooling and servicing agreement ("Pooling and Servicing
Agreement") between the Seller, a servicer, a trustee and possibly a special
servicer and a fiscal agent to be identified in the Prospectus Supplement for
such Series of Certificates. A form of a Pooling and Servicing Agreement is
included as an exhibit to the Registration Statement. Capitalized terms used and
not otherwise defined herein have the respective meanings given them in the
Registration Statement.
In rendering the opinion set forth below, we have examined and relied on
the following: (1) the Registration Statement and the Prospectus and the form of
Prospectus Supplement included therein; (2) the form of the Pooling and
Servicing Agreement included as an exhibit to the Registration Statement; and
(3) such other documents, materials, and authorities as we have deemed necessary
in order to enable us to render our opinion set forth below.
As your counsel, we have advised you with respect to certain federal income
tax aspects of the proposed issuance of the Certificates of each Series. Such
advice has formed the basis for the description of material federal income tax
consequences for holders of the
Washington, D.C./Phoenix, Arizona/Overland Park, Kansas/Wichita,
Kansas
<PAGE>
Midland Realty Acceptance Corp.
July 2, 1996
Page 2
Certificates that appears under the heading "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" in the Prospectus. Such descriptions do not purport to discuss all
possible federal income tax ramifications of the proposed issuance of the
Certificates, but, with respect to those federal income tax consequences that
are discussed, in our opinion, the description is accurate in all material
respects.
This opinion is based on the facts and circumstances set forth in the
Prospectus and the form of Prospectus Supplement and in the other documents
reviewed by us. Our opinion as to the matters set forth herein could change with
respect to a particular Series of Certificates as a result of changes in facts
and circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. Consequently, we express no
such opinion with respect to any particular Series of Certificates. As the
Registration Statement contemplates multiple Series of Certificates with
numerous different characteristics, the particular characteristics of a Series
of Certificates must be considered in evaluating whether such opinion would be
relevant under the circumstances.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to our firm under the heading
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus and the Prospectus
Supplement. This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Act.
Very truly yours,
MORRISON & HECKER L.L.P.
/s/ Ben W. Hobert
Ben W. Hobert
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