As filed with the Securities Exchange Commission on November 24, 1997
Registration No. 333-13725
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------------------
Amendment No. 4
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
COMMERCIAL MORTGAGE ACCEPTANCE CORP.
(Exact name of registrant as specified in its charter)
Missouri 43-1681393
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Commercial Mortgage 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
Commercial Mortgage 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.
Morrison & Hecker L.L.P.
2600 Grand Avenue
Kansas City, Missouri 64108
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement as determined by
market conditions.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box. X
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering.
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box.
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=====================================================================================
Title of Amount to be Proposed maximum Proposed maximum Amount of
securities to registered offering price aggregate offering registration fee
be registered per security <F1> price<F1>
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage
Pass-Through $730,000,000 100% $730,000,000 $221,253.92<F2>
Certificates,
issued in
series
===========================================================================
<FN>
<F1>Estimated solely for the purpose of calculating the registration fee.
<F2>$344.83 of the registration fee has been previously paid.
</FN>
</TABLE>
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<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 FrontCover Page**
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages**
3. Summary Information, Risk
Factors and Ratio of Earnings
to Fixed Charges............. Risk Factors; The Depositor**
4. Use of Proceeds.............. Use of Proceeds**
5. Determination of Offering
Price*....................... *
6. Dilution..................... *
7. Selling Security Holders..... *
8. Plan of Distribution......... Plan of Distribution**
9. Description of Securities to
Be Registered ............... Outside Front Cover Page;
Description of the Certificates;
The Mortgage Pools; Servicing of
the Mortgage Loans; Enhancement;
Certain Legal Aspects of the
Mortgage Loans; Material Federal
Income Tax Consequences; ERISA
Considerations; Legal
Investment**
10. Interest of Named Experts
and Counsel ................ *
11. Material Changes............. *
12. Incorporation of Certain
Information by Reference .... Incorporation of Certain Information
by Reference
13. Disclosure of Commission
Position on Indemnification for
Securities Act Liabilities... *
- -----------------
* Omitted, since item is not applicable or answer is negative.
** To be completed or provided from time to time by Prospectus
Supplement.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains (i) a base prospectus to be used for
transactions involving mortgage loans secured by multifamily and commercial
properties containing concentrations of general commercial properties (which
consist of office, retail, including shopping centers, industrial, warehouse,
mini-warehouse and similar types of commercial properties, including commercial
properties that mix the foregoing property types) and multifamily properties
(which consist of apartments, congregate care facilities and mobile home parks)
and (ii) alternate pages to the base prospectus for transactions involving
mortgage loans secured by commercial and multifamily properties containing
concentrations of (a) general commercial properties, multifamily properties and
hotels, (b) general commercial properties, multifamily properties and nursing
homes and (c) general commercial properties, multifamily properties, hotels and
nursing homes.
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES
SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER,
SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS SUPPLEMENT, DATED NOVEMBER 24, 1997
SUBJECT TO COMPLETION
PROSPECTUS SUPPLEMENT
(To Prospectus dated November __, 1997)
$[ ] (Approximate)
Commercial Mortgage Acceptance Corp. (Depositor)
________________________ (Mortgage Loan Seller)
Midland Loan Services, L.P. (Master Servicer)
Commercial Mortgage Pass-Through Certificates, Series _______
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 CERTIFICATES--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 _______________________ (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 , 1997 (the "Delivery Date"), against payment therefor in immediately
available funds.
November __, 1997
<PAGE>
(continued from previous page)
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. The Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of this Web site is http://www.sec.gov.
S-2
<PAGE>
SUMMARY OF PROSPECTUS
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.
- ----------------------------------------------------------------
Approximate Approximate
Percent Credit
of Support
Total
----------------------------------------------
% Class [ ] Class A Ratings: ( ) %
% Excess interest Class B Ratings: ( ) %
on Class A through
Class [ ]
% Class [ ] Ratings: ( ) %
Ratings:
( )
%
---------------------------------------------------
% Class [ ] Ratings: ( )
---------------------------------------------------
% Class [ ] Interest only Class [ ] Principal only %
---------------------------------------------------
Not offered hereby: Classes [ ]
Ratings: ( )
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
==========================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Initial
Aggregate
Certificat
Principal
or Weighted Principal
Rating Notional Average Window
by Amount % of Pass-Through Life (years)<F1>
Class ( ) Aggregate Total Description Rate (years)<F1> Window
- ------------------------------------------------------------------------------------------
Senior Certificates
- ------------------------------------------------------------------------------------------
A $ % %
- ------------------------------------------------------------------------------------------
[EC]
- ------------------------------------------------------------------------------------------
Subordinate Certificates
- ------------------------------------------------------------------------------------------
B $ % %
- ------------------------------------------------------------------------------------------
[ ] $ % %
- ------------------------------------------------------------------------------------------
[ ] $ % %
- ------------------------------------------------------------------------------------------
[ ] $ % %
- ------------------------------------------------------------------------------------------
[ ] $ % %
- ------------------------------------------------------------------------------------------
[PO] $ % Principal Only %
- ------------------------------------------------------------------------------------------
Interest
[IO] $ N/A Only % N/A N/A
==========================================================================================
<FN>
<F1> Based respectively on Scenario 2, which assumes a 0% CPR, no defaults
and an Auction in December, 2007, and Scenario 1, which assumes a 0%
CPR and no defaults. See "YIELD AND MATURITY CONSIDERATIONS--Weighted
Average Life" herein.
</FN>
</TABLE>
S-3
<PAGE>
Title of
Certificates....... Commercial Mortgage Acceptance Corp. Commercial
Mortgage Pass-Through Certificates, Series ______ (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 Certificates are being issued pursuant to a Pooling and
Servicing Agreement dated as of [________________________],
1997 (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"), _______________, as
trustee (the "Trustee"), and _______________, 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.
The Certificates will represent beneficial ownership
interests in a trust fund (the "Trust Fund") to be created
by Commercial Mortgage 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
S-4
<PAGE>
the Mortgage Loans and the related Mortgaged Properties are
described under "DESCRIPTION OF THE MORTGAGE POOL" herein.
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 [ ], 1997 (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.
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.
Depositor.......... Commercial Mortgage Acceptance Corp., a Missouri corporation
and wholly owned subsidiary of Midland Loan Services, L.P.
(the "Master Servicer"). See "THE DEPOSITOR" in the
Prospectus.
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............ _____________, a ________________. See "THE POOLING AND
SERVICING AGREEMENT--The Trustee" herein.
Fiscal Agent....... _______________, a __________________, and the corporate
parent of the Trustee. See "THE POOLING AND SERVICING
AGREEMENT--The Fiscal Agent" herein.
Cut-off Date....... [______________________], 1997 [(except with respect to
[______________________] loans for which the Cut-off Date is
[ ]), 1997].
S-5
<PAGE>
Closing Date....... On or about [____________], 1997.
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 [___________________], 1997. As used
herein, a "Business Day" is any day other than a Saturday,
Sunday or a day in which banking institutions in the States
of New York, Missouri or Illinois are authorized or
obligated by law, executive order or governmental decree to
close.
Scheduled Final
Distribution Date.. Scheduled
Final
Class Designation Distribution Date
----------------- ------------------
Class A...............
Class [EC]............
Class B...............
Class [ ].............
Class [ ].............
Class [ ].............
Class [PO]............
Class [IO]............
The Scheduled Final Distribution Dates set forth above have
been determined on the basis of the assumptions described in
"DESCRIPTION OF THE CERTIFICATES--Scheduled Final
Distribution Date" herein.
Rated Final
Distribution Date.. As to each Class of Certificates, _______________.
Record Date........ With respect to each Distribution Date, the close of
business on the last Business Day of the month preceding
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 [ ], 1997 on the day after
the Cut-off Date) and ending on the Determination Date in
the month in which such Distribution Date occurs.
S-6
<PAGE>
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 [______________], 1997.
Due Date.......... With respect to any Collection Period and Mortgage Loan,
the date on which scheduled payments are due on such
Mortgage Loan (without regard to grace periods), which date,
for [__] 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.] The Residual Certificates are not
entitled to distributions of interest or principal. On each
Distribution Date, each Class of Certificates [(other than
the Class [EC]
S-7
<PAGE>
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 Amountfor
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 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
S-8
<PAGE>
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
Payments allocable to principal of any Mortgage Loan that
was liquidated during the related Collection Period; (v) the
principal component of all Balloon Payments received during
the related Collection Period; (vi) all other Principal
Prepayments received in the related Collection Period; and
(vii) any other full or partial recoveries in respect of
principal, including Insurance Proceeds, Condemnation
Proceeds, Liquidation Proceeds and Net REO Proceeds.
S-9
<PAGE>
See "DESCRIPTION OF THE CERTIFICATES--Distributions" herein.
Yield
Considerations..... 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 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.
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
S-10
<PAGE>
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
AGREEMENT--Advances" herein. If the Master Servicer fails to
make a required P&I Advance, the Trustee, acting in
accordance with the servicing standard, will be required to
make such P&I Advance, and if the Trustee fails to make a
required P&I Advance, the Fiscal Agent will be required to
make such P&I Advance. See "THE POOLING AND SERVICING
AGREEMENT--the Fiscal Agent" herein.
Subordination...... As a means of providing a certain amount of protection to
the holders of the Class A 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.
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.] 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
S-11
<PAGE>
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, 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
S-12
<PAGE>
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 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
CERTIFICATES--Distributions" herein.]
S-13
<PAGE>
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 "noneconomic residual interests," certain
transfers of which may be disregarded for federal income tax
purposes.
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.
ERISA
Considerations..... The United States Department of Labor has issued to the
Underwriter an individual prohibited transaction exemption,
Prohibited Transaction Exemption [_____], 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
S-14
<PAGE>
("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 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
S-15
<PAGE>
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.
Other Information.. 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.
Collateral Overview:
Loan Details....... See Annex A hereto for certain characteristics of Mortgage
Loans on a loan-by-loan basis. All numerical information
provided herein with respect to the Mortgage Loans is
provided on an approximate basis. All weighted average
information regarding the Mortgage Loans reflects weighting
of the Mortgage Loans by their Cut-off Date Principal
Balances. The "Cut-off Date Principal Balance" of each
Mortgage Loan is equal to the unpaid principal balance
thereof as of the Cut-off Date, after application of all
payments of principal due on or before such date, whether or
not received. See also "DESCRIPTION OF THE MORTGAGE POOL"
for additional statistical information regarding the
Mortgage Loans.
Characteristics
Aggregate Cut-off Date Principal Balance.... $
Number of Mortgage Loans....................
Weighted Average Mortgage Rate %
Weighted Average Remaining Term to Maturity.
Weighted Average DSCR (1)...................
Average Mortgage Loan Balance............... $
Balloon Mortgage Loans...................... %
_______________
(1) Debt Service Coverage Ratio ("DSCR") is calculated based on the ratio of
Underwritten Cash Flow to the Annual Debt Service. For more information on
the Debt Service Coverage Ratios, see "DESCRIPTION OF THE MORTGAGE
POOL--Certain Characteristics of the Mortgage Pool" herein.
S-16
<PAGE>
Cut-off Date Principal Balances
% by Cut-off Number
Date Principal of
Balance Mortgage Loans
Cut-off Date Principal Balance
$ 500,000- $ 999,999..........
$ 1,000,000-$ 1,999,999..........
$ 2,000,000-$ 2,999,999..........
$ 3,000,000-$ 3,999,999..........
$ 4,000,000-$ 4,999,999..........
$ 5,000,000-$ 5,999,999..........
$ 6,500,000-$ 6,999,999..........
$ 7,000,000-$ 7,999,999..........
$ 8,000,000-$ 8,999,999..........
$ 9,000,000-$ 9,999,999..........
$10,000,000-$10,999,999..........
$11,000,000-$11,999,999..........
$12,000,000-$12,999,999..........
$16,000,000-$16,999,999..........
$17,000,000-$17,999,999..........
$27,000,000-$27,999,999..........
Total
Geographical Distribution
% by Cut-off Number
Date Principal of
Balance Mortgage Loans
Jurisdiction
.................................
.................................
.................................
.................................
.................................
.................................
.................................
Other (1)...........................
Total
(1) No other jurisdiction has Mortgage Loans aggregating more than ___% of the
Initial Pool Balance.
S-17
<PAGE>
Debt Service Coverage Ratios (1)
% by Cut-off Number
Date Principal of
Balance Mortgage Loans
Range of Debt Service Coverage Ratios
1.15-1.19...........................
1.20-1.24...........................
1.25-1.29...........................
1.30-1.34...........................
1.35-1.39...........................
1.40-1.44...........................
1.45-1.49...........................
1.50-1.54...........................
1.55-1.59...........................
1.60-1.64...........................
2.45-2.49...........................
2.70-2.74...........................
Total
(1) Calculated based on the ratio of Underwritten Cash Flow to Annual Debt
Service. See "DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of
the Mortgage Pool" herein for more information relating to the calculation
of debt service coverage ratios.
S-18
<PAGE>
Loan to Value Ratios
% by Cut-off Number
Date Principal of
Balance Mortgage Loans
Range of Loan to Value Ratios
30.0% to less than 35.0%............
35.0% to less than 40.0%............
40.0% to less than 45.0%............
50.0% to less than 55.0%............
55.0% to less than 60.0%............
60.0% to less than 65.0%............
65.0% to less than 70.0%............
70.0% to less than 75.0%............
75.0% to less than 80.0%............
80.0% to less than 85.0%............
Total
____________
Weighted Average DSCR
S-19
<PAGE>
Property Types
% by Cut-off Number
Date Principal of
Balance Mortgage Loans
Property Types
Congregate Care.....................
Hotel...............................
Industrial..........................
Industrial/Warehouse................
Mini Warehouse......................
Mixed Use...........................
Mobile Home Park....................
Multifamily.........................
Office..............................
Office/R&D..........................
Office/Retail.......................
Office/Warehouse....................
Retail, Anchored....................
Retail, Factory Outlet..............
Retail, Single Tenant...............
Retail, Unanchored..................
Total
Maturity Years
% by Cut-off Number
Date Principal of
Balance Mortgage Loans
Year
Total
S-20
<PAGE>
Delinquency Status as of [___________]
% by Cut-off Number
Date Principal of
Balance Mortgage Loans
Status
S-21
<PAGE>
Prepayment Lockout/Premium Analysis <F1>
Percentage of Mortgage Pool by Prepayment
Restriction Assuming No Prepayments
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Prepayment Restrictions
- -----------------------
Lockout.................
Greater of Yield
Maintenance or
Percentage Premium of:
5.00% or greater.....
4.00% to 4.99%.......
3.00% to 3.99%.......
2.00% to 2.99%.......
1.00% to 1.99%.......
0.00% to 0.99%.......
Total of Yield
Maintenance............
Total of Yield
Maintenance and
Lockout................
percentage Premium:
5.00% or greater.....
4.00 to 4.99%........
3.00 to 3.99%........
2.00 to 2.99%........
1.00 to 1.99%........
Total with Percentage
Premium................
Open....................
Total...................
% of Initial Pool
Balance<F2>............
_____________________
<FN>
<F1> This table sets forth an analysis of the percentage of the declining
balance of the Mortgage Pool that, on [_______], in each of the years
indicated, will be within a Lockout Period or in which Principal
Prepayments must be accompanied by the indicated Prepayment Premium or
yield maintenance charge. See "DESCRIPTION OF THE MORTGAGE POOL--Certain
Terms and Conditions of the Mortgage Loans--Prepayment Provisions" for the
assumptions used in preparing this table.
<F2> Represents the approximate percentage of the Initial Pool Balance that will
remain outstanding at the indicated date based upon the assumptions used in
preparing this table.
</FN>
</TABLE>
S-22
<PAGE>
[Description will vary based on the particular Mortgage Pool.]
RISK FACTORS
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.
S-23
<PAGE>
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 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.
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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 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
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hazardous substances or other pollutants or contaminants or will remain so in
the future. See "DESCRIPTION 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
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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. See "DESCRIPTION OF THE MORTGAGE POOL--Concentration of Mortgage
Loans and Borrowers" herein.
[Inability to Verify Underwriting Standards; No Reunderwriting of Mortgage
Loans
[Some][All] of the Mortgage Loans included in the Trust Fund were
originated by entities unaffiliated with the Depositor. The Depositor has not
been able to verify the underwriting standards used to originate [some][all] of
these Mortgage Loans because [they were purchased from Sellers that had
originally acquired the Mortgage Loans in the open market][they were originated
over a long period of time pursuant to varying underwriting standards which
cannot now be confirmed]. [In addition, the Depositor has been unable to verify
the originator for Mortgage Loans #___, #___ and #___.]
The underwriting standards used to originate the aforesaid Mortgage Loans
may be different and/or less stringent than the underwriting standards used by
affiliates of the Depositor. These Mortgage Loans, therefore, may have a higher
rate of delinquency than mortgage loans originated by affiliates of the
Depositor.
The Depositor has not reunderwritten the Mortgage Loans. Instead, the
Depositor has relied on the representations and warranties made by the
applicable Seller, and the applicable Seller's obligation to repurchase a
Mortgage Loan in the event that a representation or warranty was not true when
made. See "DESCRIPTION OF THE MORTGAGE POOL--Representations and Warranties;
Repurchase" herein. These representations and warranties do not cover all of the
matters that the Depositor would review in underwriting a mortgage loan and
should not be viewed as a substitute for reunderwriting the Mortgage Loans. If
the Depositor had reunderwritten the Mortgage Loans, it is possible that the
reunderwriting process may have revealed problems with a Mortgage Loan not
covered by a representation or warranty. In addition, no assurance can be given
that the applicable Seller will be able to repurchase a Mortgage Loan if a
representation or warranty has been breached. See "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchase" 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
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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.
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
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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 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
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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.]
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
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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 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
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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 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
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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 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
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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 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
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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
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
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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 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.
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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 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] %
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[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 (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
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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]
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
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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 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.
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<PAGE>
(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.
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
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<PAGE>
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
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:
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
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<PAGE>
<TABLE>
<CAPTION>
Prepayment Lock-out/Premium Analysis <F1>
Percentage of Mortgage Pool by Prepayment
Restriction Assuming No Prepayments
___________________________________________________________________________________________________
Current 12 Mo. 24 Mo. 36 Mo. 48 Mo. 60 Mo. 72 Mo. 84 Mo. 96 Mo. 108 Mo. 120
_______ ______ ______ ______ ______ ______ ______ ______ ______ ______ ______
Prepayment Restrictions 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
_______________________ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____ ____
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Mortgage Pool Balance
(in millions)
% of Initial Pool
Balance<F2>
____________________
<FN>
<F1> This table sets forth an analysis of the percentage of the declining
balance of the Mortgage Pool that, on __________ ___, 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.
<F2> 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.
</FN>
</TABLE>
Changes in Mortgage Pool Characteristics
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for
scheduled principal payments due on the Mortgage Loans on or before the Cut-off
Date. Prior to the issuance of the Certificates, one or more Mortgage Loans may
be removed from the Mortgage Pool if the Depositor deems such removal necessary
or appropriate or if it is prepaid. A limited number of other mortgage loans may
be included in the Mortgage Pool prior to the issuance of the Certificates,
unless including such mortgage loans would materially alter the characteristics
of the Mortgage Pool as described herein. Accordingly, the range of Mortgage
Rates and maturities, as well as the other characteristics of the Mortgage Loans
constituting the Mortgage Pool at the time the Certificates are issued may vary
from those described herein.
A Current Report on Form 8-K (the "Form 8-K") will be filed, together with
the Pooling and Servicing Agreement, with the Securities and Exchange Commission
within fifteen days after the initial issuance of the Certificates. The Form 8-K
will be available to Certificateholders of the related Series
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<PAGE>
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 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
S-47
<PAGE>
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 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
S-48
<PAGE>
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 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.
S-49
<PAGE>
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 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,
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<PAGE>
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. 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.
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<PAGE>
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].
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
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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
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
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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 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
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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, 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.
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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.
[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.
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[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
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.
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===================================================================
Cut-off
Lease Date
Type of Expiration Comments Principal
Loan # Property Name Lease Date Balance
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
- -------------------------------------------------------------------
===================================================================
[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.]
[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.]
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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
Description to be provided.
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 [ ], 199_, 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.
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The following delinquency tables set forth information concerning the
delinquency experience on commercial and multi-family mortgage loans serviced by
the Master Servicer for commercial mortgage-backed securities transactions (the
"CMBS Portfolio"). The CMBS Portfolio does not include mortgage loans included
in distressed RTC portfolios.
As of December 31, As of December 31, As of December 31,
1994 1995 1996
__________________ __________________ __________________
By By By
By Dollar By Dollar By Dollar
No.of Amount No.of Amount No.of Amount
Loans of Loans Loans of Loans Loans of Loans
(Dollar amounts in thousands)
Total Portfolio.... 118 $470,415 651 $1,899,207 2,782 $6,557,024
===== ========= ===== =========== ===== ==========
Period of
delinquency(1)
30 to 59 days. 16 $ 47,282 16 $ 80,888 198 89,419
60 to 89 days. -- -- 3 1,372 17 10,479
90 days or
more(2)...... 11 83,821 6 49,607 18 33,898
----- --------- ----- --------- ---- ---------
Total delinquent
loans............ 27 131,103 25 $ 131,866 233 $ 133,795
===== ========= ===== ========== ==== =========
Percent of
portfolio.......... 23% 28% 4% 7% 8% 2%
As of March 31, As of March 31,
1996 1997
__________________ __________________
By By
By Dollar By Dollar
No.of Amount No.of Amount
Loans of Loans Loans of Loans
(Dollar amounts in thousands)
Total Portfolio.............. 1,312 $4,172,418 2,866 $7,160,214
===== ========== ===== ==========
$ 11,469 318 $ 110,821
Period of delinquency(1)
30 to 59 days........... 6 -- 31 20,859
60 to 89 days........... --
90 days or more(2)...... 5 6,244 24 35,560
----- ---------- ----- ----------
Total delinquent loans....... 11 $ 17,714 373 $ 167,240
===== ========== ===== ==========
Percent of portfolio......... 1% * 13% 2%
____________________
*Less than 1%.
(1) The indicated periods of delinquency are based on the number of days past
due on a contractual basis, based on a 30-day month. No mortgage loan is
considered delinquent for these purposes until the monthly anniversary of
its contractual due date (e.g., a mortgage loan with a payment due on
January 1 would first be considered delinquent on February 1). The
delinquencies reported above were determined as of the dates indicated.
(2) Includes pending foreclosures.
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The following delinquency tables set forth information concerning the
delinquency experience on commercial and multi-family mortgage loans serviced by
the Master Servicer for commercial mortgage-backed securities transactions
sponsored by the RTC (the "RTC Portfolio").
As of December 31, As of December 31, As of December 31,
1994 1995 1996
__________________ __________________ __________________
By By By
By Dollar By Dollar By Dollar
No.of Amount No.of Amount No.of Amount
Loans of Loans Loans of Loans Loans of Loans
(Dollar amounts in thousands)
Total Portfolio.... 8,328 $3,423,678 9,408 $4,290,220 7,870 $3,544,352
===== ========== ===== =========== ===== ==========
Period of
delinquency(1)
30 to 59 days. 556 $ 214,230 314 $ 130,974 91 42,771
60 to 89 days. 186 98,979 128 69,046 54 29,685
90 days or
more(2)...... 595 343,983 486 311,873 328 175,568
----- ---------- ----- ---------- ---- ---------
Total delinquent
loans............ 1,337 657,192 928 $ 511,894 473 $ 248,024
===== ========= ===== ========== ==== =========
Percent of
portfolio.......... 16% 19% 10% 12% 6% 7%
As of March 31, As of March 31,
1996 1997
__________________ __________________
By By
By Dollar By Dollar
No.of Amount No.of Amount
Loans of Loans Loans of Loans
(Dollar amounts in thousands)
Total Portfolio.............. 9,212 $4,185,913 7,497 $3,307,452
===== ========== ===== ==========
$ 11,469 318 $ 110,821
Period of delinquency(1)
30 to 59 days........... 93 $ 56,451 100 57,094
60 to 89 days........... 58 37,453 43 30,346
90 days or more(2)...... 433 286,580 355 144,892
----- ---------- ----- ----------
Total delinquent loans....... 584 $ 380,484 498 $ 232,332
===== ========== ===== ==========
Percent of portfolio......... 6% 9% 7% 7%
____________________
(1) The indicated periods of delinquency are based on the number of days past
due on a contractual basis, based on a 30-day month. No mortgage loan is
considered delinquent for these purposes until the monthly anniversary of
its contractual due date (e.g., a mortgage loan with a payment due on
January 1 would first be considered delinquent on February 1). The
delinquencies reported above were determined as of the dates indicated.
(2) Includes pending foreclosures.
Based on information published by the FDIC, the percentage of mortgage
loans delinquent 30 to 59 days, 60 to 89 days, and 90 days or more was 2%, 1%
and 9% as of March 31, 1997 for all RTC commercial and multi-family
mortgage-backed securities transactions. The Depositor is not aware of any
similar industry
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wide statistics regarding delinquency experience for non-RTC commercial and
multi-family mortgage-backed certificates.
The delinquency experience set forth above is historical and is based on
the servicing of mortgage loans that may not be representative of the Mortgage
Loans in the Mortgage Pool. Consequently, there can be no assurance that the
delinquency experience on the Mortgage Loans in the Mortgage Pool will be
consistent with the data set forth above. The CMBS Portfolio, for example,
includes mortgage loans having a wide variety of characteristics (including
geographic location and property type) that may not be representative of the
characteristics of the Mortgage Loans in the Mortgage Pool. In addition, most of
the mortgage loans included in the CMBS Portfolio were originated by persons
that are not affiliated with the Master Servicer and were not reunderwritten by
the Master Servicer. These mortgage loans were originated by numerous entities
over a long period of time in accordance with a variety of underwriting policies
and standards, which underwriting standards may be materially different from
those used to underwrite the Mortgage Loans included in the Mortgage Pool.
Furthermore, some of the mortgage loans included in the CMBS Portfolio are being
primary serviced or sub-serviced by third parties.
The CMBS Portfolio includes many mortgage loans which have not been
outstanding long enough to have seasoned to a point where delinquencies would be
fully reflected. In the absence of substantial continuous additions of servicing
for recently originated mortgage loans to the CMBS Portfolio, it is possible
that the delinquency percentages experienced in the future could be
significantly higher than those indicated in the tables above.
It should be noted that if the commercial and/or multi-family real estate
market should experience an overall decline in property values, the actual rates
of delinquencies could be higher than those previously experienced by the Master
Servicer. In addition, adverse economic conditions may affect the timely payment
of scheduled payments of principal and interest on the Mortgage Loans and,
accordingly, the actual rates of delinquencies with respect to the Mortgage
Pool.
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 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]
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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] 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 [_______________], 1997,
(each, a "Distribution Date"). All distributions (other than the final
distribution on any Certificate) will be made by the Trustee to the persons in
whose names the Certificates are registered at the close of business on the last
Business Day of the month preceding the month in which such Distribution Date
occurs (the "Record Date"). Such distributions will be made (i) by wire transfer
of immediately available funds to the account specified by the Certificateholder
at a bank or other entity having appropriate facilities therefor, if such
Certificateholder 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
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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;
(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
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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 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 [____________], 1997 on the day after the Cut-off
Date) and ending on the Determination Date in the month in which such
Distribution Date occurs.
"Determination Date" means the 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 [_____________], 1997.
"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.
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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
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
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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.
"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;
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(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;
(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;
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(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 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;]
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[[_____] [_____________], 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 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.]
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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 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.
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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.
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.
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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.
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
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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.
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
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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 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
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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 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
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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 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
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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
Loan # Property Principal Balloon Property Appraised Balloon Original
Name Balance Balance Type LTV LTV Maturity
- --------------------------------------------------------------------------------
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 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
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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 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).
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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 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 [ ], 1997 (notwithstanding that any
such day is not a Business Day); (vi) there are no additional ongoing Trust Fund
expenses payable out of the Trust Fund other than the Servicing Fee; 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.
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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 [____________________],
1997, then at a rate equal to 0.5% CPR for the 12 months beginning on the Due
Date in [ ], 2001, then at a rate equal to 1.5% CPR for the 24 months beginning
on the Due Date in [ ], 2002, then at a rate equal to 4.2% CPR for the 24 months
beginning on the Due Date in [ ], 2004, then at a rate equal to 5.0% CPR for the
24 months beginning on the Due Date in [ ], 2006, and finally at a rate equal to
15.0% CPR for the period beginning on the Due Date in [ ], 2008. 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.
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 Life1
____________________
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).
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[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 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.
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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 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.
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THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of [ ], 1997 (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 Commercial
Mortgage 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 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.]
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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.
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
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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.
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.
Collection Activities
The Master Servicer proactively seeks to identify and cure potential
delinquencies. The Master Servicer monitors the performance of all loans,
including tracking of the status of outstanding payments due, grace periods and
due dates, and the calculation and assessment of late fees. All collection
activity is fully automated. The Master Servicer has created a customized
collection system that downloads all current loan information from the servicing
system on a daily basis. A variety of delinquency reports are regularly
prepared, and a series of delinquency notice letters is system-generated and
mailed, pursuant to the terms of the Agreement for the applicable Series.
Payment reminder letters are automatically generated and mailed to borrowers at
10 days past due; more strongly worded collection letters are sent at 30 and 60
days past due. Higher-risk mortgage loans, such as those with a large principal
balance or chronic delinquency are flagged on the system and the borrower
receives a telephone call rather than a letter. If there is a Special Servicer
for a Series, a delinquent mortgage loan will be transferred to the Special
Servicer after the passage of a certain number of days specified in the related
Agreement.
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
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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 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
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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
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
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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 ("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
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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 (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,
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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
[__________], 1998 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 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
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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, 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.
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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 CONSE-
QUENCES--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 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).
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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.
Early Termination
The holder of the Class LR Certificates representing greater than a 50%
Percentage Interest of the Class LR Certificates, and, if such holder does not
exercise its option, the Master Servicer and the Depositor, will have the option
to purchase all of the Mortgage Loans and all property acquired in respect of
any Mortgage Loan remaining in the Trust Fund, and thereby effect termination of
the Trust Fund and early retirement of the then outstanding Certificates, on any
Distribution Date on which the aggregate Scheduled Principal Balance of the
Mortgage Loans remaining in the Trust Fund is less than 10% of the aggregate
principal balance of such Mortgage Loans as of the Cut-off Date. The purchase
price payable upon the exercise of such option on such a Distribution Date will
be an amount equal to not less than the greater of (i) the sum of (A) 100% of
the outstanding principal balance of each Mortgage Loan included in the Trust
Fund as of the last day of the month preceding such Distribution Date (less any
Advances previously made on account of principal); (B) the fair market value of
all other property included in the Trust Fund as of the last day of the month
preceding such Distribution Date, as determined by an independent appraiser as
of a date not more than 30 days prior to the last day of the month preceding
such Distribution Date; (C) all unpaid interest accrued on such principal
balance of each such Mortgage Loan (including any Mortgage Loan as to which
title to the related Mortgaged Property has been acquired) at the Mortgage Rate
to the last day of the month preceding such Distribution Date (less any Advances
previously made on account of interest); and (D) unreimbursed Advances with
interest thereon at the Advance Rate, unpaid servicing compensation and unpaid
Trust Fund expenses; or (ii) the aggregate fair market value of the Mortgage
Loans, and all other property acquired in respect of any Mortgage Loan in the
Trust Fund, on the last day of the month preceding such Distribution Date, as
determined by an independent appraiser as of a date not more than 30 days prior
to the last day of the month preceding such Distribution Date, together with one
month's interest thereon at the related Mortgage Rate plus disposition expenses.
See "--Additional Rights of the Residual Certificates" herein.
Auction
On each of (i) the Distribution Date occurring in [ ] 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
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 (the "Auction Agent") to solicit offers from
prospective purchasers, that the Auction Agent reasonably determines possess the
financial ability
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and are otherwise qualified to purchase all of the Mortgage Loans, 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, will notify the
Certificateholders of the anticipated termination of the Trust 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"). Certificateholders will not
receive notice of the auction until the Trustee accepts the highest qualified
bid and will not have a vote in the auction process.
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.
If an auction is completed it will decrease the weighted average life of,
and may affect a holder's yield on, any Certificates for such Series outstanding
on the date of the closing of the auction. In addition, the holders of any such
outstanding Certificates will bear the reinvestment risk associated with such
Certificates. See "YIELD AND MATURITY CONSIDERATIONS."
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
________________, a ______________ with its principal offices in
______________,_________, will act as Trustee pursuant to the Pooling and
Servicing Agreement. The Trustee's corporate trust office is located at
_________________________________.
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
__________________, a ___________________ 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
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Liquidation Proceeds) in respect of such Mortgage Loan. The Master Servicer will
also be entitled to retain as additional servicing compensation (i) all
investment income earned on amounts on deposit in the Reserve Accounts, (to the
extent consistent with applicable law and the related Mortgage Loan documents),
the Collection Account and the Distribution Account, (ii) all amounts collected
with respect to the Mortgage Loans (that are not Specially Serviced Mortgage
Loans) in the nature of late payment charges, late fees, 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-
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stances described in clauses (iii) and (vii), when such circumstances cease to
exist or (c) with respect to the circumstances described in clause (v) above,
when such default is cured; provided, in 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
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with respect to which a REMIC election is made will qualify as a REMIC under the
Internal Revenue Code of 1986 (the "Code") and (ii) (a) the Class A, 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 [____________________]) 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-102
<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
the acquisitions; and (iv) immediately after the acquisition no more than 25% of
the assets of the Plan with
S-103
<PAGE>
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-104
<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
__________________________ (the "Underwriter") has agreed, pursuant to an
Underwriting Agreement dated [ ], 199_ (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.
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.
S-105
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Morrison &
Hecker L.L.P. and for the Underwriter by ________________________.
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-106
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
Definitions Page
1933 Act................................................S-2
[199__] Net Operating Income...........................S-40
ACMs...................................................S-53
ADA..............................................S-30, S-56
Adjusted Annualized Year To Date Net
Operating Income......................................S-41
Advance Rate...........................................S-88
Advances...............................................S-87
Aggregate Certificate Balance..........................S-94
Annual Debt Service....................................S-40
Anticipated Loss.......................................S-87
Appraised Value........................................S-40
Assumed Maturity Date...................................S-1
Assumed Scheduled Payment..............................S-68
Auction Agent..........................................S-94
Auction Fees...........................................S-95
Auction Valuation Date...........................S-12, S-94
Available Funds........................................S-64
Available Funds Allocation.............................S-68
Balloon Amount.........................................S-41
Balloon LTV............................................S-41
Bankruptcy Code..................................S-31, S-32
Beneficial Owners......................................S-73
Book-Entry Certificate.................................S-73
Business Day............................................S-6
Certificate Balance.....................................S-4
Certificate Registrar..................................S-75
Certificates.......................................S-1, S-4
Class A-EC Notional Balance............................S-63
Class Interest Distribution
Amount......................................S-8, S-6, S-66
Class Interest Shortfall...............................S-67
Class [EC] Excess Interest.............................S-66
Class [EC] Notional Balance............................S-66
Class [EC] Pass-Through Rate...........................S-66
Class [IO] Notional Balance............................S-64
Closing Date............................................S-6
Code..................................................S-100
Collection Account.....................................S-88
Collection Period.................................S-6, S-65
Commission..............................................S-2
Condemnation Proceeds..................................S-64
Congregate Care Loan...................................S-37
Congregate Care Property...............................S-37
Constant Prepayment Rate...............................S-80
CPR....................................................S-80
Cross-Collateralized Loans.......................S-30, S-57
Cut-off Date Principal Balance...................S-16, S-37
Cut-off Date............................................S-5
Debt Service Coverage Ratio............................S-40
Default Interest.......................................S-65
Default Rate...........................................S-65
Definitive Certificate.................................S-73
Delivery Date...........................................S-1
Department............................................S-101
Depositor..........................................S-4, S-5
Depository..............................................S-7
Determination Date................................S-7, S-65
Discount Rate..........................................S-71
Disposition Fee........................................S-99
Disqualified Organization.......................S-14, S-104
Distribution Account...................................S-89
Distribution Date.................................S-6, S-63
DSCR.............................................S-16, S-40
DTC................................................S-1, S-7
Due Date................................................S-7
EC Maturity Date........................................S-7
Eligible Bank..........................................S-89
EPA....................................................S-53
ERISA...........................................S-15, S-101
Exemption.............................................S-102
Extension Advisor......................................S-92
Final Recovery Determination...........................S-72
Fiscal Agent.......................................S-4, S-5
Form 8-K...............................................S-46
Hotel Loan.............................................S-37
Hotel Property.........................................S-37
Indirect Participants..................................S-74
Initial Pool Balance...................................S-37
Insurance Proceeds.....................................S-64
Interest Accrual Period...........................S-6, S-67
Lead Paint Act.........................................S-53
Light Industrial/Industrial Loan.......................S-37
Light Industrial/Industrial Property...................S-37
Liquidation Proceeds...................................S-64
Loan Portfolio Analysis System.........................S-95
Loan Purchase Closing Date.............................S-38
Loan-to-Value Ratio....................................S-41
Lower-Tier Regular Interests...........................S-13
Lower-Tier REMIC.......................................S-13
LPAS...................................................S-95
LTV..............................................S-39, S-41
Major Tenant.....................................S-31, S-57
Master Servicer....................................S-4, S-5
Master Servicer Mortgage File..........................S-84
Midland................................................S-59
S-107
<PAGE>
Mobile Home Park Loan..................................S-37
Mobile Home Park Property..............................S-37
Monthly Payment........................................S-65
Mortgage...............................................S-37
Mortgage File..........................................S-84
Mortgage Loan Purchase and Sale
Agreement.............................................S-38
Mortgage Loans....................................S-4, S-37
Mortgage Pool...........................................S-4
Mortgaged Property................................S-4, S-37
Multifamily Loan.......................................S-37
Multifamily Property...................................S-37
Net Mortgage Rate......................................S-67
Net REO Proceeds.......................................S-65
Note...................................................S-37
Notional Balances......................................S-64
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-37
Office/Multifamily/Retail Property.....................S-37
Office/Warehouse Loan..................................S-37
Office/Warehouse Property..............................S-37
OID Regulations.......................................S-100
Originators............................................S-38
P&I Advance......................................S-10, S-86
Participants...........................................S-73
Pass-Through Rate.................................S-7, S-67
Paying Agent...........................................S-74
Percentage Interest....................................S-64
Permitted Investments..................................S-89
Plan............................................S-15, S-101
Pooled Principal Distribution
Amount...........................................S-9, S-67
Pooling and Servicing
Agreement...................................S-4, S-5, S-84
Prepayment Interest Shortfall..........................S-66
Prepayment Interest Surplus............................S-67
Prepayment Premiums....................................S-65
Principal Prepayments..................................S-65
Private Certificates....................................S-5
Property Advances......................................S-87
Property Protection Expenses...........................S-87
Rated Final Distribution Date...........................S-6
Realized Loss..........................................S-72
Record Date............................................S-63
Regular Certificates..............................S-1, S-13
Regulations...........................................S-102
REMIC............................................S-13, S-99
Remittance Date........................................S-86
REO Account............................................S-63
REO Mortgage Loan......................................S-68
REO Property...........................................S-63
Repurchase Price.......................................S-85
Reserve Accounts.......................................S-39
Residual Certificates...................................S-1
Restricted Group...............................S-103, S-104
Retail Loan............................................S-37
Retail Property........................................S-37
Retail/Multifamily Loan................................S-37
Retail/Multifamily Property............................S-37
Retail/Office Loan.....................................S-37
Retail/Office Property.................................S-37
Rules..................................................S-74
Scenarios..............................................S-81
Scheduled Final Distribution Date.......................S-6
Scheduled Principal Balance............................S-72
Self-Storage Loan......................................S-37
Self-Storage Property..................................S-37
Senior Principal Distribution Cross-Over
Date..................................................S-70
Seriously Delinquent Loan..............................S-87
Servicing Fee..........................................S-97
Servicing Fee Rate.....................................S-97
Similar Law...........................................S-101
SMMEA.................................................S-105
Special Servicer.......................S-4, S-5, S-62, S-98
Special Servicing Fee..................................S-99
Specially Serviced Mortgage Loan.......................S-98
Triple Net.............................................S-58
Trust Fund..............................................S-4
Trustee............................................S-4, S-5
Trustee Mortgage File..................................S-84
U.S. Person............................................S-14
Underwriter......................................S-1, S-105
Underwriting Agreement................................S-105
Underwritten Cash Flow.................................S-40
Unscheduled Payments...................................S-65
Updated Appraisal......................................S-91
Upper-Tier REMIC.......................................S-13
USTs...................................................S-54
Voting Rights..........................................S-96
Weighted Average Net Mortgage Rate.....................S-67
Yield Maintenance Loan.................................S-71
Yield Maintenance Period...............................S-71
Zoning Laws......................................S-30, S-56
S-108
<PAGE>
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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A-1
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<CAPTION>
Annex A
Table B: Property Locations and LTVs
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Apprais.
Loan Property Property State Cut-Off Date Appraised Appraised Appraised Balloon Balloon
# Name City Balance Value Date LTV Balance LTV
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A-2
<PAGE>
<TABLE>
<CAPTION>
Annex A
Table C: Collateral Debt Service and YTD or Trailing NOI
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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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A-3
<PAGE>
Annex A
Table C: Collateral Debt Service and YTD or Trailing NOI
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Adjust 95
YTD YTD 9_ Adjusted Ann Annual'd Cash
Loan NOI Mths YTD NOI Flow Financial Comments
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A-4
<PAGE>
Annex A
Table D: Mortgage Loan Terms
<TABLE>
<CAPTION>
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cut-Off- Original
Loan Property Original Date Interest Amort Term Mat. Remain. Remain. Balloon
# Name Balance Balance Rate Term to Mat. Date Amort. Term Balance
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A-5
<PAGE>
Annex A
Table E: Retail Subcategories
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Cut-Off-Date
Loan # Property Name Retail Sub Categories Balance
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Type of Retail % of Cut-Off Date Balance
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A-6
<PAGE>
Annex B
Prepayment Provisions
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Penalty
Prepayment Premium
Cut-Off Yield Premium following
Property Date Lockout Maint. During YM (in % Premium
Loan # Name Balance Period Period YM years) After YM
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B-1
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
VERSION 1: GENERAL COMMERCIAL AND MULTIFAMILY
Preliminary Prospectus dated November 24, 1997, Subject to Completion
Commercial Mortgage Acceptance Corp.
Depositor
Commercial/Multifamily Mortgage Pass-Through Certificates
(Issuable in Series)
Commercial Mortgage 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. (continued on next page)
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. See "RISK FACTORS."
Prospective Investors should consider the material risks discussed herein
under "RISK FACTORS" at page 7 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.
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.
Retain this Prospectus for future reference. This Prospectus may not be
used to consummate sales of the Certificates offered hereby unless accompanied
by a Prospectus Supplement.
The date of this Prospectus is November __, 1997.
<PAGE>
(cover page continued)
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-use
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. See "DESCRIPTION OF THE
CERTIFICATES--General" herein. The percentage of any mixed-use property used for
commercial purposes will be set forth in the Prospectus Supplement. Multifamily
properties (consisting of apartments, congregate care facilities and/or mobile
home parks) and general commercial properties (consisting of retail properties,
office buildings, mini-warehouses, warehouses, industrial properties and/or
including shopping centers, other similar types of properties) will represent
security for a material concentration of the Mortgage Loans in any Trust Fund,
based on principal balance at the time such Trust Fund is formed. See
"DESCRIPTION OF THE MORTGAGE POOL" in the Prospectus Supplement. If so specified
in the related Prospectus Supplement, the Mortgage Pool may also include
installment contracts for the sale of such types of properties. Such mortgage
loans and installment contracts 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. The Mortgage Loans may be
originated by affiliated entities, including Midland Loan Services, L.P. and/or
unaffiliated entities. See "RISK FACTORS." 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 master serviced
by Midland Loan Services, L.P.
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.
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. The Depositor does
not intend to make an application to list any Series of Certificates on a
national securities exchange or quote any Series of Certificates in an automated
quotation system of a registered securities association.
(ii)
<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: Commercial
Mortgage Acceptance Corp., 201 West 10th Street, 6th Floor, Kansas City,
Missouri 64105, Attention: Clarence Krantz, telephone number (816) 435-5000. The
Commission maintains an Internet Web site that contains reports, proxy
information statements and other information regarding registrants that file
electronically with the Commission. The address of such Internet Web site is
http://www.sec.gov.
(iii)
<PAGE>
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 (the "1934 Act"),
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
Certificates. See "FINANCIAL INFORMATION." Requests to the Depositor should be
directed to: Commercial Mortgage Acceptance Corp., 210 West 10th Street, 6th
Floor, Kansas City, Missouri 64105, Attention: Clarence Krantz, 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.
The Depositor intends to apply for relief from the reporting requirements
of Sections 13, 15(d) and 16(a) of the 1934 Act. In lieu of filing the periodic
reports required by those sections, the Master Servicer, on behalf of the
related Trust Fund, will file with the Commission on Form 8-K the monthly
reports and information set forth in the related Prospectus Supplement. See "THE
POOLING AND SERVICING AGREEMENT--Reports to Certificateholders; Available
Information" in the related Prospectus Supplement. The Depositor does not intend
to file periodic reports under the 1934 Act with respect to the related Trust
Fund for any Series of Certificates following the completion of the reporting
period required by Rule 15d-1 under the 1934 Act.
(iv)
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT.........................................(iii)
ADDITIONAL INFORMATION........................................(iii)
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE..............(iv)
REPORTS........................................................(iv)
SUMMARY OF PROSPECTUS........................................... 1
RISK FACTORS.................................................... 7
Limited Liquidity; Lack of Market for Resale................ 7
Limited Assets as Security for Investment in Certificates;
No Personal Liability.................................... 7
Effects of Prepayments on Average Life of Certificates and
Yields................................................... 7
Limited Nature of Ratings................................... 8
Risks Associated with Lending on Income Producing Properties 8
Certain Tax Considerations of Variable Rate Certificates.... 9
Limited Nature of Credit Ratings............................ 10
Potential Inability to Verify Underwriting Standards........ 10
Nonrecourse Mortgage Loans; Limited Recovery................ 11
Inclusion of Delinquent and Non-Performing Mortgage Loans
May Adversely Affect Yields.............................. 11
Junior Mortgage Loans....................................... 11
Balloon Payments............................................ 11
Extensions and Modifications of Defaulted Mortgage Loans;
Additional Servicing Fees................................ 11
Risks Related to the Mortgagor's Form of Entity and
Sophistication........................................... 12
Credit Enhancement Limitations.............................. 12
Risks to Subordinated Certificateholders; Lower Payment
Priority................................................. 13
Taxable Income in Excess of Distributions Received.......... 13
Due-on-Sale Clauses and Assignments of Leases and Rents..... 13
Environmental Risks......................................... 14
ERISA Considerations........................................ 14
Certain Federal Tax Considerations Regarding Residual
Certificates............................................. 14
Special Hazard Losses....................................... 15
Control; Decisions by Certificateholders.................... 15
Book-Entry Registration..................................... 15
THE DEPOSITOR................................................... 16
THE MASTER SERVICER............................................. 16
USE OF PROCEEDS................................................. 16
DESCRIPTION OF THE CERTIFICATES................................. 16
General..................................................... 17
Distributions on Certificates............................... 18
Accounts.................................................... 18
Amendment................................................... 20
Termination................................................. 21
Reports to Certificateholders............................... 21
The Trustee................................................. 21
THE MORTGAGE POOLS.............................................. 21
General..................................................... 21
Assignment of Mortgage Loans................................ 23
Mortgage Underwriting Standards and Procedures.............. 24
Representations and Warranties.............................. 25
SERVICING OF THE MORTGAGE LOANS................................. 26
General..................................................... 26
Collections and Other Servicing Procedures.................. 26
Insurance................................................... 27
Fidelity Bonds and Errors and Omissions Insurance........... 29
Servicing Compensation and Payment of Expenses.............. 29
Advances.................................................... 29
Modifications, Waivers and Amendments....................... 30
Evidence of Compliance...................................... 30
(v)
<PAGE>
Certain Matters With Respect to the Master Servicer, the
Special Servicer, the Trustee and the Depositor.......... 30
Events of Default........................................... 32
Rights Upon Event of Default................................ 32
CREDIT ENHANCEMENT.............................................. 33
General..................................................... 33
Subordinate Certificates.................................... 34
Reserve Funds............................................... 34
Cross-Support Features...................................... 35
Certificate Guarantee Insurance............................. 35
Limited Guarantee........................................... 35
Letter of Credit............................................ 35
Pool Insurance Policies; Special Hazard Insurance Policies.. 35
Surety Bonds................................................ 36
Fraud Coverage.............................................. 36
Mortgagor Bankruptcy Bond................................... 36
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS..................... 36
General..................................................... 36
Types of Mortgage Instruments............................... 37
Personalty.................................................. 37
Installment Contracts....................................... 38
Junior Mortgages; Rights of Senior Mortgagees or
Beneficiaries............................................ 38
Foreclosure................................................. 39
Environmental Risks......................................... 45
Enforceability of Certain Provisions........................ 48
Soldiers' and Sailors' Relief Act........................... 50
Applicability of Usury Laws................................. 50
Alternative Mortgage Instruments............................ 50
Leases and Rents............................................ 51
Secondary Financing; Due-on-Encumbrance Provisions.......... 51
Certain Laws and Regulations................................ 52
Type of Mortgaged Property.................................. 52
Criminal Forfeitures........................................ 52
Americans With Disabilities Act............................. 53
MATERIAL FEDERAL INCOME TAX CONSEQUENCES........................ 53
General..................................................... 53
Taxation of the REMIC and its Certificate Holders........... 53
Qualification as a REMIC ................................... 54
Taxation of Regular Interests............................... 56
REMIC Expenses.............................................. 61
Sale or Exchange of Regular Certificates.................... 62
Taxation of the REMIC....................................... 62
Taxation of Holders of Residual Certificates................ 64
Excess Inclusions........................................... 66
Restrictions on Ownership and Transfer of Residual
Certificates............................................. 66
Mark-to-Market Rules........................................ 68
Administrative Matters...................................... 68
Tax Status as a Grantor Trust............................... 69
Miscellaneous Tax Aspects................................... 73
Tax Treatment of Foreign Investors.......................... 73
STATE TAX CONSIDERATIONS........................................ 74
ERISA CONSIDERATIONS............................................ 75
Prohibited Transactions..................................... 75
LEGAL INVESTMENT................................................ 77
PLAN OF DISTRIBUTION............................................ 77
LEGAL MATTERS................................................... 78
FINANCIAL INFORMATION........................................... 78
RATING.......................................................... 78
(vi)
<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
Definitions is included at the end of this Prospectus.
Title of Certificates...... Commercial/Multifamily Mortgage
Pass-Through Certificates, issuable in
Series Certificates (the "Certificates").
Depositor.................. Commercial Mortgage Acceptance Corp., an
indirect wholly-owned subsidiary of
Midland Loan Services, L.P. See "THE
DEPOSITOR."
Master Servicer............ Midland Loan Services, L.P., a Missouri
limited partnership. 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-use property, and related property
and interests (each such interest or
property, as the case may be, a "Mortgaged
Property"). Multifamily properties
(consisting of apartments, congregate care
facilities and/or mobile home parks) and
general commercial properties (consisting
of retail properties, including shopping centers,
office buildings, mini-warehouses, warehouses,
industrial properties and/or other similar types of
properties) will represent security for a
material concentration of the Mortgage
Loans in any Trust Fund, based on
principal balance at the time such Trust
Fund is formed. Each such mortgage loan or
Installment Contract interest is herein referred
to as a "Mortgage Loan." The Mortgage Loans will
not be guaranteed or insured by the
1
<PAGE>
Depositor or any of its affiliates. The
Prospectus Supplement will indicate
whether the Mortgage Loans will be
guaranteed or insured by any governmental
agency or instrumentality or other
person. The Mortgage Loans will have the
additional characteristics described under
"THE MORTGAGE POOLS" herein and
"DESCRIPTION OF THE MORTGAGE POOL" in the
related Prospectus Supplement. All
Mortgage Loans will have been purchased,
either directly or indirectly, by the
Depositor on or before the date of initial
issuance of the related Series of
Certificates.
All Mortgage Loans will be of one or more
of the following types: Mortgage Loans
with fixed interest rates; Mortgage Loans
with adjustable interest rates; 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; and Mortgage Loans that
provide for recourse against the other
assets of the related mortgagors.
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.
The Depositor will not originate any
Mortgage Loan, unless provided in the
Prospectus Supplement; however, some or
all of the Mortgage Loans may be
originated by affiliates of the
Depositor.
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
2
<PAGE>
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." A Certificate
Account may be maintained as an interest
bearing or a non-interest bearing account,
and funds held therein may be held as cash
or invested in certain obligations
acceptable to each Rating Agency rating
one or more classes of the related series
of Offered Certificates. See DESCRIPTION
OF THE CERTIFICATES-Accounts.
C. Credit Enhancement... If so provided in the related
Prospectus Supplement, protection against certain
defaults and losses with respect to one or more
Classes of Certificates of a Series or the related
Mortgage Loans ("Credit Enhancement"). Credit
Enhancement may be in the form of a letter of
credit, the subordination of one or more Classes of
the Certificates of such Series, the establishment
of one or more reserve funds, surety bonds,
certificate guarantee insurance, limited guarantees,
or another type of credit support, or a combination
thereof. It is unlikely that Credit Enhancement will
protect against all risks of loss or guarantee
repayment of the entire principal balance of the
Certificates and interest thereon. The amount and
types of coverage, the identification of the entity
providing the coverage (if applicable) and related
information with respect to each type of Credit
Enhancement, if any, will be described in the
applicable Prospectus Supplement for a Series of
Certificates. See "RISK FACTORS--Credit Enhancement
Limitations" and "CREDIT ENHANCEMENT--General."
Description of Certificates The Certificates of each Series will
be issued pursuant to a Pooling and
Servicing Agreement (the "Agreement")
and will represent in the aggregate
the entire beneficial ownership
interest in the related Trust Fund. 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
3
<PAGE>
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 as Security for
Investment in Certificates; No Personal
Liability" and "DESCRIPTION OF THE
CERTIFICATES."
Distributions on
Certificates............ Distributions of principal and interest on
the Certificates of each Series will be
made to the registered holders thereof on
the day (the "Distribution Date")
specified in the related Prospectus
Supplement, beginning in the period
specified in the related Prospectus
Supplement following the establishment of
the related Trust Fund.
With respect to each Series of
Certificates on each Distribution Date,
the Trustee (or such other paying agent as
may be identified in the applicable
Prospectus Supplement) will distribute to
the Certificateholders the amounts
described in the related Prospectus
Supplement that are due to be paid on such
Distribution Date. In general, such
amounts will include previously
undistributed payments of principal
(including principal prepayments, if any)
and interest on the Mortgage Loans
received by the Master Servicer or the
Special Servicer, if any, after a date
specified in the related Prospectus
Supplement (the "Cut-off Date") and prior
to the day preceding each Distribution
Date specified in the related Prospectus
Supplement.
Advances................... The related Prospectus Supplement will set
forth the obligations, if any, of the
Master Servicer and the Special Servicer,
if any, as part of their servicing
responsibilities, to make certain advances
with respect to delinquent payments on the
Mortgage Loans, payments of taxes,
assessments, insurance premiums and other
required payments. See "DESCRIPTION OF THE
CERTIFICATES--Advances."
Termination................ The obligations of the parties to the
Agreement for each Series will terminate
upon: (i) the purchase of all of the
assets of the related Trust Fund, as
described in the related Prospectus
Supplement; (ii) the later of (a) the
distribution to Certificateholders of that
Series of final payment with respect to
the last outstanding Mortgage Loan or (b)
the disposition of all property acquired
upon foreclosure or deed-in-lieu of
foreclosure with respect to the last
outstanding Mortgage Loan and the
remittance to the Certificateholders of
all funds due under the
4
<PAGE>
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."
Risk Factors............... There are material risks associated with
an investment in the Certificates. See
"RISK FACTORS."
Listing of Certificates.... The Depositor does not currently intend to
make an application to list any Series of
Certificates on a national securities
exchange or quote any Series of
Certificates in the automated quotation
system of a registered securities
association. See "RISK FACTORS--Limited
Liquidity; Lack of Market for Resale."
Material Federal Income
Tax Consequences........... 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. The information
contained in these sections is supported
by the opinion of Morrison & Hecker
L.L.P., counsel to the Depositor.
Potential purchasers of Certificates,
however, are advised to consult their own
tax advisers regarding the purchase of
Certificates.
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
5
<PAGE>
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.
6
<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; Lack of Market for Resale
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 Depositor does not currently intend to make an
application to list any Series of Certificates on a national securities exchange
or quote any Series of Certificates on an automated quotation system of a
Registered Securities Association. 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 as Security for Investment in Certificates; No
Personal Liability
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.
In general, neither the Depositor, nor any partner, director, officer,
employee or agent of the Depositor, will be liable to the related 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. As a result, if the
assets of the related Trust Fund are depleted, the Certificateholders will not
be able to recover any amounts from such persons, provided the applicable
standard of care has been met.
Effects of Prepayments on Average Life of Certificates and 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, as well as Acts of God. Accordingly, 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
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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 over
other Classes of Certificates, including Classes of Offered Certificates, and,
as a result, yields on such Series may be more sensitive to prepayments on the
Mortgage Loans in the related Trust Fund. A Series of Certificates may include
one or more Classes offered at a significant premium or discount. Yields on such
Classes of Certificates will be sensitive, and in some cases extremely
sensitive, to prepayments on Mortgage Loans. With respect to interest only or
disproportionately interest weighted Classes purchased at a premium, such
Classes may not return their purchase prices under rapid repayment scenarios.
See "YIELD AND MATURITY CONSIDERATIONS" in the related Prospectus Supplement.
When considering the effects of prepayments on the average life and yield
of a Certificate, an investor should also consider provisions of the related
Agreement that permit the optional early termination of the Class of
Certificates to which such Certificate belongs. If so specified in the related
Prospectus Supplement, a Series of Certificates may be subject to optional early
termination through the repurchase of the Mortgage Properties in the related
Trust Fund by the party or parties specified therein, under the circumstances
and in the manner set forth therein. See "DESCRIPTION OF THE
CERTIFICATES--Termination."
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 properties
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
properties. 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.
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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 businesses 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 businesses 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 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."
Potential Conflicts of Interest.
The Special Servicer, if any, for a Series of Certificates, will have
considerable latitude in determining whether to liquidate or modify defaulted
Mortgage Loans. See SERVICING OF THE MORTGAGE LOANS--Modifications, Waivers and
Amendments. If the Special Servicer or anyone else who purchases Mortgage Loans
and has the power to appoint the Special Servicer, investors in the Offered
Certificates should consider that, although the Special Servicer will be
obligated to act in accordance with the terms of the Pooling and Servicing
Agreement and will be governed by the servicing standards described herein, it
may have interests when dealing with defaulted Mortgage Loans that are in
conflict with those of holders of the Offered Certificates.
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
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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.
Limited Nature of Credit Ratings
Any rating assigned by a Rating Agency to a Class of Certificates will
reflect only its assessment of the likelihood that holders of such Certificates
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
related Trust Fund. Furthermore, such rating will not address the possibility
that prepayment of the related Mortgage Loans at a higher or lower rate than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor that purchases a Certificate at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios.
The amount, type and nature of Credit Enhancement, if any, provided 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. Those criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. However, there can be no assurance
that the historical data supporting any such actuarial analysis will accurately
reflect future experience, or that the data derived from a large pool of
mortgage loans will accurately predict the delinquency, foreclosure of loss
experience of any particular pool of Mortgage Loans. In other cases, such
criteria may be based upon determinations of the values of the Mortgaged
Properties that provide security for the Mortgage Loans. However, no assurance
can be given that those values will not decline in the future. 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 a greater than the value of the
Mortgaged Properties, the rates of delinquencies, foreclosures and losses could
be higher than those now generally experienced by institutional lenders. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Mortgage Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by Credit Enhancement, such losses may
be borne, at least in part, by the holders of one or more Classes of
Certificates of the related Series. See "RATING".
Potential Inability to Verify Underwriting Standards
The Mortgage Loans included in a Trust Fund may be originated by entities
affiliated with the Depositor or by unaffiliated entities. Unaffiliated
originators may use underwriting criteria that are different from that used by
affiliates of the Depositor. The Prospectus Supplement relating to each Series
will, to the extent verifiable, 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. In certain cases, the Depositor
may not be able to verify the underwriting standards used to originate a
Mortgage Loan (e.g., if the Mortgage Loans being purchased from a Seller were
acquired by the Seller in the open market or were originated over a long period
of time pursuant to varying underwriting standards which cannot now be
confirmed). In general, the Depositor will not engage in the reunderwriting of
Mortgage Loans that it acquires. Instead, the Depositor will rely on the
representations and warranties made by the Seller, and the Seller's obligation
to repurchase a Mortgage Loan in the event that a representation or warranty was
not true when made.
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Nonrecourse Mortgage Loans; Limited Recovery
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.
Inclusion of Delinquent and Non-Performing Mortgage Loans May
Adversely Affect Yields
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 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. Neither the Depositor or any affiliate
will be required to refinance any Mortgage Loan.
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
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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 Laws." 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 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,
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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; Lower Payment Priority
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 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."
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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."
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
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by the transferee Residual Certificateholder. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--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.
Special Hazard Losses
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer and Special Servicer, if any, for any Trust Fund will each be
required to cause the borrower on each Mortgage Loan serviced by it to maintain
such insurance coverage in respect of the related Mortgaged Property as is
required under the related Mortgage, including hazard insurance; provided that,
as and to the extent described herein and in the related Prospectus Supplement,
each of the Master Servicer and the Special Servicer, if any, may satisfy its
obligation to cause hazard insurance to be maintained with respect to any
Mortgaged Property through the acquisition of a blanket policy or master force
placed policy. In general, the standard form of fire and extended coverage
policy covers physical damage to or destruction of the improvements of the
property by fire, lightning, explosion, smoke, windstorm and hail, and riot,
strike and civil commotion, subject to the conditions and exclusions specified
in each policy. Although the policies covering the Mortgaged Properties will be
underwritten by different insurers under different state laws in accordance with
different applicable state forms, and therefore will not contain identical terms
and conditions, most such policies typically do not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), wet or dry rot, vermin, domestic animals and other kinds of risks not
specified in the preceding sentence. Unless the related Mortgage specifically
requires the mortgagor to insure against physical damage arising from such
causes, then, to the extent any consequent losses are not covered by Credit
Enhancement, such losses may be borne, at least in part, by the holders of one
or more Classes of Certificates of the related Series. See "SERVICING OF THE
MORTGAGE LOANS--Insurance."
Control; Decisions by Certificateholders
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."
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THE DEPOSITOR
Commercial Mortgage Acceptance Corp. was incorporated in the State of
Missouri on September 17, 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.
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.
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.
The size of the loan portfolio which the Master Servicer was servicing as
of the end of the most recent calendar quarter will be set forth in each
Prospectus Supplement. The Master Servicer's delinquency experience as of the
end of its three most recent fiscal years and the most recent calendar quarter
for which such information is available on the portfolio of loans relating to
commercial mortgage pass-through certificates master serviced by it will be
summarized in each Prospectus Supplement. There can be no assurance that such
experience will be representative of the results that may be experienced with
respect to any particular Mortgage Pool.
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 any 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. The maturity and interest rate of such indebtedness, if any, will
be set forth in "USE OF PROCEEDS" in the related Prospectus Supplement.
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
- --------
*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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or in such other form as may be described in the applicable Prospectus
Supplement. The following summaries describe the material 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, security agreements
and pledges; (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; and (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). In
addition, the Trust Fund for a Series may include 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 material
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.
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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.
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 and in the amounts
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
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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 other 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
other 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.
"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 obligations guaranteed as to full and 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 Federal Home Loan Mortgage Corporation
("FHLMC") (debt obligations only), the Federal National Mortgage Association
("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 the
highest short-term rating available from each Rating Agency rating the
Certificates of a Series;
(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 rating the Certificates of
a Series in its highest short-term unsecured rating category;
(v) units of taxable money market funds or mutual funds that seek to
maintain a constant asset value and have been rated by each Rating Agency rating
the Certificates of a Series 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 rating
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the Certificates of a Series as a permitted investment of funds backing
securities having ratings equivalent to each such Rating Agency's highest
initial rating of the Certificates; and
(vii) such other obligations as are acceptable as Permitted
Investments to each Rating Agency rating the Certificates of a Series;
provided, however, that (a) if Standard and Poor's Rating Service, a division of
the McGraw-Hill Companies, Inc. ("S&P") is a Rating Agency for such Series, none
of such obligations or securities listed above may have an "r" highlighter
affixed to its rating if rated by S&P; (b) except with respect to units of money
market funds pursuant to clause (v) above, each such obligation or security will
have a fixed dollar amount of principal due at maturity which cannot vary or
change; and (c) except with respect to units of money market funds pursuant to
clause (v) above, if any such obligation or security provides for a variable
rate of interest, interest will be tied to a single interest rate index plus a
single fixed spread (if any) and move proportionately with that index; and
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 or this Prospectus or the related Prospectus Supplement, (iii) to amend
any provision thereof to the extent necessary or desirable to maintain the
rating or ratings assigned to each of the Classes of Certificates by each Rating
Agency or (iv) to make any other provisions with respect to matters or questions
arising under the Agreement that will not (a) be inconsistent with the
provisions of the Agreement or this Prospectus or the related Prospectus
Supplement, (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 all Classes 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
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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 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
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property, and/or mixed-use property, and related property and interests (each
such interest or property, as the case may be, a "Mortgaged Property").
Multifamily properties (consisting of apartments, congregate care facilities
and/or mobile home parks) and general commercial properties (consisting of
retail properties, including shopping centers, office buildings,
mini-warehouses, warehouses, industrial properties and/or other similar types of
properties) will represent security for a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust Fund
is formed. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--General," "--Types
of Mortgage Instruments," "--Installment Contracts" and "--Junior Mortgages;
Rights of Senior Mortgagees or Beneficiaries" for more detailed information
regarding the characteristics of such types of mortgage loans. A Mortgage Pool
will not include securities of the type listed in the definition of Permitted
Investments. Each such mortgage loan or Installment Contract 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; and
6. Mortgage Loans that provide for recourse against the other assets of
the related mortgagors.
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 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, cash
collateral deposits, personal guarantees or combinations thereof. Pursuant to an
assignment of leases and rents, the obligor on the related promissory note,
bond, mortgage consolidation agreement, installment contract or other similar
instrument (each, a "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. In the event that the Mortgage Pool securing Certificates for any
Series includes a Mortgage Loan or a group of Mortgage Loans of a single obligor
or group of affiliated obligors representing 10% or more 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.
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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, to the extent
verifiable, 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. See "RISK FACTORS--Potential Inability to Verify
Underwriting Standards" herein. 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 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
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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 re-assignment
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 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. 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. 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. In general, the Depositor will not engage in
the reunderwriting of Mortgage Loans that it acquires. Instead, the Depositor
will rely on the representations and warranties made by the Seller, and the
Seller's obligation to repurchase a Mortgage Loan in the event that a
representation or warranty was not true when made. See "RISK FACTORS--Potential
Inability to Verify Underwriting Standards."
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. In general,
originators of commercial and multifamily mortgage loans require each mortgaged
property to be appraised by an independent appraiser in accordance with MAI
Standards. Furthermore, 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.
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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 "Seller"), which may
be an affiliate of the Depositor, will have made representations and warranties
in respect of the Mortgage Loans sold by such 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 if not yet
issued, a pro forma or specimen policy or a "marked-up" commitment for title
insurance furnished by the related title insurance company for purposes of
closing) and any required hazard insurance was effective at the origination of
each Mortgage Loan, and that each policy (or pro forma or specimen policy or
"marked-up" commitment for title insurance) remained in effect on the date of
purchase of the Mortgage Loan from the Seller; (ii) that the Seller was the sole
owner and holder of such Mortgage Loan and had full right and authority to sell
and assign 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 under the terms
of each Mortgage Loan (inclusive of any applicable grace or cure period) have
been made. The Prospectus Supplement for a Series will identify each Seller and
specify the representations and warranties being made by the Seller.
All of the representations and warranties of a Seller in respect of a
Mortgage Loan generally will have been made as of the date on which such 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 Seller do not address events that may
occur following the sale of a Mortgage Loan by the Seller, the repurchase
obligation of the Seller described below will not arise if, on or after the date
of the sale of a Mortgage Loan by the 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 Seller will not be
accurate and complete in all material respects in respect of such Mortgage Loan
as of the date of sale of the Mortgage Loans or such other date specified in the
applicable Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Depositor will make certain representations and warranties for
the benefit of Certificateholders 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 Seller in respect of a Mortgage Loan that materially and adversely affects
the interests of the Certificateholders of the related Series, if the Seller
cannot cure such breach within 90 days following discovery of the breach or the
Seller's receipt of notice of such breach, such 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, plus (a) unpaid
accrued interest to the due date for such Mortgage Loan in the month following
the month in which such repurchase occurs, (b) the amount of any unreimbursed
advances made with respect to Property
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Protection Expenses, (c) interest on all advances made with respect to such
Mortgage Loan at the rate specified in the related Agreement, (d) the amount of
any unpaid servicing compensation and Trust Fund expenses allocable to such
Mortgage Loan, and (e) the amount of any expenses reasonably incurred by the
Master Servicer, the Special Servicer, if any, or the Trustee in respect of such
repurchase obligation. The Master Servicer will be required to enforce such
obligation of the Seller for the benefit of the Trustee and the
Certificateholders in accordance with servicing standards for the applicable
Agreement. 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 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 Seller
will carry out its repurchase obligation with respect to the Mortgage Loans.
If specified in the related Prospectus Supplement, the 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 (i) which do not conform in
one or more respects to the description thereof contained in the related
Prospectus Supplement, (ii) as to which a breach of a representation or warranty
is discovered, which breach materially and adversely affects the interests of
the Certificateholders, or (iii) 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. The Master Servicer's
collection procedures will be described under "THE POOLING AND SERVICING
AGREEMENT--Servicing of the Mortgage Loans; Collection of Payments" and
"Collection Activities" in the related Prospectus Supplement. 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 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 the
Depositor and its affiliates.
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
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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 (i) to 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 (or other similar fees)
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 best efforts to or require each mortgagor to maintain insurance in
accordance with the related Mortgage Loan documents, which generally will
include a standard fire and hazard insurance policy with extended coverage. To
the extent required by the related Mortgage Loan, the coverage of each such
standard hazard insurance policy will be in an amount that is at least equal to
the lesser of (i) the full replacement cost of the improvements and equipment
securing such Mortgage Loan or (ii) the outstanding principal balance owing on
such Mortgage Loan or such amount as is necessary to prevent any reduction in
such policy by reason of the application of co-insurance and to prevent the
Trustee thereunder from being deemed to be a co-insurer, in each case with a
replacement cost rider. The Master Servicer will also use its reasonable efforts
to require each mortgagor to maintain (i) insurance providing coverage against
12 months of rent interruptions and (ii) such other insurance as provided in the
related Mortgage Loan. Subject to the requirements for modification, waiver or
amendment of a Mortgage Loan (See "--Modifications, Waivers and Amendments"),
the Master Servicer may in its reasonable discretion consistent with the
servicing standard set forth in the related Agreement waive the requirement of a
Mortgage Loan that the related mortgagor maintain earthquake insurance on the
related Mortgaged Property. If a Mortgaged Property is located at the time of
origination of the related Mortgage Loan in a federally designated special flood
hazard area, the Master Servicer will also use its best 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 Servicer
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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 is 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 the Agreement for the related Series.
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. In general, the
Master Servicer or the Special Servicer, if any, will be entitled to
reimbursement for any advance equal to the amount of such advance, plus interest
thereon at the rate specified in the related Agreement, 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, which amounts
may include funds that would otherwise be applied to the reduction of the
principal balance of the Certificates for such Series. The monthly statements to
certificateholders will disclose the amount of any advances made during the
prior month. See "THE POOLING AND SERVICING AGREEMENT--Advances" in the related
Prospectus Supplement.
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Modifications, Waivers and Amendments
The Agreement for each Series will provide the Master Servicer or the
Special Servicer, if any, with the discretion to modify, waive or amend certain
of the terms of any Mortgage Loan without the consent of the Trustee or any
Certificateholder subject to certain conditions set forth therein, including the
condition that such modification, waiver or amendment will not result in such
Mortgage Loan ceasing to be a "qualified mortgage" under the REMIC Regulations.
Evidence of Compliance
The Agreement for each Series will generally provide that on or before a
specified date in each year, with the first such date being 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 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 of 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, misrepresentations, bad faith, fraud
or negligence or, in the case of the Master Servicer or Special Servicer, if
any, a breach of the servicing standards set forth in the Agreement in the
performance of its duties or by reason of negligent disregard of its obligations
and duties thereunder. The Agreement will further provide that the Depositor,
the Master Servicer, the Special Servicer, if any, and any partner, director,
officer, employee or agent of the Depositor, the Master Servicer, the Special
Servicer, if any (and of any general partner thereof), will be entitled to
indemnification by the Trust Fund for any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Certificates,
other than any loss, liability or expense incurred by reason of its respective
willful misfeasance,
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misrepresentation, bad faith, fraud or negligence or, in the case of the Master
Servicer or the Special Servicer, if any, a breach of the servicing standard set
forth in the Agreement in the performance of duties thereunder or by reason of
negligent disregard of its respective obligations and duties thereunder. Any
loss resulting from such indemnification will reduce amounts distributable to
Certificateholders. The Prospectus Supplement will specify any variations to the
foregoing required by the Rating Agencies rating Certificates of a Series.
In addition, the Agreement will generally provide that none of the
Depositor, the Master Servicer or the Special Servicer, if any, will be under
any obligation to appear in, prosecute or defend any legal action unless such
action is related to its duties under the Agreement and which in its opinion
does not involve it in any expense or liability. The Master Servicer or the
Special Servicer, if any, may, however, in its discretion undertake any such
action that is related to its respective obligations under the related Agreement
and that it may deem necessary or desirable with respect to the Agreement and
the rights and duties of the parties thereto and the interests of the holders of
Certificates thereunder. In such event, the legal expenses and costs of such
action and any liability resulting therefrom (except any liability related to
the Master Servicer's or the Special Servicer's, if any, obligations to service
the Mortgage Loans in accordance with the servicing standard under 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
Supplement 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
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Supplement. Any resignation and removal of the Trustee, and the
appointment of a successor Trustee, will not become effective until
acceptance of such appointment by the successor Trustee.
The Depositor is not obligated to monitor or supervise the performance of
the Master Servicer, Special Servicer, if any, or the Trustee under the
Agreement.
Events of Default
Events of default with respect to the Master Servicer or the Special
Servicer, if any, as applicable (each, an "Event of Default") under the
Agreement for each Series will consist of, in summary form, (i) any failure by
the Master Servicer or the Special Servicer, if any, to remit to the Collection
Account or any failure by the Master Servicer to remit to the Trustee for
deposit into the Distribution Account any amount required to be so remitted
pursuant to the Agreement; (ii) any failure by the Master Servicer or Special
Servicer, as applicable, duly to observe or perform in any material respect any
of its other covenants or agreements or the breach of its representations or
warranties (which breach materially and adversely affects the interests of the
Certificateholders, the Trustee, the Master Servicer or the Special Servicer, if
any, with respect to any Mortgage Loan) under the Agreement, which in each case
continues unremedied for 30 days after the giving of written notice of such
failure to the Master Servicer or the Special Servicer, as applicable, by the
Depositor or the Trustee, or to the Master Servicer or Special Servicer, if any,
the Depositor and the Trustee by the holders of Certificates evidencing Voting
Rights of at least 25% of any affected Class; (iii) confirmation in writing by
any of the Rating Agencies that the then current rating assigned to any Class of
Certificates would be withdrawn, downgraded or qualified unless the Master
Servicer or Special Servicer, as applicable, is removed; (iv) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by, on behalf of or against the Master
Servicer or Special Servicer, as applicable, indicating its insolvency or
inability to pay its obligations; or (v) any failure by the Master Servicer to
make a required advance. The related Prospectus Supplement may provide for other
Events of Default to the extent required by the Rating Agencies rating
Certificates of a Series.
Rights Upon Event of Default
As long as an Event of Default remains unremedied, the Trustee may, and at
the written direction of the holders of Certificates entitled to 25% of the
aggregate Voting Rights of all Certificates will, terminate all of the rights
and obligations of the Master Servicer or Special Servicer, as the case may be.
Notwithstanding the foregoing, upon any termination of the Master Servicer or
the Special Servicer, as applicable, under the Agreement the Master Servicer or
the Special Servicer, as applicable, will continue to be entitled to receive all
accrued and unpaid servicing compensation through the date of termination plus,
in the case of the Master Servicer, all advances and interest thereon as
provided in the Agreement.
The holders of Certificates evidencing not less than 66 2/3% of the
aggregate Voting Rights of the Certificates may, on behalf of all holders of
Certificates, waive any default by the Master Servicer or Special Servicer, if
any, in the performance of its obligations under the Agreement and its
consequences, except a default in making any required deposits to (including
advances) or payments from the Collection Account or the Distribution Account or
in remitting payments as received, in each case in accordance with the
Agreement. Upon any such waiver of a past default, such default will cease to
exist, and any Event of Default arising therefrom will be deemed to have been
remedied for every purpose of the Agreement. No such waiver will extend to any
subsequent or other default or impair any right consequent thereon.
On and after the date of termination, the Trustee will succeed to all
authority and power of the Master Servicer or the Special Servicer, as
applicable, under the Agreement and will be entitled to similar compensation
arrangements to which the Master Servicer or the Special Servicer, as
applicable, would have been entitled. If the Trustee is unwilling or unable so
to act, or if the holders of Certificates evidencing a majority of the aggregate
Voting Rights so request or if the Trustee is not rated in one of its two
highest long-term unsecured debt rating categories by each of the Rating
Agencies rating the Certificates of such Series, the Trustee must appoint, or
petition a court of competent jurisdiction for the appointment of, an
established mortgage loan servicing institution, the appointment of which will
not result in the downgrading,
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withdrawal or qualification of the rating or ratings then assigned to any Class
of Certificates as evidenced in writing by each Rating Agency rating the
Certificates of such Series, to act as successor to the Master Servicer or the
Special Servicer, as applicable, under the Agreement. Pending such appointment,
the Trustee will be obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer or the
Special Servicer, as the case may be, under the Agreement.
No Certificateholder will have any right under the Agreement to institute
any proceeding with respect to the Agreement or the Mortgage Loans, unless, with
respect to the Agreement, such holder previously shall have given to the Trustee
a written notice of a default under the Agreement and of the continuance
thereof, and unless also the holders of Certificates representing a majority of
the aggregate Voting Rights allocated to each affected Class have made written
request of the Trustee to institute such proceeding in its own name as Trustee
under the Agreement and have offered to the Trustee such reasonable indemnity as
it may require against the costs, expenses and liabilities to be incurred
therein or thereby, and the Trustee, for 30 days after its receipt of such
notice, request and offer of indemnity, has neglected or refused to institute
such proceeding.
The Trustee will have no obligation to institute, conduct or defend any
litigation under the Agreement or in relation thereto at the request, order or
direction of any of the holders of Certificates, unless such holders of
Certificates have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
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.
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Subordinate Certificates
If so specified in the related Prospectus Supplement, one or more Classes
of a Series may be Subordinate Certificates. If so specified in the related
Prospectus Supplement, the rights of the holders of subordinate Certificates
(the "Subordinate Certificates") to receive distributions of principal and
interest from the Distribution Account on any Distribution Date will be
subordinated to such rights of the holders of senior Certificates (the "Senior
Certificates") to the extent specified in the related Prospectus Supplement. In
addition, subordination may be effected by the allocation of losses first to
Subordinate Certificates in reduction of the principal balance of such
Certificates until the principal balance thereof is reduced to zero before any
losses are allocated to Senior Certificates. The Agreement may require a trustee
that is not the Trustee to be appointed to act on behalf of holders of
Subordinate Certificates.
A Series may include one or more Classes of Subordinate Certificates
entitled to receive cash flows remaining after distributions are made to all
other Classes designated as being senior thereto. Such right to receive payments
will effectively be subordinate to the rights of holders of such senior
designated Classes of Certificates. A Series may also include one or more
Classes of Subordinate Certificates that will be allocated losses prior to any
losses being allocated to Classes of Subordinate Certificates designated as
being senior thereto. If so specified in the related Prospectus Supplement, the
subordination of a Class may apply only in the event of (or may be limited to)
certain types of losses not covered by insurance policies or other Credit
Enhancement, such as losses arising from damage to property securing a Mortgage
Loan not covered by standard hazard insurance policies.
The related Prospectus Supplement will describe any such subordination in
greater detail and set forth information concerning, among other things, to the
extent applicable, (i) the amount of subordination of a Class or Classes of
Subordinate Certificates in a Series, (ii) the circumstances in which such
subordination 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 prepayment 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.
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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 Master Servicer as additional servicing
compensation, and any loss resulting from such investment will be borne by the
Master Servicer. The Reserve Fund, if any, for a Series will be a part of the
Trust Fund only if the related Prospectus Supplement so specifies. If the
Reserve Fund is not a part of the Trust Fund, the right of the Trustee to make
draws on the Reserve Fund will be an asset of the Trust Fund.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purpose for which funds in the Reserve Fund may be applied to
make distributions to Certificateholders and use of investment earnings, if any,
from the Reserve Fund.
Cross-Support Features
If the Mortgage Pool for a Series is divided into separate Mortgage Loan
Groups, each securing a separate Class or Classes of a Series, Credit
Enhancement may be provided by a cross-support feature that requires that
distributions be made on Senior Certificates secured by one Mortgage Loan Group
prior to distributions on Subordinate Certificates secured by another Mortgage
Loan Group within the Trust Fund. The related Prospectus Supplement for a Series
that includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
Certificate Guarantee Insurance
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
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default to the extent a related Mortgage Loan is not covered by any primary
mortgage insurance policy. The amount and terms of any such coverage will be set
forth in the Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, for each Series
of Certificates as to which a pool insurance policy is provided, the Depositor
will also obtain a special hazard insurance policy for the related Trust Fund in
the amount set forth in such Prospectus Supplement. The special hazard insurance
policy will, subject to the limitations described in the applicable Prospectus
Supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain hazards not insured against under the standard form of hazard
insurance policy for the respective states in which the Mortgaged Properties are
located. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
Surety Bonds
If so specified in the Prospectus Supplement relating to a Series of
Certificates, Credit Enhancement with respect to one or more Classes of
Certificates of a Series may be provided by the issuance of a surety bond issued
by a financial guarantee insurance company specified in the applicable
Prospectus Supplement. The coverage, amount and frequency or any reduction in
coverage provided by a surety bond will be set forth in the Prospectus
Supplement relating to such Series.
Fraud Coverage
If so specified in the applicable Prospectus Supplement, losses resulting
from fraud, dishonesty or misrepresentation in connection with the origination
or sale of the Mortgage Loans may be covered to a limited extent by (i)
representations and warranties to the effect that no such fraud, dishonesty or
misrepresentation had occurred, (ii) a Reserve Fund, (iii) a letter of credit or
(iv) some other method. The amount and terms of any such coverage will be set
forth in the Prospectus Supplement.
Mortgagor Bankruptcy Bond
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 a general summary of the material legal
aspects of mortgage loans. 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 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
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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" below. 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. In a case where
the borrower is a land trust, there would be an additional party because legal
title to the property is held by a land trustee under a land trust agreement for
the benefit of the borrower. At origination of a mortgage loan involving a land
trust, the borrower may execute a separate undertaking to make payments on the
mortgage note. In no event is the land trustee personally liable for the
mortgage note obligation. As used herein, unless the context otherwise requires,
the term "mortgagor" includes a mortgagor under a mortgage, a trustor under a
deed of trust and a grantor under a deed to secure debt, and the term
"mortgagee" includes a mortgagee under a mortgage, a beneficiary under a deed of
trust and a grantee under a deed to secure debt. The mortgagee's authority under
a mortgage, the trustee's authority under a deed of trust and the grantee's
authority under a deed to secure debt are governed by the express provisions of
the mortgage, the law of the state in which the real property is located,
certain federal laws and, in some cases, in deed of trust transactions, the
directions of the beneficiary. The Mortgage Loans (other than Installment
Contracts) will consist of 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. In certain cases, Mortgage
Loans secured in part by personal property may be included in a Trust Fund even
if the security interest in such personal property was not perfected or the
requisite UCC filings were allowed to lapse.
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Installment Contracts
The Mortgage Loans may also consist of Installment Contracts (also
sometimes called contracts for deed). Under an Installment Contract, the seller
(referred to in this section as the "mortgagee") retains legal title to the
property and enters into an agreement with the purchaser (referred to in this
section as the "mortgagor") for the payment of the purchase price, plus
interest, over the term of such Installment Contract. Only after full
performance by the mortgagor of the Installment Contract is the mortgagee
obligated to convey title to the property to the mortgagor. As with mortgage or
deed of trust financing, during the effective period of the Installment
Contract, the mortgagor is generally responsible for maintaining the property in
good condition and for paying real estate taxes, assessments and hazard
insurance premiums associated with the property.
The method of enforcing the rights of the mortgagee under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing or able to enforce the Installment Contract strictly
according to its terms. The terms of Installment Contracts generally provide
that upon a default by the mortgagor, the mortgagor loses his or her right to
occupy the property, the entire indebtedness is accelerated and the mortgagor's
equitable interest in the property is forfeited. The mortgagee in such a
situation does not have to foreclose in order to obtain title to the property,
although in some cases both a quiet title action to clear title to the property
(if the mortgagor has recorded notice of the Installment Contract) and an
ejectment action to recover possession may be necessary. In a few states,
particularly in cases of a default during the early years of an Installment
Contract, ejectment of the mortgagor and a forfeiture of his or her interest in
the property will be permitted. However, in most states, laws (analogous to
mortgage laws) have been enacted to protect mortgagors under Installment
Contracts from the harsh consequences of forfeiture. These laws may require the
mortgagee to pursue a judicial or nonjudicial foreclosure with respect to the
property, give the mortgagor a notice of default and some grace period during
which the Installment Contract may be reinstated upon full payment of the
default amount. Additionally, the mortgagor may have a post-foreclosure
statutory redemption right, and, in some states, a mortgagor with a significant
equity investment in the property may be permitted to share in the proceeds of
any sale of the property after the indebtedness is repaid or may otherwise be
entitled to a prohibition of the enforcement of the forfeiture clause.
Junior Mortgages; Rights of Senior Mortgagees or Beneficiaries
Some of the Mortgage Loans may be secured by junior mortgages that are
subordinate to senior mortgages held by other lenders or institutional
investors. In such cases, the rights of the Trust Fund (and therefore the
Certificateholders), as mortgagee under a junior mortgage, will be subordinate
to those of the mortgagee under the senior mortgage, including the prior rights
of the senior mortgagee to: (i) receive rents, hazard insurance proceeds and
condemnation proceeds; and (ii) cause the property securing the Mortgage Loan to
be sold upon the occurrence of a default under the senior mortgage, thereby
extinguishing the lien of the junior mortgage, unless the Master Servicer or
Special Servicer, if applicable, either asserts such subordinate interest in the
related property in the foreclosure of the senior mortgage or satisfies the
defaulted senior loan. As discussed more fully below, in many states a junior
mortgagee may satisfy a defaulted senior loan in full, or may cure such default
and bring the senior loan current, in either event adding the amounts expended
to the balance due on the junior loan. Absent a provision in the senior mortgage
or the existence of a recorded request for notice 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
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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 procee ding purporting to affect the property or the rights of the mortgagee
under the mortgage. Upon a failure of the mortgagor to perform any of these
obligations, the mortgage typically provides the mortgagee the option to perform
the obligation itself, with the mortgagor agreeing to reimburse the mortgagee
for any sums expended by the mortgagee in connection therewith. All sums so
expended by the mortgagee also typically become part of the indebtedness secured
by the mortgage. The form of mortgage used by many institutional lenders also
typically requires the mortgagor to obtain the consent of the mortgagee as to
all actions affecting the mortgaged property, including, without limitation, all
leasing activities (including new leases and termination or modification of
existing leases), any alterations, modifications or improvements to the
buildings and other improvements forming a part of the mortgaged property and
all property management activities affecting the mortgaged property (including
new management or leasing agreements or any termination or modification of
existing management or leasing agreements). Tenants will often refuse to execute
a lease unless the mortgagee executes a written agreement with the tenant not to
disturb the tenant's possession of its premises in the event of a foreclosure. A
senior mortgagee may refuse to consent to matters approved by a junior mortgagee
with the result that the value of the security for the junior mortgage is
diminished. For example, a senior mortgagee may decide not to approve a lease or
refuse to grant to a tenant such a non-disturbance agreement. If, as a result,
the lease is not executed, the value of the mortgaged property may be
diminished.
Foreclosure
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage and, by reason thereof, the indebtedness has been
accelerated, 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
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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 conducted in a court having jurisdiction over a Mortgaged Property
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. If the mortgage covered the tenant's interest in
a lease and leasehold estate, the purchaser will acquire such tenant's interest
subject to the tenant's obligations under the lease to pay rent and perform
other covenants contained therein.
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 a notice of sale 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. A notice of
sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
costs and expenses (in some states, limited to reasonable costs and expenses)
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorneys' fees which may be
recovered by a mortgagee. In other states, the mortgagor or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. 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. In case of foreclosure under a mortgage
or a deed of trust, the sale by the referee or other designated official or the
trustee is often a public sale. 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
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United States Court of Appeals for the Fifth Circuit in Durrett v. Washington
National Insurance Company and other decisions that have followed its reasoning.
The court in Durrett held that even a non-collusive, regularly conducted
foreclosure sale was a fraudulent transfer under the federal Bankruptcy Code, as
amended from time to time (11 U.S.C.) (the "Bankruptcy Code"), and, therefore,
could be rescinded in favor of the bankrupt's estate, if: (i) the foreclosure
sale was held while the debtor was insolvent and not more than one year prior to
the filing of the bankruptcy petition; and (ii) the price paid for the
foreclosed property did not represent "fair consideration" ("reasonably
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, or for a lesser amount in
order to preserve its right to seek a deficiency judgment if such is available
under state law and under the terms of the Mortgage Loan documents. 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. There may also be state
transfer taxes due and payable upon obtaining such properties at foreclosure and
such taxes could be substantial. 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.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
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
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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. In addition, some states may have statutory protection such as the
right of the borrower to reinstate mortgage loans after commencement of
foreclosure proceedings but prior to a foreclosure sale.
Under the REMIC Regulations and the related Agreement, the Master Servicer
or Special Servicer, if any, may be permitted (and in some cases may be
required) to hire an independent contractor to operate any REO Property. The
costs of such operation may be significantly greater than the costs of direct
operation by the Master Servicer or Special Servicer, if any. See "SERVICING OF
THE MORTGAGE LOANS--Collections and Other Servicing Procedures."
Rights of Redemption. The purposes of a foreclosure are to enable the
mortgagee to realize upon its security and to bar the mortgagor, and all persons
who have an interest in the property that is subordinate to the mortgage being
foreclosed, from any exercise of their "equity of redemption." The doctrine of
equity of redemption provides that, until the property covered by a mortgage has
been sold in accordance with a properly conducted foreclosure sale, those having
an interest that is subordinate to that of the foreclosing mortgagee may redeem
the property by paying the entire debt with interest. In addition, in some
states, when a foreclosure action has been commenced, the redeeming party must
pay certain costs of such action. Those having an equity of redemption must
generally be made parties and joined in the foreclosure proceeding in order for
their equity of redemption to be 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. 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.
Whether the mortgagee has any rights to recover these expenses from a mortgagor
who redeems the property depends on the applicable state statute. 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
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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.
Cross-Collateralization. Certain of the Mortgage Loans may be secured by
more than one mortgage covering properties located in more than one state.
Because of various state laws governing foreclosure or the exercise of a power
of sale and because, in general, foreclosure actions are brought in state court
and the courts of one state cannot exercise jurisdiction over property in
another state, it may be necessary upon a default under such a loan to foreclose
on the related mortgages in a particular order rather than simultaneously in
order to ensure that the lien of the mortgages is not impaired or released.
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
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Bankruptcy Code virtually all actions (including foreclosure actions and
deficiency judgment proceedings) related to the "bankrupt" borrower 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 scheduled payment, which reduction
may result from a reduction in the rate of interest and/or the alteration of the
repayment schedule (with or without affecting the unpaid principal balance of
the loan) and/or an extension (or acceleration) of the final maturity date. Some
bankruptcy courts have approved plans, based on the particular facts of the
reorganization case before them, that effected the curing of a mortgage loan
default by paying arrearages over a number of years. A bankruptcy court may also
permit a debtor to de-accelerate a secured loan and to reinstate the loan even
though the mortgagee had accelerated such loan and final judgment of foreclosure
had been entered in state court (provided no sale of the property had yet
occurred) prior to the filing of the debtor's petition, even if the full amount
due under the original loan is never repaid. Other types of significant
modifications to the terms of the mortgage may be acceptable to the bankruptcy
court, often depending on the particular facts and circumstances of the specific
case.
Federal bankruptcy law may also interfere with or affect the ability of a
mortgagee to enforce an assignment of rents and leases or a security interest in
hotel or nursing home 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 or nursing home revenues. Rents or hotel or
nursing home 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 or nursing home 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
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petition and the date that the lease is assumed or rejected. Although the lessee
is obligated to make all lease payments currently with respect to the
post-petition period, there is a risk that such payments will not be made due to
the lessee's poor financial condition. If the lease is rejected, the lessor will
be treated as an unsecured creditor with respect to its claim for damages for
termination of the lease, and the lessor must relet the mortgaged property
before the flow of lease payments will recommence. In addition, pursuant to
Section 502(b)(6) of the Bankruptcy Code, a lessor's damages for lease rejection
are limited.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery, as a preferential transfer, of certain payments made by the mortgagor
under the related Mortgage Loan to the Trust Fund. Payments on long-term debt
may be protected from recovery as preferences if they are payments in the
ordinary course of business made on debts incurred in the ordinary course of
business. Whether any particular payment would be protected depends upon the
facts specific to a particular transaction. If a Mortgage Loan includes any
guaranty, and the guaranty waives any rights of subrogation or contribution,
then certain payments by the mortgagor to the Trust Fund also may be avoided and
recovered as fraudulent conveyances.
A trustee in bankruptcy or a debtor in possession or various creditors who
extend credit after a case is filed, in some cases, may be entitled to collect
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the mortgagee. In certain circumstances, a trustee in bankruptcy or
debtor in possession may have the power to grant liens senior to or pari passu
with the lien of a mortgage, and analogous state statutes and general principles
of equity may also provide a mortgagor with means to halt a foreclosure
proceeding or sale and enforce a restructuring of a mortgage loan on terms a
mortgagee would not otherwise accept.
A trustee in bankruptcy or a debtor in possession, in some cases, also may
be entitled to subordinate the lien created by the mortgage loan to other liens
or the claims of general unsecured creditors. Generally, this requires proof of
"unequitable conduct" by the mortgagee. However, various courts have expanded
the grounds for equitable subordination to apply to various non-pecuniary claims
for such items as penalties and fines. A court may find that any prepayment
charge, various late payment charges and other claims by mortgagees may be
subject to equitable subordination on these grounds.
A trustee in bankruptcy or a debtor in possession, in some cases, also may
be entitled to avoid all or part of any claim or lien by the mortgagee if and to
the extent a judgment creditor, or a bona fide purchaser of 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
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 or have been built with or contain asbestos-containing
material or other indoor pollutants. 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; (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; or (iv) the
inability to sell the related Mortgage Loan in the secondary market or lease the
property to potential tenants. In certain circumstances,
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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 certain 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.
Under certain circumstances, it is possible that environmental 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. Excluded from CERCLA's definition of "owner"
or "operator", however, is a person "who without participating in the management
of the facility, holds indicia of ownership primarily to protect his security
interest." This is known as the "secured creditor exemption." Judicial decisions
interpreting the secured creditor exemption had varied widely, and one decision,
United States v. Fleet Factors Corp., 901 F.2d 1550 (11th Cir. 1990), cert.
denied, 498 U.S. 1046 (1991), had indicated that a lender's mere power to affect
and influence a borrower's operations might be sufficient to lead to liability
on the part of the lender. However, on September 30, 1996, the Asset
Conservation, Lender Liability, and Deposit Insurance Protection Act of 1996
(the "Lender Liability Act") became law. The Lender Liability Act clarifies the
secured creditor exemption to impose liability only on a secured lender who
exercises control over operational aspects of the facility and thus is
"participating in management." A number of environmentally related activities
before the loan is made and during its pendency, as well as "workout" steps to
protect a security interest, are identified as permissible to protect a security
interest without triggering liability. The Lender Liability Act also identifies
the circumstances in which foreclosure and post-foreclosure activities will not
trigger CERCLA liability.
The Lender Liability Act also amends the Solid Waste Disposal Act to limit
the liability of lenders holding a security interest for costs of cleaning up
contamination from underground storage tanks. However, the Lender Liability Act
has no effect on state environmental laws similar to CERCLA that may impose
liability on mortgagees and other persons, and not all of those laws provide for
a secured creditor exemption. Liability under many of these federal and state
laws 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.
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
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both, and uncertainty exists as to what kind of environmental site assessment
must be performed in order to qualify for the defense.
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 Materials for which some investigation,
remediation or clean-up action could be required or that it would be in the best
economic interest of the Trust Fund to take such actions with respect to such
Mortgaged Property. This requirement effectively precludes enforcement of the
security for the related Note until a satisfactory environmental assessment is
obtained and/or any required remedial action is taken. This requirement will
reduce the likelihood that a given Trust Fund will become liable for any
environmental conditions affecting a Mortgaged Property, but will make it more
difficult to realize on the security for the Mortgage Loan. There can be no
assurance that any environmental assessment obtained by the Master Servicer or
the Special Servicer, if any, will detect all possible environmental conditions
or that the other requirements of the Agreement, even if fully observed by the
Master Servicer or the Special Servicer, if any, will in fact insulate a given
Trust Fund from liability for environmental conditions.
"Hazardous Materials" are generally defined as any dangerous, toxic or
hazardous pollutants, chemicals, wastes or substances, including, without
limitation, those so identified pursuant to CERCLA or any other environmental
laws now existing, and specifically including, without limitation, asbestos and
asbestos-containing materials, polychlorinated biphenyls, radon gas, petroleum
and petroleum products, urea formaldehyde and any substances classified as being
"in inventory," "usable work in process" or similar classification that would,
if classified as unusable, be included in the foregoing definition.
If a mortgagee is or becomes liable for clean-up costs, it may bring an
action for contribution against the current owners or operators, the owners or
operators at the time of on-site disposal activity or any other party who
contributed to the environmental hazard, but such persons or entities may be
without substantial assets, 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. Accordingly, it is possible that such costs could
become a liability of the Trust Fund and occasion a loss to the
Certificateholders. 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.
Other environmental laws that may affect the value of a mortgaged
property, or impose cleanup costs or liabilities, including those related to
asbestos, radon, lead paint and underground storage tanks.
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 presumed ACMs (consisting of thermal system insulation, surfacing
materials and asphalt and vinyl flooring in buildings constructed prior to 1981)
and transfer all information regarding ACMs and presumed ACMs in their
facilities to successive owners.
The United States Environmental Protection Agency (the "EPA") has
concluded that radon gas, a naturally occurring substance, is linked to
increased risks of lung cancer. Although there are no current federal or state
requirements mandating radon gas testing, the EPA and the United States Surgeon
General recommend testing residences for the presence of radon and that
abatement measures be undertaken if radon concentrations in indoor air meet or
exceed four picocuries per liter.
The Residential Lead-Based Paint Hazard Reduction Act of 1992 (the "Lead
Paint Act") requires federal agencies to promulgate regulations that will
require owners of residential housing constructed prior to 1978 to disclose to
potential residents or purchasers any known lead-paint hazards. The Lead Paint
Act creates a private right of action with treble damages available for any
failure to so notify. Federal agencies have issued regulations delineating the
scope of this disclosure obligation which became effective in September 1996 for
owners of more than four residential dwellings and in December 1996 for owners
of one to four residential dwellings. In addition, the ingestion of lead-based
paint chips or dust particles by children can result in lead poisoning, and the
owner of a property where such circumstances exist may be held liable for such
injuries. Finally, federal law mandates that detailed worker safety standards
must be complied with where construction, alteration, repair or renovation of
structures that contain lead, or materials that contain lead, is contemplated.
Underground storage tanks ("USTs") are, and in the past have been,
frequently located at properties used for industrial, retail and other business
purposes. Federal law, as well as the laws of most states, currently require
USTs used for the storage of fuel or hazardous substances and waste to meet
certain standards designed to prevent releases from the USTs into the
environment. USTs installed prior to the implementation of these standards, or
that otherwise do not meet these standards, are potential sources of
contamination to the soil and groundwater. Land owners may be liable for the
costs of investigating and remediating soil and groundwater contamination that
may emanate from leaking USTs.
Enforceability of Certain Provisions
Default Interest; Late Charges; and Prepayment Fees. Some of the Mortgage
Loans may contain provisions requiring the mortgagor to pay late charges or
additional interest if required payments are not timely made, and in some
circumstances, may prohibit payments for a specified period and/or condition
prepayments upon the mortgagor's payment of prepayment fees or yield maintenance
penalties. 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"
below.
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Due-on-Sale Provisions. The enforceability of due-on-sale and
due-on-encumbrance 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 under
applicable state law. However, the Garn-St. Germain Depository Institutions Act
of 1982 (the "Garn-St. Germain Act"), which generally 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 have exercised their authority to regulate the enforceability
of such clauses with respect to mortgage loans that were: (i) originated or
assumed during the "window period" under the Garn-St. Germain Act, which ended
in all cases not later than October 15, 1982; and (ii) originated by lenders
other than national banks, federal savings institutions or federal credit
unions. The Federal Home Loan Mortgage Corporation has taken the position in its
published mortgage servicing standards that, out of a total of eleven "window
period states," five states (Arizona, Michigan, Minnesota, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of loans that were originated or assumed during the "window period"
applicable to such state. Also, the Garn-St. Germain Act does "encourage"
lenders to permit assumption of loans at the original rate of interest or at
some other rate less than the average of the original rate and the market rates.
The Agreement for each Series generally will provide that if any Mortgage
Loan contains a provision in the nature of a "due-on-sale" clause, which by its
terms provides that: (i) such Mortgage Loan shall (or may at the mortgagee's
option) become due and payable upon the sale or other transfer of an interest in
the related Mortgaged Property or (ii) such Mortgage Loan may not be assumed
without the consent of the related mortgagee in connection with any such sale or
other transfer, then, for so long as such Mortgage Loan is included in the Trust
Fund, the Master Servicer or the Special Servicer, if any, on behalf of the
Trustee, shall take such actions as it deems to be in the best interest of the
Trust Fund in accordance with the servicing standard set forth in the Agreement,
and may waive or enforce any due-on-sale clause contained in the related Note or
Mortgage.
In addition, under the federal Bankruptcy Code, due-on-sale clauses may
not be enforceable in bankruptcy proceedings and may, under certain
circumstances, be eliminated in any modified mortgage resulting from such
bankruptcy proceeding.
Acceleration on Default. It is expected that the Mortgage Loans will
include a "debt-acceleration" clause, which permits the mortgagee to accelerate
the full debt upon a monetary or nonmonetary default of the mortgagor. The
courts of all states will enforce such acceleration clauses in the event of a
material payment default if appropriate notices of default have been effectively
given. However, the equity courts of any state may refuse to foreclose a
mortgage when an acceleration of the indebtedness would be inequitable or unjust
or the circumstances would render the acceleration unconscionable. Furthermore,
in some states, the mortgagor may avoid foreclosure and reinstate an accelerated
loan by paying only the defaulted amounts and, in certain states, the costs and
attorneys' fees incurred by the mortgagee in collecting such defaulted payments.
State courts also are known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of Installment
Contracts. For example, a mortgagee's practice of accepting late payments from
the mortgagor may be deemed a waiver of the forfeiture clause. State courts also
may impose equitable grace periods for payment of arrearages or otherwise permit
reinstatement of the Installment Contract following a default. Not infrequently,
if a mortgagor under an Installment Contract has significant equity in the
property, equitable principles will be applied to reform or reinstate the
Installment Contract or to permit the mortgagor to share the proceeds upon a
foreclosure sale of the property if the sale price exceeds the debt.
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Soldiers' and Sailors' Relief Act
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service (including
the Army, Navy, Air Force, Marines, Coast Guard, members of the National Guard
or any Reserves who are called to active duty status after the origination of
their mortgage loan and officers of the U.S. Public Health Service assigned to
duty with the military) after the origination of such mortgagor's mortgage loan
may not be charged interest (including fees and charges) above an annual rate of
6% during the period of such mortgagor's active duty status, unless a court
orders otherwise upon application of the mortgagee. Any shortfall in interest
collections resulting from the application of the Relief Act, to the extent not
covered by any applicable Credit Enhancement, could result in losses to the
holders of the Certificates. In addition, the Relief Act imposes limitations
that would impair the ability of the Master Servicer or the Special Servicer, if
any, to foreclose on an affected Mortgage Loan during the mortgagor's period of
active duty status and, under certain circumstances, during an additional three
months thereafter. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned by the inability to realize
upon the Mortgaged Property in a timely fashion. Because the Relief Act applies
to mortgagors who enter military service (including reservists who are later
called to active duty) after origination of the related 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,
but may exclude payments in the form of "reimbursement of foreclosure expenses"
or other charges found to be distinct from "interest". If, however, the amount
charged for the use of the money loaned is found to exceed a statutorily
established maximum rate, the form employed and the degree of overcharge are
both immaterial. Statutes differ in their provision as to the consequences of a
usurious loan. One type of statute requires the mortgagee to forfeit the
interest above the applicable limit or imposes a specified penalty. Under this
statutory scheme, the mortgagor may have the recorded mortgage or deed of trust
cancelled upon paying its debt with lawful interest, or the mortgagee may
foreclose, but only for the debt plus lawful interest, in either case, subject
to any applicable credit for excessive interest collected from the mortgagor and
any penalty owed by the mortgagee. A second type of statute is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to have the recorded mortgage or
deed of trust cancelled without any payment and prohibiting the mortgagee from
foreclosing.
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that state usury limitations do
not apply to certain types of residential (including multifamily, but not other
commercial) first mortgage loans originated by certain lenders after March 31,
1980. A similar federal statute was in effect with respect to mortgage loans
made during the first three months of 1980. The statute authorized any state to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans, originated by non-federally chartered lenders have historically been
subjected to a variety of restrictions. Such restrictions differed from state to
state, resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially with
respect to residential (including multifamily, but not other commercial)
mortgage loans as a result of the enactment of Title VIII of the Garn-St.
Germain Act ("Title VIII"). Title VIII
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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.
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
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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.
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of a mortgage. In addition, substantive
requirements are imposed on mortgagees in connection with the origination and
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include the federal Truth-in-Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, and related statutes. These federal laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans.
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 risks to
mortgagees in that: (i) such properties are typically operated pursuant to
franchise, management and operating agreements that may be terminable by the
franchisor, manager or operator; and (ii) the transferability of operating,
liquor and other licenses to the entity acquiring such properties either through
purchase or foreclosure is subject to the vagaries of local law requirements. In
addition, mortgaged properties that are multifamily residential properties or
cooperatively owned multifamily properties may be subject to rent control laws,
which could impact the future cash flows of such properties. See "RISK
FACTORS--Risks Associated with Lending on Income Producing Properties."
Criminal Forfeitures
Various federal and state laws (collectively, the "Forfeiture Laws")
provide for the civil or criminal forfeiture of certain property (including real
estate) used or intended to be used to commit or facilitate the commission of a
violation of certain laws (typically criminal laws), or purchased with the
proceeds of such violations. Even though the Forfeiture Laws were originally
intended as tools to fight organized crime and drug related crimes, the current
climate appears to be to expand the scope of such laws. Certain of the
Forfeiture Laws (i.e., the Racketeer Influenced and Corrupt Organizations law
and the Comprehensive Crime Control Act of 1984) provide for notice, opportunity
to be heard and for certain defenses for "innocent lienholders." However, given
the uncertain scope of the Forfeiture Laws and their relationship to existing
constitutional protections afforded property owners, no assurance can be made
that enforcement of a Forfeiture Law with respect to any Mortgaged Property
would not deprive the Trust Fund of its security for the related Mortgage Loan.
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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. 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. 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 focuses primarily upon investors who will hold Certificates
as "capital assets" (generally, property held for investment) within the meaning
of Section 1221 of the Code, but much of the discussion is applicable to other
investors as well. Potential purchasers of Certificates are advised to consult
their own tax advisers concerning the state or local tax consequences to them of
the purchase, holding and disposition of Certificates or the federal tax
consequences to them resulting from their individual circumstances or status or
resulting from their being subject to special treatment under the federal income
tax laws.
Taxation of the REMIC and its Certificate 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
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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 minimus 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 minimus 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
minimus 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 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. For purposes of this
opinion, where the applicable Prospectus Supplement provides for a fixed
retained yield with respect to the Mortgaged Properties underlying a Series of
Certificates, references to the Mortgaged Properties will be deemed to refer to
that portion of the Mortgaged Properties held by the Trust Fund which does not
include the fixed retained yield.
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
("IRS").
In addition to the foregoing requirements, the various interests in a
REMIC also must meet certain requirements. All of the interests in a REMIC must
be either of the following: (i) one or more Classes of regular interests or (ii)
a single Class of residual interests on which distributions, if any, are made
pro rata. A regular interest is an interest in a REMIC that is issued on the
Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate or consist of a specified, nonvarying portion of
the interest payments on some or all of the qualified mortgages. A qualified
variable rate includes a rate based on a weighted average of rates on some or
all of the REMIC's qualified mortgages, which in turn bear a fixed rate or
qualified variable rate. A residual interest is an interest in a REMIC other
than a regular interest that is issued on the Startup Day and is designated as a
residual interest.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any prohibited transactions tax,
contributions tax, tax on "net income from foreclosure
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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.
Status of REMIC Certificates. 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. REMIC Certificates held by a regulated investment company
will not constitute "government securities" within the meaning of Code Section
851(b)(4)(A)(i). REMIC Certificates held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
682(c)(i).
It is possible that various reserves or funds will reduce the proportion
of REMIC assets that qualify under the standards described above.
Tiered REMIC Structures. For certain Series of Certificates, two or more
separate elections may be made to treat designated portions of the related Trust
Fund as REMICs ("Tiered REMICs") for federal income tax purposes. Upon the
issuance of any such Series of Certificates, counsel to the Depositor will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the related Agreement, the Tiered REMICs will each qualify as a
REMIC and the Certificates issued by the Tiered REMICs, will be considered to
evidence ownership of Regular Certificates or Residual Certificates in the
related REMIC within the meaning of the REMIC Regulations of the Code.
Solely for purposes of determining whether the Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether
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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 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
minimus amount determined under the Code.
Under a de minimus rule, OID on a Regular Certificate will be considered
to be zero if such OID is less than .25% of the stated redemption price at
maturity of the Regular Certificate multiplied by the weighted average maturity
of the Regular Certificate. Although not specifically addressed by regulations,
it is assumed that the schedule of distributions used in determining weighted
average maturity should be based on the assumed rate of prepayment of the
Mortgage Loans and the anticipated reinvestment rate, if any relating to the
Regular Certificates (the "Prepayment Assumption"). The Prepayment Assumption
with respect to a Series of Regular Certificates will be set forth in the
related Prospectus Supplement. The holder of a Regular Certificate includes any
de minimus OID in income pro rata as stated principal payments are received.
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. The
stated redemption price at maturity is the sum of all payments on the
Certificate other than any "Qualified Stated Interest" payments.
If the interval between the issue date and the first Distribution Date on
a Regular Certificate is longer than the interval between subsequent
Distribution Dates (and interest paid on the first Distribution Date is less
than would have been earned if the stated interest rate were applied to
outstanding principal during each day in such interval), the stated interest
distributions on such Regular Certificate technically do not constitute
qualified stated interest. In such case a special rule, applying solely for the
purpose of determining whether OID is de minimus, provides that the interest
shortfall for the long first period (i.e., the interest that would have been
earned if interest had been paid on the first Distribution Date for each day the
Regular Certificate was outstanding) is treated as made at a fixed rate if the
value of the rate on which the payment is based is adjusted in a reasonable
manner to take into account the length of the interval. Regular Certificate
holders should consult their own tax advisors to determine the issue price and
stated redemption price at maturity of a Regular Certificate.
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Qualified stated interest is interest that is unconditionally payable at
least annually during the entire term of the Certificate at either (a) a single
fixed rate that appropriately takes into account the length of the interval
between payments or (b) the current values of (i) a single "qualified floating
rate" or (ii) a single "objective rate" (each a "Single Variable Rate"). A
"current value" is the value of a variable rate on any day that is no earlier
than three months prior to the first day on which that value is in effect and no
later than one year following that day. A qualified floating rate is a rate the
variations in which reasonably can be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the currency in which the
Regular Certificate is denominated (e.g., LIBOR). Such a rate remains qualified
even though it is multiplied by a fixed, positive multiple not exceeding 1.35,
increased or decreased by a fixed rate, or both. Certain combinations of rates
constitute a single qualified floating rate, including (a) interest stated at a
fixed rate for an initial period of less than one year followed by a qualified
floating rate, if the value of the qualified floating rate on the issue date is
intended to approximate the fixed rate, and (b) two or more qualified floating
rates that can reasonably be expected to have approximately the same values
throughout the term of the Regular Certificate. A combination of such rates is
conclusively presumed to be a single qualified floating rate if the values of
all rates on the issue date are within .25 percentage points of each other. A
variable rate that is subject to an interest rate cap, floor, "governor" or
similar restriction on rate adjustment may be a qualified floating rate only if
such restriction is fixed throughout the term of the instrument, or is not
reasonably expected as of the issue date to cause the yield on the debt
instrument to differ significantly from the expected yield absent the
restriction. An objective rate is a rate, other than a qualified floating rate,
determined by a single formula that is fixed throughout the term of the Regular
Certificate and is based on (i) one or more qualified floating rates (including
a multiple or inverse of a qualified floating rate); (ii) one or more rates each
of which would be a qualified floating rate for a debt instrument denominated in
a foreign currency; (iii) the yield or the changes in the price of one or more
items of "actively traded" personal property other than stock or debt of the
issuer or a related party, (iv) a combination of rates described in (i), (ii) or
(iii); or (v) other rates designated by the IRS in the Internal Revenue
Bulletin. Each rate described in (i) through (v) 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. 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 (i) 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 (ii)
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
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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 prepaid 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.
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, OID, de minimus
OID, market discount, de minimus market discount and unstated interest, as
adjusted by any premium. If a holder of a Regular Certificate makes such an
election and (i) the Regular Certificate has amortizable bond premium, the
holder is deemed to have made an election to amortize bond premium with respect
to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires or (ii) the Regular Certificate has market
discount, the holder is deemed to have made an election to include market
discount in income currently for all debt instruments having market discount
acquired during the year of the election or thereafter. See "--Market Discount
and Premium" above. A holder of a Regular Certificate should consult its tax
adviser before making this election.
A subsequent holder of a Regular Certificate will also be required to
include OID in gross income. If such a holder purchases a Regular Certificate
for an amount that exceeds its adjusted issue price the holder will be entitled
(as will an initial holder who pays more than a Regular Certificate's issue
price) to offset such OID by comparable economic accruals of portions of such
excess.
Interest Weighted Certificates. It is not clear how income should be
accrued with respect to Regular Certificates the payments on which consist
solely or primarily of a specified portion of the interest payments on qualified
mortgages held by the REMIC ("Interest Weighted Certificate"). The Depositor
intends to take the position that all of the income derived from an Interest
Weighted Certificate should be treated as OID and that the amount and rate of
accrual of such OID should be calculated by treating the Interest Weighted
Certificate as a Compound Interest Certificate. However, the IRS could assert
that income derived from an Interest Weighted Certificate should be calculated
as if the Interest Weighted Certificate were a Certificate purchased at a
premium equal to the excess of the price paid by such Certificateholder for the
Interest Weighted Certificate over its stated principal amount, if any. Under
this approach, a Certificateholder would be entitled to amortize such premium
only if it has in effect an election under Section 171 of the Code with respect
to all taxable debt instruments held by such holder, as described below.
Alternatively, the IRS could assert that the Interest Weighted Certificate
should be taxable under the final regulations under Section 1275 governing debt
issued with contingent principal payments, in which case a Certificateholder
might recognize income at a slower rate than if the Interest Weighted
Certificate were treated as a Compound Interest Certificate. If the contingent
payment rules were applicable to Interest Weighted Securities (which, as
1272(a)(6) instruments, are specifically excluded from the scope of the
contingent payment regulations) income on certain Certificates would be computed
under the "noncontingent bond method." The noncontingent bond method would
generally apply in a manner similar to the method prescribed by the Code under
Section 1272(a)(6). See "--Variable Rate Regular Securities." Because of
uncertainty in the law, counsel to the Depositor will not render any opinion on
these issues.
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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 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
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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) allocated to such period in relation
to the sum of such interest together with the remaining interest as of the end
of such period. 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. The deferred portion of such interest expense in any taxable year
generally will not exceed the accrued market discount on the Regular Certificate
for such year.
Any such deferred interest expense is, in general, allowed as a deduction not
later than the year in which the related market discount income is recognized or
the Regular Certificate is disposed of. 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. In Revenue Procedure 92- 67, the IRS set forth procedures for taxpayers (1)
electing under Code Section 1278(b) to include market discount in income
currently, (2) electing under rules of Code Section 1276(b) to use a constant
interest rate to determine accrued market discount on a bond where the holder of
the bond is required to determine the amount of accrued market discount at a
time prior to the holder's disposition of the bond, and (3) requesting consent
to revoke an election under Code Section 1278(b). Purchasers who purchase
Regular Certificates at a market discount should consult their tax advisors
regarding the elections for recognition of such discount.
By analogy to the OID Regulations, market discount with respect to a
Regular Certificate will be considered to be zero if such market discount is
less than 0.25% of the remaining stated redemption price at maturity of such
Regular Certificate multiplied by the weighted average maturity of the Regular
Certificates {determined as described above under "- Original Issue Discount"}
remaining after the date of purchase. Treasury regulations implementing the
market discount rules have not yet been issued, and therefore investors should
consult their own tax advisors regarding the application of these rules as well
as the advisability of making any of the elections with respect thereto.
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.
The IRS has published proposed regulations (the "Proposed Premium
Regulations") covering the amortization of bond premiums. The Proposed Premium
Regulations describe the yield method of amortizing premium and provided that
the Regular Certificate holder may offset the premium against corresponding
interest income only as that income is taken into account under the Regular
Certificate holder's method of accounting. For instruments that may be called or
prepaid prior to maturity, a Regular Certificate holder will be deemed to
exercise its option and an issuer will be deemed to exercise its redemption
right in a manner that maximizes the Regular Certificate holder's yield. The
Proposed Premium Regulations are proposed to
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be effective for debt instruments acquired on or after 60 days after final
regulations are issued. A Regular Certificate holder may elect to amortize bond
premium under the Proposed Premium Regulations for the taxable year containing
the effective date, with the election applying to all the Regular Certificate
holder's debt instruments held on the first day of the taxable year. The
Proposed Regulations are subject to further administrative actions before
becoming effective, if at all, and may be modified before their becoming
effective. Purchasers who pay a premium for their Regular Certificates should
consult their tax advisors regarding the election to amortize premium and the
method to be employed.
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 OID 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 1997, estimated to be $121,200, or
$60,600, 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.
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Sale or Exchange of Regular Certificates
A Regular Interest Certificateholder's tax basis in its Regular
Certificate is the price such holder pays for a Certificate, plus amounts of OID
or market discount included in income and reduced by any payments received
(other than qualified stated interest payments) and any amortized premium. Gain
or loss recognized on a sale, exchange or redemption of a Regular Certificate,
measured by the difference between the amount realized and the Regular
Certificate's basis as so adjusted, will generally be capital gain or loss,
assuming that the Regular Certificate is held as a capital asset. If, however, a
Certificateholder is a bank, thrift or similar institution described in Section
582 of the Code, gain or loss realized on the sale or exchange of a Certificate
will be taxable as ordinary income or loss. In addition, gain from the
disposition of a Regular Certificate that might otherwise be capital gain will
be treated as ordinary income to the extent of the excess, if any, of (i) the
amount that would have been includible in the holder's income if the yield on
such Regular Certificate had equaled 110% of the applicable federal rate as of
the beginning of such holder's holding period, over (ii) the amount of ordinary
income actually recognized by the holder with respect to such Regular
Certificate prior to its sale. As of date of this Prospectus the maximum
marginal tax rate on ordinary income for individual taxpayers is 39.6%. The
maximum marginal tax rate on long-term capital gains for non-corporate taxpayers
is 20%. The maximum tax rate on midterm capital gains for non-corporate
taxpayers is 28% and the maximum marginal tax rate on both ordinary income and
long-term capital gains of corporate taxpayers is 35%. The Tax Relief bill of
1997 enacted new tax rates for net capital gain income realized by non-corporate
taxpayers. Net capital gain realized on a capital asset which is sold after
being held by 12 months or less will be subject to tax at ordinary income tax
rates. Any gain realized on a capital asset which is sold after being held for
more than 12 months but not more than 18 months will be subject to tax at
ordinary income tax rates, subject to a maximum tax rate of 28% (a "mid-term
capital gain"). Gain realized on a sale of a capital asset after a holding
period of more than 18 months would be subject to tax at 20%, assuming that the
taxpayer is otherwise in a rate bracket equal to or greater than 28% (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
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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 1997, estimated to be $121,200, or $60,600 in the case of
a separate return of a married individual within the meaning of Code Section
7703, which amounts will be adjusted annually for inflation) will be reduced by
the lesser of (i) 3% of the excess of adjusted gross income over the applicable
amount, or (ii) 80% of the amount of itemized deductions otherwise allowable for
such taxable year. The amount of additional taxable income reportable by
Certificateholders that are subject to the limitations of either Section 67 or
Section 68 of the Code may be substantial. Furthermore, in determining the
alternative minimum taxable income of such a Certificateholder that is an
individual, estate or trust, or a "pass-through entity" beneficially owned by
one or more individuals, estates or trusts, no deduction will be allowed for
such holder's allocable portion of servicing fees and other miscellaneous
itemized deductions of the REMIC, even though an amount equal to the amount of
such fees and other deductions will be included in such holder's gross income.
Accordingly, such Certificates may not be appropriate investments for
individuals, estates or trusts, or pass-through entities beneficially owned by
one or more individuals, estates or trusts. Such prospective investors should
consult with their tax advisors prior to making an investment in such
Certificates.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the Regular Interests and the Residual Interests on the "Startup
Day" (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to all loans.
Subject to possible application of the de minimus 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 minimus 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
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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.
Liquidation of the REMIC. If a REMIC and the Trustee adopt a plan of
complete liquidation, within the meaning of Code Section 860F(a)(4)(A)(i) and
sell all the REMIC's assets (other than cash) within a 90- day period beginning
on the date of the adoption of the plan of liquidation, the REMIC will recognize
no gain or loss on the sale of its assets, provided that the REMIC credits or
distributes in liquidation all the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC) to holders of Regular
Certificates and Residual Certificateholders within the 90-day period.
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."
A Residual Certificateholder will not be permitted to amortize directly
the cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC. Such taxable income will not include cash received
by the REMIC that represents a recovery of the REMIC's basis in its assets. Such
recovery of basis by the REMIC will have the effect of amortization of the issue
price of the Residual Certificates over their life. However, in view of the
possible acceleration of the income of Residual Certificateholders discussed
subsequently, the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Certificates.
If a Residual Certificate has a negative value, it is not clear whether
its issue price would be considered to be zero or such negative amount for
purposes of determining the REMIC's basis in its assets. The REMIC Regulations
do not address whether residual interests could have a negative basis and a
negative issue price. The Depositor does not intend to treat a Class of Residual
Certificates as having a value of less than zero for purposes of determining the
bases of the related REMIC in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in a Residual Certificate is
greater than the corresponding portion of the REMIC's basis in the Mortgage
Loans, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC, unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations do not currently so provide. See "Residual
Certificates-Sale or Exchange" below regarding possible treatment of a loss upon
termination of the REMIC as a capital loss.
The holder of a Residual Certificate must report its proportionate share
of the taxable income of the REMIC regardless of whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMICs in which the loans held by the REMIC were issued or acquired
at a discount, since mortgage prepayments cause recognition of discount income,
while the corresponding portion of the prepayment could be used in whole or in
part to make principal payments on Regular Interests issued without any discount
or at an insubstantial discount. When there is more than one Class of Regular
Certificates that distribute
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principal sequentially, this mismatching of income and deductions is
particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being made
in respect of earlier maturing Classes of Certificates to the extent that such
Classes are not issued with substantial discount. If taxable income attributable
to such a mismatching is realized in general, losses would be allowed in later
years as distributions on the later Classes of Regular Certificates are made.
(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.
As a result, such investors may have aggregate taxable income in excess of
the aggregate amount of cash received on such Certificates with respect to
interest at the pass-through rate on such Certificates or discount thereon. In
addition, such expenses are not deductible at all for purposes of computing the
alternative minimum tax and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Certificates or
where the servicing fees are in excess of reasonable servicing compensation, the
transaction will be subject to the application of the "stripped bond" and
"stripped coupon" rules of the Code, as described below under "--Tax Status as a
Grantor Trust-Discount or Premium on Stripped Certificates."
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.
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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. The Small Business Job Protection
Act of 1996 eliminated a prior law exception to this rule for certain
organizations taxed under Section 593 (thrift institutions) with respect to
Residual Certificates with significant value. This change is effective for
Residual Certificates acquired in taxable years beginning after December 31,
1995. If the holder of a Residual Certificate is an organization subject to the
tax on unrelated business income imposed by Code Section 511, such as a pension
fund or other exempt organization, 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." Although not entirely clear,
the REMIC Regulations indicate that the significant value determination is made
only on the Startup Day.
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.
Alternative Minimum Tax. The 1996 Act also provides new rules affecting
the determination of alternative minimal taxable income ("AMTI") of a Residual
Certificateholder. First, AMTI is calculated without regard to the special rule
that taxable income cannot be less than excess inclusion income for the year.
Second, AMTI cannot be less than excess inclusion income for the year. Finally,
any AMTI net operating loss deduction is computed without regard to excess
inclusion income. These changes are effective for tax years ending after
December 31, 1986, unless a Residual Certificateholder elects to have the rules
apply only to tax years beginning after August 20, 1996.
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
Disqualified Organizations. 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 and the
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transferor provides a statement in writing to the Depositor and the Trustee that
it has no actual knowledge that the statement is false.
The Prospectus Supplement relating to a Series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term "U.S. Person" means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof or an estate or trust that is subject to U.S.
federal income tax regardless of the source of its income.
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).
Such a tax generally would be imposed on the transferor of the Residual
Certificate, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. A transferor of a Residual Certificate
would in no event, however, be liable for such tax with respect to a transfer if
the transferee furnishes to the transferor an affidavit that the transferee is
not a Disqualified Organization and, as of the time of the transfer, the
transferor does not have actual knowledge that such affidavit is false. The tax
also may be waived by the Treasury Department if the Disqualified Organization
promptly disposes of the Residual Certificate and the transferor pays income tax
at the highest corporate rate on the excess inclusion for the period the
Residual Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" has excess inclusion income with
respect to a Residual Certificate during a taxable year and a Disqualified
Organization is the record holder of an equity interest in such entity, then a
tax is imposed on such entity equal to the product of (i) the amount of excess
inclusions that are allocable to the interest in the Pass-Through Entity during
the period such interest is held by such Disqualified Organization and (ii) the
highest marginal federal corporate income tax rate. Such tax would be deductible
from the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that (i) states under penalty of perjury that
it is not a Disqualified Organization or (ii) furnishes a social security number
and states under penalties of perjury that the social security number is that of
the transferee, provided that during the period such person is the record holder
of the Residual Certificate, the Pass-Through Entity does not have actual
knowledge that such affidavit is false.
Noneconomic Residual Interests. 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. 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 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
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distributions from the REMIC at or after the time at which the taxes accrue on
the anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. The present value is calculated based on the Prepayment Assumption, using
a discount rate equal to the applicable federal rate under Code Section
1274(d)(1) that would apply to a debt instrument issued on the date the
noneconomic residual interest was transferred and whose term ended on the close
of the last quarter in which excess inclusions were expected to accrue with
respect to the Residual Interest at the time of transfer. 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. Under the REMIC Regulations, a transferor is presumed not to have
improper knowledge if (i) the transferor conducted, at the time of the transfer,
a reasonable investigation of the financial condition of the transferee and, as
a result of the investigation, the transferor found that the transferee had
historically paid its debts as they came due and found no significant evidence
to indicate that the transferor will not continue to pay its debts a they come
due in the future; and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, the
transferee may incur tax liabilities in excess of any cash flows generated by
the residual interest and that the transferee intends to pay taxes associated
with holding of residual interest as they become due. The Agreement will require
the transferee of a Residual Certificate to state as part of the affidavit
described above under the heading "-Disqualified Organizations" that such
transferee (i) has historically paid its debts as they come due, (ii) intends to
continue to pay its debts as they come due in the future, (iii) understands
that, as the holder of a noneconomic residual interest, it may incur tax
liabilities in excess of any cash flows generated by the Residual Certificate,
and (iv) intends to pay any and all taxes associated with holding the Residual
Certificate as they become due. The transferor must have no reason to believe
that such statement is untrue. 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 final
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. Reports of accrued interest and OID will be made
annually to the IRS and to individuals, estates, non-exempt and non-charitable
trusts, and partnerships who are either holders of record of Regular
Certificates or beneficial owners who own Regular Certificates through a broker
or middleman as nominee. All brokers, nominees and all other non- exempt holders
of record of Regular Certificates (including corporations, non-calendar year
taxpayers, securities or commodities dealers, real estate investment trusts,
investment companies, common trust funds, thrift institutions and charitable
trusts) may request such information for any calendar quarter by telephone
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or in writing by contacting the person designated in IRS Publication 938 with
respect to a particular Series of Regular Certificates. Holders through nominees
must request such information from the nominee.
The IRS's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC to each
Residual Certificateholder by the end of the month following the close of each
calendar quarter (41 days after the end of a quarter under proposed Treasury
regulations) in which the REMIC is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the IRS concerning Code Section 67
expenses (see "Calculation of REMIC Income" above) allocable to such holders.
Furthermore, under such regulations, information must be furnished quarterly to
Residual Certificateholders, furnished annually to holders of Regular
Certificates, and filed annually with the IRS concerning the percentage of the
REMIC's assets meeting the qualified asset tests described above under
"--Qualification as a REMIC--Status of REMIC Certificates." The holder of the
largest percentage interest of the Residual Certificates will be designated as
and will act as the "tax matters person" with respect to the REMIC in all
respects.
In general, the Trustee will act as attorney in fact and agent for the tax
matters person and, subject to certain notice requirements and various
restrictions and limitations, generally will have the authority to act on behalf
of the REMIC and the Residual Interest Certificateholders in connection with the
administrative and judicial review of items of income, deduction, gain or loss
of the REMIC, as well as the REMIC's classification. Residual Interest
Certificateholders generally will be required to report such REMIC items
consistently with their treatment on the related REMIC's tax return and may in
some circumstances be bound by a settlement agreement between the Trustee as
attorney in fact and agent for tax matters person, and the IRS concerning any
such REMIC item. Adjustments made to the REMIC tax return may require a Residual
Interest Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a Residual Interest Certificateholder's
return. No REMIC will be registered as a tax shelter pursuant to Section 6111 of
the Code because it is not anticipated that any REMIC will have a net loss for
any of the first five taxable years of its existence. Any person that holds a
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, the
name and address of such person and other information.
Tax Status as a Grantor Trust
General. If the applicable Prospectus Supplement so specifies with respect
to a Series of Certificates, the Certificates of such Series will not be treated
as regular or residual interests in a REMIC for federal income tax purposes but
instead will be treated as an undivided beneficial ownership interest in the
Mortgage Loans and the arrangement pursuant to which the Mortgage Loans will be
held and the Certificates will be issued, will be classified for federal income
tax purposes as a grantor trust under Subpart E, Part 1 of Subchapter J of the
Code and not as an association taxable as a corporation. In such a case,
Morrison & Hecker L.L.P., counsel to the Depositor, will deliver its opinion to
the effect that the arrangement by which the Certificates of that Series are
issued will be treated as a grantor trust as long as all of the provisions of
the applicable Trust Agreement are complied with and the statutory and
regulatory requirements are satisfied. In some Series ("Pass-Through
Certificates"), there will be no separation of the principal and interest
payments on the Mortgage Loans. In such circumstances, a Certificateholder will
be considered to have purchased an undivided interest in each of the Mortgage
Loans. In other cases ("Stripped Certificates"), sale of the Certificates will
produce a separation in the ownership of the principal payments and interest
payments on the Mortgage Loans.
Each Certificateholder will be required to 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 provided that such
amounts are
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reasonable compensation for services rendered (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 1997, $120,200, or $60,600 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.
Stripped Certificates
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.
Original Issue Discount. The treatment of any discount will depend on
whether the discount represents OID or market discount. In the case of a
Mortgage Loan with OID 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 OID that accrues during that year, determined under a
constant yield method by reference to the initial yield to maturity of the
Mortgage Loan, in advance of receipt of the cash attributable to such income and
regardless of the method of federal income tax accounting employed by that
holder. OID 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 OID 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 OID 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 OID will be reduced or eliminated.
Market Discount. 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 minimus
amount of "market discount" (generally, the excess of the principal amount of
the
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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 OID, 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, OID in the relevant period to
total OID 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 applies the OID rules to stripped bonds and stripped coupons. For purposes
of computing OID, 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 OID 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
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of reporting income for such Certificates, and it is expected that OID 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 OID 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 OID 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 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
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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. Any amounts withheld from distribution on Regular Certificates
would be allowed as a credit against such Certificate holders federal income tax
liability or would be refunded by the IRS.
Tax Treatment of Foreign Investors
Regular Certificates. 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 not be subject to the 30% United States withholding tax. Upon receipt of
appropriate ownership statements signed under penalties of perjury, identifying
the beneficial owner and stating, together with other statements, that the
beneficial owner of the Regular Certificate is a Nonresident, the issuer
normally will be relieved of obligations to withhold tax from
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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 United States federal income tax at regular rates.
Residual Certificates. 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. If the amounts paid to
Residual Certificateholders who are Nonresidents are effectively connected with
the conduct of a trade or business within the United States by such
Nonresidents, 30% (or lower treaty rate) withholding will not apply. Instead,
the amounts paid to such Nonresidents will be subject to United States federal
income tax at regular rates. 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. See
"--Excess Inclusions" herein. 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."
On April 22, 1996, the IRS issued proposed regulations which, if adopted
in final form, could have an affect on the United States taxation of foreign
investors holding Regular Certificates or Residual Certificates. The proposed
regulations would apply to payments after December 31, 1997. Investors who are
Non-U.S. Persons should consult their tax advisors regarding the specific tax
consequences to them of owning Regular Certificates or Residual Certificates.
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.
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ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on employee benefit plans subject to ERISA ("ERISA
Plans") and prohibits certain transactions between ERISA Plans and persons who
are "parties in interest" (as defined under ERISA) with respect to assets of
such Plans. Section 4975 of the Code prohibits a similar set of transactions
between certain plans ("Code Plans," and together with ERISA Plans, "Plans") and
persons who are "disqualified persons" (as defined in the Code) with respect to
Code Plans. Certain employee benefit plans, such as governmental plans and
church plans (if no election has been made under Section 410(d) of the Code),
are not subject to the requirements of ERISA or Section 4975 of the Code, and
assets of such plans may be invested in Certificates, subject to the provisions
of other applicable federal and state law. Any such plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is, however, subject to the prohibited transaction rules set forth
in Section 503 of the Code.
Investments by ERISA Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that investments be made in accordance with
the documents governing the ERISA Plan. Before investing in a Certificate, an
ERISA Plan fiduciary should consider, among other factors, whether to do so is
appropriate in view of the overall investment policy and liquidity needs of the
ERISA Plan. Such fiduciary should especially consider the sensitivity of the
investments to the rate of principal payments (including prepayments) on the
Mortgage Loans, as discussed in the Prospectus Supplement related to a Series.
Prohibited Transactions
Section 406 of ERISA and Section 4975 of the Code prohibit parties in
interest and disqualified persons with respect to ERISA Plans and Code Plans
from engaging in certain transactions involving such Plans or "plan assets" of
such Plans, unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code and Sections 502(i) and 502(l) of ERISA
provide for the imposition of certain excise taxes and civil penalties on
certain persons that engage or participate in such prohibited transactions. The
Depositor, the Underwriter, the Master Servicer, the Special Servicer, if any,
or the Trustee or certain affiliates thereof may be considered or may become
parties in interest or disqualified persons with respect to a Plan. If so, the
acquisition or holding of Certificates by, on behalf of or with "plan assets" of
such Plan may be considered to give rise to a "prohibited transaction" within
the meaning of ERISA and/or Section 4975 of the Code, unless the 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.
75
<PAGE>
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be considered merely to include its interest in the
Certificates instead of being deemed to include an undivided interest in each of
the underlying assets of the Trust Fund. However, it cannot be predicted in
advance, nor can there be a continuing assurance whether such exceptions may be
met, because of the factual nature of certain of the rules set forth in the
Regulations. For example, one of the exceptions in the Regulations states that
the underlying assets of an entity will not be considered "plan assets" if less
than 25% of the value of each class of equity interests is held by "benefit plan
investors," which are defined as ERISA Plans, Code Plans, individual retirement
accounts and employee benefit plans not subject to ERISA (for example,
governmental plans), but this exemption is tested immediately after each
acquisition of an equity interest in the entity whether upon initial issuance or
in the secondary market.
Pursuant to the Regulations, if the assets of the Trust Fund were deemed
to be "plan assets" by reason of the investment of assets of a Plan in any
Certificates, the "plan assets" of such Plan would include an undivided interest
in the Mortgage Loans, the mortgages underlying the Mortgage Loans and any other
assets held in the Trust Fund. Therefore, because the Mortgage Loans and other
assets held in the Trust Fund may be deemed to be "plan assets" of each Plan
that purchases Certificates, in the absence of an exemption, the purchase, sale
or holding of Certificates of any Series or Class by or with "plan assets" of a
Plan may result in a prohibited transaction and the imposition of civil
penalties or excise taxes. Depending on the relevant facts and circumstances,
certain prohibited transaction exemptions may apply to the purchase, sale or
holding of Certificates of any Series or Class by a Plan--for example,
Prohibited Transaction Class Exemption ("PTCE") 95-60, which exempts certain
transactions between insurance company general accounts and parties in interest;
PTCE 91-38, which exempts certain transactions between bank collective
investment funds and parties in interest; PTCE 90-1, which exempts certain
transactions between insurance company pooled separate accounts and parties in
interest; or PTCE 84-14, which exempts certain transactions effected on behalf
of a plan by a "qualified professional asset manager." There can be no assurance
that any of these exemptions will apply with respect to any Plan's investment in
any Certificates or, even if an exemption were deemed to apply, that any
exemption would apply to all prohibited transactions that may occur in
connection with such investment. Also, the Department has issued individual
administrative exemptions from application of certain prohibited transaction
restrictions of ERISA and the Code to most underwriters of mortgage-backed
securities (each, an "Underwriter's Exemption"). Such an Underwriter's Exemption
can only apply to mortgage-backed securities which, among other conditions, are
sold in an offering with respect to which such an underwriter serves as the sole
or a managing underwriter, or as a selling or placement agent. If such an
Underwriter's Exemption might be applicable to a Series of Certificates, the
related Prospectus Supplement will refer to such possibility. Further, the
related Prospectus Supplement may provide that certain Classes or Series of
Certificates may not be purchased by, or transferred to, Plans or may only be
purchased by, or transferred to, an insurance company for its general account
under circumstances that would not result in a prohibited transaction.
Any fiduciary or other Plan investor who proposes to invest "plan assets"
of a Plan in Certificates of any Series or Class should consult with its counsel
with respect to the potential consequences under ERISA and Section 4975 of the
Code of any such acquisition and ownership of such Certificates.
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
76
<PAGE>
with respect to ERISA Plans and Code Plans consult with their counsel regarding
the consequences under ERISA and/or the Code of their acquisition and ownership
of Certificates.
The sale of Certificates to a Plan is in no respect a representation by
the Depositor, the applicable underwriter or any other service provider with
respect to the Certificates, such as the Trustee, the Master Servicer and the
Special Servicer, if any, that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
The related Prospectus Supplement will indicate whether the Offered
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 (the "Enhancement Act"). It is
anticipated that the Offered Certificates generally will not constitute
"mortgage related securities" for purposes of the Enhancement Act.
All depository institutions considering an investment in the Certificates
should review the Supervisory Policy Statement on Securities Activities dated
January 28, 1992 (the "Policy Statement") of the Federal Financial Institutions
Examination Council (to the extent adopted by their respective regulators),
which in relevant part prohibits depository institutions from investing in
certain "high-risk" mortgage securities, except under limited circumstances, and
sets forth certain investment practices deemed to be unsuitable for regulated
institutions.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income-paying," and provisions that may restrict or prohibit
investments in securities that are issued in book-entry form.
The appropriate characterization of the Certificates under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisers to determine
whether, and to what extent, the Certificates will constitute legal investments
for them.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
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
77
<PAGE>
with respect to a sale of any Class of Certificates will generally be obligated
to purchase all such Certificates if any are purchased. Pursuant to each such
underwriting agreement, the Depositor will indemnify the related underwriters
against certain civil liabilities, including liabilities under the 1933 Act.
If any Certificates are offered other than through underwriters pursuant
to such underwriting agreements, the related Prospectus Supplement or Prospectus
Supplements will contain information regarding the terms of such offering and
any agreements to be entered into in connection with such offering.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the 1933 Act in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer and sale.
LEGAL MATTERS
Certain legal matters relating to the Certificates offered hereby will be
passed upon for the Depositor by Morrison & Hecker L.L.P., Kansas City,
Missouri, and for the Underwriters as specified in the related Prospectus
Supplement.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any Class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in one
of the four highest categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments. See "RISK FACTORS--Limited Nature of Credit Ratings."
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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INDEX OF DEFINITIONS
ACMs.................................................................47
ADA..................................................................53
Agreement.............................................................3
AMTI.................................................................66
Bankruptcy Code......................................................41
Cash Flow Bond Method................................................71
CERCLA...............................................................14
Certificateholders...................................................15
Certificates........................................................(i)
Classes.............................................................(i)
Closing Date.........................................................23
Code..................................................................5
Code Plans...........................................................75
Collection Account....................................................2
Commission........................................................(iii)
Compound Interest Certificates.......................................56
Credit Enhancement....................................................3
Cut-off Date..........................................................4
Department...........................................................75
Depositor...........................................................(i)
Disqualified Organization............................................14
Disqualified Organizations...........................................66
Distribution Account..................................................2
Distribution Date.....................................................4
Enhancement Act......................................................77
EPA..................................................................48
ERISA.................................................................5
ERISA Plans..........................................................75
Escrow Account.......................................................27
Escrow Payments......................................................27
Event of Default.....................................................32
Fannie Mae...........................................................19
FHA..................................................................24
FHLMC................................................................19
Final Regulations....................................................56
Forfeiture Laws......................................................52
Form 8-K.............................................................23
Garn-St Germain Act..................................................49
Hazardous Materials..................................................47
HUD..................................................................24
Installment Contracts.................................................1
Interest Weighted Certificate........................................58
IRS..................................................................54
Lead Paint Act.......................................................48
Master Servicer......................................................26
Master Servicer Remittance Date......................................18
Mortgage..............................................................1
Mortgage Loan.....................................................1, 22
Mortgage Loan File...................................................24
Mortgage Loan Groups.................................................23
Mortgage Loan Schedule...............................................23
Mortgage Loans.....................................................(ii)
Mortgage Pool......................................................(ii)
Mortgaged Property....................................................1
Multiple Variable Rate...............................................59
NCUA.................................................................51
Negative Adjustment..................................................72
Nonresidents.........................................................73
Note.................................................................22
Offered Certificates................................................(i)
OID..................................................................56
Pass-Through Certificates............................................69
Pass-Through Rate.................................................(iii)
Permitted Investments................................................19
Plans................................................................75
Policy Statement.....................................................77
Prepayment Assumption................................................57
Property Protection Expenses.........................................18
PTCE.................................................................76
Rating Agency.........................................................6
Ratio Strip Certificates.............................................71
Registration Statement............................................(iii)
Regular Certificates..................................................5
Regular Interests.....................................................5
Regulations..........................................................75
Relief Act...........................................................50
REMIC..............................................................(ii)
REO Account..........................................................19
Reserve Account......................................................17
Reserve Fund.........................................................34
Residual Certificate.................................................64
Residual Certificates.................................................5
Residual Interests....................................................5
Securities Act of 1933..............................................(i)
Seller...............................................................25
Senior Certificates..................................................34
Series..............................................................(i)
Servicing Fee........................................................29
Simple Interest Loans................................................22
Single Variable Rate.................................................57
Special Servicer......................................................1
Special Servicing Fee................................................29
Specially Serviced Mortgage Loans....................................26
Startup Day..........................................................54
Stripped Certificates................................................69
Subordinate Certificates.............................................34
Tax Reform Act of 1986...............................................57
Tiered REMICs........................................................55
TIN..................................................................73
Title V..............................................................50
Title VIII...........................................................50
Trust Fund..........................................................(i)
Trustee...............................................................1
U.S. Person..........................................................67
UCC..................................................................37
Underwriter's Exemption..............................................76
USTs.................................................................48
Voting Rights........................................................15
79
<PAGE>
NO DEALER, SALES PERSON 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
PRESENTATION 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
Available Information...............................................S-2
Summary of Prospectus...............................................S-3
Risk Factors..................................................... S-25
Description of the Mortgage Pool...................................S-39
The Mortgage Loan Seller...........................................S-61
The Master Servicer................................................S-61
The Special Servicer...............................................S-64
Description of the Certificates................................... S-65
Yield Considerations...............................................S-78
The Pooling and Servicing Agreement................................S-85
Material Federal Income Tax Consequences......................... S-101
ERISA Considerations............................................. S-102
Legal Investment................................................. S-106
Plan of Distribution............................................. S-107
Use of Proceeds...................................................S-107
Legal Matters.................................................... S-107
Ratings.......................................................... S-107
Index of Significant Definitions..................................S-109
PROSPECTUS
Prospectus Supplement.............................................(iii)
Additional Information............................................(iii)
Incorporation of Certain Information by Reference..................(iv)
Reports............................................................(iv)
Table of Contents...................................................(v)
Summary of Prospectus.................................................1
Risk Factors..........................................................7
The Depositor........................................................16
The Master Servicer..................................................16
Use of Proceeds......................................................16
Description of the Certificates......................................16
The Mortgage Pools...................................................21
Servicing of the Mortgage Loans......................................26
Credit Enhancement...................................................33
Certain Legal Aspects of the Mortgage Loans..........................36
Material Federal Income Tax Consequences.............................53
State Tax Considerations.............................................74
ERISA Considerations.................................................75
Legal Investment.....................................................77
Plan of Distribution.................................................77
Legal Matters........................................................78
Financial Information................................................78
Rating...............................................................78
Index of Definitions.................................................79
$__________________ (Approximate)
COMMERCIAL MORTGAGE
ACCEPTANCE CORP.
Depositor
MIDLAND LOAN SERVICES, L.P.
Servicer
Class ___, Class ___, Class ___, Class ___
Commercial Mortgage
Pass-Through Certificates
Series 1997-____
-----------------------------
PROSPECTUS SUPPLEMENT
-----------------------------
<PAGE>
VERSION 2: MULTIFAMILY, GENERAL COMMERCIAL AND HOTELS
Replace the first paragraph of the cover page of the prospectus with the
following:
Commercial Mortgage 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-use 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. See
"DESCRIPTION OF THE CERTIFICATES--General" herein. The percentage of any
mixed-use residential/commercial property used for commercial purposes will
be set forth in the Prospectus Supplement. Multifamily properties
(consisting of apartments, congregate care facilities and/or mobile home
parks), general commercial properties (consisting of retail properties,
including shopping centers, office buildings, mini-warehouses, warehouses,
industrial properties and/or other similar types of properties) and hotels
will represent security for a material concentration of the Mortgage Loans
in any Trust Fund, based on principal balance at the time such Trust Fund
is formed. See "DESCRIPTION OF THE MORTGAGE POOL" in the Prospectus
Supplement. If so specified in the related Prospectus Supplement, the
Mortgage Pool may also include installment contracts for the sale of such
types of properties. Such mortgage loans and installment contracts 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. The Mortgage Loans may be
originated by affiliated entities, including Midland Loan Services, L.P.
and unaffiliated entities. See "RISK FACTORS--Origination of Mortgage
Loans." 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 master serviced by
Midland Loan Services, L.P.
In "Summary of the Prospectus--The Trust Fund--A. Mortgage Pool," replace the
second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini- warehouses, warehouses, industrial properties and/or other
similar types of properties) and hotels will
<PAGE>
represent security for a material concentration of the Mortgage Loans in
any Trust Fund, based on principal balance at the time such Trust Fund is
formed.
In "Risk Factors" insert the following after the section entitled "Risks
Associated with Lending on Income Producing Properties":
Risks Particular to Hotel Properties
The Mortgaged Properties securing the Mortgage Loans for any Trust
Fund will contain a material concentration of hotel properties. Hotel
properties may involve different types of hotels, including full service
hotels, limited service hotels, hotels associated with national franchise
chains, hotels associated with regional franchise chains and hotels that
are not affiliated with any franchise chain but may have their own brand
identity.
These Mortgaged Properties will be subject to operating risks common
to the hotel industry. These risks include, among other things,
competition from other hotels, increases in operating costs (which
increases may not necessarily be offset by increased room rates),
dependence on business and commercial travelers and tourism, increases in
energy costs and other expenses of travel, strikes, relocation of highways
and the construction of additional highways. A hotel's location, quality
and franchise affiliation can also affect its economic performance.
Adverse economic conditions, either local, regional or national, may limit
the amount that can be charged for a room and may result in a reduction in
occupancy levels. In addition, as hotel revenues are primarily generated
by room occupancy and such occupancy is usually for short periods of time,
hotel revenues may be more sensitive to general economic conditions and
competition than other income producing properties. This daily
mark-to-market also accentuates the highs and lows of economic cycles.
Additionally, the revenues of certain hotels, particularly those located
in regions whose economy depends upon tourism, may be highly seasonal in
nature, and this seasonality can be expected to cause periodic
fluctuations in room and other revenues, occupancy levels, room rates and
operating expenses. Since limited service hotels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of such hotels could occur in any given region, which would
likely adversely affect occupancy and daily room rates.
To meet competition in the industry and to maintain economic values,
continuing expenditures must be made for modernizing, refurbishing and
maintaining existing facilities prior to the expiration of their
anticipated useful lives. As a result of relatively high operating costs
due to more frequent improvements and renovations than other types of
income producing properties, relatively small decreases in hotel revenues
can cause significant stress on a hotel's cash flow.
The viability of any hotel property that is a franchise of a national
or regional hotel chain depends in part on the continued existence and
financial strength of the franchisor, the public perception of such hotel
chain and the duration of the franchise licensing agreement. 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 a hotel 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
V2-ii
<PAGE>
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.
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. In the event of a foreclosure on a hotel property,
it is unlikely that the Trustee, the Master Servicer (or Special Servicer,
if applicable) or the purchaser of such hotel property may be entitled to
the rights under any operating, liquor and other licenses for such hotel
property, and such party would be required to apply in its own right for
such licenses. There can be no assurance that new licenses could be
obtained or that they could be obtained promptly. The transferability of
franchise license agreements may be restricted and, in the event of a
foreclosure on any such hotel property, the consent of the franchisor for
the continued use the franchise license by the hotel property would be
required. Conversely, a lender may be unable to remove a franchisor that
it desires to replace following a foreclosure.
In "Mortgage Pools--General," replace the second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini- warehouses, warehouses, industrial properties and/or other
similar types of properties) and hotels will represent security for a
material concentration of the Mortgage Loans in any Trust Fund, based on
principal balance at the time such Trust Fund is formed.
V2-iii
<PAGE>
VERSION 3: MULTIFAMILY, GENERAL COMMERCIAL AND NURSING HOMES
Replace the first paragraph of the cover page of the prospectus with the
following:
Commercial Mortgage 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-use 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. See
"DESCRIPTION OF THE CERTIFICATES--General" herein. The percentage of any
mixed-use residential/commercial property used for commercial purposes will
be set forth in the Prospectus Supplement. Multifamily properties
(consisting of apartments, congregate care facilities and/or mobile home
parks), general commercial properties (consisting of retail properties,
including shopping centers, office buildings, mini-warehouses, warehouses,
industrial properties and/or other similar types of properties) and nursing
homes will represent security for a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust
Fund is formed. See "DESCRIPTION OF THE MORTGAGE POOL" in the Prospectus
Supplement. If so specified in the related Prospectus Supplement, the
Mortgage Pool may also include installment contracts for the sale of such
types of properties. Such mortgage loans and installment contracts 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. The Mortgage Loans may be
originated by affiliated entities, including Midland Loan Services, L.P.
and unaffiliated entities. See "RISK FACTORS--Origination of Mortgage
Loans." 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 master serviced by
Midland Loan Services, L.P.
In "Summary of the Prospectus--The Trust Fund--A. Mortgage Pool," replace the
second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties) and nursing
V3-i
<PAGE>
homes will represent security for a material concentration of the Mortgage
Loans in any Trust Fund, based on principal balance at the time such Trust
Fund is formed.
In "Risk Factors" insert the following after the section entitled "Risks
Associated with Lending on Income Producing Properties":
Risks Particular to Nursing Homes
The Mortgaged Properties securing the Mortgage Loans for any Trust
Fund will contain a material concentration of nursing home properties.
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.
Nursing homes 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, all of which can adversely affect revenues from operation.
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 these payments. Accordingly, there can be no assurance that
payments under government reimbursement programs will, in the future, be
sufficient to fully reimburse the cost of caring for program
beneficiaries. If such payments are insufficient, net operating income of
those nursing homes that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their
obligations under any Mortgage Loans secured thereby, could be adversely
affected.
Moreover, nursing homes are generally 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 an operator to maintain or renew any required
license or regulatory approval could prevent it from continuing operations
at a nursing home or, if applicable, bar it from participation in
government reimbursement programs. Any or all of the foregoing factors can
increase the cost of operation, limit growth and in extreme cases, require
or result in suspension or cessation of operations.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements are generally not permitted to be made to any
person other than the provider who actually furnished the related medical
goods and services. Accordingly, in the event of foreclosure on a
Mortgaged Property that is operated as a nursing home, none of the
Trustee, the Master Servicer (or the Special Servicer, if applicable) or a
subsequent lessee or operator of the Mortgaged Property would generally be
entitled to obtain from federal or state governments any outstanding
reimbursement payments relating to services furnished at the respective
Mortgaged Properties prior to such foreclosure. Furthermore, in the event
of foreclosure, there can be no assurance that the Trustee, the Master
Servicer (or the Special Servicer, if applicable) or purchaser in a
foreclosure sale
V3-ii
<PAGE>
would be entitled to the rights under any required licenses and regulatory
approvals and such party may have to apply in its own right for such
licenses and approvals. There can be no assurance that a new license could
be obtained or that a new approval would be granted. In addition, nursing
homes are generally "special purpose" properties that could not be readily
converted to general residential, retail or office use, and transfers of
nursing homes are subject to regulatory approvals under state, and in some
cases federal, law not required for transfers of other types of commercial
operations and other types of real estate, all of which may adversely
affect the liquidation value of the related Mortgaged Property.
Government regulation applying specifically to nursing homes includes
health planning legislation, enacted by most states, intended, at least in
part, to regulate the supply of nursing beds. The most common method of
control is the requirement that a state authority first make a
determination of need, evidenced by its issuance of a Certificate of Need
("CON"), before a long-term care provider can establish a new facility,
add beds to an existing facility or, in some states, take certain other
actions (for example, acquire major medical equipment, make major capital
expenditures, add services, refinance long-term debt, or transfer
ownership of a facility). States also regulate nursing bed supply in other
ways. For example, some states have imposed moratoria on the licensing of
new beds or on the certification of new Medicaid beds, or have discouraged
the construction of new nursing facilities by limiting Medicaid
reimbursements allocable to the cost of new construction and equipment. In
general, a CON is site specific and operator specific, and cannot be
transferred to another site or to another operator without the approval of
the appropriate state agency. Accordingly, if a Mortgage Loan secured by a
lien on such a Mortgaged Property were foreclosed upon, the purchaser at
foreclosure might be required to obtain a new CON or an appropriate
exemption. In addition, compliance by a purchaser with applicable
regulations may in any case require the engagement of a new operator and
the issuance of a new operating license. Upon a foreclosure, a state
regulatory agency may be willing to expedite any necessary review and
approval process to avoid interruption of care to a facility's residents,
but there can be no assurance that any will do so or that any necessary
licenses or approvals will be issued.
Further government regulation applicable to nursing homes is found in
the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care
providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products or services. Violation of these restrictions can result in
license revocation, civil and criminal penalties and exclusion from
participation in Medicare or Medicaid programs. The state law restrictions
in this area vary consider- ably from state to state. Moreover, the
federal anti-kickback law includes broad language that potentially could
be applied to a wide range of referral arrangements, and regulations
designed to create "safe harbors" under the law provide only limited
guidance. Accordingly, there can be no assurance that such laws will be
interpreted in a manner consistent with the practices of the owners or
operators of the nursing homes included in the Mortgage Pool for any Trust
Fund that are subject to such laws.
The operators of nursing homes 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 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
V3-iii
<PAGE>
quality of care and the cost of that care. The inability of a nursing home
to flourish in a competitive market may increase the likelihood of
foreclosure on the related Mortgage Loan, possibly affecting the yield on
one or more Classes of the related Series of Offered Certificates.
In "Mortgage Pools--General," replace the second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties) and nursing homes will represent security for
a material concentration of the Mortgage Loans in any Trust Fund, based on
principal balance at the time such Trust Fund is formed.
V3-iv
<PAGE>
VERSION 4: MULTIFAMILY, GENERAL COMMERCIAL, HOTELS AND NURSING HOMES
Replace the first paragraph of the cover page of the prospectus with the
following:
Commercial Mortgage 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-use 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.
See "DESCRIPTION OF THE CERTIFICATES--General" herein. The percentage of any
mixed-use residential/commercial property used for commercial purposes will be
set forth in the Prospectus Supplement. Multifamily properties (consisting of
apartments, congregate care facilities and/or mobile home parks), general
commercial properties (consisting of retail properties, including shopping
centers, office buildings, mini-warehouses, warehouses, industrial properties
and/or other similar types of properties), hotels and nursing homes will
represent security for a material concentration of the Mortgage Loans in any
Trust Fund, based on principal balance at the time such Trust Fund is formed.
See "DESCRIPTION OF THE MORTGAGE POOL" in the Prospectus Supplement. If so
specified in the related Prospectus Supplement, the Mortgage Pool may also
include installment contracts for the sale of such types of properties. Such
mortgage loans and installment contracts 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. The Mortgage Loans
may be originated by affiliated entities, including Midland Loan Services, L.P.
and unaffiliated entities. See "RISK FACTORS--Origination of Mortgage Loans."
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 master serviced by Midland Loan Services, L.P.
In "Summary of the Prospectus--The Trust Fund--A. Mortgage Pool," replace the
second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties), hotels and
V4-i
<PAGE>
nursing homes will represent security for a material concentration of the
Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
In "Risk Factors" insert the following after the section entitled "Risks
Associated with Lending on Income Producing Properties":
Risks Particular to Nursing Homes
The Mortgaged Properties securing the Mortgage Loans for any Trust
Fund will contain a material concentration of nursing home properties.
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.
Nursing homes 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, all of which can adversely affect revenues from operation.
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 these payments. Accordingly, there can be no assurance that
payments under government reimbursement programs will, in the future, be
sufficient to fully reimburse the cost of caring for program
beneficiaries. If such payments are insufficient, net operating income of
those nursing homes that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their
obligations under any Mortgage Loans secured thereby, could be adversely
affected.
Moreover, nursing homes are generally 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 an operator to maintain or renew any required
license or regulatory approval could prevent it from continuing operations
at a nursing home or, if applicable, bar it from participation in
government reimbursement programs. Any or all of the foregoing factors can
increase the cost of operation, limit growth and in extreme cases, require
or result in suspension or cessation of operations.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements are generally not permitted to be made to any
person other than the provider who actually furnished the related medical
goods and services. Accordingly, in the event of foreclosure on a
Mortgaged Property that is operated as a nursing home, none of the
Trustee, the Master Servicer (or the Special Servicer, if applicable) or a
subsequent lessee or operator of the Mortgaged Property would generally be
entitled to obtain from federal or state governments any outstanding
reimbursement payments relating to services furnished at the respective
Mortgaged Properties prior to such foreclosure. Furthermore, in the event
of foreclosure, there can be no assurance that the Trustee, the Master
Servicer (or the Special Servicer, if applicable) or purchaser in a
foreclosure sale
V4-ii
<PAGE>
would be entitled to the rights under any required licenses and regulatory
approvals and such party may have to apply in its own right for such
licenses and approvals. There can be no assurance that a new license could
be obtained or that a new approval would be granted. In addition, nursing
homes are generally "special purpose" properties that could not be readily
converted to general residential, retail or office use, and transfers of
nursing homes are subject to regulatory approvals under state, and in some
cases federal, law not required for transfers of other types of commercial
operations and other types of real estate, all of which may adversely
affect the liquidation value of the related Mortgaged Property.
Government regulation applying specifically to nursing homes includes
health planning legislation, enacted by most states, intended, at least in
part, to regulate the supply of nursing beds. The most common method of
control is the requirement that a state authority first make a
determination of need, evidenced by its issuance of a Certificate of Need
("CON"), before a long-term care provider can establish a new facility,
add beds to an existing facility or, in some states, take certain other
actions (for example, acquire major medical equipment, make major capital
expenditures, add services, refinance long-term debt, or transfer
ownership of a facility). States also regulate nursing bed supply in other
ways. For example, some states have imposed moratoria on the licensing of
new beds or on the certification of new Medicaid beds, or have discouraged
the construction of new nursing facilities by limiting Medicaid
reimbursements allocable to the cost of new construction and equipment. In
general, a CON is site specific and operator specific, and cannot be
transferred to another site or to another operator without the approval of
the appropriate state agency. Accordingly, if a Mortgage Loan secured by a
lien on such a Mortgaged Property were foreclosed upon, the purchaser at
foreclosure might be required to obtain a new CON or an appropriate
exemption. In addition, compliance by a purchaser with applicable
regulations may in any case require the engagement of a new operator and
the issuance of a new operating license. Upon a foreclosure, a state
regulatory agency may be willing to expedite any necessary review and
approval process to avoid interruption of care to a facility's residents,
but there can be no assurance that any will do so or that any necessary
licenses or approvals will be issued.
Further government regulation applicable to nursing homes is found in
the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care
providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products or services. Violation of these restrictions can result in
license revocation, civil and criminal penalties and exclusion from
participation in Medicare or Medicaid programs. The state law restrictions
in this area vary consider- ably from state to state. Moreover, the
federal anti-kickback law includes broad language that potentially could
be applied to a wide range of referral arrangements, and regulations
designed to create "safe harbors" under the law provide only limited
guidance. Accordingly, there can be no assurance that such laws will be
interpreted in a manner consistent with the practices of the owners or
operators of the nursing homes included in the Mortgage Pool for any Trust
Fund that are subject to such laws.
The operators of nursing homes 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 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
V4-iii
<PAGE>
quality of care and the cost of that care. The inability of a nursing home
to flourish in a competitive market may increase the likelihood of
foreclosure on the related Mortgage Loan, possibly affecting the yield on
one or more Classes of the related Series of Offered Certificates.
Risks Particular to Hotel Properties
The Mortgaged Properties securing the Mortgage Loans for any Trust
Fund will contain a material concentration of hotel properties. Hotel
properties may involve different types of hotels, including full service
hotels, limited service hotels, hotels associated with national franchise
chains, hotels associated with regional franchise chains and hotels that
are not affiliated with any franchise chain but may have their own brand
identity.
These Mortgaged Properties will be subject to operating risks common
to the hotel industry. These risks include, among other things,
competition from other hotels, increases in operating costs (which
increases may not necessarily be offset by increased room rates),
dependence on business and commercial travelers and tourism, increases in
energy costs and other expenses of travel, strikes, relocation of highways
and the construction of additional highways. A hotel's location, quality
and franchise affiliation can also affect its economic performance.
Adverse economic conditions, either local, regional or national, may limit
the amount that can be charged for a room and may result in a reduction in
occupancy levels. In addition, as hotel revenues are primarily generated
by room occupancy and such occupancy is usually for short periods of time,
hotel revenues may be more sensitive to general economic conditions and
competition than other income producing properties.
This daily mark-to-market also accentuates the highs and lows of
economic cycles. Additionally, the revenues of certain hotels,
particularly those located in regions whose economy depends upon tourism,
may be highly seasonal in nature, and this seasonality can be expected to
cause periodic fluctuations in room and other revenues, occupancy levels,
room rates and operating expenses. Since limited service hotels are
relatively quick and inexpensive to construct and may quickly reflect a
positive value, an over-building of such hotels could occur in any given
region, which would likely adversely affect occupancy and daily room
rates.
To meet competition in the industry and to maintain economic values,
continuing expenditures must be made for modernizing, refurbishing and
maintaining existing facilities prior to the expiration of their
anticipated useful lives. As a result of relatively high operating costs
due to more frequent improvements and renovations than other types of
income producing properties, relatively small decreases in hotel revenues
can cause significant stress on a hotel's cash flow.
The viability of any hotel property that is a franchise of a national
or regional hotel chain depends in part on the continued existence and
financial strength of the franchisor, the public perception of such hotel
chain and the duration of the franchise licensing agreement. 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 a hotel 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
V4-iv
<PAGE>
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.
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. In the event of a foreclosure on a hotel property,
it is unlikely that the Trustee, the Master Servicer (or Special Servicer,
if applicable) or the purchaser of such hotel property may be entitled to
the rights under any operating, liquor and other licenses for such hotel
property, and such party would be required to apply in its own right for
such licenses. There can be no assurance that new licenses could be
obtained or that they could be obtained promptly. The transferability of
franchise license agreements may be restricted and, in the event of a
foreclosure on any such hotel property, the consent of the franchisor for
the continued use the franchise license by the hotel property would be
required. Conversely, a lender may be unable to remove a franchisor that
it desires to replace following a foreclosure.
In "Mortgage Pools--General," replace the second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties), hotels and nursing homes will represent
security for a material concentration of the Mortgage Loans in any Trust
Fund, based on principal balance at the time such Trust Fund is formed.
V4-v
<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................................. $221,253.92
NASD Filing Fee....................................... N/A
Legal Fees and Expenses...............................$260,000.00
Accounting Fees and Expenses..........................$ 70,000.00
Trustee's Fees and Expenses (including counsel fees)..$ 60,000.00
Blue Sky Qualification Fees and Expenses..............$ 5,000.00
Printing and Engraving Fees...........................$ 90,000.00
Rating Agency Fees....................................$650,000.00
Miscellaneous.........................................$100,000.00
-----------
Total...............................................$1,456,253.92
=============
*All amounts except the SEC Registration Fee are estimates of expenses
incurred or to be incurred in connection with the issuance and
distribution of a series of Certificates.
Item 15. Indemnification of Directors and Officers
Section 355 of the General and Business Corporation Law of Missouri
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses, costs and fees (including attorney's fees), judgements, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if the person indemnified acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. If the person indemnified is not wholly successful in such action,
suit or proceeding, but is successful, on the merits or otherwise, in one or
more but less than all claims, issues or matters in such proceeding, he or she
may be indemnified against expenses actually and reasonably incurred in
connection with each successfully resolved claim, issue or matter. In the case
of an action or suit by or in the right of the corporation, no indemnification
may be made in respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 355 provides that to the extent a director, officer, employee or agent
of a corporation has been successful in the defense of any action, suit or
proceeding referred to above or in the defense of any claim, issue or matter
therein, he or she shall be indemnified against expenses (including attorney's
fees) actually and reasonably incurred by him or her in connection therewith.
<PAGE>
Section 355 of the General and Business Corporation Law of Missouri
further provides that a corporation may give any further indemnity, in addition
to the indemnity set forth above to any person who is or was a director,
officer, employee or agent, or to any person who is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, provided
such further indemnity is either (i) authorized, directed, or provided for in
the articles of incorporation of the corporation or any duly adopted amendment
thereof or (ii) is authorized, directed, or provided for in any bylaw or
agreement of the corporation which has been adopted by a vote of the
shareholders of the corporation, and provided further that no such indemnity
shall indemnify any person from or on account of such person's conduct which was
finally adjudged to have been knowingly fraudulent, deliberately dishonest or
willful misconduct. The Articles of Incorporation of the Registrant contain a
provision requiring the Registrant to indemnify each such person to the extent
his or her conduct is not adjudged to have been knowingly fraudulent,
deliberately dishonest or willful misconduct.
The Registrant is authorized to purchase liability insurance for its
directors and officers if it has not currently obtained such a policy.
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 Regis- trant within the meaning of Section 15 of the
Securities Act of 1933, as amended, or Section 20 of the Securities Act of 1934,
as amended, against any and all losses, claims, damages or liabilities, joint or
several, to which they may become liable under the Securities Act of 1933, as
amended, the Securities Act of 1934, as amended, or other federal or state law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the prospectus or prospectus supplement or in any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in light of the
circumstances under which they were made, but only with reference to written
information furnished to the Registrant by or on behalf of the Underwriter
(including in electronic media) specifically for use in connection with the
preparation of the documents referred to in the foregoing indemnity.
Unless otherwise specified, the Agreement relating to each Series will
provide that neither the Registrant nor any 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, fraud,
misrepresentation or negligence in the performance of its duties or by reason of
negligent 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 incurred by reason of its respective
willful misfeasance, bad faith, fraud, misrepresentation or negligence in the
performance of duties thereunder or by reason of negligent disregard of its
respective obligations and duties thereunder.
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 on signature page).
- ------------------
* Filed herewith.
** Previously filed.
(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.
II-3
<PAGE>
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.
(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. 4 to 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 21st day of November, 1997.
COMMERCIAL MORTGAGE ACCEPTANCE CORP.
By: /s/ Clarence A. Krantz
--------------------------------------------
Clarence A. Krantz, Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 4 to Registration Statement has been signed by the following
persons in the capacities and as of the dates indicated.
Signature Position Date
* November 21, 1997
- ----------------------
Alan L. Atterbury Director and President
(Principal Executive
Officer)
* November 21, 1997
- ----------------------
Leon E. Bergman Chief Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Clarence A. Krantz November 21, 1997
- ----------------------
Clarence A. Krantz Director
* November 21, 1997
- ----------------------
William V. Morgan Director
*By: /s/ Clarence A. Krantz
----------------------
Clarence A. Krantz
Attorney-in-Fact
[Morrison & Hecker L.L.P. Letterhead]
November 21, 1997
Commercial Mortgage Acceptance Corp.
210 West 10th Street
6th Floor
Kansas City, Missouri 64105
Re: Mortgage Pass-Through Certificates
Ladies and Gentlemen:
We have acted as your counsel in connection with the proposed issuance of
Mortgage Pass-Through Certificates (the "Certificates") pursuant to the
Registration Statement on Form S-3 (Registration No. 333-13725) (the
"Registration Statement") 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 Commercial Mortgage 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 master 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.
<PAGE>
Commercial Mortgage Acceptance Corp.
November 21, 1997
Page 2
It is our opinion that all material federal income tax consequences to
holders of the Certificates are as described under the heading "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES" in the Prospectus and we hereby confirm our opinion set
forth therein.
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.
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,
/s/ Morrison & Hecker L.L.P.
