<PAGE>
Filed Pursuant to Rule 424(b)(4)
Registration File No.: 333-13725
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 DECEMBER 5, 1997
SUBJECT TO COMPLETION
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 26, 1997)
$730,000,000 (APPROXIMATE)
COMMERCIAL MORTGAGE ACCEPTANCE CORP. (DEPOSITOR)
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-ML1
--------------------
The Commercial Mortgage Pass-Through Certificates, Series 1997-ML1 (the
"Certificates") will consist of sixteen Classes of Certificates, designated
as the Class A-1 Certificates, the Class A-2 Certificates, the Class A-3
Certificates, the Class A-4 Certificates, the Class IO Certificates, the
Class B Certificates, the Class C Certificates, the Class D Certificates, the
Class E Certificates, the Class F Certificates, the Class G Certificates, the
Class H Certificates and the Class J Certificates (collectively, the "Regular
Certificates") and the Class R-I Certificates, the Class R-II and Class R-III
Certificates (together, the "Residual Certificates"). Only the Class A-1,
Class A-2, Class A-3, Class A-4, Class B, Class C, Class D and Class E and
the Class IO Certificates (the "Offered Certificates") are offered hereby.
(cover page continued on following 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, THE UNDERWRITER OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE OFFERED CERTIFICATES NOR THE MORTGAGE
LOANS ARE INSURED OR GUARANTEED BY THE UNITED STATES GOVERNMENT OR ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PROSPECTIVE INVESTORS SHOULD REVIEW FULLY THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS, INCLUDING, WITHOUT LIMITATION, THE MATERIAL RISKS DISCUSSED
UNDER "RISK FACTORS" AT PAGE S-43 IN THIS PROSPECTUS SUPPLEMENT AND PAGE 6 OF
THE PROSPECTUS BEFORE PURCHASING ANY OF THE OFFERED CERTIFICATES.
--------------------
<TABLE>
<CAPTION>
=========================================================================================================
PERCENTAGE OF RATED FINAL
CLASS OF INITIAL CERTIFICATE INITIAL POOL PASS-THROUGH DISTRIBUTION EXPECTED
OFFERED CERTIFICATES BALANCE(1) BALANCE(1) RATE(2) DATE(7) RATINGS(8)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-1............ $ % December 15, 2030 Aaa/AAA
Class A-2 ........... $ % December 15, 2030 Aaa/AAA
Class A-3 ........... $ % December 15, 2030 Aaa/AAA
Class A-4 ........... $ % December 15, 2030
Class B ............. $ (3) December 15, 2030 Aa2/AA
Class C ............. $ (4) December 15, 2030 A2/A
Class D ............. $ (5) December 15, 2030 Baa2/BBB
Class E ............. $ (6) December 15, 2030 Baa3/BBB-
Class IO ............ (9) (9) (9) December 15, 2030 Aaa/AAA
=========================================================================================================
</TABLE>
<PAGE>
(1) Approximate, subject to an upward or downward variance of up to 5%.
(2) In addition to distributions of principal and interest, holders of
certain Classes of Certificates will be entitled to receive a portion
of the Prepayment Premiums received from the Borrowers as described
herein. See "DESCRIPTION OF THE CERTIFICATES--Distributions--Allocation
of Prepayment Premiums" herein.
(3) The Class B Certificates will bear interest at a per annum rate equal
to the REMIC I Weighted Average Rate minus % (the "Class B Rate").
(4) The Class C Certificates will bear interest at a per annum rate equal
to the lesser of the REMIC I Weighted Average Rate minus % (the
"Class C Rate").
(5) The Class D Certificates will bear interest at a per annum rate equal
to the lesser of the REMIC I Weighted Average Rate minus % (the
"Class D Rate").
(6) The Class E Certificates will bear interest at a per annum rate (the
"Class E Rate") equal to the REMIC I Weighted Average Rate minus %.
(7) The Rated Final Distribution Date (the "Rated Final Distribution Date")
for each Class of Offered Certificates is the first Distribution Date
that follows the third anniversary of the end of the amortization term
(without giving effect to any Balloon Payments) for the Mortgage Loan
that, as of the Cut-off Date, has the longest remaining amortization
term.
(8) Ratings of Moody's Investors Service, Inc. and Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, Inc.
respectively.
(9) The Class IO Certificates will not have a principal balance nor will
they entitle the holders thereof to receive distributions of principal,
but will entitle such holders to receive payments of interest equal to
the aggregate interest accrued on the notional amount of each of its
Components, as described herein. See "DESCRIPTION OF THE
CERTIFICATES--Certificate Balances and Notional Amounts" and
"--Pass-Through Rates" herein.
The Offered Certificates will be offered by Merrill Lynch, Pierce, Fenner
& Smith, Incorporated (the "Underwriter") from time to time in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. Proceeds to the Depositor from the 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 when, as and if
delivered to and accepted by the Underwriter, and subject to the
Underwriter's right to reject orders in whole or in part. It is expected that
the Offered Certificates will be delivered in book-entry form through the
Same-Day Funds Settlement System of The Depository Trust Company ("DTC"), on
or about December 22, 1997 (the "Delivery Date").
--------------------
MERRILL LYNCH & CO.
--------------------
The date of this Prospectus Supplement is December , 1997
<PAGE>
COMMERCIAL MORTGAGE ACCEPTANCE CORP.
- -------------------------------------------------------------------------------
Commercial Mortgage Pass-Trhough Certificates, Series 1997-ML1
New York Mississippi Washington
1 property 3 properties 2 properties
$67,000,000 $13,635,978 $7,087,156
7.9% of total 1.6% of total 0.8% of total
Massachusetts Louisiana Idaho
1 property 1 property 3 properties
$96,908,666 $9,144,690 $12,539,089
4% of total 1.1% of total 1.5% of total
Kentucky Texas Wyoming
1 property 3 properties 1 property
$1,178,196 $109,931,452 $2,407,635
0.1% of total 13.0% of total 0.3% of total
Tennessee Arizona Missouri
3 properties 1 property 1 property
$10,798,633 $5,709,026 $41,850,000
1.3% of total 0.7% of total 4.9% of total
Florida California Minnesota
5 properties 16 properties 1 property
$62,521,907 $134,227,627 $59,754,386
7.4% of total 15.8% of total 7.0% of total
Alabama Oregon Pennsylvania
7 properties 7 properties 2 properties
$32,152,460 $52,142,455 $129,493,575
3.8% of total 6.1% of total 15.3% of total
Primary Property Type by
Cut-Off Date Principal Balance
Office and Retail/
Office 31.1%
Hotel
27.8%
Retail
25.8%
Multifamily
15.3%
<PAGE>
COMMERCIAL MORTGAGE ACCEPTANCE CORP.
- -------------------------------------------------------------------------------
Anticipated Repayment Date/Amortization Schedule Time Line
Cut-Off Date Principal Balance (in $mm)
[Chart to Come]
(1) The Copley Place senior interest gets all principal from the $195 million
total loan calculated on a 30-year amortization schedule.
(2) The first 2 years of the Tower Realty Loan are IO, during years 3 through
7 the loan amortizes using a 28-year schedule.
<PAGE>
(continued from cover)
The Certificates in the aggregate represent the entire undivided
beneficial interest in a trust fund (the "Trust Fund") to be established by
Commercial Mortgage Acceptance Corp. (the "Depositor"). The Trust Fund is
expected to consist primarily of a segregated pool (the "Mortgage Pool") of
twelve conventional, fixed rate mortgage loans (excluding, in the case of one
such mortgage loan, the obligation to make future advances) (the "Mortgage
Loans") secured by first liens on commercial and multifamily properties
(each, a "Mortgaged Property"). The Mortgage Pool consists of two groups
(each, a "Mortgage Loan Group"). Mortgage Loan Group 1 consists of the Copley
Place Loan (as defined herein) and Mortgage Loan Group 2 consists of the
remaining eleven Mortgage Loans. As of December 1, 1997 (the "Cut-off Date"),
the Mortgage Loans had an aggregate principal balance of $848,482,929.29,
after application of all payments of principal due on or before such date.
Mortgage Loan Group 1 has a principal balance of $751,582,423 and Mortgage
Loan Group 2 has an aggregate principal balance of $ .
As described herein, three separate "real estate mortgage investment
conduit" ("REMIC") elections will be made with respect to the Trust Fund for
federal income tax purposes (the REMICs formed thereby, "REMIC I", "REMIC II"
and "REMIC III"). The Offered Certificates will constitute "regular
interests" in REMIC III. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES"
herein and in the Prospectus.
There is currently no secondary market for the Offered Certificates. The
Underwriter intends to make a secondary market in the Offered Certificates,
but has no obligation to do so. See "RISK FACTORS--Limited Liquidity" herein.
Application has been made to list the Offered Certificates on the
Luxembourg Stock Exchange.
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
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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 the Web site is
http://www.sec.gov. See "ADDITIONAL INFORMATION" and "REPORTS" in the
Prospectus.
S-2
<PAGE>
TABLE OF CONTENTS
PAGE
----
AVAILABLE INFORMATION S-2
SUMMARY OF PROSPECTUS S-5
THE OFFERED CERTIFICATES S-8
RISK FACTORS S-43
Investment in Commercial and Multifamily Mortgage Loans S-43
Repurchase of Mortgage Loans S-53
Prepayments and Yield Considerations S-53
Limited Liquidity S-56
Limited Information S-56
DESCRIPTION OF THE MORTGAGE POOL S-57
General S-57
Security for the Mortgage Loans S-58
Certain Terms and Conditions of the Mortgage Loans S-58
Certain Characteristics of the Mortgage Pool S-64
Changes in Mortgage Pool Characteristics S-73
Representations and Warranties; Repurchase S-73
Copley Place Loan: The Borrower; The Property S-79
Copley Place: The Loan S-85
Brookfield Loan: The Borrower; The Property S-91
Brookfield: The Loan S-100
Tower Realty: The Loan S-120
Franklin Mills Loan: The Borrower; The Property S-130
Franklin Mills Mall: The Loan S-139
Newton Oldacre McDonald Loan: The Borrowers; The Property S-147
Newton Oldacre McDonald: The Loan S-158
Four Seasons Biltmore Hotel Loan: The Borrower; The Property S-169
Four Seasons Biltmore Hotel: The Loan S-173
Ritz-Carlton Hotel, St. Louis Loan: The Borrower; The Property S-181
Ritz-Carlton Hotel, St. Louis: The Loan S-185
Four Seasons Hotel, Austin Loan: The Borrower; The Property S-193
Four Seasons Hotel, Austin: The Loan S-197
Shilo Inn Loan: The Borrower; The Property S-205
Shilo Inns Hotel Pool: Property Description S-206
Individual Property Descriptions S-206
Shilo Inn: The Loan S-214
Farb Investments: The Loans S-232
American Apartment Communities I: The Borrower; The Property S-242
American Apartment Communities I: The Loan S-259
American Apartment Communities II: The Borrower; The Property S-267
American Apartment Communities II: The Loan S-273
THE MORTGAGE LOAN SELLER S-281
THE MASTER SERVICER AND SPECIAL SERVICER S-281
DESCRIPTION OF THE CERTIFICATES S-283
General S-283
Delivery, Form and Denomination S-283
Registration and Transfer S-286
Certificate Balances and Notional Amounts S-286
Pass-Through Rates S-287
Distributions S-288
Scheduled Final Distribution Date S-293
S-3
<PAGE>
PAGE
----
Subordination; Allocation of Losses and Certain Expenses S-294
Additional Rights of the Residual Certificates S-296
Termination S-296
YIELD AND MATURITY CONSIDERATIONS S-297
Yield Considerations S-297
Weighted Average Life S-301
THE POOLING AND SERVICING AGREEMENT S-305
General S-305
Assignment of the Mortgage Loans S-305
Servicing of the Mortgage Loans; Collection of Payments S-307
Collection Activities S-308
Advances S-308
Appraisal Reductions S-309
Accounts S-310
Withdrawals from the Collection Account S-311
Special Servicing S-312
The Controlling Class Representative S-314
Limitation on Liability of Controlling Class Representative S-315
Enforcement of "Due-on-Sale" and "Due-on-Encumbrance" Clauses S-315
Inspections S-316
Realization Upon Mortgage Loans S-316
Servicing Compensation and Payment of Expenses S-318
Amendments, Modifications and Waivers S-320
The Trustee S-320
Voting Rights S-321
Duties of the Trustee S-321
The Fiscal Agent S-321
Reports to Certificateholders; Available Information S-322
MATERIAL FEDERAL INCOME TAX CONSEQUENCES S-325
ERISA CONSIDERATIONS S-326
Class A-1, Class A-2, Class A-3, Class A-4 and Class IO Certificates S-327
Offered Certificates Other than Class A-1, Class A-2, Class A-3,
Class A-4 and Class IO Certificates S-329
Special Considerations for Insurance Company General Accounts S-329
General S-329
LEGAL INVESTMENT S-329
PLAN OF DISTRIBUTION S-331
USE OF PROCEEDS S-332
LEGAL MATTERS S-332
RATINGS S-332
INDEX OF DEFINITION S-334
Annex A
S-4
<PAGE>
SUMMARY OF PROSPECTUS
Prospective investors are advised to read carefully, and should rely
solely on, the detailed information appearing elsewhere in this Prospectus
Supplement and the Prospectus relating to the Offered Certificates in making
their investment decision. The following Summary does not include all
relevant information relating to the Offered Certificates or the Mortgage
Loans, particularly with respect to the risks and special considerations
involved with an investment in the Offered Certificates and is qualified in
its entirety by reference to the detailed information appearing elsewhere in
this Prospectus Supplement and the Prospectus. Prior to making any investment
decision, a prospective investor should review fully this Prospectus
Supplement and the Prospectus. Capitalized terms used and not otherwise
defined herein have the respective meanings assigned to them in the
Prospectus. See "INDEX OF DEFINITIONS" herein and in the Prospectus.
<TABLE>
<CAPTION>
INITIAL
AGGREGATE
CERTIFICATE APPROXIMATE
RATING BY PRINCIPAL % OF CREDIT
CLASS S&P/MOODY'S AMOUNT TOTAL SUPPORT
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------
Senior Certificates
- --------------------------------------------------------------------
A-1 AAA/Aaa $ % %
- --------------------------------------------------------------------
A-2 AAA/Aaa $ % %
- --------------------------------------------------------------------
A-3 AAA/Aaa $ % %
- --------------------------------------------------------------------
A-4 --/-- $ % %
- --------------------------------------------------------------------
IO AAA/Aaa N/A (2) N/A
- --------------------------------------------------------------------
Subordinate Certificates
- --------------------------------------------------------------------
B AA/Aa2 $ % %
- --------------------------------------------------------------------
C A/A2 $ % %
- --------------------------------------------------------------------
D BBB/Baa2 $ % %
- --------------------------------------------------------------------
E BBB-/Baa3 $ % %
- --------------------------------------------------------------------
F BB/Ba2 $ % %
- --------------------------------------------------------------------
G BB-/Ba3 $ % %
- --------------------------------------------------------------------
H B/B2 $ % %
- --------------------------------------------------------------------
J B-/B3 $ % 0%
- --------------------------------------------------------------------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
PASS- WEIGHTED PRINCIPAL
THROUGH AVERAGE LIFE WINDOW
CLASS DESCRIPTION RATE (YEARS)(1) (YEARS)(1)
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------
Senior Certificates
- -------------------------------------------------------------------------
A-1 Fixed Rate %
- -------------------------------------------------------------------------
A-2 Fixed Rate %
- -------------------------------------------------------------------------
A-3 Fixed Rate %
- -------------------------------------------------------------------------
A-4 Fixed Rate %
- -------------------------------------------------------------------------
IO Excess (2)(3) N/A
Interest(3)
- -------------------------------------------------------------------------
Subordinate Certificates
- -------------------------------------------------------------------------
B Net WAC-Fixed Strip %
- -------------------------------------------------------------------------
C Net WAC-Fixed Strip %
- -------------------------------------------------------------------------
D Net WAC-Fixed Strip %
- -------------------------------------------------------------------------
E Net WAC-Fixed Strip %
- -------------------------------------------------------------------------
F Fixed Rate %
- -------------------------------------------------------------------------
G Fixed Rate %
- -------------------------------------------------------------------------
H Fixed Rate %
- -------------------------------------------------------------------------
J Fixed Rate %
- -------------------------------------------------------------------------
</TABLE>
- --------------
(1) Based on Scenario 1, which assumes a 0% CPR and no defaults. See "YIELD
AND MATURITY CONSIDERATIONS--Weighted Average Life" herein.
(2) The initial aggregate Class IO notional amount is $751,582,423 (the
aggregate principal balance of the Group 2 Mortgage Loans).
(3) Distributions of interest on the Class IO Certificates will equal the
sum of the interest accrued on each component at the related Strip
Rate. The Notional Amount of each Component will equal the principal
amount of the related class of certificates. The Strip Rates applicable
to the Class A-1, Class A-2, Class A-3, Class F, Class G, Class H, and
Class J Components (stated as a percentage of the related Component
Notional Amount) will equal the Group 2 Weighted Average Net Mortgage
Rate minus %, %, %, %, %, %, and %, respectively and the
Strip Rates applicable to the Class B, Class C, Class D, and Class E
Components stated as a percentage of the related Component Notional
Amount will equal %, %, %, and %, respectively.
S-5
<PAGE>
SCHEMATIC OVERVIEW
- --------------- -------------
GROUP 1 LOAN GROUP 2 LOANS
("COPLEY LOAN") (11 LOANS)
- --------------- -------------
- ---------------
CLASS A-4 CREDIT
- --------------- SUPPORT
-------------------------------
% Class A-1 (Fixed)
(Aaa/AAA) (WAC)
-------------------------------
% CLASS A-2 (FIXED)
(Aaa/AAA) (WAC)
-------------------------------
% CLASS A-3 (FIXED)
(Aaa/AAA) (WAC)
-------------------------------
% CLASS B (WAC)
(Aa2/AA) (Fixed)
-------------------------------
% CLASS C (WAC)
(A2/A) (Fixed)
-------------------------------
% CLASS D (WAC)
(Baa2/BBB) (Fixed)
-------------------------------
% CLASS E (WAC)
(Baa3/BBB-) (Fixed)
-------------------------------
% CLASS F (FIXED)
(Ba2/BB) (WAC)
-------------------------------
% CLASS G (FIXED)
(Ba3/BB-) (WAC)
-------------------------------
% CLASS H (FIXED)
(B2/B) (WAC)
-------------------------------
% CLASS J (FIXED)
(B3/B-) (WAC)
-------------------------------
S-6
<PAGE>
MORTGAGE LOAN SUMMARY
<TABLE>
<CAPTION>
CUT-OFF
DATE
PROPERTY NO. OF PRINCIPAL ARD/
MORTGAGE LOAN TYPE PROPERTIES BALANCE BALLOON DATE
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COPLEY PLACE RETAIL/
OFFICE 1 $ 96,908,666 AUGUST 1, 2007
- ---------------------------------------------------------------------------
BROOKFIELD RETAIL/
PROPERTIES OFFICE 1 59,754,386 JUNE 1, 2007
- ---------------------------------------------------------------------------
TOWER REALTY OFFICE 2 107,000,000 NOVEMBER 1, 2004
- ---------------------------------------------------------------------------
THE MILLS
CORPORATION
-INITIAL
FUNDING RETAIL 1 109,538,921 MAY 5, 2007
- ---------------------------------------------------------------------------
ADDITIONAL
FUNDING RETAIL 1 19,954,654 MAY 5, 2007
- ---------------------------------------------------------------------------
TOTAL
FUNDING 2 129,493,575 MAY 5, 2007
- ---------------------------------------------------------------------------
NEWTON INITIAL RETAIL 16 76,640,023 NOVEMBER 1, 2012
FUNDING
- ---------------------------------------------------------------------------
ADDITIONAL RETAIL 3 12,791,840 NOVEMBER 1, 2012
FUNDING
- ---------------------------------------------------------------------------
TOTAL 19 89,431,863 NOVEMBER 1, 2012
FUNDING
- ---------------------------------------------------------------------------
FOUR SEASONS HOTEL 1 63,000,000 DECEMBER 1, 2007
BILTMORE
- ---------------------------------------------------------------------------
RITZ-CARLTON HOTEL 1 41,850,000 DECEMBER 1, 2007
- ---------------------------------------------------------------------------
FOUR SEASONS, HOTEL 1 45,150,000 DECEMBER 1, 2007
AUSTIN
- ---------------------------------------------------------------------------
SHILO INNS HOTEL 16 65,765,282 N/A
-INITIAL
FUNDING
- ---------------------------------------------------------------------------
ADDITIONAL HOTEL 1 19,967,537 N/A
FUNDING
- ---------------------------------------------------------------------------
TOTAL FUNDING 17 85,732,818 N/A
- ---------------------------------------------------------------------------
FARB INVESTMENTS MULTI- 2 64,781,452 OCTOBER 1, 2007
FAMILY
- ---------------------------------------------------------------------------
AACI MULTI- 10 44,440,152 JANUARY 1, 2004
FAMILY
- ---------------------------------------------------------------------------
AACII MULTI- 2 20,940,017 JULY 1, 2007
FAMILY
- ---------------------------------------------------------------------------
TOTAL/WEIGHTED 59 $848,482,929
Average
- ---------------------------------------------------------------------------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ORIGINAL
FINAL AMORTIZATION CUT-OFF ARD/
MATURITY TERM MORTGAGE DATE MATURITY
MORTGAGE LOAN DATE (MONTHS) RATE DSCR LTV LTV(1)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COPLEY PLACE AUGUST 1, 2007 360 6.75% 2.69X 30.8% 22.7%
- --------------------------------------------------------------------------------------------------
BROOKFIELD
PROPERTIES JUNE 1, 2027 360 8.00% 1.50X 61.0% 53.7%
- --------------------------------------------------------------------------------------------------
TOWER REALTY NOVEMBER 1, 2027 360(2) 6.8174% 1.64X 71.3% 66.3%
- --------------------------------------------------------------------------------------------------
THE MILLS
CORPORATION
-INITIAL
FUNDING JUNE 1, 2027 360 7.882% N/A N/A N/A
- --------------------------------------------------------------------------------------------------
ADDITIONAL
FUNDING JUNE 1, 2027 360 7.44% N/A N/A N/A
- --------------------------------------------------------------------------------------------------
TOTAL
FUNDING JUNE 1, 2007 360 7.814% 1.65X 60.5% 53.1%
- --------------------------------------------------------------------------------------------------
NEWTON INITIAL NOVEMBER 1, 2027 360 7.56% N/A N/A N/A
FUNDING
- --------------------------------------------------------------------------------------------------
ADDITIONAL NOVEMBER 1, 2027 360 7.325% N/A N/A N/A
FUNDING
- --------------------------------------------------------------------------------------------------
TOTAL 360 7.526% 1.24X 80.6% 61.1%
FUNDING
- --------------------------------------------------------------------------------------------------
FOUR SEASONS DECEMBER 1, 2022 300 7.138% 1.58X 69.6% 55.1%
BILTMORE
- --------------------------------------------------------------------------------------------------
RITZ-CARLTON DECEMBER 1, 2022 300 7.188% 1.61X 69.8% 55.3%
- --------------------------------------------------------------------------------------------------
FOUR SEASONS, DECEMBER 1, 2022 300 7.188% 1.57X 75.0% 59.4%
AUSTIN
- --------------------------------------------------------------------------------------------------
SHILO INNS OCTOBER 1, 2017 240 8.47% N/A N/A 0.0%
-INITIAL
FUNDING
- --------------------------------------------------------------------------------------------------
ADDITIONAL NOVEMBER 1, 2017 240 8.36% N/A N/A 0.0%
FUNDING
- --------------------------------------------------------------------------------------------------
TOTAL FUNDING 360 N/A 1.52X 65.4% 0.0%
- --------------------------------------------------------------------------------------------------
FARB INVESTMENTS OCTOBER 1, 2007 360 7.40% 1.35X 79.9% 69.3%
- --------------------------------------------------------------------------------------------------
AACI JANUARY 1, 2022 300 7.75% 1.73X 63.8% 56.7%
- --------------------------------------------------------------------------------------------------
AACII JULY 1, 2027 360 7.74% 1.85X 64.6% 56.6%
- --------------------------------------------------------------------------------------------------
TOTAL/WEIGHTED 334.1 7.4621% 1.68X 64.8% 54.4%
Average
- --------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted average loan-to-value ratio (calculated using the appraised
values set forth herein and the principal balance of the Mortgage Loans
(other than the Shilo Loan which is fully-amortizing) on the date on
which the Balloon Payments are due or the Anticipated Repayment Date,
as applicable.
(2) Tower Realty Loan pays interest only for two years. Commencing with the
December 1, 1999 payment, the loan amortizes on a 28-year schedule.
S-7
<PAGE>
THE OFFERED CERTIFICATES
TITLE OF CERTIFICATES ......... Commercial Mortgage Acceptance Corp.
Commercial Mortgage Pass-Through Certificates,
Series 1997-ML1 (the "Certificates").
The Certificates will be issued pursuant to a
Pooling and Servicing Agreement to be dated as
of December 1, 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-1, CLASS A-2, CLASS A-3,
CLASS A-4, CLASS IO, CLASS B, CLASS C, CLASS D
AND CLASS E CERTIFICATES ARE OFFERED HEREBY.
The Class F, Class G, Class H, Class J
Certificates and the Residual Certificates
(collectively, the "Private Certificates")
have not been registered under the 1933 Act
and are not offered hereby. Accordingly, to
the extent this Prospectus Supplement contains
information regarding the terms of the Private
Certificates, such information is provided
solely because of its relevance to a
prospective purchaser of an Offered
Certificate.
DEPOSITOR ..................... Commercial Mortgage Acceptance Corp., a
Missouri corporation and a wholly owned
subsidiary of Midland Loan Services, L.P. (the
Master Servicer and the Special Servicer). See
"THE DEPOSITOR" in the Prospectus.
MORTGAGE LOAN SELLER .......... Merrill Lynch Mortgage Capital Inc. (the
"Mortgage Loan Seller"), a Delaware
corporation and an affiliate of the
Underwriter. See "MORTGAGE LOAN SELLER"
herein.
MASTER SERVICER ............... Midland Loan Services, L.P., a Missouri
limited partnership. See "THE MASTER SERVICER
AND SPECIAL SERVICER" herein.
SPECIAL SERVICER .............. Initially, Midland Loan Services, L.P., a
Missouri limited partnership. See "THE MASTER
SERVICER AND SPECIAL SERVICER" herein. It is
expected that CRIIMI MAE Inc. or an affiliate
will be named as Special Servicer on or about
the Closing Date. The Special Servicer will be
responsible for performing certain servicing
functions with respect to the Mortgage Loans
that, in general, are in default or as to
which default is likely (as determined by the
Master Servicer), for administering any REO
Property (as defined herein) and for
performing certain other servicing functions
with respect to the Mortgage Pool under the
Pooling and Servicing Agreement. The majority
holder (or holders) of the Class among the
Class A-1, Class A-2, Class A-3, and Class
A-4, considered as a single Class, and the
Class B, Class C, Class D, Class E, Class F,
Class G, Class H and Class J Certificates (the
"Sequential Pay Certificates") which is
outstanding and has the latest alphabeti-
S-8
<PAGE>
cal Class designation will generally, subject
to certain limitations described further
herein have the right, subject to certain
conditions described herein, to replace the
Special Servicer and to select a
representative (the "Controlling Class
Representative") from whom the Special
Servicer will seek advice and approval and
take direction under certain circumstances, as
described herein. See "DESCRIPTION OF THE
POOLING AND SERVICING AGREEMENT--Special
Servicing" and "--The Controlling Class
Representative" herein.
TRUSTEE ....................... LaSalle National Bank, a nationally chartered
bank. See "THE POOLING AND SERVICING
AGREEMENT--The Trustee" herein.
FISCAL AGENT .................. ABN AMRO Bank N.V., a Netherlands banking
corporation, and the corporate parent of the
Trustee. See "THE POOLING AND SERVICING
AGREEMENT--The Fiscal Agent" herein.
CUT-OFF DATE .................. December 1, 1997.
CLOSING DATE .................. On or about December 22, 1997.
DISTRIBUTION DATE ............. The 15th day of each month, or if such 15th
day is not a Business Day, the Business Day
immediately following such day, commencing in
January 1998. 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-1.............
Class A-2 ............
Class A-3 ............
Class A-4 ............
Class IO..............
Class B...............
Class C...............
Class D...............
Class E...............
Class F ..............
Class G ..............
Class H ..............
Class J...............
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.
S-9
<PAGE>
RATED FINAL DISTRIBUTION
DATE ......................... As to each Class of Certificates, December 15,
2030. The Rated Final Distribution Date for
each Class of Certificates is the first
Distribution Date that follows the third
anniversary of the end of the amortization
term (without giving effect to any Balloon
Payment) for the Mortgage Loan that, as of the
Cut-off Date, has the longest remaining
amortization term.
RECORD DATE ................... With respect to each Distribution Date, the
close of business on the last Business Day
of the month preceding the month in which
such Distribution Date occurs.
INTEREST ACCRUAL PERIOD ....... With respect to any Distribution Date, the
calendar month preceding the month in which
such Distribution Date occurs. Interest for
each Interest Accrual Period is calculated
based on a 360-day year consisting of twelve
30-day months.
COLLECTION PERIOD ............. With respect to each Distribution Date and
any Mortgage Loan, the period beginning on
the day following the Determination Date in
the month preceding the month in which such
Distribution Date occurs (or, in the case of
the Distribution Date occurring in January
1998 on the day after the Cut-off Date) and
ending on the Determination Date in the
month in which such Distribution Date
occurs.
DETERMINATION DATE ............ The fifth Business Day preceding each
Distribution Date commencing in January
1998.
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 each of the Mortgage Loans, is the
first day of the month.
DENOMINATIONS ................. The Class A-1, Class A-2, Class A-3, Class
A-4, Class IO, Class B, Class C, Class D and
Class E Certificates will be issued in
minimum denominations of Certificate Balance
or notional amount of $1,000 and integral
multiples of $1 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 ("Beneficial Owners")
through the book-entry facilities of the
Depository. The Depositor has been informed
by DTC that its nominee will be Cede & Co.
Beneficial Owners will hold and transfer
their respective ownership interests in and
to such Book-Entry Certificates through the
book-entry facilities of DTC and will not be
entitled to definitive, fully registered
Certificates except in the limited
circumstances set forth herein. See
"DESCRIPTION OF THE CERTIFICATES--Delivery,
Form and Denomination" herein.
MORTGAGE LOAN GROUPS .......... The Mortgage Pool will consist of two groups
(each, a "Mortgage Loan Group"). "Mortgage
Loan Group 1" consists of the Copley Place
Loan and "Mortgage Loan Group 2" consists of
the remaining eleven Mortgage Loans.
S-10
<PAGE>
DISTRIBUTIONS ................ Distributions on the Certificates will be
made on each Distribution Date, commencing
in January 1998, to the holders of record at
the close of business on the related Record
Date.
The aggregate amount available for
distribution with respect to the Certificates
on any Distribution Date, other than
distributions of Prepayment Premiums, is the
Available Funds. See "DESCRIPTION OF THE
CERTIFICATES--Distributions" for a detailed
description of what constitutes Available
Funds for any Distribution Date.
On each Distribution Date, the Trustee will
(except as otherwise described under
"DESCRIPTION OF THE CERTIFICATES--
Termination" herein) apply the Group 1
Available Distribution Amount for such date
for the following purposes and in the
following order of priority, in each case to
the extent of remaining available funds:
(1) to distributions of interest to the
holders of the Class A-4 Certificates in
an amount equal to all Distributable
Certificate Interest (as defined herein)
in respect of the Class A-4 Certificates
for such Distribution Date, and, to the
extent not previously paid, for all prior
Distribution Dates and, in the event that
the Group 2 Available Distribution Amount
is not sufficient to pay Distributable
Certificate Interest to the holders of
the Class A-1, Class A-2 and Class A-3
Certificates, to pay any shortfall in
such amount;
(2) to distributions of principal to the
holders of the Class A-4 Certificates
equal to the lesser of the then
outstanding Certificate Balance of the
Class A-4 Certificates and the Group 1
Principal Distribution Amount (as defined
herein) for such Distribution Date;
(3) any remaining amounts shall be included
in Group 2 Available Funds.
On each Distribution Date, the Trustee will
(except as required to make payments on the
Group 1 Certificates as described below or as
otherwise described under "DESCRIPTION OF THE
CERTIFICATES--Termination" herein) apply the
Group 2 Available Distribution Amount for such
date for the following purposes and in the
following order of priority, in each case to
the extent of remaining available funds:
(1) to distributions of interest to the
holders of the Class A-1, Class A-2,
Class A-3 and Class IO Certificates (in
each case, so long as any such Class
remains outstanding), pro rata in
accordance with the respective amounts of
Distributable Certificate Interest (as
defined herein) on such Classes of
Certificates on such Distribution Date,
in an amount equal to all Distributable
Certificate Interest in respect of each
such Class of Certificates for such
Distribution Date and, to the extent not
previously paid, for all
S-11
<PAGE>
prior Distribution Dates and, in the
event that the Group 1 Available
Distribution Amount is not sufficient
to pay Distributable Certificate
Interest, to the holders of the Class
A-4 Certificates to pay any shortfall
in such amount; and
(2) to distributions of principal to the
holders of the Class A-1 Certificates
equal to the lesser of the then
outstanding Certificate Balance of the
Class A-1 Certificates and the Group 2
Principal Distribution Amount (as defined
herein) for such Distribution Date;
(3) to distributions of principal to the
holders of the Class A-2 Certificates
equal to the lesser of the then
outstanding Certificate Balance of the
Class A-2 Certificates and the Group 2
Principal Distribution Amount for such
Distribution Date, less any portion
thereof distributed in respect of the
Class A-1 Certificates;
(4) to distributions of principal to the
holders of the Class A-3 Certificates
equal to the lesser of the then
outstanding Certificate Balance of the
Class A-3 Certificates and the Group 2
Principal Distribution Amount for such
Distribution Date, less any portion
thereof distributed in respect of the
Class A-1 and/or Class A-2 Certificates;
(5) to distributions to the holders of the
Class A-1, Class A-2 and Class A-3
Certificates, pro rata in accordance with
the amount of Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to such Classes of
Certificates for which no reimbursement
has previously been received, to
reimburse such holders for such Realized
Losses and Additional Trust Fund
Expenses, if any;
(6) if the Class A-4 Certificates remain
outstanding, (after application of the
Group 1 Available Funds as described
above) to distributions of principal
equal to the lesser of the then
outstanding Certificate Balance of the
Class A-4 Certificates and the Group 2
Principal Distribution Amount for such
Distribution Date, less any portion
thereof distributed in respect of the
Class A-1, Class A-2 and Class A-3
Certificates;
(7) to distributions of interest to the
holders of the Class B Certificates in an
amount equal to all Distributable
Certificate Interest in respect of the
Class B Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior
Distribution Dates;
(8) after the principal balances of the Class
A-1, Class A-2, Class A-3 and Class A-4
Certificates have been reduced to zero,
to distributions of principal to the
holders of the Class B Certificates in an
amount not to exceed the then
S-12
<PAGE>
outstanding Certificate Balance of the
Class B Certificates equal to the Group
2 Principal Distribution Amount for
such Distribution Date, less any
portion thereof distributed in respect
of the Class A-1, Class A-2, Class A-3
and Class A-4 Certificates;
(9) to distributions to the holders of the
Class B Certificates to reimburse such
holders for all Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to the Class B
Certificates and for which no
reimbursement has previously been
received;
(10) to distributions of interest to the
holders of the Class C Certificates in an
amount equal to all Distributable
Certificate Interest in respect of the
Class C Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior
Distribution Dates;
(11) to distributions of principal to the
holders of the Class C Certificates equal
to the lesser of then outstanding
Certificate Balance of the Class C
Certificates and the Group 2 Principal
Distribution Amount for such Distribution
Date, less any portion thereof
distributed in respect of the Class A-1,
Class A-2, Class A-3, Class A-4 and/or
Class B Certificates;
(12) to distributions to the holders of the
Class C Certificates to reimburse such
holders for all Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to the Class C
Certificates and for which no
reimbursement has previously been
received;
(13) to distributions of interest to the
holders of the Class D Certificates in an
amount equal to all Distributable
Certificate Interest in respect of the
Class D Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior
Distribution Dates;
(14) to distributions of principal to the
holders of the Class D Certificates equal
to the lesser of the then outstanding
Certificate Balance of the Class D
Certificates and the Principal
Distribution Amount for such Distribution
Date, less any portion thereof
distributed in respect of the Class A-1,
Class A-2, Class A-3, Class A-4, Class B
and/or Class C Certificates;
(15) to distributions to the holders of the
Class D Certificates to reimburse such
holders for all Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to the Class D
Certificates and for which no
reimbursement has previously been
received;
(16) to distributions of interest to the
holders of the Class E Certificates in an
amount equal to all Distributable
Certificate Interest in respect of the
Class E Certificates for such
Distribution Date and, to the extent not
previously paid, for all prior
Distribution Dates;
S-13
<PAGE>
(17) to distributions of principal to the
holders of the Class E Certificates equal
to the lesser of the then outstanding
Certificate Balance of the Class E
Certificates and the Principal
Distribution Amount for such Distribution
Date, less any portion thereof
distributed in respect of the Class A-1,
Class A-2, Class A-3, Class B, Class C
and/or Class D Certificates;
(18) to distributions to the holders of the
Class E Certificates to reimburse such
holders for all Realized Losses and
Additional Trust Fund Expenses, if any,
previously allocated to the Class E
Certificates and for which no
reimbursement has previously been
received; and
(19) to distributions to the holders of the
respective Classes of Private
Certificates (other than the REMIC
Residual Certificates) as described
herein (provided that no distributions of
principal will be made in respect of any
Class of Private Certificates until the
aggregate Certificate Balance of the
Class A-1, Class A-2, Class A-3, Class B,
Class C, Class D and Class E Certificates
has been reduced to zero and no Event of
Default has occurred with respect to the
Group 1 Mortgage Loan). See "DESCRIPTION
OF THE CERTIFICATES--Distributions
--Application of the Group 1 Available
Distribution Amount" and "--Application
of the Group 2 Available Distribution
Amount" herein.
Notwithstanding the foregoing, if, at any time
when the Class A-1, Class A-2 or Class A-3
Certificates are outstanding, the amount
available to pay the Group 2 Principal
Distribution Amount is less than the Group 2
Principal Distribution Amount, such amount
will be applied on a pro rata basis among the
outstanding Class A-1, Class A-2 and Class A-3
Certificates. In addition, if at any time the
remaining principal balance of the Mortgage
Loans is less than the aggregate Certificate
Balance of the Class A-1, Class A-2, Class A-3
and Class A-4 Certificates, the Group 1 and
Group 2 Available Distribution Amounts will be
combined. Thereafter, on each Distribution
Date, the Available Distribution Amount will
be distributed first, to pay Distributable
Certificate Interest to the Class A-1, Class
A-2, Class A-3 and Class A-4 Certificates, pro
rata in proportion to such Distributable
Certificate Interest, and thereafter, pro rata
to each such Class to pay the Certificate
Balances thereof.
The "Distributable Certificate Interest" in
respect of any Class of the Group 1
Certificates (other than the Class IO
Components) for any Distribution Date will
generally equal one month's interest at the
applicable Pass-Through Rate accrued on the
Certificate Balance of such Class of
Certificates, outstanding immediately prior to
such Distribution Date. The "Distributable
Certificate Interest" in respect of the Class
IO Certificates will equal the sum of the
interest due on each of the Components.
Interest payable on the Regular Certificates
on
S-14
<PAGE>
any Distribution Date will accrue during the
immediately preceding calendar month and will
be calculated on a 30/360 basis (each, an
"Interest Accrual Period"). See "THE POOLING
AND SERVICING AGREEMENT--Servicing
Compensation and Payment of Expenses" and
"DESCRIPTION OF THE CERTIFICATES--
Distributions--Distributable Certificate
Interest" herein.
The Pass-Through Rates for the Class B,
Class C, Class D, and Class E Certificates
will equal the Group 2 Weighted Average Rate
minus %, %, %, and %, respectively.
The "Group 2 Weighted Average Rate" equals for
any Distribution Date, the weighted average of
the REMIC I Net Mortgage Rates, weighted on
the basis of the Certificate Principal Amounts
of the REMIC I Interests as of the close of
the preceding Distribution Date.
The "REMIC I Net Mortgage Rate" for each REMIC
I Interest is equal to the Mortgage Interest
Rate for the related Mortgage Loan without
taking into account any modification of such
rate occurring after the Cut-Off Date.
For purposes of calculating the Group 2
Weighted Average Rate applicable to any
Distribution Date, in the case of any REMIC I
Interest for which interest is not calculated
on the basis of a year consisting of twelve
30-day months, the REMIC I Net Mortgage Rate
for each Due Period will be converted to an
effective rate equal to the amount of interest
accrued on the related REMIC I Interest for
such Distribution Date, multiplied by twelve
and expressed as a percentage of the principal
balance of the REMIC I Interest as of the
preceding Distribution Date.
The "Group 1 Principal Distribution Amount"
for any Distribution Date will generally equal
the aggregate of the following: (a) the
aggregate of the principal portions of all
Scheduled Payments (as defined below) (other
than Balloon Payments) and the principal
portion of any Assumed Scheduled Payments (as
defined herein) due or deemed due on or in
respect of the Group 1 Mortgage Loan for its
Due Date during the related Interest Accrual
Period; (b) the aggregate of all principal
prepayments received on the Group 1 Mortgage
Loan during the related Interest Accrual
Period; (c) if the stated maturity date of the
Group 1 Mortgage Loan occurred during or prior
to the related Collection Period, any payment
of principal made by or on behalf of the
related borrower during the related Collection
Period (including any Balloon Payment), in
each case net of any portion of such payment
that represents a recovery of the principal
portion of any Scheduled Payment (other than a
Balloon Payment) due or the principal portion
of any Assumed Scheduled Payment deemed due,
in respect of the Group 1 Mortgage Loan on a
Due Date during or prior to the related
Interest Accrual Period to the extent
previously advanced and not previously
recovered; (d) the aggregate of all
liquidation
S-15
<PAGE>
proceeds, insurance proceeds, condemnation
proceeds and awards, and proceeds of any Group
1 Mortgage Loan repurchase that were received
on or in respect of Mortgage Loans during the
related Collection Period and that were
identified and applied by the Master Servicer
as recoveries of principal, in each case net
of any portion of such amounts that represents
a recovery of the principal portion of any
Scheduled Payment (other than a Balloon
Payment) due and of the principal portion of
any Assumed Scheduled Payment deemed due, in
respect of the Group 1 Mortgage Loan or a Due
Date during or prior to the related Collection
Period to the extent previously advanced and
not previously recovered; and (e) for each
Distribution Date after the initial
Distribution Date, the excess, if any, of the
Group 1 Principal Distribution Amount for the
immediately preceding Distribution Date, over
the aggregate distributions of principal made
on the Class A-4 Certificates on such
immediately preceding Distribution Date.
The "Group 1 Scheduled Payment" due on the
Group 1 Mortgage Loan on any related Due Date
is the amount of the Monthly Payment that is
or would have been, as the case may be, due
thereon on such date, after giving effect to
any waiver, modification or amendment granted
or agreed to by the Master Servicer or the
Special Servicer or in connection with a
bankruptcy or similar proceeding involving the
related borrower, and assuming that each prior
Scheduled Payment has been timely made. The
"Group 1 Assumed Scheduled Payment" is an
amount deemed due in respect of the Group 1
Mortgage Loan if it is delinquent in respect
of its Balloon Payment beyond the first
Determination Date (as defined herein) after
its stated maturity date. The Assumed
Scheduled Payment deemed due on the Group 1
Mortgage Loan on its stated maturity date and
on each successive related Due Date that it
remains or is deemed to remain outstanding
(and prior to such time, if any, as the amount
of the Scheduled Payment is modified) will
equal the Scheduled Payment that would have
been due thereon on such date if the related
Balloon Payment had not come due but rather
such Mortgage Loan had continued to amortize
in accordance with the Group 1 Mortgage Loan's
amortization schedule, if any, in effect prior
to its stated maturity date.
The "Group 2 Principal Distribution Amount"
for any Distribution Date will generally equal
the aggregate of the following: (a) the
aggregate of the principal portions of all
Scheduled Payments (as defined below) (other
than Balloon Payments) and the principal
portion of any Assumed Scheduled Payments (as
defined herein) due or deemed due on or in
respect of the Group 2 Mortgage Loans (and, if
the Class A-4 Certificates have been paid in
full, the Group 1 Mortgage Loan) for its Due
Dates during the related Collection Period;
(b) the aggregate of all principal prepayments
received on the Group 2 Mortgage Loans during
the related Collection Period; (including any
Remaining Cash Flow); (c) with respect to any
Mortgage Loan
S-16
<PAGE>
as to which the related stated maturity date
occurred during or prior to the related
Collection Period, any payment of principal
made by or on behalf of the related borrower
during the related Collection Period
(including any Balloon Payment), in each case
net of any portion of such payment that
represents a recovery of the principal portion
of any Scheduled Payment (other than a Balloon
Payment) due or the principal portion of any
Assumed Scheduled Payment deemed due, in
respect of such Mortgage Loan on a Due Date
during or prior to the related Collection
Period to the extent previously advanced and
not previously recovered; (d) the aggregate of
all liquidation proceeds, insurance proceeds,
condemnation proceeds and awards, and proceeds
of Group 2 Mortgage Loan repurchases that were
received on or in respect of Group 2 Mortgage
Loans during the related Collection Period and
that were identified and applied by the Master
Servicer as recoveries of principal, in each
case net of any portion of such amounts that
represents a recovery of the principal portion
of any Scheduled Payment (other than a Balloon
Payment) due and of the principal portion of
any Assumed Scheduled Payment deemed due, in
respect of the Group 2 Mortgage Loan on a Due
Date during or prior to the related Interest
Accrual Period to the extent previously
advanced and not previously recovered; and (e)
for each Distribution Date after the initial
Distribution Date, the excess, if any, of the
Group 2 Principal Distribution Amount for the
immediately preceding Distribution Date, over
the aggregate distributions of principal made
on the Group 2 Certificates on such
immediately preceding Distribution Date.
The "Group 2 Scheduled Payment" due on any
Group 2 Mortgage Loan on any related Due Date
is the amount of the Monthly Payment that is
or would have been, as the case may be, due
thereon on such date, after giving effect to
any waiver, modification or amendment granted
or agreed to by the Master Servicer or the
Special Servicer or in connection with a
bankruptcy or similar proceeding involving the
related borrower, and assuming that each prior
Scheduled Payment has been timely made. The
"Assumed Scheduled Payment" is an amount
deemed due in respect of a Balloon Loan that
is delinquent in respect of its Balloon
Payment beyond the first Determination Date
(as defined herein) after its stated maturity
date. The Assumed Scheduled Payment deemed due
on any such Balloon Loan on its stated
maturity date and on each successive related
Due Date that it remains or is deemed to
remain outstanding (and prior to such time, if
any, as the amount of the Scheduled Payment is
modified) will equal the Scheduled Payment
that would have been due thereon on such date
if the related Balloon Payment had not come
due but rather such Group 2 Mortgage Loan had
continued to amortize in accordance with such
loan's amortization schedule, if any, in
effect prior to its stated maturity date. The
"Determination Date" will be the fifth
Business Day preceding each Distribution Date.
See
S-17
<PAGE>
"DESCRIPTION OF THE CERTIFICATES--
Distributions--Principal Distribution Amount"
herein.
Reimbursements of Realized Losses and
Additional Trust Fund Expenses previously
allocated to a Class will not constitute
distributions of principal for any purpose and
will not result in an additional reduction in
the Certificate Balance of the Class of
Certificates in respect of which any such
reimbursement is made.
The holders of the Certificates may also
receive portions of any Prepayment Premiums,
to the extent described under "DESCRIPTION OF
THE CERTIFICATES--Distributions--Allocation
of Prepayment Premiums" herein. Such
distributions will be in addition to the
distributing of interest, if any, made to such
holders from the Available Distribution Amount
(as defined herein) on each Distribution Date.
ADVANCES ...................... Subject to a recoverability determination, as
described herein, and subject to Appraisal
Reductions, as described herein, the Master
Servicer will be required to make advances
(each, a "P&I Advance") with respect to each
Distribution Date in an amount that is
generally equal to the aggregate of all
Scheduled Payments (other than Balloon
Payments) and any Assumed Scheduled Payments,
net of related Servicing Fees (as defined
herein), due or deemed due, as the case may
be, on or in respect of the Mortgage Loans
during the related Interest Accrual Period, in
each case to the extent that such amount was
not paid by or on behalf of the related
Borrower or otherwise collected as of the
close of business on the last day of the
related Interest Accrual Period. Pursuant to
the terms of the Pooling and Servicing
Agreement, if the Master Servicer fails to
make a P&I Advance required to be made, the
Trustee shall then 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. No
default by the Trustee will be deemed to have
occurred if the Fiscal Agent makes such P&I
Advance in a timely manner, as set forth in
the Pooling and Servicing Agreement. See " THE
POOLING AND SERVICING AGREEMENT--Appraisal
Reductions" herein. In addition, the Master
Servicer or Special Servicer will be required
to make certain servicing advances, subject to
a recoverability determination, as described
under "THE POOLING AND SERVICING
AGREEMENT--Advances" (a "Servicing Advance"
and, together with a P&I Advance, an
"Advance").
As described herein, the Master Servicer (or
the Trustee or Fiscal Agent or Special
Servicer, as applicable) will be entitled to
interest on any Advance made by it. Such
interest will accrue from the date any such
Advance is made or incurred at a rate per
annum equal to the "prime rate" published in
the "Money Rates" section of The Wall Street
Journal, as such "prime rate" may change from
time to time (the "Advance Rate"), com-
S-18
<PAGE>
pounded annually, and will be paid,
contemporaneously with the reimbursement of
the related Advance, from general collections
on the Mortgage Pool then on deposit in the
Certificate Account. See "THE POOLING AND
SERVICING AGREEMENT--Advances" herein and in "
SERVICING OF THE MORTGAGE LOANS--Advances" and
"DESCRIPTION OF THE CERTIFICATES--Accounts" in
the Prospectus.
DISTRIBUTION OF PREPAYMENT
PREMIUMS ..................... For any Distribution Date, with respect to any
Prepayment Premium actually collected in
respect of a Group 2 Mortgage Loan during the
related Interest Accrual Period, the holders
of the Class A-1, Class A-2, Class A-3, Class
B, Class C, Class D, Class E, Class F, Class
G, Class H and Class J Certificates are
entitled to distributions in the amount of the
product of (a) a fraction (not greater than
one and not less than zero), the numerator of
which is the applicable Pass-Through Rate
minus the discount rate used in calculating
such Prepayment Premium and the denominmator
of which is the Mortgage Rate of the
applicable Group 2 Mortgage Loan minus such
discount rate, (b) the appropriate Class
Prepayment Percentage and (c) the amount of
such Prepayment Premium collected. On each
Distribution Date, the holders of each
Component of the Class IO Certificates are
entitled to receive any remaining portion of
such Prepayment Premium received with respect
to the Group 2 Mortgage Loans in proportion to
the Strip Rate payable on such Class. The
holders of the Class A-4 Certificates are
entitled to receive all Prepayment Premiums
received on the Group 1 Mortgage Loan.
YIELD CONSIDERATIONS .......... The yield to maturity of an Offered
Certificate purchased at a discount or premium
will be affected by the rate and timing of
prepayments and other unscheduled collections
of principal on or in respect of the Mortgage
Loans and the allocation thereof to reduce the
principal balance (on notional amount) of such
Certificate. An investor should consider, in
the case of any such Certificate purchased at
a discount, the risk that a slower than
anticipated rate of prepayments could result
in a lower than anticipated yield and, in the
case of any such Certificate purchased at a
premium, the risk that a faster than
anticipated rate of prepayments could result
in a lower than anticipated yield. THE YIELD
TO MATURITY OF EACH COMPONENT OF THE CLASS IO
CERTIFICATES WILL BE HIGHLY SENSITIVE TO THE
RATE AND TIMING OF PRINCIPAL PAYMENTS
(INCLUDING PREPAYMENTS, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS, AND
INVESTORS IN THE CLASS IO CERTIFICATES SHOULD
FULLY CONSIDER THE ASSOCIATED RISKS, INCLUDING
THE RISK THAT A RAPID RATE OF PREPAYMENTS,
DEFAULTS AND/OR LIQUIDATIONS IN RESPECT OF THE
MORTGAGE LOANS COULD RESULT IN THE FAILURE OF
SUCH INVESTORS TO FULLY RECOUP THEIR INITIAL
INVESTMENTS. See "YIELD AND MATURITY
CONSIDERATIONS" herein and in the Prospectus.
The allocation to any Offered Class of
S-19
<PAGE>
Certificates of any Prepayment Premium may be
insufficient to offset fully the effects on
the reduction to the anticipated yield to
maturity resulting from the corresponding
principal prepayment. See "DESCRIPTION OF
CERTIFICATES--Distributions -- Allocation of
Prepayment Premiums" herein.
In addition, insofar as an investor's initial
investment in any Offered Certificate is
returned in the form of payments of principal
thereon, there can be no assurance that such
amounts can be reinvested in comparable
alternative investments with comparable
yields. Investors in the Offered Certificates
should consider that, as of the Cut-off Date,
certain of the Mortgage Loans may be prepaid
at any time after the expiration of the
applicable Lockout Period, subject, in most
cases, to the payment of a Prepayment Premium.
See "DESCRIPTION OF THE MORTGAGE POOL" herein.
Accordingly, the rate of prepayments on the
Mortgage Loans is likely to be inversely
related to the level of prevailing market
interest rates (and, presumably, to the yields
on comparable alternative investments).
SUBORDINATION; ALLOCATION OF
REALIZED LOSSES .............. The rights of holders of the Class B, Class C,
Class D, Class E and the Private Certificates
(collectively, the "Subordinate Certificates")
to receive distributions of amounts collected
or advanced on the Mortgage Loans (including
the Group 1 Mortgage Loan) will, in each case,
be subordinated, to the extent described
herein, to the rights of holders of the Class
A-1, Class A-2, Class A-3, Class A-4 and Class
IO Certificates (collectively, the "Senior
Certificates") and each other such Class of
Subordinate Certificates, if any, with an
earlier alphabetical class designation. This
subordination is intended to enhance the
likelihood of timely receipt by the holders of
the Senior Certificates of the full amount of
Distributable Certificate Interest payable in
respect of such Classes of Certificates on
each Distribution Date, and the ultimate
receipt by the holders of the Senior
Certificates (other than the Class IO
Certificates) of principal equal to the entire
respective Certificate Balances of the Class
A-1, Class A-2, Class A-3 and Class A-4
Certificates. Similarly, but to decreasing
degrees, this subordination is also intended
to enhance the likelihood of timely receipt by
the holders of the Class B, Class C, Class D
and Class E Certificates (in such order) of
the full amount of Distributable Certificate
Interest payable in respect of such Classes of
Certificates on each Distribution Date, and
the ultimate receipt by the holders of such
Certificates of principal equal to the entire
respective Certificate Balances of such
Classes of Certificates. The protection
afforded to the holders of the Senior
Certificates and, to decreasing degrees, each
Class of Offered Certificates subordinate
thereto by means of the subordination referred
to above will be accomplished by (i) the
application of the related Principal
Distribution Amount on each Distribution Date
in the order described above in this
S-20
<PAGE>
Summary under "--Description of the
Certificates--Distributions" and (ii) the
allocation of Realized Losses and Additional
Trust Fund Expenses as described below. No
other form of credit support will be available
for the benefit of the holders of the Offered
Certificates.
On each Distribution Date, following all
distributions on the Certificates to be made
on such date, the aggregate of all Realized
Losses and Additional Trust Fund Expenses that
have been incurred since the Cut-off Date
through the end of the related Collection
Period and that have not previously been so
allocated will be allocated, subject to the
limitations described herein, first to the
Private Certificates in the order described in
the Pooling and Servicing Agreement, and then
to the Class E, Class D, Class C and Class B
Certificates, in that order, until the
Certificate Balance of each such Class has
been reduced to zero. Thereafter any
additional Realized Losses and Additional
Trust Fund Expenses will be allocated to the
Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, pro rata in proportion to their
outstanding Certificate Balances (in each case
in reduction of their respective Certificate
Balances as of the related Distribution Date),
but in the aggregate only to the extent that
the aggregate Certificate Balance of such
Classes of Certificates remaining outstanding
after giving effect to the distributions on
such Distribution Date exceeds the aggregate
Stated Principal Balance of the Mortgage Pool
that will be outstanding immediately following
such Distribution Date. See "DESCRIPTION OF
THE CERTIFICATES -- Subordination; Allocation
of Losses and Certain Expenses" herein.
Any Realized Loss allocated in reduction of
the aggregate outstanding principal balance of
the Group 2 Mortgage Loans will result in a
corresponding reduction in the notional amount
of the Class IO-1 Component, and any Realized
Loss or Additional Trust Fund Expenses
allocated in reduction of the Certificate
Balance of the Class A-1 or Class A-2
Certificates will also result in a
corresponding reduction in the notional amount
of the Class IO-2 Component.
OPTIONAL TERMINATION .......... Each of the Depositor and the Master Servicer
will have an option to purchase all of the
Mortgage Loans and all REO Properties, if any,
and thereby effect an early termination of the
Trust Fund and an early retirement of the then
outstanding Certificates, on any Distribution
Date on which the aggregate Stated Principal
Balance of the Mortgage Pool is less than 1%
of the Initial Pool Balance. See "DESCRIPTION
OF THE CERTIFICATES--Termination" herein and
in the Prospectus.
CERTAIN FEDERAL INCOME
TAX CONSEQUENCES ............. Elections will be made to treat the Trust
Funds, and the Trust Funds will qualify, as
two separate real estate mortgage investment
conduits (each, "REMIC I", "REMIC II" and
"REMIC III" for federal income tax purposes.
The Class A-1, Class A-2, Class A-3, Class
A-4, Class IO, Class B, Class C, Class D,
Class
S-21
<PAGE>
E, Class F, Class G, Class H and Class J
Certificates (collectively, the "Regular
Certificates") will represent "regular
interests" in REMIC II and the Class R-II
Certificates will be designated as the sole
Class of "residual interest" in REMIC II.
Certain uncertificated classes of interests
will represent "regular interests" in REMIC I
and the Class R-I and Class R-II Certificates
will be designated as the sole Class of
"residual interest" in REMIC I and REMIC II,
respectively.
Because they represent regular interests, the
Regular Certificates generally will be treated
as newly originated debt instruments for
federal income tax purposes. Holders of the
Regular Certificates will be required to
include in income all interest on such
Certificates in accordance with the accrual
method of accounting, regardless of a
Certificateholder's usual method of
accounting. The Class IO Certificates will
consist of two regular interests and will be
issued with original issue discount. For the
purposes of determining the rate of accrual of
market discount, original issue discount and
premium for federal income tax purposes, it
has been assumed that the Mortgage Loans will
prepay at the rate of 0% CPR. No
representation is made as to whether the
Mortgage Loans will prepay at that rate or any
other rate. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Regular
Interests--Interest and Acquisition Discount"
in the Prospectus.
The amount of income reported by a holder of a
Subordinate Certificate may exceed cash
distributions as a result of the preferential
right of other Classes of Regular Certificates
to receive cash distributions in the event of
losses or delinquencies on the Mortgage Loans.
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 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"
within the meaning of Section
7701(a)(19)(C)(xi) of the Code only in the
proportion that the underlying assets of REMIC
II are assets described in Section
S-22
<PAGE>
7701(a)(19) of the Code. See "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES--Taxation of the REMIC
and its Certificate Holders" in the
Prospectus.
For further information regarding the federal
income tax consequences of investing in the
Offered Certificates, see "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES--Taxation of the
REMIC" in the Prospectus and "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES" herein.
ERISA CONSIDERATIONS .......... The Class A-1, Class A-2, Class A-3, Class A-4
and Class IO Certificates may in general be
purchased by employee benefit plans subject to
Title I of ERISA or plans subject to Section
4975 of the Code, subject to certain
conditions and restrictions. In this regard,
the U.S. Department of Labor (the "DOL") has
issued an administrative exemption to Merrill
Lynch, Pierce, Fenner & Smith Incorporated,
which, subject to the satisfaction of certain
conditions and restrictions described herein,
should exempt the acquisition of the Class
A-1, Class A-2, Class A-3, Class A-4 and Class
IO Certificates offered hereby from the
penalties and taxes that might otherwise arise
under the prohibited transaction rules of
ERISA and Section 4975 of the Code.
The remaining Classes of Offered Certificates
(the "Subordinated Certificates") do not meet
the requirements of the foregoing exemption
and accordingly, in general, may not be
purchased or transferred to a plan or person
acting on behalf of a plan; provided that such
Subordinated Certificates may be purchased by
an insurance company general account that
satisfies the requirements of Sections I(a),
III and IV of DOL Prohibited Transaction Class
Exemption 95-60 ("PTCE 95-60") or otherwise
qualifies for exemptive relief under Section
401(c) of ERISA and the forthcoming
regulations thereunder. Each initial investor
that purchases a Subordinated Certificate or
interest therein and each subsequent
transferee thereof will be deemed to represent
and warrant that either (a) it is not
purchasing such Subordinated Certificates with
the assets of any Plan (as defined in "ERISA
Considerations") or (b) part or all of the
assets to be used to purchase such
Certificates constitutes assets of an
insurance company general account and PTCE
95-60 applies such that the use of such assets
to acquire and hold such Certificates does not
and will not constitute a non-exempt
prohibited transaction for purposes of ERISA
and Section 4975 of the Code.
S-23
<PAGE>
RATINGS ...................... It is anticipated that the Certificates will
have the following ratings from Standard &
Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("S&P") and
Moody's Investors Service, Inc. ("Moody's" and
together with S&P, the "Rating Agencies"):
CLASS S&P MOODY'S
----- --- -------
A-1 AAA Aaa
A-2 AAA Aaa
A-3 AAA Aaa
A-4 -- --
IO AAA Aaa
B AA Aa2
C A A2
D BBB Baa2
E BBB- Baa3
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.
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. In general, the ratings thus
address credit risk and not prepayment risk.
As described herein, the amounts payable with
respect to the Class IO 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 IO
Certificateholders receive only a single
month's interest and thus suffer a nearly
complete loss of their investment, all amounts
"due" to such holders will nevertheless have
been paid, and such result is consistent with
the "AAA" and "Aaa" ratings received on the
Class IO Certificates. The Class IO notional
amount upon which interest is calculated is
reduced by the allocation of Realized Losses,
scheduled payments on the Mortgage Loans,
prepayments, whether voluntary or involuntary
and payments of principal on the Class A-1 and
Class A-2 Certificates. The rating does not
address the timing or
S-24
<PAGE>
magnitude of reductions of the Class IO
notional amount, but only the obligation to
pay interest timely on the Class IO Notional
Balance as so reduced from time to time.
Accordingly, the ratings of the Class IO
Certificates should be evaluated independently
from similar ratings on other types of
securities. See "RISK FACTORS" and "RATINGS"
herein.
LEGAL INVESTMENT .............. The Class A-1, Class A-2, Class A-3, Class
A-4, Class IO and Class B Certificates will
constitute "mortgage related securities"
within the meaning of the Secondary Mortgage
Market Enhancement Act of 1984 as amended.
HOWEVER, NO REPRESENTATION CAN BE MADE AS TO
WHETHER ANY OF THE OFFERED CERTIFICATES WILL
CONSTITUTE "COMMERCIAL MORTGAGE RELATED
SECURITIES" AND THUS AS "TYPE IV SECURITIES"
FOR PURPOSES OF THE LEGAL INVESTMENT AUTHORITY
OF DEPOSITORY INSTITUTIONS. The appropriate
characterization of the Offered Certificates
under various legal investment restrictions,
and thus the ability of investors subject to
these restrictions to purchase the Offered
Certificates, may be subject to significant
interpretative uncertainties. Accordingly,
investors should consult their own legal
advisors to determine whether and to what
extent the Offered Certificates constitute
legal investments for them. See "LEGAL
INVESTMENT" herein and in the Prospectus.
THE MORTGAGE LOANS AND THE MORTGAGED PROPERTIES
OVERVIEW OF THE MORTGAGE LOANS
AND THE MORTGAGED PROPERTIES . 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 twelve
fixed-rate mortgage loans (the "Mortgage
Loans") secured by first liens on commercial
and multifamily residential properties (each,
a "Mortgaged Property"). Nine of the Mortgage
Loans (70.9% of the Cut-off Date Loan Balance)
were originated by Midland Loan Services, L.P.
("Midland"). One of the Mortgage Loans (11.4%
of the Cut-off Date Loan Balance) was
originated by Metropolitan Life Insurance
Company ("MetLife"). One of the Mortgage Loans
(10.1% of the Cut-off Date Loan Balance) was
originated by KeyCorp Real Estate Capital
Markets, Inc. ("KeyCorp"). One of the Mortgage
Loans (7.6% of the Cut-off Date Loan Balance)
was originated by L.J. Melody & Company
("Melody"). Each of the Mortgage Loans (other
than the Mortgage Loan originated by MetLife)
was underwritten by the Mortgage Loan Seller
pursuant to the Mortgage Loan Seller's
underwriting standards and was immediately
conveyed by the originator to the Mortgage
Loan Seller. The Mortgage Loan originated by
MetLife was subject to limited reunderwriting
by the Mortgage Loan Seller and described
under "RISK FACTORS--Underwriting". 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-25
<PAGE>
the Mortgage Loans and the related Mortgaged
Properties are described under "RISK FACTORS"
and "DESCRIPTION OF THE MORTGAGE POOL" herein.
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.
Minimum Cut-off Date Balance............. $ 20,940,017
Maximum Cut-off Date Balance............. 129,493,575
Average Cut-off Date Balance............. 70,706,911
Minimum Mortgage Rate.................... 6.75%
Maximum Mortgage Rate.................... 8.47%
Weighted Average Mortgage Rate........... 7.4621%
Minimum Remaining Term to Maturity
(months)................................ 116
Maximum Remaining Term to Maturity
(months)................................ 359
Weighted Average Remaining Term to
Maturity (months)....................... 285.3
Minimum Remaining Amortization Term
(months)................................ 238
Maximum Remaining Amortization Term
(months)................................ 359
Weighted Average Remaining Amortization
Term (months)........................... 331.1
Minimum Cut-off Date DSCR................ 1.24x
Maximum Cut-off Date DSCR................ 2.69x
Weighted Average Cut-off Date DSCR ...... 1.68x
Minimum Cut-off Date LTV................. 30.8%
Maximum Cut-off Date LTV................. 80.6%
Weighted Average Cut-off Date LTV ....... 64.8%
Minimum ARD(1)/Balloon LTV............... 22.7%
Maximum ARD(1)/Balloon LTV............... 69.3%
Weighted Average ARD(1)/Balloon LTV ..... 54.4%
--------------
(1) Balloon or Anticipated Repayment Date
COPLEY PLACE LOAN ............. The "Copley Place Loan" has a principal
balance as of the Cut-Off Date of
approximately $96,908,666 and is evidenced by
a Class A Promissory Note in the original
principal amount of $97,500,000 (the "Copley
Class A Note") issued by Copley Place
Associates, LLC, a Delaware limited liability
company (the "Copley Place Borrower"). The
Copley Place Loan is secured by a first
priority mortgage lien (the "Copley Mortgage")
issued by the Copley Borrower encumbering a
mixed-use development in Boston, Massachusetts
(the "Copley Prop-
S-26
<PAGE>
erty"). The Copley Mortgage also secures a
Class B Promissory Note in the original and
current principal amount of $97,500,000 issued
by the Copley Borrower (the "Copley Class B
Note" and, together with the Copley Class A
Note, the "Copley Notes"). The Copley Notes at
origination had a combined balance of
$195,000,000). Only the Copley Class A Note
will be an asset of the Trust Fund.
The Copley Property consists of the Copley
Borrower's three ground leasehold interests in
all the parcels comprising the Copley
Property, a mixed-use development located in
Boston, Massachusetts, containing
approximately 3.7 million square feet of GLA,
comprised of a 368,921 square foot shopping
center, 845,323 square feet of office space
and two garages with 1,525 parking spaces.
Anchor stores at the Copley Property are
Nieman Marcus, Sony Theatres and Tiffany &
Co., and significant office tenants include
Bain & Co., Massachusetts Registry of Motor
Vehicles, Internal Revenue Service, AT&T and
Fleet Bank. An appraisal dated June 30, 1997
determined a value for the Copley Property of
approximately $315,000,000, resulting in a
Cut-Off Date LTV of approximately 30.8% with
respect to the Copley Class A Note and 61.7%
with respect to the Copley Class A Note and
the Copley Class B Note combined. The DSCR is
calculated using Underwritten Cashflow divided
by 50% of the total debt service due on the
Copley Class A and Copley Class B Notes as of
the Cut-Off Date and is approximately 2.69x
for the Copley Place Class A Note.
The Copley Class A Note and the Copley Class B
Note together bear interest at a weighted
average fixed rate per annum equal to 7.44%
(the "Copley Loan Interest Rate") and the
Copley Class A Note bears interest at a fixed
rate per annum equal to 6.75% (the "Copley
Class A Interest Rate") through August 1, 2007
(the "Copley Maturity Date"). Commencing on
September 1, 1997 and continuing through and
including July 1, 2007, the Copley Place Loan
requires equal monthly payments of principal
and interest on the Copley Class A Note of
$1,355,465.67 (based on a 30-year amortization
schedule calculated by reference to the
aggregate principal amount of the Copley
Notes). Voluntary prepayment without penalty
of the Copley Place Loan is prohibited prior
to the Copley Maturity Date; however such
prepayment may be made upon payment of the
entire principal sum evidenced by both Copley
Notes, together with all interest accrued
thereon and payment of a Prepayment Premium.
The scheduled principal balance of the Copley
Loan on the Copley Maturity Date will be
approximately $71,525,775.
The Copley Place Loan is subject to servicing
arrangements that differ in some respects from
the servicing arrangements for the other
Mortgage Loans. Such servicing arrangements
are described under "THE POOLING AND SERVICING
AGREEMENT--Servicing of the Mortgage Loans;
Collections
S-27
<PAGE>
of Payments" and "--Special Servicing." The
Copley Place Loan is subject to servicing
arrangements that differ in some respects from
the servicing arrangements for the other
Mortgage Loans, as described under "THE
POOLING AND SERVICING AGREEMENT--Servicing of
the Mortgage Loans; Collections of Payments"
and "--Special Servicing." The Copley Place
Loan will be sub-serviced by Metropolitan Life
Insurance Company (the "Copley Sub-Servicer").
In addition, in the event that a Payment
Default or any other Event of Default under
the Copley Mortgage or other Loan Documents
has occurred and is continuing for a period of
two months, or if a Maturity Default has
occurred with respect to the Copley Loan, and
if the Copley Sub-Servicer, the Trust Fund
(acting through the Master Servicer) and the
Class B Noteholder are unable to reach
agreement with respect to the appropriate
course of action with respect thereto, the
Class B Noteholder may elect, by written
notice to the Servicer and the Trustee, to
either (i) require the Copley Sub-Servicer to
commence foreclosure proceedings as soon as
practicable or (ii) to purchase from the Trust
Fund the Class A Note. In the event that an
Event of Default with respect to either Copley
Note or the Copley Mortgage shall have
occurred and be continuing for a period in
excess of five months (in the absence of an
election by Class B Noteholder during such
period), and if the Copley Sub-Servicer, the
Trust Fund (acting through the Master
Servicer) and the Class B Noteholder are
unable to reach agreement with respect to the
appropriate course of action, the Trust Fund
(acting through the Master Servicer) is
required to make written demand on the Copley
Sub-Servicer and the Class B Noteholder for
the commencement of foreclosure proceedings
which shall be commenced by the ninetieth day
(or as soon thereafter as practicable)
following the date of the demand thereof by
the Trust Fund (acting through the Master
Servicer). The Copley Sub-Servicer is required
to thereafter commence foreclosure proceedings
unless the Class B Noteholder shall
irrevocably elect in writing prior to such
ninetieth day to purchase from the Trust Fund
the Class A Note at a purchase price equal to
the sum of (i) the outstanding principal
balance of the Copley Class A Note, (ii)
unpaid interest at the Class A Interest Rate
to the date of purchase and (iii) unless the
loan-to-value ratio exceeds 115% or such
purchase occurs on a day on or after the
Copley Maturity Date, a yield maintenance fee
on the Class A Note calculated using the
formula set forth in the Copley Class A Note
for the calculation of the Note Prepayment
Premium provided for therein. Upon the receipt
of the purchase price, the Trust Fund will be
required to assign and deliver the Copley
Class A Note to the Class B Noteholder and to
take all such actions as are reasonably
necessary or appropriate to effect the
transfer of the Copley Class A Note to the
Class B Noteholder. See "THE POOLING AND
SERVICING AGREEMENT--Realization on Mortgage
Loans."
S-28
<PAGE>
BROOKFIELD LOAN .............. The "Brookfield Loan" has a principal balance
as of the Cut-Off Date of approximately
$59,754,386 and is evidenced by (i) an amended
and restated mortgage note issued by
Brookfield DB Inc., a special-purpose
Minnesota corporation (the "Brookfield
Borrower") and (ii) a pledge of a mortgage
note issued by Brookfield Retail Centers Inc.,
a Minnesota corporation (the "Brookfield
Pledge"). The Brookfield Loan is secured by
(i) a first priority mortgage lien (the
"Brookfield Mortgage") encumbering a 40-story
office building, a multi-level retail section
of the building along with a parking facility,
all of which are located in Minneapolis,
Minnesota (the "Brookfield Property") and (ii)
in connection with the Brookfield Pledge, a
collateral assignment of the first mortgage
encumbering a vertical mall adjacent to the
Brookfield Property. The Brookfield Pledge
will be released upon the achievement of
certain debt service coverage tests described
under "DESCRIPTION OF THE MORTGAGE POOL--Dain
Bosworth Plaza/Gaviidae Common Phase I & II".
The Brookfield Borrower is organized for the
sole purpose of owning the ground subleasehold
estate in the Brookfield Property pursuant to
the ground sublease with the Minnesota
Community Development Agency, a Minnesota
public body corporate and politic, as landlord
(the "MCDA"). In addition to the Brookfield
Mortgage and the Brookfield Pledge, the
Brookfield Loan is secured by a collateral
assignment of a lease of retail space by and
between the Brookfield Borrower, as landlord,
and Brookfield Arc Inc., a Minnesota
corporation (and an affiliate of the
Brookfield Borrower), as tenant (the "Master
Lease").
The Brookfield Properties consist of the
Brookfield Borrower's ground subleasehold
interest in (i) Dain Bosworth Plaza, a
40-story office building located in
Minneapolis, Minnesota, containing
approximately 592,953 rentable square feet,
(ii) Gaviidae Common Phase II, an enclosed 4
level vertical mall located in Minneapolis,
Minnesota, containing approximately 188,864
square feet of GLA and anchored by Neiman
Marcus, and (iii) and a parking facility with
three subterranean levels, located in
Minneapolis, Minnesota. The Brookfield Pledge
encumbers Gaviidae Common Phase I, a five
level retail center, located in Minneapolis,
Minnesota, containing approximately 136,142
square feet of GLA and anchored by Saks Fifth
Avenue. The significant office tenants at Dain
Bosworth Plaza include Interra Financial
Group, Martin/Williams, National City Bank,
Marquette Bank Shares and Decision Systems. An
appraisal dated March 1, 1997 determined a
value for the Brookfield Property and Gaviidae
Common Phase I of approximately $98,000,000,
resulting in a Cut-Off Date LTV of
approximately 61.0%. The DSCR based on
Underwritten Cashflow for the Brookfield
Property as of the Cut-Off Date is
approximately 1.50x.
The Master Lease provides for a term
commencing on May 1, 1997 and ending on the
earlier to occur of (x) May 1, 2007 and (y)
the date the requisite debt service coverage
ratio is met. The
S-29
<PAGE>
rent under the Master Lease is $720,000 per
annum. The sums due under the Master Lease are
guaranteed by an unconditional guarantee of
payment delivered by The Edper Group Limited,
an Ontario corporation for the benefit of the
Brookfield Borrower.
The Brookfield Loan bears interest at a fixed
rate per annum equal to 8.00% (the "Brookfield
Initial Interest Rate") to and including June
1, 2007 (the "Brookfield Effective Maturity
Date") and has a final maturity date of June
1, 2027 (the "Brookfield Maturity Date"). From
and after the Brookfield Effective Maturity
Date, the Brookfield Loan will bear interest
at an increased rate (see "Description of the
Mortgage Pool--Brookfield: The Loan--Payment
Terms") (the "Brookfield Revised Interest
Rate"). The Brookfield Loan requires 360 equal
monthly payments of principal and interest of
$440,258.74 (based on a 30-year amortization
schedule and the Brookfield Initial Interest
Rate). After the Brookfield Effective Maturity
Date, any interest accrued at the excess of
the Brookfield Revised Interest Rate over the
Brookfield Initial Interest Rate is deferred
and added to the outstanding indebtedness
under the Brookfield Loan and earns interest
at the Brookfield Revised Interest Rate (such
deferred interest and interest thereon, the
"Brookfield Accrued Interest"). Voluntary
Prepayment of the Brookfield Loan is
prohibited at any time prior to the 180-day
period prior to the Brookfield Effective
Maturity Date. Thereafter, the Brookfield Loan
may be prepaid without payment of a prepayment
premium. The scheduled principal balance of
the Brookfield Loan on the Brookfield
Effective Maturity Date will be approximately
$52,634,822.
TOWER REALTY LOAN ............. The "Tower Realty Loan" has a principal
balance as of the Cut-Off Date of
approximately $107,000,000 and is evidenced by
a consolidated, amended and restated mortgage
note (the "Tower Realty Note" issued by
Magnolia Associates, Ltd., a Florida limited
partnership (the "Tower Realty Borrower"). The
Tower Realty Loan was made pursuant to two
advances. The first advance (the "First
Advance") in the original principal amount of
$54,000,000 was funded on October 16, 1997 and
the second advance (the "Second Advance") of
$53,000,000 was funded on November 26, 1997.
The Tower Realty Loan is secured by a first
priority mortgage lien (the "Tower Realty
Mortgage") encumbering an office building in
Orlando, Florida and an office building in New
York, New York (collectively, the "Tower
Realty Properties").
The Tower Realty Properties consist of the
Tower Realty Borrower's fee simple and ground
subleasehold interest in Tower 45, a 40 story
Class A office building located in New York,
New York, containing approximately 455,033
rentable square feet, including approximately
4,583 square feet of retail space and an
on-site 47-space parking garage, and the Tower
Realty Borrower's fee simple interest in One
Orlando Center, a
S-30
<PAGE>
19 story, Class A office building located in
Orlando, Florida, containing approximately
355,164 rentable square feet and parking for
1,390 cars. Significant tenants at Tower 45
include D.E. Shaw & Co., L.P. and The
Equitable Life Assurance Society of the United
States. Significant tenants at One Orlando
Center include First Union Bank and United
Healthcare. An appraisal dated September 23,
1997 determined a value for Tower 45 of
approximately $95,000,000, and an appraisal
dated as of September 23, 1997 determined a
value for One Orlando Center of approximately
$55,000,000, resulting in a Cut-Off Date LTV
of approximately 71.3%. The DSCR based on
Underwritten Cashflow for the Tower Realty
Property as of the Cut-Off Date is
approximately 1.64x.
The Tower Realty Loan bears interest at a
fixed rate per annum equal to 6.8174% (the
"Tower Realty Initial Interest Rates") for the
period from the closing date up to but not
including November 1, 2004 (the "Tower Realty
Effective Maturity Date"), and has a final
maturity date of November 1, 2027 (the "Tower
Realty Maturity Date"). From and after the
Tower Realty Effective Maturity Date, the
Tower Realty Loan will bear interest at an
increased rate (see "Description of the
Mortgage Pool--Tower Realty: The Loan--Payment
Terms") (the "Tower Realty Revised Interest
Rate"). Commencing on January 1, 1998 and
continuing until November 1, 1999, the Tower
Realty Loan requires 23 equal monthly payments
of interest of $607,884.83. From and after
December 1, 1999, the Tower Realty Loan
requires 336 equal monthly payments of
principal and interest of $714,360.64 (based
on 2 years of interest only and a 28-year
amortization schedule and the Tower Realty
Initial Interest Rate). After the Tower Realty
Effective Maturity Date, any interest accrued
at the excess of the Tower Realty Revised
Interest Rate over the Tower Realty Initial
Interest Rate is deferred and added to the
outstanding indebtedness under the Tower
Realty Loan and earns interest at the Tower
Realty Revised Interest Rate (such deferred
interest and interest thereon, the "Tower
Realty Accrued Interest"). Voluntary
prepayment of the Tower Realty Loan is
prohibited at any time prior to the Tower
Realty Maturity Date. The scheduled principal
balance of the Tower Realty Loan on the Tower
Realty Effective Maturity Date will be
approximately $99,413,008.
FRANKLIN MILLS LOAN ........... The "Franklin Mills Loan" has an aggregate
principal balance of $129,493,575 principal
balance as of the Cut-Off Date, (representing
approximately $109,538,921 with respect to the
original principal loan amount and
approximately $19,954,654 with respect to the
Initial Additional Amount (as hereinafter
defined)). The Franklin Mills Loan is
evidenced by a mortgage note (the "Franklin
Mills Note") issued by Franklin Mills
Associates Limited Partnership, a District of
Columbia limited partnership and Liberty Plaza
Limited Partnership, a Delaware
S-31
<PAGE>
limited partnership (collectively, the
"Franklin Mills Borrower"). On August 8, 1997,
the original principal amount of the Franklin
Mills Note was increased by $20,000,000 (the
"Initial Additional Amount") to $130,000,000.
Subject to the terms of the Franklin Mills
Note, the Franklin Mills Borrower may request
an increase in principal (the "Additional
Amount") provided that the aggregate principal
indebtedness constituting the Franklin Mills
Loan does not exceed $165,000,000. The Trust
Fund will not be obligated to advance any
portion of such Additional Amount, the
Additional Amount will rate pari passu with
the Franklin Mills Note and the Additional
Amount, if any, will not constitute an asset
of the Trust Fund. The Franklin Mills Loan is
secured by a first priority mortgage lien (the
"Franklin Mills Mortgage") encumbering two
shopping centers in Philadelphia, Pennsylvania
(collectively, the "Franklin Mills
Properties").
The Franklin Mills Properties consist of the
Franklin Mills Borrower's ground leasehold
interest in Liberty Plaza, a power center
located in Philadelphia, Pennsylvania,
containing approximately 304,463 square feet
of GLA and parking for 1,700 cars and the
Franklin Mills Borrower's fee simple interest
in the Franklin Mills Outlet Mall, a shopping
center complex located in Philadelphia,
Pennsylvania, containing approximately 1.7
million square feet of GLA and parking for
7,100 cars. Anchor stores at the Franklin
Mills Outlet Mall are Boscov's, Burlington
Coat Factory, JC Penney, Marshall's, General
Cinema, Speigel, Sam's Wholesale Club and
Phar-mor. Other significant retail tenants at
the Franklin Mills Outlet Mall include Saks
Fifth Avenue, Nordstrom, Bed, Bath & Beyond,
Brooks Brothers, Nautica, Tommy Hilfiger, Polo
and Eddie Bauer. Anchor tenants at Liberty
Plaza are Dick's Sporting Goods and Service
Merchandise. An appraisal dated April 16, 1997
determined a value for the Franklin Mills
Property of approximately $214,000,000,
resulting in a Cut-Off Date LTV of
approximately 60.5%. The DSCR based on
Underwritten Cashflow for the Franklin Mills
Property as of the Cut-Off Date is
approximately 1.65x.
The Franklin Mills Loan bears interest at a
fixed rate per annum through but not including
May 5, 2007 (the "Franklin Mills Effective
Maturity Date") equal to 7.882% with respect
to the original principal amount and 7.44%
with respect to the Initial Additional Amount
(collectively, the "Franklin Mills Initial
Interest Rates"), and has a final maturity
date of June 1, 2027 (the "Franklin Mills
Maturity Date"). From and after the Franklin
Mills Effective Maturity Date, the Franklin
Mills Loan will bear interest at an increased
rate (see "Description of the Mortgage
Pool--Franklin Mills: The Loan--Payment
Terms") (the "Franklin Mills Revised Interest
Rate"). The Franklin Mills Loan requires 360
equal monthly payments of principal and
interest of $798,110.85 (based on a 30-year
amortization
S-32
<PAGE>
schedule and the applicable Franklin Mills
Initial Interest Rate) with respect to the
original principal amount, and 358 equal
monthly payments of principal and interest of
$139,022.12 with respect to the Initial
Additional Amount (based on a 30-year
amortization schedule and the applicable
Franklin Mills Initial Interest Rate). After
the Franklin Mills Effective Maturity Date,
any interest accrued at the excess of the
Franklin Mills Revised Interest Rate over the
Franklin Mills Initial Interest Rate is
deferred and added to the outstanding
indebtedness under the Franklin Mills Loan and
earns interest at the Franklin Mills Revised
Interest Rate (such deferred interest and
interest thereon, the "Franklin Mills Accrued
Interest"). Voluntary prepayment of the
Franklin Mills Loan is prohibited at any time
prior to the 180-day period prior to the
Franklin Mills Effective Maturity Date.
Thereafter, the Franklin Mills Loan may be
prepaid without payment of a prepayment
premium. The scheduled principal balance of
the Franklin Mills Loan on the Franklin Mills
Effective Maturity Date will be approximately
$113,690,442.
NEWTON OLDACRE MCDONALD LOAN .. The "Newton Oldacre McDonald Loan" (also
referred to herein as the "NOM Loan") has a
principal balance as of the Cut-Off Date of
$89,431,863 (representing approximately
$76,640,023 with respect to the First Advance
(as hereinafter defined)) and approximately
$12,791,840 with respect to the Second Advance
(as hereinafter defined). The NOM Loan is
evidenced by a consolidated, amended and
restated mortgage note (the "NOM Note") issued
by 59 West Partners, Ltd., Brownsville Place
Partners, Ltd., Cantonment Partners, Ltd.,
Clanton Partners, Ltd., Golden Springs
Partners, Ltd., Longbeach Partners, Ltd.,
Mandeville Partners, Ltd., Nine Mile Partners,
Ltd., NOM Franklin, Ltd., One Main Place
Partners, Ltd., Opelika Partners, Ltd., Opp
Partners, Ltd., Pascagoula Properties, Ltd.,
Russell Crossing Partners, Ltd. and Wye
Partners, Ltd., each an Alabama limited
partnership (each, a "NOM Borrower Entity"
and, collectively, the "NOM Borrower"). The
Newton Oldacre McDonald Loan is secured by a
first priority mortgage lien (as amended, the
"NOM Mortgage") encumbering 19 community and
neighborhood shopping centers, located in
Alabama, Florida, Kentucky, Louisiana,
Mississippi and Tennessee (the "NOM
Properties"). The Newton Oldacre McDonald Loan
was made pursuant to two advances. The first
advance (the "First Advance") in the original
principal amount of $76,702,000 was originated
on October 14, 1997 and the second advance
(the "Second Advance") of $12,800,000 was
funded on December 1, 1997 (pursuant to
revised loan documentation dated November 26,
1997).
The NOM Properties consist of the NOM
Borrower's fee simple interest in 20
properties on 19 parcels of land, containing
approximately 1,338,462 square feet of GLA.
The NOM Properties consist of: (i) Greenbrier
Station, a shopping center
S-33
<PAGE>
located in Anniston, Alabama, containing
approximately 62,840 square feet of GLA; (ii)
59 West, a shopping center located in
Bessemer, Alabama, containing approximately
95,591 square feet of GLA; (iii) Brownsville
Place, a shopping center located in
Brownsville, Tennessee, containing
approximately 76,762 square feet of GLA; (iv)
29 North, a shopping center located in
Cantonment, Florida, containing approximately
58,040 square feet of GLA; (v) Delchamps
Plaza, a shopping center located in Long
Beach, Mississippi, containing approximately
62,859 square feet of GLA; (vi) Mandeville
Marketplace, a shopping center located in
Mandeville, Louisiana, containing
approximately 77,786 square feet of GLA; (vii)
One Main Place, a shopping center located in
Moss Point, Mississippi, containing
approximately 68,566 square feet of GLA;
(viii) Betts Crossing, a shopping center
located in Opelika, Alabama, containing
approximately 58,400 square feet of GLA; (ix)
Opp Marketplace, a shopping center located in
Opp, Alabama, containing approximately 25,350
square feet of GLA; (x) The "Y", a shopping
center located in Panama City, Florida,
containing approximately 64,848 square feet of
GLA; (xi) Parker Center, a shopping center
located in Parker, Florida, containing
approximately 68,680 square feet of GLA; (xii)
Chicot Crossing, a shopping center located in
Pascagoula, Mississippi, containing
approximately 122,360 square feet of GLA;
(xiii) Nine Mile Plaza, a shopping center
located in Pensacola, Florida, containing
approximately 191,787 square feet of GLA;
(xiv) Clanton Marketplace, a shopping center
located in Clanton, Alabama, containing
approximately 65,250 square feet of GLA; (xv)
Russell Crossing, a shopping center located in
Phenix City, Alabama, containing approximately
72,312 square feet of GLA; (xvi) Franklin
Center, a shopping center located in Franklin,
Tennessee, containing approximately 10,908
square feet of GLA; (xvii) River Square, a
shopping center located in Hueytown, Alabama,
containing approximately 89,303 square feet of
GLA; (xviii) a Hollywood Video located in
Franklin, Tennessee, containing approximately
7,488 square feet of GLA; (xix) a Hollywood
Video located in Paducah, Kentucky, containing
approximately 7,488 square feet of GLA; and
(xx) Bi-Lo Center, a shopping center located
in McMinnville, Tennessee, containing
approximately 51,844 square feet of GLA.
Anchor stores at the NOM Properties are
Winn-Dixie, Wal-Mart, Big B Drugs, Harco, B.C.
Moore and Eckerd Drugs (the "NOM Anchor
Tenants"). Other significant retail tenants at
the NOM Properties include TJX and Bruno's
(Food World). Appraisals dated between August
4, 1996 and December 1, 1997 determined a
value for the NOM Property of approximately
$111,005,000, resulting in a Cut-Off Date LTV
of approximately 80.6%. The DSCR based on
Underwritten Cashflow for the NOM Property as
of the Cut-Off Date is approximately 1.24x.
The NOM Loan bears interest at a fixed rate
per annum equal to (i) 7.56% with respect to
the outstanding principal amount of
S-34
<PAGE>
the First Advance and (ii) 7.325% with respect
to the outstanding principal amount of the
Second Advance (each such rate, as to the
First Advance or the Second Advance, as the
case may be, the "NOM Initial Interest Rate")
through and including October 31, 2012 (the
"NOM Effective Maturity Date") and has a final
maturity date of November 1, 2027 (the "NOM
Maturity Date"). From and including November
1, 2012, the NOM Loan will bear interest at an
increased rate (see "Description of the
Mortgage Pool--Newton Oldacre McDonald: The
Loan--Payment Terms"). On December 1, 1997,
the NOM Loan requires (i) a payment of
principal and interest with respect to the
First Advance of $545,199.61 and (ii) a
payment of principal with respect to the
Second Advance of $8,159.77. Thereafter, the
NOM Loan requires 359 equal monthly payments
of principal and interest of (i) $ 545,199.61
with respect to the First Advance and (ii)
$88,897.55 with respect to the Second Advance
(based on a 30-year amortization schedule and
the NOM Initial Interest Rate). After the NOM
Effective Maturity Date, any interest accrued
at the excess of the applicable NOM Revised
Interest Rate over the related NOM Initial
Interest Rate is deferred and added to the
outstanding indebtedness under the NOM Loan
and earns interest at the applicable NOM
Revised Interest Rate (such deferred interest
and interest thereon, the "NOM Deferred
Interest"). Voluntary prepayment of the NOM
Loan is prohibited at any time prior to the
NOM Effective Maturity Date. Thereafter, the
NOM Loan may be prepaid in whole or in part
without payment of a prepayment premium. The
scheduled principal balance of the NOM Loan on
the NOM Effective Maturity Date will be
approximately $67,875,893.
Corporate General, Inc., an Alabama
corporation which is the sole shareholder of
the NOM Borrower general partner, and the
limited partners of the NOM Borrower Entities
(collectively, the "NOM Mezzanine Borrowers")
are the borrowers under a loan in the amount
of $5,000,000 (the "NOM Mezzanine Loan"),
originated on the closing date of the NOM
Loan. The NOM Mezzanine Loan is secured by a
pledge by all the NOM Mezzanine Borrowers
except Corporate General, Inc. of their
limited partnership interests in the NOM
Borrower Entities and by a pledge by Corporate
General, Inc. of 100% of the stock of the NOM
Borrower general partner.
BILTMORE LOAN ................. The "Biltmore Loan" has a principal balance as
of the Cut-Off Date of approximately
$63,000,000 and is evidenced by a deed of
trust note (the "Biltmore Note") issued by
Channel Drive LLC, a California limited
liability company (the "Biltmore Borrower").
The Biltmore Loan is secured by a first
priority mortgage lien (the "Biltmore
Mortgage") encumbering a hotel in Santa
Barbara, California (the "Biltmore Property").
The Biltmore Property consists of the Biltmore
Borrower's fee simple interest in the Four
Seasons Biltmore Hotel in Santa
S-35
<PAGE>
Barbara, California, a 217-room luxury hotel
located on approximately 18 acres of
oceanfront property, and including
approximately 15,000 square feet of meeting
and banquet spaces, four restaurants, a fully
staffed health club and spa, three tennis
courts, and a private beach club. An appraisal
dated October 1, 1997 determined a value for
the Biltmore Property of approximately
$90,500,000, resulting in a Cut-Off Date LTV
of approximately 69.6%. The DSCR based on
Underwritten Cashflow for the Biltmore
Property as of the Cut-Off Date is
approximately 1.58x.
The Biltmore Loan bears interest at a fixed
rate per annum through but not including
December 1, 2007 (the "Biltmore Effective
Maturity Date") equal to 7.138% (the "Biltmore
Initial Interest Rates"), and has a final
maturity date of December 1, 2022 (the
"Biltmore Maturity Date"). From and after the
Biltmore Effective Maturity Date, the Biltmore
Loan will bear interest at an increased rate
(see "Description of the Mortgage Pool--Four
Seasons Hotel Biltmore: The Loan--Payment
Terms") (the "Biltmore Revised Interest
Rate"). The Biltmore Loan requires 300 equal
monthly payments of principal and interest of
$455,022.40 (based on a 25-year amortization
schedule and the Biltmore Initial Interest
Rate). After the Biltmore Effective Maturity
Date, any interest accrued at the excess of
the Biltmore Revised Interest Rate over the
Biltmore Initial Interest Rate is deferred and
added to the outstanding indebtedness under
the Biltmore Loan and earns interest at the
Biltmore Revised Interest Rate (such deferred
interest and interest thereon, the "Biltmore
Accrued Interest"). Voluntary prepayment of
the Biltmore Loan is prohibited at any time
prior to the 90-day period prior to the
Biltmore Effective Maturity Date. Thereafter,
the Biltmore Loan may be prepaid in whole or
in part without payment of a prepayment
premium. The scheduled principal balance of
the Biltmore Loan on the Biltmore Effective
Maturity Date will be approximately
$49,867,379.
RITZ LOAN ..................... The "Ritz Loan" has a principal balance as of
the Cut-Off Date of approximately $41,850,000
and is evidenced by a deed of trust note (the
"Ritz Note") issued by HEF 1-STL No. 1,
L.L.C., a Missouri limited liability company
(the "Ritz Borrower"). The Ritz Loan is
secured by a first priority mortgage lien (the
"Ritz Mortgage") encumbering a hotel in St.
Louis, Missouri (the "Ritz Property").
The Ritz Property consists of the Ritz
Borrower's fee simple interest in the
Ritz-Carlton Hotel in St. Louis, Missouri, a
multi-story 301-room luxury hotel located on
approximately 3 acres, and including
approximately 29,000 square feet of meeting
and banquet spaces, two restaurants, a fully
staffed health club, a cigar club, an indoor
swimming pool and a sauna. An
S-36
<PAGE>
appraisal dated October 1, 1997 determined a
value for the Ritz Property of approximately
$60,000,000, resulting in a Cut-Off Date LTV
of approximately 69.8%. The DSCR based on
Underwritten Cashflow for the Ritz Property as
of the Cut-Off Date is approximately 1.61x.
The Ritz Loan bears interest at a fixed rate
per annum through but not including December
1, 2007 (the "Ritz Effective Maturity Date")
equal to 7.188% (the "Ritz Initial Interest
Rates"), and has a final maturity date of
December 1, 2022 (the "Ritz Maturity Date").
From and after the Ritz Effective Maturity
Date, the Ritz Loan will bear interest at an
increased rate (see "Description of the
Mortgage Pool--Ritz-Carlton Hotel: The
Loan--Payment Terms") (the "Ritz Revised
Interest Rate"). The Ritz Loan requires 300
equal monthly payments of principal and
interest of $303,633.69 (based on a 25-year
amortization schedule and the Ritz Initial
Interest Rate). After the Ritz Effective
Maturity Date, any interest accrued at the
excess of the Ritz Revised Interest Rate over
the Ritz Initial Interest Rate is deferred and
added to the outstanding indebtedness under
the Ritz Loan and earns interest at the Ritz
Revised Interest Rate (such deferred interest
and interest thereon, the "Ritz Accrued
Interest"). Voluntary prepayment of the Ritz
Loan is prohibited at any time prior to the
90-day period prior to the Ritz Effective
Maturity Date. Thereafter, the Ritz Loan may
be prepaid in whole or in part without payment
of a prepayment premium. The scheduled
principal balance of the Ritz Loan on the Ritz
Effective Maturity Date will be approximately
$33,172,132.
AUSTIN LOAN ................... The "Austin Loan" has a principal balance as
of the Cut-Off Date of approximately
$45,150,000 and is evidenced by a deed of
trust note (the "Austin Note") issued by HEF
I-AUS No. 2, L.P., a Texas limited partnership
(the "Austin Borrower"). The Austin Loan is
secured by a first priority mortgage lien (the
"Austin Mortgage") encumbering a hotel in
Austin, Texas and a non-exclusive easement
(the "Austin Property").
The Austin Property consists of the Austin
Borrower's fee simple interest in the Four
Seasons Hotel Austin in Austin, Texas, a
291-room luxury hotel comprised of
approximately 3 acres of land and including
approximately 18,021 square feet of meeting
and banquet spaces, one restaurant, one cafe,
a fully staffed health club, a heated, outdoor
pool and a sauna. An appraisal dated October
1, 1997 determined a value for the Austin
Property of approximately $60,200,000,
resulting in a Cut-Off Date LTV of
approximately 75.0%. The DSCR based on
Underwritten Cashflow for the Austin Property
as of the Cut-Off Date is approximately 1.57x.
The Austin Loan bears interest at a fixed rate
per annum through but not including December
1, 2007 (the "Austin Effective Maturity Date")
equal to 7.188% (the "Austin Initial
S-37
<PAGE>
Interest Rates"), and has a final maturity
date of December 1, 2022 (the "Austin Maturity
Date"). From and after the Austin Effective
Maturity Date, the Austin Loan will bear
interest at an increased rate (see
"Description of the Mortgage Pool--Four
Seasons Hotel Austin: The Loan--Payment
Terms") (the "Austin Revised Interest Rate").
The Austin Loan requires 300 equal monthly
payments of principal and interest of
$327,575.81 (based on a 25-year amortization
schedule and the Austin Initial Interest
Rate). After the Austin Effective Maturity
Date, any interest accrued at the excess of
the Austin Revised Interest Rate over the
Austin Initial Interest Rate is deferred and
added to the outstanding indebtedness under
the Austin Loan and earns interest at the
Austin Revised Interest Rate (such deferred
interest and interest thereon, the "Austin
Accrued Interest"). Voluntary prepayment of
the Austin Loan is prohibited at any time
prior to the 90-day period prior to the Austin
Effective Maturity Date. Thereafter, the
Austin Loan may be prepaid in whole or in part
without payment of a prepayment premium. The
scheduled principal balance of the Austin Loan
on the Austin Effective Maturity Date will be
approximately $35,787,856.
SHILO LOAN .................... The "Shilo Inn Loans" have a principal balance
as of the Cut-Off Date of approximately
$65,765,282, in the aggregate, with respect to
the sixteen Shilo Inn I Loans (as hereinafter
defined) and approximately $19,967,537 with
respect to the Shilo Inn II Loan (as
hereinafter defined) and is evidenced by
seventeen promissory notes, each issued by a
Shilo Borrower (as hereinafter defined). Each
Shilo Inn Loan is secured by a first priority
mortgage lien (as amended, a "Shilo Inn
Mortgage") encumbering each of 17 hotels,
located in Wyoming, Idaho, Washington,
California, Oregon and Arizona (the "Shilo
Properties"). The Shilo Inn I Loans were made
in the aggregate original principal amount of
$65,977,276 on September 29, 1997 and the
Shilo Inn II Loan in the original principal
amount of $20,000,000 was funded on October
28, 1997.
The Shilo Properties consist of the applicable
Shilo Borrower's fee or ground leasehold
interest in each of 17 hotels, comprised, in
the aggregate, of 2,000 units. The Shilo
Properties consist of: (i) Boise/Riverside, a
112-unit hotel located in Boise, Idaho; (ii)
Casper/Evansville, a 101-unit hotel located in
Evansville, Wyoming; (iii) The Dalles, a
112-unit hotel located in The Dalles, Oregon;
(iv) Delano, a 48-unit hotel located in
Delano, California; (v) Grants Pass, a 70-unit
hotel, located in Grants Pass, Oregon; (vi)
Idaho Falls, a 161-unit hotel located in Idaho
Falls, Idaho; (vii) Lincoln City, a 246-unit
located in Lincoln City, Oregon; (viii) Nampa,
a 61-unit hotel located in Nampa, Idaho; (ix)
Newport, a 179-unit hotel located in Newport,
Oregon; (x) Oakhurst/Yosemite, an 80-unit
hotel in Oakhurst, California; (xi) Pomona, a
160-unit hotel located in Pomona, California;
(xii) Portland/Beaverton, a 142-unit hotel
located in
S-38
<PAGE>
Portland, Oregon; (xiii) Richland, a 150 unit
hotel located in Richland, Washington; (xiv)
Spokane, a 105-unit hotel located in Spokane,
Washington; (xv) Warrenton, a 62-unit hotel in
Warrenton, Oregon; (xvi) Washington Square, a
77-unit hotel located in Tigard, Oregon; and
(xvii) Yuma, a 134-unit hotel located in Yuma,
Arizona. An appraisal dated December 1, 1997
determined a value for the Shilo Properties of
approximately $131,125,000 in the aggregate,
resulting in a Cut-Off Date LTV of
approximately 65.4%. The DSCR based on
Underwritten Cashflow for the Shilo Property
as of the Cut-Off Date is approximately 1.52x.
Each of the Shilo Inn I Loans matures on the
Payment Date (as defined below) in October,
2017 (the "Shilo Loan I Maturity Date"). The
Shilo Inn II Loan matures on the Payment
Date in November, 2017 (the "Shilo Loan II
Maturity Date"). The Shilo Inn I Loans bear
interest at a fixed rate per annum equal to
8.47% (the "Shilo Inn I Interest Rate"). The
Shilo Inn II Loan bears interest at a fixed
rate per annum equal to 8.36% (the "Shilo
Inn II Interest Rate"). Voluntary prepayment
of the Shilo Inn Loans is prohibited at any
time prior to, in the case of the Shilo Inn
I Loans, October 1, 2007, and in the case of
the Shilo Inn II Loan, November 1, 2007.
Thereafter, the Shilo Inn Loans may be
prepaid in whole subject to the payment of a
prepayment premium.
FARB LOAN ..................... The "Farb Loans" were made in the original
principal amounts, respectively, of
$28,640,000 ("Farb Loan 1") and $36,240,000
("Farb Loan 2") and have a principal balance
in the aggregate as of the Cut-Off Date of
approximately $64,781,452. The Farb Loans are
evidenced by two promissory notes (each, a
"Farb Note" and, collectively, the "Farb
Notes") issued by Farb Investments Nob Hill,
Ltd. and Farb Investments West Point, Ltd. ,
both Texas limited partnerships (each, a "Farb
Borrower" and, collectively, the "Farb
Borrowers"). The Farb Loans are secured by two
first priority mortgage liens encumbering two
multi-family properties located in Houston,
Texas (collectively, the "Farb Properties").
The Farb Properties consist of the respective
Farb Borrower's fee interest in an apartment
complex located in Austin Texas, containing,
in the aggregate 2,606 units. Appraisals dated
August 7, 1997 for Nob Hill Apartments and
July 29, 1997 for West Point Apartments
determined a combined value for the Farb
Properties of approximately $81,100,000,
resulting in a Cut-Off Date LTV of
approximately 79.9%. The DSCR based on
Underwritten Cashflow for the Farb Property as
of the Cut-Off Date is approximately 1.35x.
The Farb Loan bears interest at a fixed rate
per annum through and including October 1,
2007 (the "Farb Maturity Date") equal to 7.40
% (the "Farb Interest Rate"). The Farb Loans
require equal monthly payments of principal
and interest in the amount,
S-39
<PAGE>
with respect to Farb Loan 1, of $198,297.57
and, with respect to Farb Loan 2, of
$250,918.44, (based on a 30-year amortization
schedule and the Farb Interest Rate).
Voluntary prepayment of the Farb Investors
Loans is prohibited at any time prior to the
90-day period prior to the Farb Maturity Date.
Thereafter, the Farb Loans may be prepaid
without payment of a prepayment premium. The
scheduled principal balance of the Farb Loans
on the Farb Effective Maturity Date will be
approximately $56,187,848 in the aggregate.
The "Farb Mezzanine Loans" were made in the
original principal amounts, respectively, of
$1,000,000 ("Farb Mezzanine Loan 1") and
$940,000 ("Farb Mezzanine Loan 2")
(collectively, the "Farb Mezzanine Loans").
Each of the Farb Mezzanine Loans is evidenced
by a promissory note made by the applicable
Farb Mezzanine Borrower, as obligor, and is
secured by a guaranty and pledge, recognition
and consent agreement, executed by the general
partner of the applicable Farb Mezzanine
Borrower and Harold Farb (collectively, the
"Farb Mezzanine Pledgors") and the applicable
Farb Mezzanine Borrower, pursuant to which the
Farb Mezzanine Pledgors have jointly and
severally unconditionally guaranteed the
payment of the applicable Farb Mezzanine Loan
and pledged as security for such guaranty all
of their right, title and interest in the
applicable Farb Borrower.
AMERICAN APARTMENT
COMMUNITIES I LOAN ............ The "CMP-1 Loan" has a principal balance as of
the Cut-Off Date of approximately $44,440,152
and is evidenced by a deed of trust note
issued by CMP-1, LLC, a Delaware limited
liability company (the "CMP-1 Borrower"). The
CMP-1 Loan is secured by a first priority
mortgage lien (the "CMP-1 Mortgage")
encumbering 10 multifamily properties, all of
which are located in Monterey County,
California (the "CMP-1 Properties").
The CMP-1 Property consists of the CMP-1
Borrower's fee simple interest in the
following multifamily complexes located in
Monterey County, California: (i) Boronda Manor
Apartments (207 Units); (ii) The Capri
Apartments (114 Units); (iii) The Circles
Apartments (319 Units); (iv) The Elms
Apartments (188 Units); (v) Harding Park
Townhomes (36 Units); (vi) Heather Plaza
Apartments (218 Units); (vii) Laurel Tree
Apartments (157 Units); (viii) North Plaza
Apartments (120 Apartments); (ix) Pine Grove
Apartments (100 Units); and (x) Westlake
Apartments (139 Units). An appraisal dated
September 28, 1996 determined a value for The
Circle Apartments and North Plaza Apartments
of approximately $21,000,000; an appraisal
dated November 19, 1997 determined a value for
Boronda Manor Apartments of approximately
$8,700,000 (which should not be relied upon
without certain qualifications); an appraisal
dated September 28, 1996 determined a value
for Westlake Apartments of approximately
$5,400,000; an appraisal dated September 28,
1996 determined a value for Heather Plaza
S-40
<PAGE>
Apartments of approximately $8,300,000; an
appraisal dated September 28, 1996 determined
a value for The Capri Apartments of
approximately $4,000,000; an appraisal dated
September 30, 1996 determined a value for Pine
Grove Apartments of approximately $5,800,000;
an appraisal dated September 28, 1996
determined a value for Laurel Tree Apartments
and Harding Park Townhomes of approximately
$8,500,000; and an appraisal dated September
28, 1996 determined a value for Elms
Apartments of approximately $8,000,000,
resulting in a Cut-Off Date LTV of
approximately 63.8%. The DSCR based on
Underwritten Cashflow for the CMP-1 Property
as of the Cut-Off Date is approximately 1.73x.
The CMP-1 Loan bears interest at a fixed rate
per annum equal to 7.75% (the "CMP-1 Initial
Interest Rate") through and including January
1, 2004 (the "CMP-1 Effective Maturity Date")
and has a final maturity date of January 1,
2022 (the "CMP-1 Maturity Date"). From and
after the CMP-1 Effective Maturity Date, the
CMP-1 Loan will bear interest at an increased
rate (see "Description of the Mortgage
Pool--CMP-1: The Loan--Payment Terms") (the
"CMP-1 Revised Interest Rate"). The CMP-1 Loan
requires 300 equal monthly payments of
principal and interest of $339,897.94 (based
on a 25-year amortization schedule and the
CMP-1 Initial Interest Rate). After the CMP-1
Effective Maturity Date, any interest accrued
at the excess of the CMP-1 Revised Interest
Rate over the CMP-1 Initial Interest Rate is
deferred and added to the outstanding
indebtedness under the CMP-1 Loan and earns
interest at the CMP-1 Revised Interest Rate
(such deferred interest and interest thereon,
the "CMP-1 Accrued Interest"). Voluntary
prepayment of the CMP-1 Loan is prohibited at
any time prior to December 31, 2001.
Thereafter, the CMP-1 Loan may be prepaid
without payment of a prepayment premium. The
scheduled principal balance of the CMP-1 Loan
on the CMP-1 Effective Maturity Date will be
approximately $39,527,429.
AMERICAN APARTMENT
COMMUNITIES II LOAN ........... The "AAC Loan" has a principal balance as of
the Cut-Off Date of approximately $20,940,017
and is evidenced by a Note issued by AAC
Funding IV LLC, a California limited liability
company (the "AAC Borrower"). The AAC Loan is
secured by a first priority mortgage lien (the
"AAC Mortgage") encumbering 2 multifamily
properties, which are located in Mountain
View, California and Santa Clara, California
(the "AAC Properties").
The AAC Property consists of the AAC
Borrower's ground leasehold interest in Birch
Creek Apartments, located in Mountain View,
California and containing 162,000 rentable
square feet and Marina Playa Apartments,
located in Santa Clara, California, and
containing 230,084 rentable square feet. An
S-41
<PAGE>
appraisal dated June 1, 1997 determined the
value of Birch Creek Apartments of
approximately $11,050,000 and an appraisal
dated June 1, 1997 determined the value of
Marina Playa Apartments of approximately
$21,380,000 (collectively, the "AAC
Appraisals"), resulting in a Cut-Off Date LTV
of approximately 64.6%. The AAC Appraisals are
subject to "General Assumption and Limiting
Conditions" and should not be relied on
without those and other qualifications. The
DSCR based on Underwritten Cashflow for the
AAC Property as of the Cut-Off Date is
approximately 1.85x.
The AAC Loan bears interest at a fixed rate
per annum equal to 7.74% (the "AAC Initial
Interest Rate") up to but not including July
1, 2001 (the "AAC Effective Maturity Date")
and has a final maturity date of July 1, 2027
(the "AAC Maturity Date"). From and after the
AAC Effective Maturity Date, the AAC Loan will
bear interest at an increased rate (see
"Description of the Mortgage Pool--American
Apartment Communities: The Loan--Payment
Terms") (the "AAC Revised Interest Rate"). The
AAC Loan requires 359 equal monthly payments
of principal and interest of $150,301.48
(based on a 30-year amortization schedule and
the AAC Initial Interest Rate). After the AAC
Effective Maturity Date, any interest accrued
at the excess of the AAC Revised Interest Rate
over the AAC Initial Interest Rate is deferred
and added to the outstanding indebtedness
under the AAC Loan and earns interest at the
AAC Revised Interest Rate (such deferred
interest and interest thereon, the "AAC
Accrued Interest"). Voluntary Prepayment of
the AAC Loan is prohibited at any time prior
to the AAC Effective Maturity Date.
Thereafter, the AAC Loan may be prepaid
without payment of a prepayment premium. The
scheduled principal balance of the AAC Loan on
the AAC Effective Maturity Date will be
approximately $18,353,955.
S-42
<PAGE>
RISK FACTORS
Prospective holders of Certificates should consider, among other things,
the factors listed below and in the Prospectus under "RISK FACTORS" in
connection with the purchase of the Certificates.
INVESTMENT IN COMMERCIAL AND MULTIFAMILY MORTGAGE LOANS
Commercial and Multifamily Lending Generally. Commercial and multifamily
lending generally is viewed as exposing a lender to risks which are different
from many of the risks faced in connection with other types of lending such
as residential mortgage lending secured by single family residences or
projects consisting of four or fewer single family units. Commercial and
multifamily lending generally involves larger loans, thereby providing
lenders with less diversification of risk and the potential for greater
losses resulting from the delinquency and/or default of individual loans. The
ability of a borrower to repay a loan secured by an income-producing property
typically is dependent primarily upon the successful operation of such
property, rather than upon the existence of independent income or assets of
the borrower; thus, the value of an income-producing property is directly
related to the net income derived from such property. If the net operating
income of the property is reduced, borrower's ability to repay its loan may
be impaired. This may occur for a variety of reasons, including an increase
in vacancy rates, a decline in rental rates or room rates, an increase in
operating expenses and/or an increase in necessary capital expenditures. The
income from and market value of a Mortgaged Property may also be adversely
affected by such factors as changes in the general economic climate, the
existence of an oversupply of comparable space or a reduction in demand for
real estate in the area, the attractiveness of the property to tenants and
guests and perceptions regarding such property's safety, convenience and
services. Real estate values and income are also affected by such factors as
government regulations and changes in real estate, zoning or tax laws, the
willingness and ability of a property owner to provide capable management,
changes in interest rate levels, the availability of financing and potential
liability under environmental and other laws. Accordingly, commercial and
multifamily property values and net operating income are subject to
volatility.
In addition, as described in more detail below with respect to the various
types of properties constituting the Mortgaged Properties, additional risk
may be presented by the type and use of a particular Mortgaged Property. For
example, a Mortgaged Property may not readily be converted to an alternative
use in the event that the operation of such Mortgaged Property for its
original purpose becomes unprofitable for any reason. In such cases, the
conversion of the Mortgaged Property to an alternative use would generally
require substantial capital expenditures. Thus, if the Borrower becomes
unable to meet its obligations under the related Mortgage Loan, the
liquidation value of any such Mortgaged Property may be substantially less,
relative to the amount outstanding on the related Mortgage Loan, than would
be the case if such Mortgaged Property were readily adaptable to other uses.
All of the Mortgage Loans are nonrecourse loans as to which recourse in
the event of a Borrower default will be limited to the specific real property
and other assets, if any, that were pledged to secure the Mortgage Loan. None
of the Mortgage Loans is insured or guaranteed by any governmental agency or
instrumentality or by any other person.
a. Property Location and Condition. In general, the location, age,
construction quality and design of a particular Mortgaged Property may affect
the occupancy level as well as the rents that may be charged for individual
leases or, in the case of any Hotel Property, the amount that the guest may
be charged for the occupancy thereof. The characteristics of an area or
neighborhood in which a Mortgaged Property is located may change over time or
in relation to competing facilities. The effects of poor construction quality
are likely to require the borrower to spend increasing amounts of money over
time for maintenance and capital improvements. Even Mortgaged Properties that
were well constructed will deteriorate over time if adequate maintenance is
not scheduled and performed in a timely manner.
b. Leases. In general, except in the case of any Hotel Property,
Borrowers rely upon periodic lease or rental payments from tenants to pay for
maintenance and other operating expenses of their related Mortgaged Property,
to fund capital improvements and to service the related Mortgage Loan and any
other outstanding debt or other obligations. There can be no guarantee that
tenants will renew leases
S-43
<PAGE>
upon expiration or, in the case of a commercial tenant, that it will continue
operations throughout the term of its lease. 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. Accordingly, repayment
of the Mortgage Loans may be affected by the expiration or termination of
occupancy leases and the ability of the related borrowers to renew such
leases with the existing occupants or to relet the space on economically
favorable terms to new occupants, or the existence of a market which requires
a reduced rental rate, substantial tenant improvements or expenditures or
other concessions to a tenant in connection with a lease renewal. No
assurance can be given that leases that expire can be renewed, that the space
covered by leases that expire or are terminated can be leased in a timely
manner at comparable rents or on comparable terms or that the borrower will
have the cash or be able to obtain the financing to fund any required tenant
improvements. In addition, upon the occurrence of an event of default by a
tenant, delays and costs in enforcing the lessor's rights could occur and a
recovery with respect thereto, if any, may be significantly less than if no
default had occurred. If a significant portion of a Mortgaged Property is
leased to a single tenant, the consequences of the failure of the borrower to
relet such portion of such Mortgaged Property in the event that such tenant
vacates the space leased to it (either as a result of the expiration of the
term of the lease or a default by the tenant) or a failure of such tenant to
perform its obligations under the related lease, will be more pronounced than
if such Mortgaged Property were leased to a greater number of tenants. See
"--Tenant Matters" herein. Certain tenants at the Mortgaged Properties may be
entitled to terminate their leases or reduce their rents based upon
negotiated lease provisions, e.g., if an anchor tenant ceases operations at
the related Mortgaged Property. In such cases, there can be no assurance that
the operation of such provisions will not allow such a termination or rent
reduction. A tenant's lease may also be terminated or otherwise affected if
such tenant becomes the subject of a bankruptcy proceeding.
In the case of retail, office and industrial properties, the performance
and liquidation value of such properties may be dependent upon the business
operated by tenants, the creditworthiness of such tenants and/or the number
of tenants. In some cases, a single tenant or a relatively small number of
tenants may account for all or a disproportionately large share of the
rentable space or rental income of such property. Accordingly, a decline in
the financial condition of a significant or the sole tenant, as the case may
be, or other adverse circumstances of such a tenant (such as a bankruptcy or
insolvency), may have a disproportionately greater effect on the net
operating income derived from such property than would be the case if
rentable space or rental income were more evenly distributed among a greater
number of tenants at such property.
c. Competition. Other multifamily and commercial properties located in
the areas of the Mortgaged Properties compete with the Mortgaged Properties
of similar types to attract customers, tenants, guests and other occupants.
Such properties generally compete on the basis of rental rates, location,
condition and features of the property. If competing properties in the
applicable market have lower rents or room rents, lower operating costs, more
favorable locations or better facilities, the rental rates for a Mortgaged
Property may be adversely affected. While a borrower may renovate, refurbish
or expand a Mortgaged Property to maintain the Mortgaged Property and remain
competitive, such renovation, refurbishment or expansion may itself entail
significant risks. In addition, if any oversupply of competing properties
exists in a particular market (either as a result of the building of new
construction or a decrease in the number of customers, tenants, guests or
other occupants due to a decline in economic activity in the area), the
rental rates for a Mortgaged Property may be adversely affected. Commercial
or multifamily properties may also face competition from other types of
property as such properties are converted to competitive uses in the future.
Such conversions may occur based upon future trends in the use of property by
tenants and occupants, e.g., the establishment of more home based offices and
businesses and the conversion of warehouse space for multifamily use.
Increased competition could adversely affect income from and the market value
of the Mortgaged Properties.
Quality of Management. The successful operation of a Mortgaged Property
may also be dependent on the performance and viability of the respective
property managers of the Mortgaged Properties. Such property managers are
responsible for responding to changes in the local market,
S-44
<PAGE>
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.
Management errors may adversely affect the long-term viability of a Mortgaged
Property. In addition, property managers are generally operating companies
which are not restricted from incurring debt and other liabilities in the
ordinary course of business or otherwise. There can be no assurance regarding
the performance of any present or future property manager, or that any such
property manager will at all times be in a financial condition to continue to
fulfill its management responsibilities under the related management
agreement throughout the term thereof.
Risks Particular to Multifamily Properties. Adverse economic conditions,
either local, regional or national, may limit the amount of rent which can be
charged and may result in a reduction in timely rent payments or a reduction
in occupancy levels. Multifamily apartment units are typically leased on a
short-term basis, and consequently, the occupancy rate of a Multifamily
Property may be subject to rapid declines for various reasons, e.g., the
relocation of tenants to new projects with better amenities or the adverse
impact on tenants as a result of adverse economic conditions in the locale.
Mortgage lenders whose loans are secured by mortgages encumbering Multifamily
Properties may be subject to additional risks not faced by lenders whose
loans are secured by other types of income-producing properties. In addition,
Mortgaged Properties that are Multifamily Properties may be subject to rent
control laws or other laws affecting such properties, which could impact the
future cash flows of such properties. The market for multifamily projects is
generally characterized by low barriers to entry. As a result, a particular
apartment market with historically low vacancies could experience substantial
new construction, and a resultant oversupply of units, in a relatively short
period of time.
Risks Particular to Office Properties. Office Properties generally require
their owners to expend significant amounts for general capital improvements,
tenant improvements and costs of reletting space. In addition, Office
Properties that are not equipped to accommodate the needs of modern business
may become functionally obsolete and thus non-competitive. Office Properties
may also be adversely affected if there is an economic decline in the
businesses operated by their tenants. The risk of such an adverse effect is
increased if revenue is dependent on a single tenant or if there is a
significant concentration of tenants in a particular business or industry.
Risks Particular to Retail Properties. Retail Properties are affected by
the overall health of the applicable economy. The retail industry is
currently undergoing a consolidation and is experiencing changes due to the
growing market share of direct mail retailing and "off-price" or "factory
outlet" retailing and the growth of other alternative forms of retailing.
Further, a Retail Property may be adversely affected by the bankruptcy,
decline in drawing power, departure or cessation of operations of an anchor
tenant, a shift in consumer demand due to demographic changes (for example,
population decreases or changes in average age or income) and/or changes in
consumer preference (for example, to discount retailers) and spending
patterns.
Significant tenants at a Retail Property play an important part in
generating customer traffic and making a Retail Property a desirable location
for other tenants at such property. Accordingly, a Retail Property may also
be adversely affected if a significant tenant ceases operations at such
location (which may occur on account of a voluntary decision not to renew a
lease, bankruptcy or insolvency of such tenant, such tenant's general
cessation of business activities or for other reasons). Certain tenants at
Retail Properties may be entitled to terminate their leases if an anchor
tenant ceases operations at such property. In such cases, there can be no
assurance that any such anchor tenants will continue to occupy space in the
related Retail Property.
Risks Particular to Hotel Properties. Hotel Properties are subject to
operating risks common to the lodging industry. These risks include, among
other things, a high level of continuing capital expenditures to keep
necessary furniture, fixtures and equipment updated, competition from other
hotels, increases in operating costs (which increases may not necessarily in
the future be offset by increased room rates), dependence on business and
commercial travelers and tourism, increases in energy costs and other
expenses of travel and adverse effects of general and local economic
conditions. These factors could adversely affect the related borrower's
ability to make payments on the related Mortgage Loans. Since
S-45
<PAGE>
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. Further, because hotel rooms are generally rented for short
periods of time, Hotel Properties tend to be more sensitive to adverse
economic conditions and competition than other commercial properties.
Additionally, the revenues of certain hotels, particularly those located in
regions whose economies depend upon tourism, may be highly seasonal in
nature.
A Hotel Property 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 any
operating, liquor and other licenses to the entity acquiring such hotel
either through purchase or foreclosure is subject to local law requirements;
(iii) it may be difficult to terminate an ineffective operator of a Hotel
Property subsequent to a foreclosure of such Hotel Property; and (iv) future
occupancy rates may be adversely affected by, among other factors, any
negative perception of such Hotel Property based upon its historical
reputation.
Hotel Properties may be operated pursuant to franchise agreements. The
continuation of franchises is typically 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 Property to maintain such standards or
adhere to such other terms and conditions could result in the loss or
cancellation of the franchise license. It is possible that the franchisor
could condition the continuation of a franchise license on the completion of
capital improvements or the making of certain capital expenditures that the
related borrower determines are too expensive or are otherwise unwarranted in
light of general economic conditions or the operating results or prospects of
the affected hotels. In that event, the related borrower may elect to allow
the franchise license to lapse. In any case, if the franchise is terminated,
the related borrower may seek to obtain a suitable replacement franchise or
to operate such Hotel Property independently of a franchise license. The loss
of a franchise license could have a material adverse effect upon the
operations or the underlying value of the hotel covered by the franchise
because of the loss of associated name recognition, marketing support and
centralized reservation systems provided by the franchisor.
No Guaranty. No Mortgage Loan is insured or guarantied by the United
States of America, any governmental agency or instrumentality, any private
mortgage insurer or by the Depositor, the Mortgage Loan Seller, the Master
Servicer, the Special Servicer, the Trustee, the Fiscal Agent, the
Underwriter or any of their respective affiliates. However, as more fully
described under "DESCRIPTION OF THE MORTGAGE POOL--General" and
"--Representations and Warranties; Repurchase" herein, the Mortgage Loan
Seller will be obligated to repurchase a Mortgage Loan if (i) there is a
defect with respect to the documents relating to such Mortgage Loan or (ii)
certain of its representations or warranties concerning such Mortgage Loan
are breached and such defect or breach materially and adversely affects the
interests of the Certificateholders and such defect or breach is not cured as
required. There can be no assurance that the Mortgage Loan Seller will be in
a financial position to effect such repurchase. See "THE MORTGAGE LOAN
SELLER" herein.
Limited Recourse. All of the Mortgage Loans are non-recourse loans, the
payment of which is primarily dependent upon the sufficiency of the net
operating income from the related Mortgaged Property and, at maturity, upon
the market value of such Mortgaged Property or the ability of the related
borrower to refinance such Mortgaged Property. See "DESCRIPTION OF THE
MORTGAGE POOL--General" herein.
Concentration of Mortgage Loans and Borrowers. In general, a mortgage pool
with a smaller number of loans that have larger average balances may be
subject to losses that are more severe than other pools having the same or
similar aggregate principal balance and composed of smaller average loan
balances and a greater number of loans. Additionally, a mortgage pool with a
high concentration of Mortgage Loans to the same borrower or affiliated
borrowers is subject to the potential risk that a borrower undergoing
financial difficulties might divert its resources or undertake remedial
actions (such as a bankruptcy) in order to alleviate such difficulties, to
the detriment of one or more of the Mortgaged
S-46
<PAGE>
Properties. In all cases, each Investor should carefully consider all aspects
of any loans representing a significant percentage of the outstanding
principal balance of a mortgage pool in order to ensure that such loans are
not subject to risks unacceptable to such Investor. See "DESCRIPTION OF THE
MORTGAGE POOL--Certain Characteristics of the Mortgage Pool--Concentration of
Mortgage Loans and Borrowers" herein.
Underwriting of Mortgage Loans. All of the Mortgage Loans included in the
Trust Fund (other than the Copley Place Loan) were originated pursuant to the
underwriting standards of the Mortgage Loan Seller and not the underwriting
standards used by the Depositor and its affiliates. Even though nine of the
Mortgage Loans were directly originated by Midland Loan Services, L.P.
("Midland"), an affiliate of the Depositor, such Mortgage Loans were
underwritten by the Mortgage Loan Seller and were neither underwritten nor
reunderwritten by the Depositor or any of its affiliates. Simultaneously
with, or shortly after, origination by Midland, such Mortgage Loans were sold
to the Mortgage Loan Seller.
Two Mortgage Loans were originated by KeyCorp Real Estate Capital Markets,
Inc. and L.J. Melody & Co., respectively, using the underwriting standards of
the Mortgage Loan Seller. The remaining Mortgage Loan, the Copley Place Loan,
was purchased by the Mortgage Loan Seller from Metropolitan Life Insurance
Company ("MetLife"). The Mortgage Loan Seller reunderwrote the Copley Place
Loan on the basis of an appraisal of the Copley Property and a review of
leases and a current rent roll, as well as a limited review of financial
statements. None of such Mortgage Loans were underwritten or reunderwritten
by the Depositor or its affiliates.
Each of the Mortgage Loans (other than the Copley Place Loan) was
underwritten by the Mortgage Loan Seller individually with primary emphasis
on stabilized net cashflow (Underwritten Cashflow), with respect to each
Mortgage Loan. The Copley Place Loan was reunderwritten by the Mortgage Loan
Seller as described above. There can be no assurance that use of different
underwriting practices or the emphasis on other factors might not have
resulted in Mortgage Loans having different characteristics or a
determination not to originate or purchase a Mortgage Loan.
The standards used to underwrite the 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.
Because the Depositor and its affiliates neither underwrote nor
reunderwrote the Mortgage Loans, the Depositor has relied on the
representations and warranties made by the Mortgage Loan Seller, and the
Mortgage Loan 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 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. REMIC I might become subject to
federal (and possibly state or local) tax on certain of its net income from
the operation and management of a Mortgaged Property subsequent to the Trust
Fund's acquisition of a Mortgaged Property pursuant to a foreclosure or
deed-in-lieu of foreclosure, including in some circumstances a 100%
prohibited transaction tax, 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.
Future Changes in the Composition of the Mortgage Pool. As principal
payments are made on the Mortgage Loans at different rates based upon the
varied amortization schedules and maturities of the Mortgage Loans, or if
prepayments are made with respect to one or more of the Mortgage Loans, the
S-47
<PAGE>
Mortgage Pool may be subject to more concentrated risk with respect to the
reduction in both the diversity of types of Mortgaged Properties and the
number of borrowers. Because principal of the Certificates is generally
payable in sequential order, and no Class receives principal until the
Certificate Balance of the preceding sequential Class or Classes has been
reduced to zero, Classes that have a later sequential designation are more
likely to be exposed to such risk of concentration than Classes with an
earlier sequential priority.
Geographic Concentration. In general, a mortgage pool with a significant
portion of its loans secured by properties located in a smaller number of
states or geographic regions may be subject to losses that are more severe
than other pools having a more diverse geographic distribution of its loans.
Repayments by borrowers and the market values of the Mortgaged Properties
could be affected by economic conditions generally or in the regions where
the borrowers and the Mortgaged Properties are located, conditions in the
real estate markets where the Mortgaged Properties are located, changes in
governmental rules and fiscal policies, natural disasters (which may result
in uninsured losses) and other factors that are beyond the control of the
borrowers. The economy of any state or region in which a Mortgaged Property
is located may be adversely affected to a greater degree than that of other
areas of the country by certain developments affecting industries
concentrated in such state or region. Moreover, in recent periods, certain
regions of the United States have experienced significant downturns in the
market value of real estate. To the extent that general economic or other
relevant conditions in states or regions in which Mortgaged Properties
securing significant portions of the aggregate principal balance of the
Mortgage Loans are located decline and result in a decrease in commercial
property, housing or consumer demand in the region, the income from and
market value of the Mortgaged Properties may be adversely affected. See
"DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage
Pool" herein.
Environmental Risks. If an adverse environmental condition exists with
respect to a Mortgaged Property, the Trust Fund may be subject to the
following risks: (i) a diminution in the value of such Mortgaged Property or
the inability to foreclose against such Mortgaged Property; (ii) the
potential that the related borrower may default on the related Mortgage Loan
due to such borrower'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 to lease such Mortgaged Property to potential tenants.
A "Phase I" environmental site assessment was performed at each of the
Mortgaged Properties. There can be no assurance that such environmental site
assessments revealed the existence of all conditions or circumstances that
might adversely affect the Mortgaged Properties or the Mortgage Loans. In
addition, there can be no assurance that future events or circumstances,
including changes in environmental law, might not occur or arise that would
adversely affect the interests of the Trust Fund in the Mortgaged Properties
or the Mortgage Loans.
Under certain federal and state laws, the reimbursement of remedial costs
incurred by state and federal regulatory agencies to correct environmental
conditions are secured by a statutory lien over the subject property, which
lien, in some instances, may be prior to the lien of an existing mortgage.
Any such lien arising with respect to a Mortgaged Property would adversely
affect the value of such Mortgaged Property and could make impracticable the
foreclosure by the Special Servicer on such Mortgaged Property in the event
of a default by the related borrower. Additionally, in some instances, the
reimbursement of remedial costs incurred by state and federal regulatory
agencies to correct environmental conditions is secured by a statutory lien
over the subject property, which lien, in some instances, may be prior to the
lien of an existing mortgage. Any such lien arising with respect to a
Mortgaged Property would adversely affect the value of such Mortgaged
Property and could make impracticable the foreclosure by the Special Servicer
on such Mortgaged Property in the event of a default by the related borrower.
Under various federal, state and local laws, ordinances and regulations, a
current or previous owner or operator of real property, as well as certain
other categories of parties, may be liable for the costs of
S-48
<PAGE>
removal or remediation of hazardous or toxic substances on, under, adjacent
to or in such property. The cost of any required remediation and the owner's
liability therefor as to any property is generally not limited under
applicable federal, state or local laws, and could exceed the value of the
property and/or the aggregate assets of the owner. Under some environmental
laws, a secured lender (such as the Trust Fund) may be found to be an "owner"
or "operator" of the related Mortgaged Property if it is determined that the
lender participated in the management of the borrower, regardless of whether
the borrower actually caused the environmental damage. In such cases, a
secured lender may be liable for the costs of any required removal or
remediation of hazardous substances. The Trust Fund's potential exposure to
liability for cleanup costs will increase if the Trust Fund actually takes
possession of a Mortgaged Property or control of its day-to-day operations;
such potential exposure to environmental liability may also increase if a
court grants a petition to appoint a receiver to operate the Mortgaged
Property in order to protect the Trust Fund's collateral. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Environmental Risks" in the Prospectus, and
"DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage
Pool--Environmental Risks" herein.
The Pooling and Servicing Agreement will provide that the Special
Servicer, 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 Special Servicer has previously determined, based upon an environmental
site assessment 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. 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 for any damages or for remediation costs under any
environmental law. However, there can be no assurance that such environmental
site assessment will reveal the existence of conditions or circumstances that
would result in the Trust Fund becoming liable under any environmental law,
or that the requirements of the Pooling and Servicing Agreement will
effectively insulate the Trust Fund from potential liability under
environmental laws. See "THE POOLING AND SERVICING AGREEMENT--Realization
Upon Mortgage Loans" herein and "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Environmental Risks" in the Prospectus.
Special Hazard Losses. The Master Servicer and/or Special Servicer will
generally 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 each of the Master Servicer and the Special Servicer
may satisfy its obligation to cause hazard insurance to be maintained with
respect to any Mortgaged Property through its acquisition of a blanket or
master single interest insurance policy. In general, the standard form of
fire and extended coverage policy covers physical damage to or destruction of
the improvements on the related Mortgaged 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 are underwritten by different
insurers under different state laws in accordance with different applicable
state forms, and therefore do 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 mud flows), wet or dry
rot, vermin, domestic animals and other kinds of risks not specified in the
preceding sentence. Any losses incurred with respect to Mortgage Loans due to
uninsured risks or insufficient hazard insurance proceeds could affect
distributions to the Certificateholders.
S-49
<PAGE>
Availability of Earthquake, Flood and Other Insurance. Although the
Mortgaged Properties are required to be insured against certain risks, there
is a possibility of casualty loss with respect to each Mortgaged Property for
which insurance proceeds may not be adequate (such as floods or earthquakes)
or which may result from risks not covered by insurance (such as supplemental
hurricane insurance). In addition, certain of the Mortgaged Properties are
located in California, Florida and Texas, which are states that have been
historically at greater risk to acts of nature (such as hurricanes, floods
and earthquakes) than properties located in other states. There can be no
assurance borrowers have complied or will in the future be able to comply
with requirements to maintain adequate insurance with respect to the
Mortgaged Properties. As with all real estate, if reconstruction (for
example, following fire or other casualty) or any major repair or improvement
is required to the property, changes in laws and governmental regulations may
be applicable and may materially affect the cost to, or ability of, the
borrower to effect such reconstruction, major repair or improvement. As a
result of the occurrence of any of these events, the amount realized with
respect to the Mortgage Loans, and the amount available to make distributions
on the Offered Certificates, could be reduced.
Optional Acceleration. 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 upon an event of default thereon. Except with respect
to the Copley Place Loan, under the Pooling and Servicing Agreement, the
Master Servicer or the Special Servicer, as applicable, will be required to
exercise each such option upon the occurrence of an event of default to
accelerate the maturity of each such Mortgage Loan on the earliest date
permitted under the related Mortgage Loan Documents. In the case of the
Copley Place Loan, "THE POOLING AND SERVICING AGREEMENT--Realization Upon
Mortgage Loans--Special Procedures with Respect to Foreclosure of Copley
Place Loan," the determination to accelerate such Mortgage Loan may be
delayed for up to five months beyond 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. Except in the case of the Copley Loan (with respect to
the Copley Class B Note), at the time of the origination of the related
Mortgage Loan, Borrowers were not permitted to have placed any encumbrances
on their Mortgaged Properties other than the related Mortgage Loan, and the
Borrowers are prohibited from further encumbering the related Mortgaged
Property with additional secured debt or the lender's approval is required
for such an encumbrance. However, a violation of such prohibition may not
become evident until the related Mortgage Loan otherwise defaults. In the
case of the Copley Place Loan, at origination the Related Borrower issued a
subordinate note secured by the related Mortgaged Property in the principal
amount of $97,500,000. In cases in which one or more subordinate liens are
imposed on a Mortgaged Property or the Borrower incurs other indebtedness,
the Trust Fund is subject to additional risks, including, without limitation,
the risks that the necessary maintenance of the Mortgaged Property could be
deferred to allow the borrower to pay the required debt service on the
subordinate financing and that the value of the Mortgaged Property may fall
as a result, and that the Borrower may have a greater incentive to repay the
subordinate or unsecured indebtedness first and that it may be more difficult
for the borrower to refinance the Mortgage Loan or to sell the Mortgaged
Property for purposes of making any Balloon Payment upon the maturity of the
Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Secondary
Financing; Due-on-Encumbrance Provisions" in the Prospectus, and "DESCRIPTION
OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage Pool--Other
Financing" herein.
Risks Related to the Borrower's Form of Entity and Sophistication. Each of
the Borrowers is a legal entity. Mortgage loans made to legal entities may
entail risks of loss greater than those of mortgage loans
S-50
<PAGE>
made to individuals. For example, a legal entity, as opposed to an
individual, may be more inclined to seek legal protection from its creditors
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 Borrower, or a general partner
or managing member of a Borrower, may impair the ability of the lender to
enforce its rights and remedies under the related mortgage.
Each of the Borrowers is a bankruptcy-remote entity, and therefore may be
less likely to become insolvent or the subject of a voluntary or involuntary
bankruptcy proceeding than an entity that does not have (or the general
partner or managing member of which does not have) characteristics such as an
independent director, restrictions on indebtedness to third parties (other
than under the Mortgage Loan) and obligations to maintain itself separate
from its affiliates. However, even a bankruptcy-remote entity, as owner of
real estate will be subject to certain potential liabilities and risks. No
assurance can be given that a Borrower will not file for bankruptcy
protection or that creditors of a Borrower or a corporate general partner or
managing member of a Borrower will not initiate a bankruptcy or similar
proceeding against such Borrower or corporate general partner or managing
member. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Foreclosure--Bankruptcy Laws" in the Prospectus. The Borrower's
sophistication may increase the likelihood of protracted litigation or
bankruptcy in default situations. The more sophisticated a Borrower is, the
more likely it will be aware of, and have the resources to make effective use
of, all of rights, remedies and defenses available to it.
Limitations of Appraisals and Engineering Reports. In general, appraisals
represent only the analysis and opinion of qualified experts and are not
guaranties of present or future value, and may determine a value of a
property that is significantly higher than the amount that can be obtained
from the sale of a Mortgaged Property under a distress or liquidation sale.
Information regarding the values of the Mortgaged Properties is presented on
the CD ROM attached hereto for illustrative purposes only. Any architectural
and engineering reports obtained in connection with this offering represent
only the analysis of the individual engineers or site inspectors preparing
such reports, and may not reveal all necessary or desirable repairs,
maintenance or capital improvement items.
Zoning Compliance. The Mortgaged Properties are typically subject to
applicable building and zoning ordinances and codes ("Zoning Laws") affecting
the construction and use of real property. Since the Zoning Laws applicable
to a Mortgaged Property (including, without limitation, density, use, parking
and set back requirements) are generally subject to change by the applicable
regulatory authority at any time, certain of the improvements upon the
Mortgaged Properties may not comply fully with all applicable current and
future Zoning Laws. Such changes may limit the ability of the related
borrower to rehabilitate, renovate and update the premises, and to rebuild or
utilize the premises "as is" in the event of a substantial casualty loss with
respect thereto.
Costs of Compliance with Applicable Laws and Regulations. A borrower may
be required to incur costs to comply with various existing and future
federal, state or local laws and regulations applicable to the related
Mortgaged Property, e.g., Zoning Laws, and the Americans with Disabilities
Act of 1990. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Americans With
Disabilities Act" in the Prospectus. The expenditure of such costs, or the
imposition of injunctive relief, penalties or fines in connection with the
borrower's noncompliance could negatively impact the borrower's cash flow,
and consequently, its ability to pay its Mortgage Loan.
Limitations on Enforceability of Due-on-Sale Clauses and Assignments of
Leases and Rents. A Mortgage may contain a due-on-sale clause, which permits
the acceleration of the maturity of the related Mortgage Loan if the borrower
sells, transfers or conveys the related Mortgaged Property or its interest in
the Mortgaged Property. There may be limitations on the enforceability of
such clauses. A Mortgage may also include a debt-acceleration clause, which
permits the acceleration of the related Mortgage Loan upon a monetary or
non-monetary default by the borrower. The courts of all states will generally
enforce clauses providing for acceleration in the event of a material payment
default, but may refuse the foreclosure of a Mortgage when acceleration of
the indebtedness would be inequitable or unjust or the circumstances would
render acceleration unconscionable. See "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS--Enforceability of Certain Provisions" in the Prospectus.
S-51
<PAGE>
The Mortgage Loans may also be secured by an assignment of leases and
rents pursuant to which the borrower typically assigns its right, title and
interest as landlord under the leases on the related Mortgaged Property and
the income derived therefrom to the lender as further security for the
related Mortgage Loan, while retaining a license to collect rents for so long
as there is no default. In the event the borrower defaults, the license
terminates and the lender is entitled to collect the rents. Such assignments
are typically not perfected as security interests prior to the lender's
taking possession of the related Mortgaged Property and/or appointment of a
receiver. Some state laws may require that the lender take possession of the
Mortgaged Property and obtain a judicial appointment of a receiver before
becoming entitled to collect the rents. In addition, if bankruptcy or similar
proceedings are commenced by or in respect of the borrower, the lender's
ability to collect the rents may be adversely affected. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Leases and Rents" in the Prospectus.
Limitations on Enforceability of Cross-Collateralization. Certain of the
Mortgage Loans (the "Cross-Collateralized Loans") are cross-collateralized
and cross-defaulted with one or more related Cross-Collateralized Loans. Such
arrangements could be challenged as fraudulent conveyances by creditors of
any of the related borrowers or by the representative of the bankruptcy
estate of any such borrower if one or more of such borrowers were to become a
debtor in a bankruptcy case. Generally, under federal and most state
fraudulent conveyance statutes, the incurrence 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
assets remaining with the person would 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
another borrower, or any payment thereon, would not be avoided as a
fraudulent conveyance. See "DESCRIPTION OF THE MORTGAGE POOL--Certain
Characteristics of the Mortgage Pool--Limitations on Enforceability of
Cross-Collateralization" herein for more information regarding the
Cross-Collateralized Loans.
Tenant Matters. Certain of the Mortgaged Properties may be leased wholly
or in large part to a single tenant or are wholly or in large part
owner-occupied (each such tenant or owner-occupier, a "Major Tenant"). Any
default by a Major Tenant could adversely affect the related borrower's
ability to make payments on the related Mortgage Loan. There can be no
assurance that any Major Tenant will continue to perform its obligations
under its lease (or, in the case of an owner-occupied Mortgaged Property,
under the related Mortgage Loan documents). See "DESCRIPTION OF THE MORTGAGE
POOL--Certain Characteristics of the Mortgage Pool--Tenant Matters" and
"Annex A" herein.
Ground Leases. Mortgage Loans secured by a Mortgage encumbering a
leasehold interest are subject to certain risks not applicable to a Mortgage
encumbering a fee interest. The most serious of such risks is the potential
for the total loss of the security for the related Mortgage Loan upon the
termination or expiration of the ground lease creating the mortgaged
leasehold interest. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Foreclosure--Leasehold Risks" in the Prospectus and "DESCRIPTION OF
THE MORTGAGE POOL--Security for the Mortgage Loans--Ground Leases" herein.
Litigation. From time to time, there may be legal proceedings pending or
threatened against the borrowers and their affiliates relating to the
business of, or arising out of the ordinary course of business of, the
borrowers and their affiliates. There can be no assurance that any such
litigation will not have a material adverse effect on any borrower's ability
to meet its obligations under the related Mortgage Loan and, thus, on the
distributions to Certificateholders.
S-52
<PAGE>
Condemnations. From time to time, there may be Condemnations pending or
threatened against one or more of the Mortgaged Properties. There can be no
assurance that the proceeds payable in connection with a total Condemnation
will be sufficient to restore the related Mortgaged Property or to satisfy
the remaining indebtedness of the related Mortgage Loan. The occurrence of a
partial Condemnation may have a material adverse effect on the continued use
of the affected Mortgaged Property, or on any borrower's ability to meet its
obligations under the related Mortgage Loan. Therefore, no assurance can be
made that the occurrence of any Condemnation will not have a negative impact
upon the distributions to Certificateholders.
REPURCHASE OF MORTGAGE LOANS
As more fully described under "DESCRIPTION OF THE MORTGAGE POOL--General"
and "--Representations and Warranties; Repurchase" herein, the Mortgage Loan
Seller will be obligated to repurchase a Mortgage Loan if (i) there is a
defect with respect to the documents relating to such Mortgage Loan or (ii)
certain of its representations or warranties concerning such Mortgage Loan in
the Mortgage Loan Purchase Agreement are breached, if such defect or breach
materially and adversely affects the interests of the Certificateholders and
such defect or breach is not cured as required. However, there can be no
assurance that the Mortgage Loan Seller will be in a financial position to
effect such repurchase. See "MORTGAGE LOAN SELLER" herein.
PREPAYMENTS AND YIELD CONSIDERATIONS
The yield on any Offered Certificate that is purchased at a discount or
premium will be affected by (i) the rate and timing of principal payments and
collections on the Mortgage Loans, particularly unscheduled payments or
collections in the form of voluntary prepayments of principal or unscheduled
recoveries of principal due to defaults, casualties or condemnations whether
before or after the scheduled maturity date of the related Mortgage Loans,
and (ii) the order of priority of distributions of principal in respect of
the Certificates. The rate and timing of unscheduled payments and collections
of principal on the Mortgage Loans is impossible to accurately predict and
will be affected by a variety of factors, including, without limitation, the
level of prevailing interest rates, restrictions on voluntary prepayments
contained in the Mortgage Notes, the availability of mortgage credit and
other economic, demographic, geographic, tax and legal factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans, borrowers under the Mortgage Loans will have an
increased incentive to prepay. As described herein, the Principal
Distribution Amount for each Distribution Date will be distributable entirely
in reduction of the Certificate Balance of the Class A-1 Certificates until
the Certificate Balance thereof is reduced to zero, and will thereafter be
distributable in its entirety in respect of each remaining Class of
Certificates (except for the Class IO Certificates), sequentially in
alphabetical and numerical order of Class designation, until the Certificate
Balance of each such Class is, in turn, reduced to zero. See "DESCRIPTION OF
THE CERTIFICATES--Distributions--Application of the Group 1 Available
Distribution Amount" and "--Application of the Group 2 Available Distribution
Amount" herein. Accordingly, the actual rate of principal payments on the
Mortgage Loans may have different effects on the yields of the respective
Classes of Offered Certificates. Any payment of principal in reduction of the
Certificate Balance of any Class of Certificates will result in a
corresponding reduction in the notional amount of the related Component.
Thus, the yield on the Class IO Certificates will be extremely sensitive to
the rate and timing of principal payments on the Mortgage Loans, and the
faster the rate at which the notional amounts of the Components are reduced,
the greater will be the negative effect on the yield of the Class IO
Certificates, to the extent such effect is not offset by distributions of a
portion of any applicable Prepayment Premiums to the holders thereof, as
described under "DESCRIPTION OF THE CERTIFICATES--Distributions--Allocation
of Prepayment Premiums" herein. In addition, the Mortgage Loans may not
require the payment of Prepayment Premiums in the event of involuntary
prepayments resulting from casualty or condemnation. Accordingly, prospective
investors in the Class IO Certificates should consider the associated risks,
including the risk that a rapid rate of prepayments on the Mortgage Loans
could result in the failure of such investors to recoup their initial
investments.
S-53
<PAGE>
The yield on any Offered Certificate also will be affected by the rate
and timing of losses attributable to defaults on the Mortgage Loans, the
severity of such losses and the extent to which such losses and related
expenses are applied in reduction of the actual or notional principal amount
of such Certificate or otherwise reduce the amount of funds available for
distribution to the holder of such Certificate. To the extent described
herein, the Private Certificates are subordinate in right and time of payment
to the Offered Certificates and will bear shortfalls in collections and
losses incurred in respect of the Mortgage Loans prior to the Offered
Certificates; and the Class B, Class C, Class D and Class E Certificates are
subordinate in right and time of payment to the Class A-1, Class A-2, Class
A-3 and Class IO Certificates and will bear such shortfalls and losses prior
to the Class A-1, Class A-2, Class A-3 and Class IO Certificates, in reverse
alphabetical order of Class designation. Even though (i) the Class A-3
Certificates will receive principal payments only after the Certificate
Balances of the Class A-2 and Class A-1 Certificates have been reduced to
zero and (ii) the Class A-2 Certificates will receive principal payment only
after the Certificate Balance of the Class A-1 Certificates has been reduced
to zero, the Class A-1, Class A-2 and Class A-3 Certificates will bear
shortfalls in collections and losses incurred in respect of the Mortgage
Loans pro rata in proportion to their outstanding Certificate Balances. On
each Distribution Date, following all distributions on the Certificates to be
made on such date, the aggregate of all Realized Losses and Additional Trust
Fund Expenses that have been incurred since the Cut-off Date through the end
of the related Collection Period and that have not previously been allocated
to the Certificates will be allocated, subject to the limitations described
herein, first to the Private Certificates in the order described in the
Pooling and Servicing Agreement, and then to the Class E, Class D, Class C
and Class B Certificates, in that order, until the Certificate Balance of
each such Class has been reduced to zero. Thereafter any additional Realized
Losses and Additional Trust Fund Expenses will be allocated to the Class A-1,
Class A-2 and Class A-3 Certificates, pro rata in proportion to their
outstanding Certificate Balances (in each case in reduction of their
respective Certificate Balances as of the related Distribution Date), but in
the aggregate only to the extent that the aggregate Certificate Balance of
such Classes of Certificates remaining outstanding after giving effect to the
distributions on such Distribution Date exceeds the aggregate Stated
Principal Balance of the Mortgage Pool that will be outstanding immediately
following such Distribution Date. See "DESCRIPTION OF THE
CERTIFICATES--Subordination; Allocation of Losses and Certain Expenses"
herein. Any Realized Loss or Additional Trust Fund Expenses allocated in
reduction of the Certificate Balance of any Class of Certificates will result
in a corresponding reduction in the notional amount of the related Component.
See "DESCRIPTION OF THE CERTIFICATES--Distributions" and "--Subordination;
Allocation of Losses and Certain Expenses" herein and "YIELD AND MATURITY
CONSIDERATIONS" herein and in the Prospectus.
The Pass-Through Rate applicable to the Class A-1, Class A-2, Class A-3,
Class F, Class G, Class H, and Class J Component for each Distribution Date
will equal the Weighted Average Net Mortgage Rate minus the applicable Strip
Rate, and the Pass-Through Rate applicable to the Class B, Class C, Class D,
and Class E Components for each Distribution Date will equal %, %, %
and %, respectively. Accordingly, the Pass-Through Rate on the Components
and, correspondingly, the yield on the Class IO Certificates will be
sensitive to changes in the relative composition of the Mortgage Pool as a
result of scheduled amortization, voluntary prepayments and liquidations. See
"DESCRIPTION OF THE CERTIFICATES--Distributions" and "Subordination;
Allocation of Losses and Certain Expenses" herein and "YIELD AND MATURITY
CONSIDERATIONS" herein and in the Prospectus.
Effect of Prepayment Premiums. The rate and timing of principal payments
made on a Mortgage Loan will be affected by restrictions on voluntary
prepayments contained in the related Note (e.g., lockout periods and
Prepayment Premiums). All of the Mortgage Loans generally provide that a
permitted prepayment must be accompanied by a Prepayment Premium; provided,
however, that the Prepayment Premium requirement generally expires prior to
the maturity date of a Mortgage Loan. The existence of Prepayment Premiums
generally will result in the Mortgage Loans prepaying at a lower rate.
However, the requirement that a prepayment be accompanied by a Prepayment
Premium may not provide a sufficient economic disincentive to a borrower
seeking to refinance at a more favorable interest rate. In addition, since
holders of the Class IO Certificates are anticipated to receive Prepayment
Premiums, potential purchasers of this Class should especially consider that
provisions requiring Prepayment Premiums may not be enforceable in some
states and under federal bankruptcy law and may constitute
S-54
<PAGE>
interest for usury purposes. Accordingly, no assurance can be given that the
obligation to pay a Prepayment Premium will be enforceable under applicable
state or federal law or, if enforceable, that the foreclosure proceeds
received with respect to a defaulted Mortgage Loan will be sufficient to make
such payment. See "DESCRIPTION OF THE MORTGAGE POOL--Certain Terms and
Conditions of the Mortgage Loans--Prepayment Provisions" herein.
Effect of Interest on Advances, Special Servicing Fees and other Servicing
Expenses. As and to the extent described herein, the Master Servicer, the
Trustee or the Fiscal Agent, as applicable, will be entitled to receive
interest on unreimbursed Advances at the Advance Rate from the date on which
the related Advance is made to the date on which such amounts are reimbursed
(which in no event will be later than the Determination Date following the
date on which funds are available to reimburse such Advance with interest
thereon at the Advance Rate). The Master Servicer's, the Trustee's or the
Fiscal Agent's right, as applicable, to receive such payments of interest is
prior to the rights of Certificateholders to receive distributions on the
Regular Certificates and, consequently, may result in decreased distributions
to the Regular Certificates that would not otherwise have resulted, absent
the accrual of such interest. See "THE POOLING AND SERVICING
AGREEMENT--Advances" herein. In addition, certain circumstances, including
delinquencies in the payment of principal and interest, will result in a
Mortgage Loan being specially serviced. The Special Servicer is entitled to
additional compensation for special servicing activities, including Special
Servicing Fees, Disposition Fees and Workout Fees, which may result in
decreased distributions to the Regular Certificates that would not otherwise
have resulted absent such compensation. See "THE POOLING AND SERVICING
AGREEMENT--Special Servicing" herein.
Effect of Borrower Defaults and Delinquencies. The aggregate amount of
distributions on the Regular Certificates, the yield to maturity of the
Regular Certificates, the rate of principal payments on the Regular
Certificates and the weighted average life of the Regular Certificates will
be affected by the rate and the timing of delinquencies, defaults, losses or
other shortfalls experienced on the Mortgage Loans. If a purchaser of a
Regular Certificate of any Class calculates its anticipated yield based on an
assumed default rate and amount of losses on the Mortgage Loans that is lower
than the default rate and amount of losses actually experienced and such
additional losses are allocable to such Class of Certificates or, with
respect to the Class IO Certificates, such losses result in a reduction of
the Class IO Notional Balance, 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.
Certain of the Mortgage Loans are Balloon Loans, which involve a greater
risk of default than fully-amortizing loans because the ability of a borrower
to make a Balloon Payment typically will depend upon its ability either to
refinance the related Mortgaged Property or to sell such Mortgaged Property
at a price sufficient to permit the borrower to make the Balloon Payment. The
ability of a borrower to accomplish either of these goals will be affected by
a number of factors at the time of attempted sale or refinancing, including
the level of available mortgage rates, the fair market value of the related
Mortgaged Property, the borrower's equity in the related Mortgaged Property,
the financial condition of the borrower and the operating history of the
related Mortgaged Property, tax laws, prevailing economic conditions and the
availability of credit for multifamily or commercial properties (as the case
may be) generally. See "YIELD AND MATURITY CONSIDERATIONS--Yield
Considerations--Certain Relevant Factors" herein.
In order to maximize recoveries on defaulted Mortgage Loans, the Pooling
and Servicing Agreement will enable the Special Servicer to extend, modify or
otherwise deal with Mortgage Loans that are in material default or as to
which a payment default (including the failure to make a Balloon Payment) is
reasonably foreseeable; subject, however, to the limitations described under
"THE POOLING AND SERVICING AGREEMENT--Amendments, Modifications and Waivers"
herein. There can be no assurance, however, that any such extension or
modification will increase the present value of recoveries in a given case.
Any delay in collection of a Balloon Payment that would otherwise be
distributable in
S-55
<PAGE>
respect of a Class of Offered Certificates, whether such delay is due to
borrower default or to modification of the related Mortgage Loan by the
Special Servicer, will likely extend the weighted average life of such Class
of Offered Certificates. See "YIELD AND MATURITY CONSIDERATIONS" herein and
in the Prospectus.
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 Distribution Amount" generally consists of principal
and interest on the Mortgage Loans actually collected or advanced. The Master
Servicer's, the Trustee's or the Fiscal Agent's obligation, as applicable, to
make Advances is limited to the extent described under "THE POOLING AND
SERVICING AGREEMENT--Advances" herein. In particular, upon determination of
the Anticipated Loss with respect to any Seriously Delinquent Loan, the
amount of any P&I Advance required to be made with respect to such Seriously
Delinquent Loan on any Distribution Date will be an amount equal to the
product of (A) the amount of the P&I Advance that would be required to be
made in respect of such Seriously Delinquent Loan without regard to the
application of this sentence, multiplied by (B) a fraction, the numerator of
which is equal to the Scheduled Principal Balance of such Seriously
Delinquent Loan as of the immediately preceding Determination Date less the
Anticipated Loss and the denominator of which is such Scheduled Principal
Balance. In addition, no Advances are required to be made to the extent that,
in the good faith judgment of the Master Servicer, the Trustee or the Fiscal
Agent, as applicable, any such Advance, if made, would be nonrecoverable from
proceeds of the Mortgage Loan to which such Advance relates. See "THE POOLING
AND SERVICING AGREEMENT--Advances" herein.
LIMITED LIQUIDITY
There is currently no secondary market for the Offered Certificates. The
Underwriter has advised the Depositor that it intends to make a secondary
market in the Offered Certificates, but it is under no obligation to do so.
Accordingly, there can be no assurance that a secondary market for the
Offered Certificates will develop. Moreover, if a secondary market does
develop, there can be no assurance that it will provide holders of Offered
Certificates with liquidity of investment or that it will continue for the
life of the Offered Certificates. Any such secondary market may provide less
liquidity to investors than any comparable market for securities that
evidence, for example, interests solely in single-family mortgage loans.
LIMITED INFORMATION
The information set forth in this Prospectus Supplement with respect to
the Mortgage Loans is derived principally from (i) inspections of the
Mortgaged Properties undertaken by or on behalf of the Mortgage Loan Seller,
(ii) audited and unaudited operating statements for the Mortgaged Properties
supplied by the borrowers, (iii) appraisals for the Mortgaged Properties that
generally were performed at origination (which appraisals were used in
presenting information regarding the values of the Mortgaged Properties as of
the Cut-off Date under "DESCRIPTION OF THE MORTGAGE POOL" herein for
illustrative purposes only) and/or (iv) other information supplied by the
Borrowers concurrent with or subsequent to the origination of the Mortgage
Loan. Also, certain Mortgage Loans constitute acquisition financing; and
accordingly, limited or no operating information is available with respect to
the related Mortgaged Property.
S-56
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Mortgage Pool will consist of 12 multifamily and commercial "whole"
mortgage loans (the "Mortgage Loans"). The Mortgage Loans have an aggregate
Cut-off Date Principal Balance of approximately $848,482,929 (the "Initial
Pool Balance"), subject to a variance of plus or minus 5%. The "Cut-off Date
Principal Balance" of each Mortgage Loan is the unpaid principal balance
thereof as of the Cut-off Date, after application of all payments of
principal due on or before such date, whether or not received. Any
description of the terms and provisions of the Mortgage Loans herein is a
generalized description of the terms and provisions of the Mortgage Loans in
the aggregate. Many of the individual Mortgage Loans have special terms and
provisions that deviate from the generalized, aggregated description.
Generally, each Mortgage Loan is evidenced by a promissory note
(collectively the "Notes" and individually a "Note"). Each Mortgage Loan is
secured by a mortgage, deed of trust, deed to secure debt or other similar
security instrument (all of the foregoing are individually a "Mortgage" and
collectively the "Mortgages") evidenced by one or more separate promissory
notes (collectively, the "Notes" are individually a "Note") that creates a
first lien on one or more of a fee simple estate or a leasehold estate in a
real property (a "Mortgaged Property") improved for multifamily, hospitality,
retail or other commercial use.
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, the Fiscal Agent, the Underwriter or any
of their respective affiliates. All 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.
Each of the Mortgage Loans was underwritten or reunderwritten by Merill
Lynch Mortgage Capital Inc. (the "Mortgage Loan Seller") using the Mortgage
Loan Seller's underwriting standards, as described under "RISK
FACTORS--Underwriting of Mortgage Loans". The Mortgage Loans were not
underwritten or reunderwritten by the Depositor or any of its affiliates.
The Depositor will purchase the Mortgage Loans on or before the Closing
Date from the Mortgage Loan Seller pursuant to a Mortgage Loan Purchase and
Sale Agreement (the "MLMC Mortgage Loan Purchase Agreement") to be dated as
of December 22, 1997 (the "Closing Date"), between the Seller and the
Depositor ." As described under "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchase" herein, the Mortgage Loan
Seller will be obligated to repurchase a Mortgage Loan in the event of a
breach of a representation or warranty made by the Mortgage Loan Seller in
the Mortgage Loan Purchase Agreement with respect to such Mortgage Loan, if
such breach materially and adversely affects the interests of the
Certificateholders and such breach is not cured. The Mortgage Loan Seller has
only limited assets, and 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 repurchase obligation upon the failure of the
Mortgage Loan Seller 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
S-57
<PAGE>
and Servicing Agreement. The Master Servicer and the Special Servicer will
each service the Mortgage Loans pursuant to the Pooling and Servicing
Agreement. See "THE POOLING AND SERVICING AGREEMENT--Servicing of the
Mortgage Loans; Collection of Payments."
SECURITY FOR THE MORTGAGE LOANS
Each Mortgage Loan is secured by a Mortgage encumbering the related
borrower's interest in the related Mortgaged Property. Except with respect to
those Mortgage Loans described in "--Ground Leases" below, all of the
Mortgage Loans are secured by a first lien encumbering a fee simple interest
in the related Mortgaged Property, subject generally only to (a) liens for
real estate and other taxes and special assessments, (b) covenants,
conditions, restrictions, rights of way, easements and other encumbrances
whether or not of public record as of the date of recording of such Mortgage,
and (c) such other exceptions and encumbrances on the Mortgaged Property as
are reflected in the related title insurance policies. Each Mortgage Loan is
also secured by an assignment of the related borrower's interest in the
leases, rents, issues and profits of the related Mortgaged Property.
All of the Mortgage Loans are non-recourse loans. In certain instances,
additional collateral may exist in the nature of letters of credit, the
establishment of one or more Reserve Accounts (for one or more of necessary
repairs and replacements, tenant improvements and leasing commissions, real
estate taxes and assessments, insurance premiums, deferred maintenance and/or
scheduled capital improvements or as reserves for the payment of Monthly
Payments and other payments due under the related Mortgage Loan), grants of
security interests in equipment, inventory, accounts receivable and other
personal property, assignments of licenses, trademarks and/or trade names,
one or more guaranties of all or part of the related Mortgage Loan, the
establishment of one or more lockbox collection accounts for the direct
collection of rentals and other income from the related Mortgaged Property,
one or more guaranties with respect to a tenant's performance of the terms
and conditions of such tenant's lease or the assignment of the proceeds of
purchase options. The documents for each Mortgage Loan typically also provide
for the indemnification of the mortgagee by the related borrower for the
presence of any hazardous substances affecting the Mortgaged Property.
However, borrowers generally have limited assets and there can be no
assurance that any borrower will have sufficient assets to support any such
indemnification obligations that may arise. See "RISK FACTORS--Investment in
Commercial and Multifamily Mortgage Loans--Environmental Risks" herein.
Ground Leases. Certain of the Mortgage Loans are secured by a first lien
encumbering only the related borrower's leasehold interest in the related
Mortgaged Property. With respect to each such ground lease, the related
ground lessors have agreed to afford the mortgagee certain notices and
rights, including without limitation, cure rights with respect to breaches of
the related ground lease by the related borrower. See "CERTAIN LEGAL ASPECTS
OF THE MORTGAGE LOANS--Foreclosure--Leasehold Risks" in the Prospectus.
CERTAIN TERMS AND CONDITIONS OF THE MORTGAGE LOANS
Due Dates. The Mortgage Loans provide for Monthly Payments to be due on or
prior to the tenth day of each month inclusive of any grace periods allowed
under the notes.
Mortgage Rates; Calculations of Interest. Eight of the Mortgage Loans
(71.8% of the Initial Pool Balance) accrue on the basis of a 360-day year and
twelve 30-day months. Four of the Mortgage Loans (28.2% of the Initial Pool
Balance) accrue on the basis of a 360-day year and the actual number of days
the principal is outstanding. Except as set forth below, each Mortgage Loan
generally accrues interest at an annualized rate (a "Mortgage Rate") that is
fixed for the entire term of such Mortgage Loan and does not permit any
negative amortization or the deferral of interest.
Amortization of Principal. Two of the Mortgage Loans (the "Balloon
Loans"), which represent approximately 19.1% of the Initial Pool Balance,
provide for monthly payments of principal based on amortization schedules
longer than their remaining terms, thereby leaving substantial principal
amounts due and payable on their respective maturity dates (each such
payment, together with interest on the related Balloon Loan for the one-month
period ending on the day preceding such Balloon Loan's maturity
S-58
<PAGE>
date, a "Balloon Payment"), unless previously prepaid. One of the Mortgage
Loans (the Shilo Loan), which represents approximately 10.1% of the Initial
Pool Balance, has a remaining amortization term that is the same as its
remaining term to maturity. The weighted average loan-to-value ratio
(calculated using the appraised values set forth herein and the principal
balance of the Mortgage Loans (other than the Shilo Loan which is
fully-amortizing) on the date on which the Balloon Payments are due or the
Anticipated Repayment Date, as applicable was 54.4%. With respect to 11 of
the Mortgage Loans, which represent approximately 87.4% of the Initial Pool
Balance, the Monthly Payments due on January 1, 1998 include an amount
allocable to the amortization of the principal amounts of such Mortgage
Loans. With respect to one of the Mortgage Loans, which represents
approximately 12.6% of the Initial Pool Balance, the Monthly Payment due
prior to December 1, 1999 is allocable to interest only on such Mortgage
Loans, with the principal amount thereof scheduled to commence amortizing
effective with the December 1, 1999 Monthly Payment.
Prepayment Provisions. The imposition of a premium or fee (a "Prepayment
Premium") payable in connection with a voluntary prepayment of certain of the
Mortgage Loans is designed primarily to deter a borrower from voluntarily
prepaying the principal amount of its Mortgage Loan. Certain of the Mortgage
Loans are subject to specified periods following the origination of such
Mortgage Loans wherein no voluntary prepayments are allowed (any such period,
a "Lockout Period").
The Prepayment Premium applicable with respect to the majority of the
Mortgage Loans is generally calculated for a certain period (any such period,
a "Yield Maintenance Period") after the origination of such Mortgage Loan and
prior to the expiration of the applicable Lockout Period, if any, on the
basis of the greater of a yield maintenance formula and an amount equal to
one percent of the amount prepaid. "Annex A" attached hereto contains more
specific information regarding the Prepayment Premiums applicable to each of
the Mortgage Loans.
The Mortgage Loans generally provide that so long as no event of default
then exists, no Prepayment Premium is payable in connection with any
involuntary prepayment resulting from a Casualty or Condemnation. Certain of
the Mortgage Loans may also permit prepayment after an event of default (but
prior to the sale by the mortgagee thereunder of the Mortgaged Property
through foreclosure or otherwise) provided that the related borrower pays the
applicable Prepayment Premium. Certain of the Mortgage Loans may permit the
related borrower to transfer the related Mortgaged Property to a third party
without prepaying the related Mortgage Loan, provided that certain conditions
are satisfied, including, without limitation, an assumption by the transferee
of all of such borrower's obligations in respect of such Mortgage Loan. See
"--'Due-on-Encumbrance' and 'Due-on-Sale' Provisions" herein.
The Depositor makes no representation as to the enforceability of the
provisions of any Mortgage Loan requiring the payment of a Prepayment Premium
or as to the collectability of any Prepayment Premium. See "RISK
FACTORS--Prepayment and Yield Considerations" herein and "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Enforceability of Certain Provisions" in the
Prospectus.
Defeasance. Ten of the Mortgage Loans permit the Borrower to defease its
Mortgage Loan in whole by the deposit of specified collateral and to obtain
the release of all of its Mortgaged Properties from the lien of related
Mortgage. Five of the Mortgage Loans permit the Borrower to defease a portion
of its Mortgage Loan by the deposit of specified collateral and to obtain the
release of one or more of its Mortgaged Properties. In the case of such a
partial defeasance of such Mortgage Loans, the Borrower is generally required
to deposit 125% of the allocated loan amount in order to obtain such release.
The remaining two Mortgage Loans do not permit defeasance.
S-59
<PAGE>
The following "Loan Prepayment Restriction Analysis" table summarizes the
prepayment restrictions for the pool.
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
WEIGHTED- WEIGHTED- NUMBER OF
AVERAGE AVERAGE MONTHS
% OF TERM REMAINING OF OPEN
NUMBER OF INITIAL INITIAL TO ARD/ LOCKOUT/ PREPAYMENT
PREPAYMENT MORTGAGE POOL POOL MATURITY DEFEASANCE PRIOR TO
RESTRICTIONS LOANS LOAN BALANCE BALANCE (MOS.) TERM (MOS.) ARD/MATURITY
------------ ----- ---- ------- ------- ------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lockout/Defeasance ..... 10 Various $665,841,445 78.5% 117 113 4
Yield Maintenance (T+50) 1 Copley 96,908,666 11.4% 116 0 0
Lockout/YM (T-flat) .... 1 Shilo 85,732,818 10.1% 238 117 3
- ----- ---------- ---- --- --- -
Total / Weighted
Average................. 12 $848,482,929 100.0% 129 113(1) 4
</TABLE>
- --------------
(1) The Total/Weighted Average calculation for the "Weighted Average
Remaining Lockout/Defeasance Term" only includes those loans for which a
lockout restriction applies.
S-60
<PAGE>
"Due-on-Encumbrance" and "Due-on-Sale" Provisions. The Mortgages
generally contain "due-on-encumbrance" clauses that permit the holder of the
Mortgage to accelerate the maturity of the related Mortgage Loan if the
borrower encumbers the related Mortgaged Property without the consent of the
mortgagee. However, in certain of the Mortgage Loans, the related borrower is
allowed, under certain circumstances, to encumber the related Mortgaged
Property with additional liens. See "RISK FACTORS--Investment in Commercial
and Multifamily Mortgage Loans--Other Financing" herein. The Master Servicer
or the Special Servicer, as applicable, will determine, in a manner
consistent with the servicing standard described herein under "THE POOLING
AND SERVICING AGREEMENT--Servicing of the Mortgage Loans; Collection of
Payments" whether to exercise any right the mortgagee may have under any such
clause to accelerate payment of a Mortgage Loan upon, or to withhold its
consent to, any additional encumbrance of the related Mortgaged Property.
The Mortgages for the Mortgage Loans generally prohibit, without the
mortgagee's prior consent, the borrower from transferring the Mortgaged
Property or allowing a change in ownership, generally defined as, among other
things, (a) a specified percentage (generally ranging from 10% to 50%) change
in the ownership of the borrower, a guarantor or, with respect to certain of
such Mortgage Loans, in the ownership of a general partner of the borrower or
a guarantor, (b) the removal, resignation or change in ownership of any
general partner or managing partner of a borrower, a guarantor or, with
respect to certain of such Mortgage Loans, any general partner of a borrower
or a guarantor, (c) with respect to certain of such Mortgage Loans, the
removal, resignation or change in ownership of the managing agent of the
related Mortgaged Property, or (d) the voluntary or involuntary transfer or
dilution of the controlling interest in the related borrower held by a
specified person; provided, however, that with respect to certain of such
Mortgage Loans, the borrower may be entitled to transfer the Mortgaged
Property or allow a change in ownership if certain conditions are satisfied,
typically including one or more of the following, (i) no event of default has
occurred, (ii) the proposed transferee meets the mortgagee's customary
underwriting criteria, (iii) the Mortgaged Property continues to meet the
mortgagee's customary underwriting criteria, and (iv) an acceptable
assumption agreement is executed. Certain of the Mortgages may also allow
transfers of interests in the related Mortgaged Property in the nature of
residential leases and easements and changes in ownership between partners,
family members, for estate planning purposes, affiliated companies and
certain specified individuals. In the event of any transfer or change in
ownership of the Mortgaged Property in violation of the applicable provisions
of the related Mortgage Loan documents, the related Mortgage Loan documents
generally provide that the mortgagee is permitted to accelerate the maturity
of the related Mortgage Loan. See "CERTAIN LEGAL ASPECTS OF MORTGAGE
LOANS--Enforceability of Certain Provisions--Due-on-Sale Provisions" in the
Prospectus. The Depositor makes no representation as to the enforceability of
any due-on-sale or due-on-encumbrance provision in any Mortgage Loan which is
the subject of a proceeding under the Bankruptcy Code.
Default Provisions. Except as described below, the related Mortgage Loan
documents generally provide that an event of default will exist if (a) any
regular installment of principal and/or interest is not paid when specified
(generally either (i) upon the date the same is due, or (ii) within a
specified period (generally ranging from 5 days to 7 days) after the date
upon which the same was due or following written notice from the mortgagee of
such failure), or (b) any violation of the conditions described in
"--'Due-on-Encumbrance' and 'Due-on-Sale' Provisions" above occurs.
Additionally, the related Mortgage Loan documents may contain other specified
events of default, including one or more of the following: the borrower's
failure to pay taxes or other charges when due, to keep all required
insurance policies in full force and effect, to cure any material violations
of laws or ordinances affecting the Mortgaged Property or to operate the
related Mortgaged Property according to certain criteria; the imposition of a
mechanic's, materialman's or other lien against the Mortgaged Property; the
institution of a bankruptcy, receivership or similar actions against the
borrower or the Mortgaged Property; unapproved conversion of the related
Mortgaged Property to a condominium or cooperative; defaults under certain
other agreements; defaults under or unapproved modifications to any related
franchise agreement; or material changes to or defaults under any related
management agreement.
Upon the occurrence of an event of default with respect to any Mortgage
Loan, the Master Servicer or the Special Servicer, as applicable, may take
such action as the Master Servicer or the Special Servicer
S-61
<PAGE>
deems advisable to protect and enforce the rights of the Trustee, on behalf
of the Certificateholders, against the related borrower and in and to the
related Mortgaged Property, subject to the terms of the related Mortgage
Loan, including, without limitation, declaring the entire debt to be
immediately due and payable and/or instituting a proceeding, judicial or
non-judicial, for the complete or partial foreclosure of the Mortgage Loan.
Default Interest. All of the Mortgage Loans provide for imposition of a
rate of interest higher than the stated interest rate upon the occurrence of
an event of default by the related borrower ("Default Interest"). The Default
Interest applicable to the Mortgage Loans is generally calculated as a
specified rate above the stated interest rate of such Mortgage Loan. No
assurance can be given as to the enforceability of any provision of any
Mortgage Loan requiring the payment of any Default Interest or as to the
collectability of any Default Interest. See "CERTAIN LEGAL ASPECTS OF
MORTGAGE LOANS--Enforceability of Certain Provisions" in the Prospectus.
Hazard, Liability and other Insurance. Generally, each Mortgage Loan
requires that the related Mortgaged Property be insured (in an amount not
less than the lesser of (a) the full replacement cost of the Mortgaged
Property or (b) the outstanding principal balance of the related Note, but in
any event in an amount sufficient to ensure that the insurer would not deem
the borrower a co-insurer) against loss or damage by fire or other risks and
hazards covered by a standard extended coverage insurance policy. Generally,
each Mortgage Loan also requires that the related borrower obtain and
maintain during the entire term of the Mortgage Loan (a) comprehensive public
liability insurance, typically with a minimum limit of $5,000,000 per
occurrence, (b) if any part of the Mortgaged Property upon which a material
improvement is located lies in a special flood hazard area and for which
flood insurance has been made available, a flood insurance policy in an
amount equal to the lesser of the outstanding principal balance of the
related Note or the maximum limit of coverage available from governmental
sources, (c) rent loss and/or business interruption insurance in an amount
equal to all rents or estimated gross revenues from the operation of the
Mortgaged Property for a period as required by the Mortgage, typically twelve
months, (d) if applicable, insurance against loss or damage from explosion of
steam boilers, air conditioning equipment, high pressure piping, machinery
and equipment, pressure vessels or similar apparatus, and (e) such other
insurance as may from time to time reasonably be required by the mortgagee.
In addition, depending on the results of a seismic study for the related
property, earthquake insurance may be required by the terms of the Mortgage
Loans with respect to any Mortgaged Property located in California and
windstorm insurance is typically by the terms of the Mortgage Loans required
with respect to any Mortgaged Property located in Florida. With respect to
many of the Mortgage Loans, the related borrower has satisfied the applicable
insurance requirements by obtaining blanket insurance policies, subject to
the review and approval of the same by the mortgagee, including the amount of
insurance and the number of properties covered by such policies.
Casualty and Condemnation. The related Mortgage Loan documents typically
provide that in the event of damage to the related Mortgaged Property by
reason of fire or other casualty (a "Casualty"), all insurance proceeds in
excess of a specified amount will be paid to the mortgagee and then it is
such mortgagee's option as to whether to apply such proceeds to the
outstanding indebtedness of the related Mortgage Loan, or to allow such
proceeds to be applied to the restoration of the related Mortgaged Property;
provided, however, that if certain conditions are satisfied, the mortgagee
shall be required to disburse such proceeds in connection with a restoration
of the related Mortgaged Property. These required conditions typically
include one or more of the following: (a) if the insurance proceeds payable
are less than a specified amount, (b) if less than a specified percentage of
the related Mortgaged Property is destroyed or if the value of the related
Mortgaged Property following such Casualty remains greater than either a
specified amount or a specified percentage of the value of the related
Mortgaged Property immediately preceding such Casualty, (c) if the Casualty
affects less than a specified percentage of the net rentable area of the
Mortgaged Property or interrupts less than a specified percentage of the
rentals from the Mortgaged Property, (d) if such restoration will cost less
than a specified amount and if sufficient funds are available to complete
such restoration, (e) if such restoration can be accomplished within a
specified time period, (f) if the restored Mortgaged Property will adequately
secure the related Mortgage Loan, (g) if adequate income (including rentals
and insurance) will be available during the restoration period and
S-62
<PAGE>
(h) if no event of default then exists. In certain of the Mortgage Loans, the
related ground lease or a lease between the related borrower and a tenant of
all or part of the related Mortgaged Property, or a reciprocal easement
agreement or operating agreement may require the borrower or the tenant to
rebuild the buildings located upon the related Mortgaged Property in the
event of a Casualty, and the related Mortgage Loan documents may require the
application of insurance proceeds to satisfy such requirement, regardless of
the value of such Mortgaged Property following such Casualty.
Generally, the Mortgage Loans provide that all awards payable to the
borrower in connection with any taking or exercise of the power of eminent
domain with respect to the related Mortgaged Property (a "Condemnation") in
excess of a specified amount will be paid directly to the mortgagee, and then
it is such mortgagee's option as to whether to apply such proceeds to the
outstanding indebtedness of the related Mortgage Loan, or to allow such
proceeds to be applied to the restoration of the related Mortgaged Property;
provided, however, that if certain conditions are satisfied, the mortgagee
may be required to disburse such awards in connection with a restoration of
the related Mortgaged Property. These required conditions typically include
one or more of the following: (a) if the award is less than a specified
amount, (b) if less than a specified percentage of the related Mortgaged
Property is taken, (c) if the Condemnation affects less than a specified
percentage of the net rentable area of the Mortgaged Property or interrupts
less than a specified percentage of the rentals from the Mortgaged Property,
(d) if such restoration will cost less than a specified amount and if
sufficient funds are available to complete such restoration, (e) if such
restoration can be accomplished within a specified time period, (f) if
adequate income (including the Condemnation award, rentals and insurance)
will be available during the restoration period, (g) if no event of default
then exists, and (h) if such restoration and repair is feasible and the
related Mortgaged Property will be commercially viable after such
restoration. In certain of the Mortgage Loans, the related ground lease or a
lease between the related borrower and a tenant of all or part of the related
Mortgaged Property, or a reciprocal easement agreement or operating agreement
may require the borrower or the tenant to restore the related Mortgaged
Property in the event of a Condemnation and the related Mortgage Loan
documents may require the application of condemnation proceeds to satisfy
such requirement.
Financial Reporting. The Mortgages generally contain covenants which
require the related borrower to provide the mortgagee with certain financial
reports regarding such borrower's operations at the related Mortgaged
Property at least upon an annual basis, and generally also require such
reporting upon an interim basis (generally monthly or quarterly) throughout
the fiscal year of the borrower. Such reports typically include information
about one or more of the following regarding such Mortgaged Property: (a)
income and expenses for the period covered by such reports, (b) current
tenancy information, and (c) the financial condition of the borrower and/or
certain specified principals of the borrower.
Delinquencies and Modifications. As of the Cut-off Date for each Mortgage
Loan, no Mortgage Loan was delinquent in respect of any Monthly Payment, and
no Mortgage Loan has been modified in any material manner since its
origination in connection with any default or threatened default on the part
of the related borrower. Any future modifications would be subject to the
conditions and requirements contained in the Pooling and Servicing Agreement.
Borrower Escrows and Reserve Accounts. In a number of the Mortgage Loans,
the related borrower was required, or may under certain circumstances in the
future be required, to establish one or more reserve or escrow accounts (such
accounts, "Reserve Accounts") for necessary repairs and replacements, tenant
improvements and leasing commissions, real estate taxes and assessments,
water and sewer charges, insurance premiums, environmental remediation,
deferred maintenance and/or scheduled capital improvements or, under certain
specified circumstances, reserves for the payment of regularly scheduled
payments of principal and/or interest ("Monthly Payments") and other payments
due under the related Mortgage Loan. The following table sets forth more
detailed information as of December 1, 1997, regarding Mortgage Loans for
which a Reserve Account existed on such date.
S-63
<PAGE>
<TABLE>
<CAPTION>
TI AND
TAX INSURANCE CAPITAL RES REPAIR RES GROUND RENT LEASING
LOAN NAME BALANCE BALANCE BALANCE BALANCE BALANCE BALANCE
--------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Copley Place (1)........ $ -- $ -- $ -- $ -- $ -- $ --
Brookfield Properties
Corporation............ $ 859,467.66 $ 28,689.46 $ --(2) $ -- $ -- $ --
Tower Realty Trust...... $1,003,230.54 $ 17,976.91 $104,585.00 $ -- $ -- $45,000.00
Franklin Mills Loan .... $3,622,099.70 $ 82,718.13 $166,666.65 $ -- $ -- $ --
Newton Oldacre
McDonald............... $ 355,032.75 $102,857.37 $214,878.29 $ -- $ -- $ --
Four Seasons Biltmore
Hotel, Santa Barbara,
CA (2)................. $ -- $ -- $ --(2) $ -- $ -- $ --
Ritz-Carlton Hotel, St.
Louis, MO (2).......... $ -- $ -- $ --(2) $ -- $ -- $ --
Four Seasons Hotel,
Austin, TX (2)......... $ -- $ -- $ --(2) $ -- $ -- $ --
Shilo Inns Portfolio ... $ 640,590(1) $ -- $ 580,902 $ 307,805 $ -- $ --
Farb Loan .............. $ 1,780,305(1) $ 91,210 $ 278,135 $ -- $ --
American Apartment
Communities I.......... $ 225,010.98 $126,547.01 $ 96,081.08 $397,908.76 $ -- $ --
American Apartment
Communities II......... $ 259,399.04 $ 76,806.38 $ 58,520.00 $402,500.00 $84,315.00 $ --
</TABLE>
- ------------
(1) MetLife, as servicer, holds the real estate tax and insurance escrows
for the Copley Place Loan.
(2) All escrows are held by the respective property manager contractually
under either the management or franchise agreement.
CERTAIN CHARACTERISTICS OF THE MORTGAGE POOL
Concentration of Mortgage Loans and Borrowers. The Mortgage Pool consists
of 12 Mortgage Loans to 44 separate borrowers. No set of Mortgage Loans made
to a single borrower or to a single group of affiliated borrowers constitutes
more than approximately 15.3% of the Initial Pool Balance. Seven Mortgage
Loans (representing approximately 63.9% of the Initial Pool Balance) are
cross-collateralized and cross-defaulted with one or more other Mortgage
Loans to the related borrower or to a related affiliated borrower. See
"--Limitations on Enforceability of Cross-Collateralization" herein.
Environmental Risks. Except as discussed below, (a) environmental site
assessments with respect to the Mortgaged Properties generally were obtained
either by (i) the Originator within 12 months of the respective origination
dates of the Mortgage Loans or (ii) the applicable Mortgage Loan Seller
within 12 months of the respective dates such Mortgage Loans were acquired by
such Mortgage Loan Seller and (b) the Mortgaged Properties have been subject
to environmental site assessments within 18 months preceding the Cut-off
Date.
Other than as described below, the environmental site assessments did not
reveal the existence of conditions or circumstances respecting the Mortgaged
Properties securing any Mortgage Loan that would constitute or result in a
material violation of applicable environmental law, impose a material
constraint on the operation of such Mortgaged Properties, require any
material change in the use thereof, require any material clean-up, remedial
action or other response with respect to hazardous materials on or affecting
such Mortgaged Properties under any applicable environmental law, with the
exception of conditions or circumstances (a) that such assessments indicated
could be cleaned up, remediated or brought into compliance with applicable
environmental law by the taking of certain actions and (b) either for which
(i) a hold-back or other escrow of funds in an amount not less than the cost
of taking such clean-up, remediation or compliance actions as estimated in
such assessments has been created, (ii) an environmental insurance policy in
an amount satisfactory to the Originator has been obtained by the related
borrower or an indemnity for such costs has been obtained from a potentially
culpable party or (iii) such clean up, remediation or compliance actions have
been completed in compliance with applicable environmental law prior to the
closing of such Mortgage Loan.
Investors should understand that the results of the environmental site
assessments do not constitute an assurance or guaranty by the Underwriter,
the Depositor, the Mortgage Loan Seller, the borrowers, any
S-64
<PAGE>
environmental consultants or any other person as to the absence or extent of
the existence of any environmental condition on the Mortgaged Properties that
could result in environmental liability. Given the scope of the environmental
site assessments, an environmental condition that affects a Mortgaged
Property may not be discovered or its severity revealed during the course of
the assessment. Further, no assurance can be given that future changes in
applicable environmental laws, the development or discovery of presently
unknown environmental conditions at the Mortgaged Properties or the
deterioration of existing conditions will not require material expenses for
remediation or other material liabilities.
Zoning Compliance. The Originator generally received assurances that all
of the improvements located upon each respective Mortgaged Property complied
with all Zoning Laws in all respects material to the continued use of the
related Mortgaged Property, or that such improvements qualified as permitted
non-conforming uses.
Limitations on Enforceability of Cross-Collateralization. Seven of the
Mortgage Loans (the "Cross-Collateralized Loans"), each of which was made to
a borrower that is affiliated with the borrower under another Mortgage Loan
or is the borrower under another Mortgage Loan, are cross-collateralized and
cross-defaulted with one or more related Cross-Collateralized Loans. This
arrangement is designed to reduce the risk that the inability of an
individual Mortgaged Property securing a Cross-Collateralized Loan to
generate net operating income sufficient to pay debt service thereon will
result in defaults (and ultimately losses). The arrangement is based on the
belief that the risk of default is reduced by making the collateral pledged
to secure each related Cross-Collateralized Loan available to support debt
service on, and principal repayment of, the aggregate indebtedness evidenced
by the related Cross-Collateralized Loans. See "--Concentration of the
Mortgage Loans and Borrowers" herein for more information regarding the
Cross-Collateralized Loans.
Tenant Matters. Certain additional information regarding Major Tenants is
set forth in the individual loan descriptions and "Annex A" herein.
Generally, Major Tenants do not have investment-grade credit ratings. Many
Major Tenants occupy their respective leased premises pursuant to leases
which require them to pay all applicable real property taxes, maintain
insurance over the improvements thereon and maintain the physical condition
of such improvements.
Other Information. The following tables and "Annex A" set forth certain
information with respect to the Mortgage Loans and the Mortgaged Properties,
which was primarily derived from financial statements supplied by each
borrower for its related Mortgaged Property. The financial statements
supplied by the borrowers in most cases are unaudited and were not prepared
in accordance with generally accepted accounting principles. "Net Operating
Income" and "Cash Flow" do not represent the net operating income and cash
flow reflected on the borrowers' financial statements. The differences
between "Net Operating Income" and "Cash Flow" determined by The Mortgage
Loan Seller and net operating income and cash flow reflected on the
borrowers' financial statements represent the adjustments made by The
Mortgage Loan Seller described below, which adjustments generally were
intended to increase the level of consistency between the financial
statements provided by the borrowers. However, such adjustments were
subjective in nature and were not made in a uniform manner nor in accordance
with generally accepted accounting principles. "Underwritten NOI" and
"Underwritten Cash Flow" are pro forma numbers prepared by The Mortgage Loan
Seller to reflect their assessment of the market based performance of the
related Mortgaged Property. Neither the Depositor nor the Underwriter have
made any attempt to verify the accuracy of the financial statements supplied
by the borrowers or the accuracy or appropriateness of the adjustments
discussed below that were made by The Mortgage Loan Seller to determine "Net
Operating Income," "Cash Flow," "Underwritten NOI" and "Underwritten Cash
Flow."
THE NUMBERS REPRESENTING "NET OPERATING INCOME," "CASH FLOW,"
"UNDERWRITTEN NOI" AND "UNDERWRITTEN CASH FLOW" ARE NOT A SUBSTITUTE FOR OR
AN IMPROVEMENT UPON, NET INCOME AS DETERMINED IN ACCORDANCE WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES AS A MEASURE OF THE RESULTS OF A MORTGAGED
PROPERTY'S OPERATIONS OR A SUBSTITUTE FOR CASH FLOWS FROM OPERATING
ACTIVITIES DETERMINED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES AS A MEASURE OF LIQUIDITY. NO REPRESENTATION IS MADE AS TO THE
FUTURE NET CASH FLOW OF THE PROPERTIES, NOR ARE THE "NET OPERATING INCOME,"
"CASH FLOW," "UNDERWRITTEN NOI" AND "UNDERWRITTEN CASH FLOW" SET FORTH HEREIN
INTENDED TO REPRESENT SUCH FUTURE NET CASH FLOW.
S-65
<PAGE>
All of the Mortgaged Properties were appraised at the request of the
Originator of the related Mortgage Loan by a state certified appraiser or an
appraiser belonging to the Appraisal Institute. The purpose of each appraisal
was to provide an opinion of the fair market value of the related Mortgaged
Property. None of the Depositor, The Mortgage Loan Seller, the Master
Servicer, the Special Servicer, the Underwriter, the Trustee or the Fiscal
Agent or any other entity has prepared or obtained a separate independent
appraisal or reappraisal, unless such person was the Originator of the
related Mortgage Loan. There can be no assurance that another appraiser would
have arrived at the same opinion of value. No representation is made that any
Appraised Value would approximate either the value that would be determined
in a current appraisal of the related Mortgage Property or the amount that
would be realized upon a sale. Accordingly, investors should not place undue
reliance on the Loan-to-Value Ratios set forth herein.
Debt service coverage ratios are used by lenders of loans secured by
income producing property to measure the ratio of (a) cash currently
generated by a property that is available for debt service (that is, cash
that remains after payment of operating expenses) to (b) required debt
service payments. However, debt service coverage ratios only measure the
current, or recent, ability of a property to service mortgage debt. If a
property is not expected to have a stable operating cash flow (for instance,
if it is subject to material leases that are scheduled to expire during the
loan term and that provide for above-market rents, may be difficult to
replace, or both) a debt service coverage ratio may not be a reliable
indicator of a property's ability to service the mortgage debt over the
entire remaining loan term. In addition, a debt service coverage ratio may
not adequately reflect the significant amounts of cash that a property owner
may be required to expend to pay for capital improvements, and for tenant
improvements and leasing commissions when expiring leases are replaced. For
the reasons discussed above, the Debt Service Coverage Ratios presented
herein are limited in their usefulness in predicting the future ability of a
Mortgaged Property to generate sufficient cash flow to repay the related
Mortgage Loan. Accordingly, no assurance can be given, and no representation
is made, that the Debt Service Coverage Ratios accurately reflect that
ability.
For purposes of the tables and "Annex A":
(1) "Net Operating Income" or "NOI" is revenue derived from the use and
operation of the Mortgaged Property (consisting primarily of rental income)
less operating expenses (such as utilities, general administrative expenses,
management fees, advertising, repairs and maintenance) and less fixed
expenses (such as insurance and real estate taxes). NOI generally does not
reflect capital expenditures, interest expense, income taxes and non-cash
items such as depreciation or amortization. The Mortgage Loan Seller adjusted
items of revenue and expense shown on the borrower financial statements in
order to reflect the historical operating results for a Mortgaged Property on
a normalized basis (e.g., adjusting for the payment of two years of real
estate taxes in a single year). Revenue was generally adjusted to eliminate
items not related to the operation of the Mortgaged Property, to eliminate
security deposits and to eliminate non-recurring items. Expense was generally
adjusted to eliminate distributions to owners, items of expense not related
to the operation of the Mortgaged Property, non-recurring items, such as
capital expenditures, and refunds of security deposits. The Mortgage Loan
Seller made the adjustments based upon their review of the borrowers'
financial statements, their experience in originating loans and, in some
cases, conversations with borrowers. The adjustments were subjective in
nature and were not uniform for each Mortgaged Property.
(2) "Underwritten NOI" means, with respect to any Mortgage Loan, the NOI
for the related Mortgage Property as determined by the Mortgage Loan Seller
in accordance with its underwriting guidelines for similar properties.
Although there are differences in the underwriting guidelines of the Mortgage
Loan Seller, the nature and types of adjustments made by each of them were
generally the same. Revenue generally is calculated as follows: Rental
revenue is calculated using the lower of actual or market rental rates,
[actual rental rates in the case of credit tenants] with a vacancy rate equal
to the higher of the Mortgaged Property's historical rate, the market rate or
an assumed vacancy rate. Other revenues, such as parking fees, are included
only if sustainable. Certain revenues, such as application fees and lease
termination fees, are not included. Operating and fixed expenses generally
are adjusted to reflect the higher of the Mortgaged Property's average
expenses or a midrange industry norm for expenses on similar properties in
similar locations (generally adjusted upward to account for inflation), a
market rate management fee and an annual reserve for replacement of capital
items.
S-66
<PAGE>
(3) "Underwritten Cash Flow" means, with respect to any Mortgage Loan,
the Underwritten NOI for such Mortgage Loan decreased by an amount that the
Mortgage Loan Seller has determined to be an appropriate allowance for
average annual tenant improvements and leasing commissions and other capital
reserves based upon its underwriting guidelines.
(4) "Appraised Value" means, for each of the Mortgaged Properties, the
appraised value of such property as determined by an appraisal thereof made
not more than nine months prior to the origination date of the related
Mortgage Loan and reviewed by the Originator of such Mortgage Loan.
(5) "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).
(6) "Debt Service Coverage Ratio," "Underwritten DSCR" or "DSCR" means,
with respect to any Mortgage Loan, (a) the Underwritten Cash Flow for the
related Mortgaged Property divided by (b) the Annual Debt Service for such
Mortgage Loan.
(7) "Loan-to-Value Ratio," "Appraised LTV" or "LTV" means, with respect to
any Mortgage Loan, the principal balance of such Mortgage Loan as of the
Cut-off Date divided by the Appraised Value of the Mortgaged Property
securing such Mortgage Loan.
(8) "ARD/Balloon LTV" for any Mortgage Loan is calculated in the same
manner as LTV, except that the Balloon Amount is used instead of the Cut-off
Date principal balance.
(9) "Balloon Amount" or "Balloon Balance" for each Mortgage Loan is equal
to the principal amount, if any, due at maturity, taking into account
scheduled amortization, assuming no prepayments or defaults.
(10) "Occupancy Rate" means the percentage of gross leasable area, rooms,
units, beds, pads or sites of a Mortgaged Property that are leased or
occupied. Occupancy rates are calculated based upon the most recent rent
information received by the applicable Mortgage Loan Seller.
(11) "Year Built" means, with respect to the related Mortgaged Property
(or Mortgaged Properties), the year in which the oldest Mortgaged Property
securing a Mortgage Loan was initially constructed.
(12) "Remaining Term to Maturity" generally means the number of months
remaining from the Cut-off Date until the maturity of a mortgage loan. The
method for calculating the "Remaining Term to Maturity" for any Mortgage Loan
is determined by subtracting (a) the number of Due Dates from and including
the first payment date to and including the Cut-off Date from (b) the number
of Due Dates from and including the first payment date to and including the
original scheduled maturity date for such Mortgage Loan.
(13) "Remaining Amortization Term" for any Mortgage Loan is calculated as
the original amortization term of the related Mortgaged Loan (based upon such
Mortgage Loan's original balance, interest rate and monthly payment) less the
number of Due Dates from and including the first payment date to and
including the Cut-off Date.
(14) The "Year Renovated" is based upon information contained in an
appraisal or engineering report of the related Mortgaged Property or other
written evidence provided by the borrower.
(15) All calculations of any applicable Lockout Period, Yield Maintenance
Period or Prepayment Premium for a Mortgage Loan are determined based upon
such Mortgage Loan's first scheduled payment date.
(16) "Weighted Average Maturity" means the weighted average of the
Remaining Terms to Effective Maturity Date of the Mortgage Loans.
(17) Due to rounding, percentages may not add to 100% and amounts may not
add to the indicated total.
S-67
<PAGE>
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
<TABLE>
<CAPTION>
CUT-OFF NUMBER ORIGINAL
DATE OF INTEREST AMORT.
LOAN BALANCE PROPERTIES TYPE COLLATERAL STATE RATE (MOS.)
- --------------------- ------------ ---------- -------- -------------------------------- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Retail /
Copley Place Loan $ 96,908,666 1 Office Copley Place MA 6.75% 360
Brookfield Properties Retail / Dain Bosworth Plaza; Gaviidae
Corporation 59,754,386 1 Office Common Phase I & II MN 8.00% 360
Tower Realty Loan 107,000,000 2 Office One Orlando Center, Tower 45 FL, NY 6.8174% 360 (1)
Franklin Mills Loan 109,538,921 1 Retail Franklin Mills, Liberty Plaza PA 7.882% 360
Franklin Mills Loan 19,954,654 1 7.44% 360
------------ -- ----- ---
Total Mills 129,493,575 2 7.814% 360
Newton Oldacre
McDonald Loan 76,640,023 16 Retail 19 Neighborhood shopping centers Various 7.56% 360
Newton Oldacre
McDonald Loan 12,791,840 3 7.325% 360
------------ -- ----- ---
Total Newton 89,431,863 19 7.526 360
Four Seasons Biltmore Four Seasons Biltmore Hotel,
Hotel Loan 63,000,000 1 Hotel Santa Barbara, CA CA 7.138% 300
Ritz-Carlton Hotel
Loan 41,850,000 1 Hotel Ritz-Carlton Hotel, St. Louis, MO MO 7.188% 300
Four Seasons Hotel,
Austin Loan 45,150,000 1 Hotel Four Seasons Hotel, Austin, TX TX 7.188% 300
Shilo Inns Loan 65,765,282 16 Hotel 17 Shilo Inns Various 8.47% 240
Shilo Inns Loan 19,967,537 1 8.36% 240
------------ -- ----- ---
Total Shilo 85,732,819 17 8.44% 240
Farb Loan 64,781,452 2 Multifamily West Point Apts., Nob Hill Apts. TX 7.40% 360
American Apartment
Communities I Loan 44,440,152 10 Multifamily 10 complexes CA 7.75% 300
American Apartment
Communities II Loan 20,940,017 2 Multifamily 2 complexes CA 7.74% 360
------------ -- ----- ---
Total/Weighted
Average $848,482,929 59 7.46% 334
</TABLE>
<TABLE>
<CAPTION>
PREPAYMENT RESTRICTIONS
--------------------------------------------
ORIGINAL MONTHS
TERM TO ORIGINAL OPEN TO
ARD/ CUT-OFF CUT-OFF TYPE OF LOCKOUT/ PREPAYMENT
MATURITY SEASONING DATE DATE OTHER CALL DEFEASANCE PRIOR TO
LOAN (MOS.) (MOS.) LTV DSCR FINANCING PROTECTION PERIOD ARD/BALLOON
- --------------------- -------- --------- ------- ------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Copley Place Loan 120 4 30.8% 2.69x $ - YM (T+50) 0 0
Brookfield Properties
Corporation 120 6 61.0% 1.50x - Lockout/Def. 114 6
Tower Realty Loan 84 1 71.3% 1.64x - Lockout/Def. 84 0
Franklin Mills Loan 120 6 60.5% N/A - Lockout/Def. 114 6
Franklin Mills Loan 117 4 60.5% N/A - Lockout/Def. 114 6
--- -- ----- --- ------------------- --- --
Total Mills 120 6 60.5% 1.65x -- 114 6
Newton Oldacre
McDonald Loan 180 1 80.6% N/A 5,000,000(2) Lockout/Def. 180 0
Newton Oldacre
McDonald Loan 179 1 80.6% N/A - Lockout/Def. 180 0
--- -- ----- --- ------------------- --- --
Total Newton 180 1 80.6% 1.24x 5,000,000 -- 180 0
Four Seasons Biltmore
Hotel Loan 120 0 69.6% 1.58x - Lockout/Def. 117 3
Ritz-Carlton Hotel
Loan 120 0 69.8% 1.61x - Lockout/Def. 117 3
Four Seasons Hotel,
Austin Loan 120 0 75.0% 1.57x - Lockout/Def. 117 3
Shilo Inns Loan 240 2 65.4% N/A - Lockout/YM (T-flat) 117 3
Shilo Inns Loan 240 1 65.4% N/A - Lockout/YM (T-flat) 117 3
--- -- ----- --- ------------------- --- --
Total Shilo 240 2 65.4% 1.52x -- 117 3
Farb Loan 120 2 79.9% 1.35x 1,940,000(3) Lockout/Def. 117 3
American Apartment
Communities I Loan 84 11 63.8% 1.73x - Lockout/Def. 60 24
American Apartment
Communities II Loan 120 5 64.6% 1.85x - Lockout/Def. 114 6
--- -- ----- --- ------------------- --- --
Total/Weighted
Average 132 3 64.8% 1.68x $6,940,000 116(4) 3
</TABLE>
<PAGE>
- --------------
(1) The first 2 years of the Tower Realty Trust loan are interest-only;
then, from years 3 to 7, the loan amortizes using a 28-year schedule.
(2) For description of Other Financing, see "Newton Oldacre McDonald Loan:
The Borrowers, The Property--Mezzanine Debt".
(3) For description of Other Financing, see "Farb Investments: The
Loans--Mezzanine Debt".
(4) The Total/Weighted Average calculation for the "Original
Lockout/Defeasance Period" only includes those loans for which a
lockout restriction applies.
S-68
<PAGE>
<TABLE>
<CAPTION>
ADJUSTMENT TO NET OPERATING INCOME
---------------------------------------------------
TENANT IMPROVEMENTS
-------------------------
BASE RENT PER
ROOM, UNIT OR AVG. LEASE RENEWAL NEW RENEWAL
SQUARE FOOT(1) TERM (YRS) PROBABILITY TENANT TENANT
------------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Copley Place Loan .............. Range $ 28.00-55.00 10.00 70.0% $ 7.00-30.00 $ 2.00-5.00
Wtd Ave. 34.37 10.00 70.0% 24.57 4.29
Brookfield Properties
Corporation.................... Range 13.50-27.00 10.00 60.0% 7.40-30.00 2.00-10.00
Wtd Ave. 22.77 10.00 60.0% 23.83 7.82
Tower Realty Loan .............. Range 21.00-37.00 5.00-10.00 65.0-70.0% 20.00-30.00 8.00-15.00
Wtd Ave. 29.80 7.75 67.7% 25.50 11.85
Franklin Mills Loan............. Range 4.40-50.00 10.00 70.0% N/A N/A
Wtd Ave. 15.78 10.00 70.0% N/A N/A
Newton Oldacre McDonald Loan ... Range 4.50-22.00 10.00 60.0% 7.00 2.00
Wtd Ave. 8.69 10.00 60.0% 7.00 2.00
Four Seasons Biltmore Hotel
Loan .......................... Average 242.33 N/A N/A N/A N/A
Ritz-Carlton Hotel Loan ........ Average 149.72 N/A N/A N/A N/A
Four Seasons Hotel, Austin
Loan........................... Average 166.05 N/A N/A N/A N/A
Shilo Inns Loan ................ Range 43.05-100.34 N/A N/A N/A N/A
Wtd Ave. 78.21 N/A N/A N/A N/A
Farb Loan ...................... Range 480-1,460 N/A N/A N/A N/A
Wtd Ave. 614 N/A N/A N/A N/A
American Apartment Communities
I Loan ........................ Range 450-925 N/A N/A N/A N/A
Wtd Ave. 661 N/A N/A N/A N/A
American Apartment Communities
II Loan ....................... Range 1,075-1,800 N/A N/A N/A N/A
Wtd Ave. 1,246 N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENT TO NET OPERATING INCOME
----------------------------------------------
LEASING COMMISSIONS
-------------------
NEW RENEWAL MANAGEMENT CAPITAL
TENANT TENANT FEES(2) RESERVES(3)
------ ------- ---------- -----------
<S> <C> <C> <C> <C>
Copley Place Loan .............. 5.0% 2.5% 3.00% $0.15
5.0% 2.5% 3.00% 0.15
Brookfield Properties
Corporation.................... 5.0% 2.5% 3.00-4.00% 0.20
5.0% 2.5% 3.35% 0.20
Tower Realty Loan .............. 5.0% 2.5% 1.50-3.00% 0.15
5.0% 2.5% 2.18% 0.15
Franklin Mills Loan............. N/A N/A 3.00-4.00% 0.25
N/A N/A 3.00% 0.25
Newton Oldacre McDonald Loan ... 5.0% 2.5% 4.00% 0.15
5.0% 2.5% 4.00% 0.12
Four Seasons Biltmore Hotel
Loan .......................... N/A N/A 4.00% 4.00%
Ritz-Carlton Hotel Loan ........ N/A N/A 4.00% 4.00%
Four Seasons Hotel, Austin
Loan........................... N/A N/A 3.00% 4.00%
Shilo Inns Loan ................ N/A N/A 5.00% 4.00%
N/A N/A N/A N/A
Farb Loan ...................... N/A N/A 5.00% 210/unit
N/A N/A 5.00% 210/unit
American Apartment Communities
I Loan ........................ N/A N/A 4.00% 250/unit
N/A N/A 4.00% 250/unit
American Apartment Communities
II Loan ....................... N/A N/A 4.00% 250/unit
N/A N/A 4.00% 250/unit
</TABLE>
- ------------
(1) Represents ADR for the Four Seasons Biltmore Hotel Loan, Four Seasons
Hotel, Austin Loan, and the Ritz-Carlton Hotel Loan and monthly rent per
unit for Farb Investments and American Apartment, Communities I & II.
(2) Represents percentage of Effective Gross Income. For the Four Seasons
Biltmore Hotel Loan and the Four Seasons Hotel, Austin Loan reflects
percentage of Room Revenue. Does not include 1% of Other Revenue Fee.
(3) Represents dollars per square foot or unit. For the Four Seasons Biltmore
Hotel Loan, Four Seasons Hotel, Austin Loan, and the Ritz-Carlton Hotel
Loan represents percentage of Gross Income.
S-69
<PAGE>
PROPERTY TYPE DISTRIBUTION BY CUT-OFF DATE BALANCE
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE CUT-OFF DATE
NUMBER OF PRINCIPAL PRINCIPAL WEIGHTED WEIGHTED
TYPE PROPERTIES BALANCE BALANCE APPRAISED VALUE AVERAGE LTV AVERAGE DSCR
- ---- ---------- ------- ------- --------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Office and Retail / Office 4 $263,663,051.97 31.1% $ 563,000,000 54.1% 1.99x
Retail 21 218,925,438.31 25.8% 325,005,000 68.7% 1.48x
Hotel 20 235,732,818.44 27.8% 341,825,000 69.1% 1.56x
Multi-family 14 130,161,620.57 15.3% 183,230,000 71.9% 1.56x
-- -------------- ---- ----------- ---- ----
Total/Weighted Average 59 $848,482,929.29 100.0% $1,413,060,000 64.8% 1.68x
</TABLE>
Office and Retail/
Office 31.1%
Hotel
27.8%
Retail
25.8%
Multifamily
15.3%
S-70
<PAGE>
STATE DISTRIBUTION BY CUT-OFF DATE BALANCE
<TABLE>
<CAPTION>
% OF
CUT-OFF CUT-OFF NUMBER WEIGHTED- WEIGHTED
DATE LOAN DATE LOAN OF APPRAISED AVERAGE AVERAGE
STATE BALANCE BALANCE PROPERTIES VALUE LTV DSCR
- ----- ------- ------- ---------- ----- --- ----
<S> <C> <C> <C> <C> <C> <C>
CA....................... $134,227,627 15.8% 16 $ 201,905,000 66.8% 1.67x
PA....................... 129,493,575 15.3% 2 214,000,000 60.5% 1.65x
TX....................... 109,931,452 13.0% 3 141,300,000 77.9% 1.44x
MA....................... 96,908,666 11.4% 1 315,000,000 30.8% 2.69x
NY....................... 67,000,000 7.9% 1 95,000,000 70.5% 1.86x
FL....................... 62,521,907 7.4% 5 83,035,000 75.5% 1.26x
MN....................... 59,754,386 7.0% 1 98,000,000 61.0% 1.50x
OR....................... 52,142,455 6.1% 7 77,750,000 67.1% 1.50x
MO....................... 41,850,000 4.9% 1 60,000,000 69.8% 1.61x
AL....................... 32,152,460 3.8% 7 39,120,000 82.2% 1.25x
MS....................... 13,635,978 1.6% 3 17,560,000 77.7% 1.23x
ID....................... 12,539,089 1.5% 3 19,350,000 64.8% 1.41x
TN....................... 10,798,633 1.3% 3 13,990,000 77.2% 1.22x
LA....................... 9,144,690 1.1% 1 10,900,000 83.9% 1.21x
WA....................... 7,087,156 0.8% 2 12,650,000 56.0% 1.86x
AZ....................... 5,709,026 0.7% 1 8,600,000 66.4% 1.48x
WY....................... 2,407,635 0.3% 1 3,500,000 68.8% 1.69x
KY....................... 1,178,196 0.1% 1 1,400,000 84.2% 1.21x
------------ ----- -- -------------- ---- ----
Total / Weighted
Average................. $848,482,929 100.0% 59 $1,413,060,000 64.8% 1.68x
</TABLE>
S-71
<PAGE>
COMMERCIAL MORTGAGE ACCEPTANCE CORP.
- -------------------------------------------------------------------------------
Anticipated Repayment Date/Amortization Schedule Time Line
Cut-Off Date Principal Balance (in $mm)
[Chart to Come]
(1) The Copley Place senior interest gets all principal from the $195 million
total loan calculated on a 30-year amortization schedule.
(2) The first 2 years of the Tower Realty Loan are IO, during years 3 through
7 the loan amortizes using a 28-year schedule.
<PAGE>
CHANGES IN MORTGAGE POOL CHARACTERISTICS
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for
scheduled principal payments due on the Mortgage Loans on or before the
Cut-off Date. Prior to the issuance of the Certificates, one or more Mortgage
Loans may be removed from the Mortgage Pool if the Depositor deems such
removal necessary or appropriate or if it is prepaid. Accordingly, the range
of Mortgage Rates and maturities, as well as the other characteristics of the
Mortgage Loans constituting the Mortgage Pool at the time the Certificates
are issued may vary from those described herein.
A Current Report on Form 8-K (the "Form 8-K") will be filed, together with
the Pooling and Servicing Agreement, with the Securities and Exchange
Commission within 15 days after the initial issuance of the Certificates. The
Form 8-K will be available to the Certificateholders promptly after its
filing. In the event that Mortgage Loans are removed from the Mortgage Pool
as set forth in the preceding paragraph, such removal or addition will be
noted in the Form 8-K.
REPRESENTATIONS AND WARRANTIES; REPURCHASE
In the Pooling and Servicing Agreement, the Depositor will assign to the
Trustee for the benefit of Certificateholders certain representations and
warranties made by the Mortgage Loan Seller in the Mortgage Loan Purchase
Agreement. In the Mortgage Loan Purchase Agreement, The Mortgage Loan Seller
will represent and warrant (with respect only to the Mortgage Loan Seller
Mortgage Loans and subject to certain specified exceptions, including,
without limitation, those exceptions described below), in favor of the
Depositor as of the Closing Date or such other date specified in the related
representation or warranty, among other things, substantially as set forth
below:
(1) The information set forth in the Mortgage Loan Schedule attached
thereto is true, complete and correct in all material respects.
(2) All payments required to be made under the terms of the Mortgage Loan
(inclusive of any applicable grace or cure period) have been made, and no
delinquency in excess of 30 days beyond the applicable Due Date has
occurred within the last twelve months.
(3) As of the date of its origination, each Mortgage Loan either complied
with, or was exempt from, applicable state or federal laws, regulations
and requirements pertaining to usury, and to the best of Mortgage Loan
Seller's knowledge, the related Originator complied in all material
respects with all other federal, state or local laws applicable to its
origination.
(4) Except in the case of the Franklin Mills Loan, the proceeds of such
Mortgage Loan have been fully disbursed, and there is no requirement for
future advances thereunder. In the case of the Franklin Mills Loans,
neither the Trust Fund nor any Certificateholder will be required to make
any future advances thereunder.
(5) Each related Mortgage Loan document is the legal, valid and binding
obligation of the related borrower or other party executing such Mortgage
Loan document, enforceable in accordance with its terms, there is no valid
offset, defense or counterclaim to any Mortgage Loan, and to the Mortgage
Loan Seller's knowledge, no default, breach, violation or event of
acceleration exists under the related Mortgage or the related Note.
(6) The Mortgage Loan Seller is the sole owner and holder of such
Mortgage Loan, has full right and authority to sell and assign such
Mortgage Loan, and the Mortgage Loan Seller's execution and delivery of an
assignment of the related Mortgage and endorsement and delivery of the
related Note validly conveys all of its right, title and interest in such
Mortgage Loan free and clear of encumbrances of any nature.
(7) The related Mortgage Loan documents create a valid first lien on the
related Mortgaged Property (not including personal property) and a valid
first priority assignment of all leases of the related Mortgaged Property,
subject only to (A) the lien of current real estate taxes and special
S-73
<PAGE>
assessments not yet delinquent or accruing interest or penalties, (B)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record, (C) senior leases and subleases pertaining to
such Mortgaged Property, and (D) other matters (excepting any mechanics'
and materialmen's liens or liens in the nature thereof) to which like
properties are commonly subject (all of the foregoing collectively the
"Permitted Encumbrances"). Uniform Commercial Code financing statements
have been filed or recorded (or sent for filing or recording) as necessary
to perfect the Mortgage Loan Seller's security interest in personal
property constituting a part of the Mortgaged Property and in which a
security interest can be perfected by the filing of such financing
statements.
(8) To the Mortgage Loan Seller's knowledge, the related Mortgage and the
related Note have not been materially impaired, waived, modified,
satisfied, canceled or subordinated, and neither the related Mortgaged
Property nor the related borrower has been released from such Mortgage in
any manner which would materially impair the security provided by such
Mortgage.
(9) The Mortgage Loan Seller has not, directly or indirectly, advanced
funds to, or, to the Mortgage Loan Seller's knowledge, received any
payment of any amount required under the related Note or the related
Mortgage from a person other than the related borrower.
(10) To the Mortgage Loan Seller's knowledge, there are no condemnation
proceedings pending or threatened with respect to any Mortgaged Property
which would materially and adversely affect the value of such Mortgaged
Property, and no Mortgaged Property has been materially damaged.
(11) The related Mortgage is insured by a title insurance policy or will
be insured pursuant to a pro forma or specimen policy or a "marked-up"
title insurance commitment issued in connection with the closing of such
Mortgage Loan (a "Title Policy") in an amount not less than the stated
principal amount of such Mortgage Loan (or, in the case of a Mortgage Loan
secured by more than one Mortgaged Property, in an amount not less than
the applicable allocated loan amount) to be a valid first lien on the
related Mortgaged Property (not including personal property or fixtures),
subject only to Permitted Encumbrances. Such Title Policy contains only
those exceptions for encroachments, boundary and other survey matters and
for easements not shown by the public records as are customarily accepted
by prudent commercial mortgage lenders in the related jurisdiction. No
material encroachments exist with respect to the related Mortgaged
Property. No claims have been made by the Mortgage Loan Seller under such
Title Policy, and to the Mortgage Loan Seller's knowledge, the coverage of
such Title Policy has not been materially impaired.
(12) Each Mortgaged Property is insured by a fire and extended perils
insurance policy, a business interruption or rental continuation insurance
policy, a comprehensive general liability policy and, if any material
improvement on such Mortgaged Property is located in a designated special
flood hazard area, a flood insurance policy.
(13) Based upon a survey, the Title Policy and other documents contained
in the related Mortgage File, at the time of origination of each Mortgage
Loan, the related borrower had sufficient rights with respect to amenities
and ingress and egress identified in an appraisal of the related Mortgaged
Property as being critical to the appraised value thereof, and adequate
utility services were available at such Mortgaged Property, none of which
is subject to revocation as a result of a foreclosure or a change in
ownership of an adjacent property.
(14) With respect to each Mortgage Loan secured in whole or in part by a
leasehold interest in the related Mortgaged Property, other than a
mortgage loan also secured by a fee interest in the same Mortgaged
Property:
(A) to the Mortgage Loan Seller's knowledge, the lease creating such
leasehold interest is in full force and effect, without any existing
defaults and unmodified in any material manner except pursuant to
written instruments contained in the Mortgage File, such lease or a
memorandum thereof has been recorded, and the effective term of such
lease extends not less than 10 years beyond the term of the related
Mortgage Loan;
S-74
<PAGE>
(B) the related borrower is permitted to mortgage and sublease its
leasehold interest, and except as may be indicated in the related
Title Policy, the related Mortgage is a first priority lien on such
leasehold interest;
(C) the mortgaged leasehold interest may be transferred in a
foreclosure of the related Mortgage or a conveyance in lieu thereof,
and thereafter may be transferred, upon notice to, but in the case of
a transfer to the Trustee, without the consent of, the related lessor
(or, if any such consent is required, either (1) it has been
previously obtained or (2) it is not to be unreasonably withheld)
provided that such lease has not been terminated and all amounts owed
thereunder have been paid;
(D) except in the case of the ground lease with respect to Tower 45
(as to which there can be no default), the related lessor has agreed,
in writing: (1) to provide the mortgagee with a notice of any default
by the related borrower under such lease, and a cure period equal to
the time provided to such lessee under such lease; and (2) that such
Ground Lease may not be modified or terminated without the mortgagee's
consent; and
(E) the related Mortgage Loan documents and such lease provide that
any insurance or condemnation proceeds with respect to a partial loss
or taking of the related Mortgaged Property will be applied to the
restoration of such Mortgaged Property or to the related Mortgage
Loan.
(15) With respect to each Mortgage Loan secured by both a leasehold and a
fee interest in all or a portion of the related Mortgaged Property, such
related fee interest is subordinate to the lien of the related Mortgage
and, except as approved by the related Originator or the Mortgage Loan
Seller, any right of the related fee owner to cure a default by the
borrower under the related Mortgage is limited to no more than a (A) 30
day period, after notice is given to such fee owner, to cure monetary
defaults, and (B) 60 day period, after such notice, to cure other defaults
or, alternatively, to commence proceedings to recover possession of such
Mortgaged Property plus a reasonable cure period after recovery of
possession if such proceedings are pursued in good faith and with due
diligence.
(16) The related Mortgaged Property is not collateral or security for the
payment or performance of any obligations owed to the Mortgage Loan Seller
other than one or more of the Mortgage Loans, and to the Mortgage Loan
Seller's knowledge, any obligations owed to any other person except for
security interests in personal property and fixtures.
(17) Each Mortgage Loan is a "qualified mortgage" for purposes of Section
860G of the Code.
(18) A Phase I Environmental Report and, if recommended by the Phase I
Environmental Report, a Phase II Environmental Report were obtained with
respect to the related Mortgaged Property, and, such Environmental
Report(s) did not indicate the existence of conditions which would
constitute a material violation of applicable environmental law or require
clean-up or other remedial action with respect to hazardous materials with
the exception of conditions which could be brought into compliance with
applicable environmental law or remediated by the taking of certain
actions for which a sufficient escrow of funds has been established, an
environmental insurance policy or an indemnity for costs has been obtained
or such compliance actions or remediation was completed prior to
origination of such Mortgage Loan. Other than with respect to any
conditions identified in such Environmental Report(s), the Mortgage Loan
Seller is without knowledge of any significant failure of the related
Mortgaged Property to comply with applicable environmental law or any
actual or threatened significant release of hazardous materials in respect
of such Mortgaged Property in violation of applicable environmental law.
(19) To the best of the Mortgage Loan Seller's knowledge, the related
Mortgaged Property complies, in all material respects, with all laws and
regulations pertaining to the zoning, use and occupancy thereof (excluding
applicable environmental laws which are addressed in (18) above) and all
applicable insurance requirements, except such non-compliance (A) which
does not materially
S-75
<PAGE>
and adversely affect the value or intended use of such Mortgaged Property,
(B) which was specifically included in the determination of such Mortgaged
Property's Appraised Value, or (C) for which a Reserve Account has been
established to pay the estimated costs to correct such non-compliance.
(20) The related Mortgage Loan documents provide for recourse against the
related borrower for damages sustained in connection with fraud,
intentional misrepresentations or misappropriation of tenant security
deposits or rent. The related Mortgage Loan documents contain an indemnity
from the related borrower for damages resulting from violations of
applicable environmental laws.
(21) The Reserve Account, if any, with respect to each Mortgage Loan
contains all amounts required by the terms of the Mortgage Loan documents
(inclusive of any applicable grace or cure period) to be on deposit
therein as of such date, and all such amounts are being transferred to the
Depositor as of such date.
(22) For each Mortgage that is a deed of trust or trust deed, a duly
qualified trustee either (A) has been designated or (B) may be substituted
for the currently designated trustee in accordance with applicable law.
(23) Such Mortgage Loan is a whole loan, and the related Mortgage Loan
documents do not provide for any (A) equity participation by the Mortgage
Loan Seller, (B) negative amortization (except from and after the
Anticipated Repayment Dates of the respective Mortgage Loans) or (C)
contingent interest based upon the cash flow of the related Mortgaged
Property. The Mortgage Loan Seller has no ownership interest in such
Mortgaged Property or the related borrower.
(24) Based upon applicable laws, rules and regulations, no tax,
governmental assessment or any installment thereof affecting such
Mortgaged Property (excluding any related personal property) due and owing
and which might give rise to a lien superior to the related Mortgage, has
become delinquent such that (A) such taxing authority may commence
proceedings to collect such tax, assessment or installment or (B) any
interest or penalties have commenced to accrue thereon.
(25) The related Note and Mortgage contain customary and enforceable
provisions adequate for the practical realization by the holder thereof of
its remedies against the related Mortgaged Property, including, as
applicable, judicial or non-judicial foreclosure.
(26) A tenant estoppel was obtained from all tenants whose leases covered
more than 10% of the net leasable area of the related Mortgaged Property,
and based upon such estoppel, no defaults with respect to any such lease
existed as of the date of such estoppel which could have a material
adverse effect on the value of the applicable Mortgaged Property. To the
Mortgage Loan Seller's knowledge, no default or any condition which, but
for the passage of time or the giving of notice, or both, would result in
such a default, exists with respect to such leases.
(27) The related Mortgage Loan documents contain: (A) a representation,
warranty or covenant that the related borrower will not use, cause or
permit to exist on the related Mortgaged Property any violation of
Environmental Law or (B) an indemnity with respect to any such violation
in favor of the mortgagee.
(28) The related Mortgaged Property has been inspected on behalf of the
related Originator or Mortgage Loan Seller within the last 12 months.
(29) The related Mortgage contains a provision for acceleration of the
Mortgage Loan if the related borrower encumbers the related Mortgaged
Property without the prior written consent of the mortgagee thereunder.
Each of such representations and warranties, to the extent related to the
enforceability of any document or as to offsets, defenses, counterclaims or
rights of rescission, is qualified to the extent that: (1) enforcement may be
limited (A) by bankruptcy, insolvency, reorganization or other similar laws
affecting the enforcement of creditors' rights generally, (B) by general
principles of equity (regardless of whether such enforcement is considered in
a proceeding in equity or at law) and (C) by any applicable anti-deficiency
law or statute; and (2) such document may contain certain provisions which
may be unenforceable in accordance with their terms, in whole or in part.
S-76
<PAGE>
The Pooling and Servicing Agreement will require that, the Master
Servicer, the Special Servicer or the Trustee notify the Mortgage Loan Seller
upon its becoming aware (i) of any breach of certain representations or
warranties made by the Mortgage Loan Seller in the Mortgage Loan Purchase
Agreement, or (ii) that any document required to be included in the Mortgage
File does not conform to the requirements of the Pooling and Servicing
Agreement, which in the case of any such defect or breach materially and
adversely affects the interests of the Certificateholders. The applicable
Mortgage Loan Purchase Agreement provides that, if such breach is not cured
within 90 days after notice of such breach from the Master Servicer, the
Special Servicer or the Trustee, The Mortgage Loan Seller will 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 and Trust Fund expenses allocable 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, including any expenses arising out of the enforcement
of the repurchase obligation (such price, the "Repurchase Price"), provided,
however, if such defect or breach cannot be cured within such 90 day period,
so long as the Mortgage Loan Seller has commenced and is diligently
proceeding with the cure of such breach, such 90 day period will be extended
for an additional 90 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 90 days. Without
limiting the generality of the provisions described above, if a Mortgage Loan
fails to constitute a "qualified mortgage" within the meaning of the REMIC
provisions of the Code by reason of the breach of a representation, warranty
or covenant or by reason of missing or defective documentation, then no
extension of the 90 day period in the preceding sentence will apply.
The obligations of the Mortgage Loan Seller to repurchase or cure
constitute the sole remedies available to holders of Certificates or the
Trustee for a breach of a representation or warranty with regard to a
Mortgage Loan by the Mortgage Loan Seller. Other than as specifically
described in the preceding paragraph, neither the Mortgage Loan Seller, the
Special Servicer, the Master Servicer nor the Depositor will be obligated to
purchase a Mortgage Loan if the Mortgage Loan Seller defaults on its
respective obligation to repurchase or cure, and no assurance can be given
that the Mortgage Loan Seller will fulfill its obligations. If such
obligations are not met, as to a Mortgage Loan that is not a "qualified
mortgage," REMIC I, REMIC II and REMIC III may be disqualified.
S-77
<PAGE>
COPLEY PLACE
LOAN INFORMATION
PRINCIPAL BALANCE: Original December 1, 1997
-------- ----------------
Class A Note: $ 97,500,000 $ 96,908,666
Total: $195,000,000 $194,408,666
Origination Date: July 30, 1997
Anticipated
Repayment
Date ("ARD"): N/A
Maturity Date: August 1, 2007
Class A Note: The Class A Note will receive principal payments
and will amortize based upon the full principal
balance of $195,000,000.
Total: August 1, 2007
Interest Rate:
Class A Note: 6.75%
Total: 7.44%
Amortization: 30 years
Event of Default: The Class B Note is subordinate to the Class A
Note with respect to the monies collected on the
underlying Loan. In the event that an Event of
Default has occurred and is continuing for a
period of two (2) months, and if the Servicer,
the Class A Note Holder, and the Class B Note
Holder are unable to reach agreement with
respect to an appropriate course of action, the
Class B Note Holder may elect to (i) require the
Servicer to commence forclosure, or (ii)
purchase the Class A Note Holder's Interest. If,
after five months, the Class B Note Holder has
taken no action on a loan which is in default,
the Servicer must commence foreclosure
proceedings.
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: PREPAYMENT OF THE MORTGAGE LOAN IS PERMITTED IN
WHOLE, BUT NOT IN PART, PROVIDED THAT (I) ALL
AMOUNTS DUE ON OR BEFORE THE PREPAYMENT DATE
HAVE BEEN PAID IN FULL, (II) A WRITTEN NOTICE OF
PREPAYMENT HAS BEEN DELIVERED TO THE CLASS A
NOTE HOLDER AND CLASS B NOTE HOLDER, (III) THE
HOLDER OF EACH NOTE HAS RECEIVED NO LESS THAN
FIVE BUSINESS DAYS' NOTICE OF THE ACTUAL DATE OF
PREPAYMENT, AND (IV) THE NOTE PREPAYMENT FEE OR
YIELD MAINTENANCE PLUS 50 BASIS POINTS HAS BEEN
PROVIDED BY THE BORROWER.
SERVICER: METROPOLITAN LIFE INSURANCE COMPANY WILL BE THE
SERVICER FOR BOTH THE CLASS A NOTE AND THE CLASS
B NOTE. PURSUANT TO THE COPLEY PLACE SERVICING
AGREEMENT, THE SERVICER HAS NO AUTHORITY TO
MODIFY THE TERMS OF THE COPLEY PLACE LOAN
WITHOUT THE PRIOR WRITTEN CONSENT OF THE CLASS A
NOTE HOLDER AND CLASS B NOTE HOLDER.
PROPERTY INFORMATION
PROPERTY TYPE: MIXED-USE RETAIL/OFFICE
WEIGHTED-AVERAGE OCCUPANCY: RETAIL 98.9%
OFFICE 96.2%
TOTAL 97.1%
YEAR BUILT: 1984
THE COLLATERAL: Copley Place
RETAIL/OFFICE MIX: Retail 368,921 square feet
Office 845,323 square feet
Total 1,214,244 square feet
PROPERTY
MANAGEMENT: Overseas Management, Inc.
1996 NET OPERATING INCOME: $25,370,123
UNDERWRITTEN
CASHFLOW: $21,882,091
APPRAISED VALUE: $315,000,000
APPRAISED BY: Landauer Real Estate Counselors
APPRAISAL DATE: June 30, 1997
LTV AS OF 12/1/97:
CLASS A NOTE: 30.8%
CLASS A AND B
NOTES: 61.7%
ANNUAL DEBT SERVICE:
CLASS A NOTE(1): 8,132,794
CLASS A AND B
NOTES: 16,265,588
DSC:
CLASS A NOTE: 2.69X
CLASS A AND B
NOTES: 1.34X
LOAN/SQ. FT. AS OF
12/1/97:
CLASS A NOTE: $79.81
CLASS A AND B
NOTES: 160.11
- --------------
(1) Represents 50% of amount due under Class A and Class B Notes.
S-78
<PAGE>
COPLEY PLACE LOAN: THE BORROWER; THE PROPERTY
The Loan. The "Copley Place Loan" has a principal balance as of the
Cut-Off Date of approximately $96,908,666 and is evidenced by a Class A
Promissory Note in the original principal amount of $97,500,000 (the "Copley
Class A Note") issued by Copley Place Associates, LLC, a Delaware limited
liability company (the "Copley Place Borrower"). The Copley Place Loan is
secured by a first priority mortgage lien (the "Copley Mortgage") issued by
the Copley Borrower encumbering a mixed-use development in Boston,
Massachusetts (the "Copley Property"). The Copley Mortgage also secures a
Class B Promissory Note in the original and current principal amount of
$97,500,000 issued by the Copley Borrower (the "Copley Class B Note" and,
together with the Copley Class A Note, the "Copley Notes"). Only the Copley
Class A Note will be an asset of the Trust Fund. The Copley Class B Note was
retained by MetLife (the "Class B Noteholder") and will not be deposited in
the Trust Fund. The principal balance under the Class A Note as of the
Cut-Off Date is approximately $96,908,666. The Copley Loan is secured by,
among other things, a Leasehold Mortgage, Security Agreement and Fixture
Financing Statement (the "Copley Mortgage") encumbering a shopping mall in
Boston, Massachusetts commonly known as Copley Place (also referred to herein
as the "Copley Property").
The Borrower. The borrower under the Copley Place Loan is Copley Place
Associates, LLC, a special-purpose Delaware limited liability company (the
"Copley Borrower"). The operating agreement of the Copley Borrower provides
that it is organized for the limited purpose and business of holding a ground
leasehold interest in the Copley Property, leasing, managing, developing,
operating, maintaining, financing and otherwise using, and as necessary
improving, the Copley Property and related interests. The Copley Borrower
owns no material assets other than the Copley Property and related interests.
The Property. Copley Place is a 3.7 million square foot, mixed-use
development opened in 1983 comprised of a 368,921 square foot regional
shopping center, 845,323 square feet in office space in four interconnected
towers and two garages with a total of 1,525 parking spaces. Also part of
Copley Place but not subject to the lien created by the mortgage are a 1,200
room Marriott Hotel, a 812 room Westin hotel and 104 cooperative residences.
The retail concourse encompasses 368,921 square feet. The primary retail
space is on two levels in a triangular floor plan with a central atrium. The
corners of the triangle are anchored by a 107,922 square foot Neiman Marcus
department store, an 11,745 square foot Tiffany & Co. Store and a 21,566
square foot Sony Theatre.
The retail concourse features approximately 100 shop tenants and was, as
of October 31, 1997, 98.9% leased. The mall has recently undergone an
extensive remerchandising effort in which a significant number of stores have
been remodeled, expanded, or added. New tenants include Mark Cross, Kenneth
Cole, Eileen Fisher, Williams-Sonoma Grande Cuisine, Louis Vuitton, Bally of
Switzerland, Bottega Veneta, Armani A/X, Pavo Real, Polo Ralph Lauren, Enzo
Angiolini and Mont Blanc. Other notable tenants include Bebe, Joan & David, J
Crew, Banana Republic and The Disney Store. Historical occupancy rates within
the retail concourse have averaged approximately 97.0% since 1992 and in 1996
mall sales averaged approximately $536 per square foot.
The primary entrances to the retail concourse are located adjacent to
pedestrian bridges on the east and west ends of the retail area at Dartmouth
Street and Huntington Street, respectively. One bridge is connected to the
Westin Hotel and the other is located at the Marriott Hotel and is connected
to the Prudential Center complex. Additional access points exist at the Back
Bay Station tunnel and Neiman Marcus. Vertical transportation within the
retail area is provided by a total of 16 escalators and 6 elevators
conveniently located throughout the concourse.
The retail concourse features walkways of rustic, brick-colored quarry
tile, storefronts encased with bay windows, and highlights of rosewood,
brass, marble, and tile which create an environment resembling that of
Newbury Street, Boston's well-known stretch of boutiques, art galleries and
cafes.
The office space at Copley Place consists of four, seven-story
interconnected office towers totaling 845,323 square feet. The towers are
approximately 96.2% occupied by tenants such as Bain & Company,
S-79
<PAGE>
AT&T, IBM and the Consulates of Germany and Canada. The single largest tenant
occupies 165,895 square feet, or 19.6%, of the total space. The lease
expiration schedule provided herein indicates that 14% of the leases expire
in 1999, which represents the maximum rollover within the next five years.
The offices are accessible from the Skylobby level which is located
directly above the second retail level of the project. The Skylobby can be
reached via elevators from the garage and retail levels or via escalators
from the retail levels. At the Skylobby, each of the four office towers has
its own distinct entrance. Floor plates for each of the towers range from
22,000 to 45,000 square feet and the floors of each tower are joined to
provide seven wrap-around floor plates of up to 125,000 square feet. The
configuration of the four buildings around the central atrium provides an
extensive line of ribbon windows on the exterior and, to a lesser extent,
interior of the building looking into the atrium and retail area. The design
of the office towers provides for staggered, landscaped balconies on each
level overlooking the central atrium.
Two garages serve Copley Place. The Central Garage provides parking for
approximately 830 cars on three levels of parking that extend below the
Copley Place development. The Dartmouth Street Parking Garage is a two-level
underground parking structure which provides parking for approximately 695
cars, including overnight parking for residents of the nearby Tent City
residential development.
Market Overview. The offices at Copley Place are situated in the Back Bay
office submarket within the 102.9 million square foot downtown Boston office
market. According to an appraisal performed by Landauer Real Estate
Counselors, the total metropolitan office market vacancy rate was, as of
July, 1997, 8.0% and the vacancy rate in the City of Boston was 6.8%. The
Back Bay submarket has a total stock of 9.5 million sq. ft. of space and a
vacancy rate of approximately 5.0%. The retail concourse is also located
within the Back Bay submarket of Boston, which contained approximately
1,200,000 square feet of gross leaseable area.
Location/Access. Copley Place is located at 100 Huntington Avenue and is
situated on 9.5 acres of air rights bounded by Dartmouth Street, Huntington
Avenue, Harcourt Street and the Southwest Corridor The Back Bay is located
west of the Financial District and is bounded by Arlington Street at the
Public Garden to the east, the Charles River to the north, Massachusetts
Avenue to the west, and Columbus Avenue to the south.
Copley Place may be accessed via different means of transportation.
Pedestrian bridges and tunnels connect Copley Place to the Back Bay Station,
the Prudential Center complex, the Hynes Convention Center, three major
hotels (Marriott, Westin and Sheraton) and three parking garages. Also, the
Massachusetts Turnpike (Interstate 90) has an exit and entrance directly at
Copley Place and rail transportation is accessible via tunnel to the Back Bay
Station.
Environmental Report. A Phase I environmental site assessment dated as of
July 9, 1997 was performed on the Copley Place Property. The Phase I
environmental site assessment did not reveal any environmental liability that
the Depositor believes would have a material adverse effect on the borrower's
business, assets or results of operations taken as a whole. Nevertheless,
there can be no assurance that all environmental conditions and risks were
identified in such environmental assessment.
Engineering Report. A Property Condition Report was completed on the
Copley Property on July 7, 1997 by a third party due diligence firm. The
Property Condition Report concluded that the Copley Property was in above
average condition and identified approximately $7.3 million in deferred
maintenance requirements.
Ground Leases. The Copley Borrower is the owner of ground leasehold
estates in all parcels comprising the Copley Property pursuant to the
following ground leases (collectively, the "Copley Ground Leases"): (i) a
ground lease pursuant to notice of direct lease dated as of July 30, 1997, by
and among the Massachusetts Turnpike Authority (the "MTA"), as lessor, Urban
Investment and Development Co. ("Urban"), as original lessee, and Copley
Borrower, as direct tenant, for certain property located in Boston,
Massachusetts which is more commonly known as the "central area premises",
and which lease extends through December 13, 2077 (the "Central Area Ground
Lease"); (ii) a lease dated as of March 7, 1986 by and between the Boston
Redevelopment Authority ("BRA"), as lessor and Urban,
S-80
<PAGE>
as tenant, for certain property located in Boston, Massachusetts which is
more commonly known as "the Dartmouth Street garage premises", as assigned by
Urban to Copley Borrower by assignment and assumption of ground lease dated
as of January 23, 1997 by and between Urban and Copley Borrower, and which
lease expires on March 6, 2095 ("Dartmouth Ground Lease") and (iii) the lease
by and between the Marriott Boston Urban Venture, as sublessor, and UIDC of
Massachusetts, Inc., as subtenant, for certain property located in Boston,
Massachusetts which is more commonly known as the "Marriott garage premises",
which lease was ultimately assigned to Copley Borrower by assignment dated
September 1, 1983 and which lease expires on December 13, 2077 (the "Marriott
Ground Lease").
The Copley Borrower has represented in the Copley Mortgage that: (i) each
respective lessor or sublessor under the Copley Ground Leases has consented
to the Copley Mortgage; (ii) the holder of the Copley Loan (the "mortgagee")
will have at all times the rights of a leasehold mortgagee as set forth in
the Copley Ground Leases; (iii) that mortgagee is permitted under the Copley
Ground Leases to cure tenant defaults thereunder; and (iv) the fee title and
the leasehold estates of the Copley Property will always be kept separate and
distinct, and has covenanted to give notice to the mortgagee of any default
under any Copley Ground Lease.
Property Management. The Property is managed by Overseas Management, Inc.
("Manager"), a Delaware corporation, pursuant to a management agreement dated
as of January 23, 1997 (the "Copley Management Agreement"). The Copley
Management Agreement provides for a management fee equal to the sum of (i) 6%
of gross revenues derived from the operation of the parking facilities of the
Property, (ii) 2-1/2% of all amounts paid by tenants under leases relating
primarily to office space, (iii) 3% of all amounts paid by tenants under all
other leases and (iv) 15% of all amounts collected under such other leases as
common area charges. The Copley Management Agreement extends for the maximum
term permitted by applicable law unless sooner terminated by either party
thereto.
The Copley Borrower is permitted to terminate the Manager (i) upon the
occurrence of any of the following events: (a) materially fraudulent conduct
by Manager resulting in material damage to the Copley Borrower; (b) willful
breach of fiduciary duty resulting in material damage to Copley Borrower; or
(c) the occurrence during any two calendar year period of three or more
material defaults not cured within 30 days after written notice thereof
(unless same are nonmonetary and cannot be cured within a 30 day period);
(ii) in the event Copley Borrower discontinues the operation of the Copley
Property as a result of damage to or destruction; (iii) in the event of a
sale of the Copley Property; and (iv) at such time as the interest of Manager
in Copley Borrower has been transferred to an entity which is not an
affiliate of Manager. The Copley Borrower is not permitted to terminate,
cancel or surrender the Copley Management Agreement, and is not permitted to
modify, alter or amend the Copley Management Agreement without mortgagee's
consent.
Pursuant to an agreement for purchase of consulting and other services
dated as of January 23, 1997 (the "Consulting Agreement"), Urban Retail
Properties Co. ("Consultant"), a Delaware corporation, provides consulting
services to Manager. The Consulting Agreement provides for a consulting fee
(payable from management fees paid to the Manager) equal to the sum of (i) 4
1/2% of gross revenues derived from the operation of the parking facilities
of the Property, (ii) 2 2/10% of all amounts paid by tenants under leases
relating primarily to office space, (iii) 2 7/10% of all amounts paid by
tenants under all other leases and (iv) 9% of all amounts collected under
such other leases as common area charges. The Consulting Agreement extends
for the maximum term permitted by applicable law unless sooner terminated by
either party thereto.
S-81
<PAGE>
Operating History. The following table presents information regarding the
financial performance of Copley Place:
COPLEY PLACE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
UNDERWRITTEN
1994 1995 1996 CASHFLOW
----------- ----------- ----------- ------------
Revenues.............. $42,705,690 $44,137,761 $49,111,810 $ 50,128,377
Expenses.............. 22,971,243 21,364,092 23,741,687 25,981,692
----------- ----------- ----------- ------------
Net Operating Income . $19,734,447 $22,773,669 $25,370,123 $ 24,146,685
Adjustments to NOI ... 2,264,594
------------
Net Cash Flow......... $ 21,882,091
============
Occupancy
Retail............... 96.7% 99.2% 96.8% 98.9%
Office............... 59.0% 76.8% 86.4% 96.2%
Weighted-Average .... 70.5% 83.6% 89.5% 97.1%
Sales per Square Foot
Anchor .............. $ 500 $ 507 $ 519 $ 563
Non -Anchor ......... $ 501 $ 516 $ 536 $ 581
12/1/97 Loan Balance . $ 96,908,666
Appraised Value....... $315,000,000
12/1/97 LTV........... 30.8%
Annual Debt Service
Class A Note ........ 8,132,794
Class A and B Notes 16,265,588
DSCR
Class A Note ........ 2.69x
Class and B Notes .. 1.34x
</TABLE>
S-82
<PAGE>
UNDERWRITTEN CASHFLOW -- COPLEY PLACE
UNDERWRITTEN
CASHFLOW
--------------
INCOME:
Base Rental Revenue ............... $33,158,297
Expense Recoveries................. 9,827,326
Tax Recoveries..................... --
Replacement Reserves............... --
Percentage Rents................... 734,806
Parking............................ 8,934,288
Misc Operating Income.............. 111,996
--------------
POTENTIAL GROSS INCOME:............. $52,766,713
==============
Less: Absorption & Turnover
Vacancy........................... --
Less: General Vacancy (1) ......... 2,638,336
Less: Bad Debt/Collection Loss .... --
--------------
TOTAL ECONOMIC VACANCY.............. 2,638,336
==============
EFFECTIVE GROSS INCOME.............. $50,128,377
EXPENSES:
Operating Expenses
Management Fees (2) ............... 1,503,851
Contract Services.................. --
Repairs & Maintenance.............. --
Payroll............................ --
Administrative..................... 1,802,466
Parking Expense.................... 5,301,093
Utilities.......................... 8,660,946
CAM................................ --
Replacement Reserves............... 165,948
Legal Fees......................... --
Misc. Expense...................... 888,336
Fixed Expenses
Insurance.......................... 271,920
Taxes.............................. 7,387,132
Ground Rent........................ --
TOTAL EXPENSES...................... 25,981,692
NET OPERATING INCOME................ $24,146,685
TI's & LC's.........................
Annual Debt Service
Class A Note ...................... 8,132,794
Class A and B Notes ............... 16,265,588
NET CASH FLOW....................... $21,882,091
Debt Service Coverage Ratio
Class A Note ...................... 2.69x
Class A and B Notes ............... 1.34x
Loan to Value ......................
Occupancy........................... 97.1%
- ------------
Analysis of Cash Flows Through October 31, 1997
(1) General Vacancy @ 5.0% of Potential Gross Income.
(2) Management Fee @ 3.0% of EGI.
S-83
<PAGE>
Major Tenant Summary. The following table presents the major tenants
occupying Copley Place:
COPLEY PLACE
<TABLE>
<CAPTION>
CREDIT RATING % OF
OF PARENT COMPANY TOTAL LEASE
TENANT PARENT COMPANY MOODY'S/S&P SQUARE FEET R.S.F. EXPIRATION
- ------------------------------- ---------------------- ----------------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C>
OFFICE
Bain & Co Deutsche Bank AG Aa1/AAA 165,895 19.6% 8/31/04
Massachusetts Registry of Motor Commonwealth of
Vehicles Massachusetts A1/NR 132,359 15.7% 7/31/01
Internal Revenue Service U.S. Government Aaa/AAA 64,099 7.6% 11/14/02
AT&T AT&T Corporation Aa3/AA- 62,840 7.4% Varies
Fleet Bank Fleet Financial Group A1/A- 45,300 5.4% 2/12/99
-------------
TOTAL -MAJOR OFFICE TENANTS 470,493 55.7%
TOTAL -OFFICE 845,323 100.0%
RETAIL
Neiman Marcus Harcourt General, Inc. Baa1/BBB+ 107,922 29.3% 1/31/14
Sony Theaters Sony Corporation Aa3/A 21,566 5.8% 1/31/00
Tiffany & Co. Tiffany & Co. NR/NR 11,745 3.2% 7/31/09
-------------
TOTAL -MAJOR RETAIL TENANTS 141,233 38.3%
TOTAL -RETAIL 368,921 100.0%
TOTAL -MAJOR TENANTS 611,726 50.4%
TOTAL -PROPERTY POOL 1,214,244 100.0%
</TABLE>
Lease Expiration Schedule. The following table presents certain
information regarding the future lease expiries at Copley Place:
<TABLE>
<CAPTION>
FOR THE YEARS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
ENDING OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002
- ------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
SQUARE FEET
EXPIRING
PROPERTY TYPE
Retail 15,079 21,636 39,905 16,861 9,905
Office 61,666 90,607 68,235 159,036 129,396
---------- ---------- ---------- ---------- ----------
Total SQFT Expiring 76,745 112,243 108,140 175,897 139,301
========== ========== ========== ========== ==========
Percent of Total 6.3% 9.2% 8.9% 14.5% 11.5%
RENT EXPIRING
PROPERTY TYPE
Retail 486,440 766,082 1,631,207 785,986 413,650
Office 1,217,143 1,873,747 1,549,552 4,238,661 3,296,208
---------- ---------- ---------- ---------- ----------
Total Rent Expiring $1,703,583 $2,639,828 $3,180,759 $5,024,648 $3,709,858
========== ========== ========== ========== ==========
Percent of Total 5.0% 7.8% 9.4% 14.9% 11.0%
Average $ per SQFT $ 22.20 $ 23.52 $ 29.41 $ 28.57 $ 26.63
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEARS YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
ENDING OCT-2003 OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND TOTAL
- ------ -------- -------- -------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
SQUARE FEET
EXPIRING
PROPERTY TYPE
Retail 13,334 34,278 45,036 17,957 11,356 143,574 368,921
Office 33,481 154,704 21,276 26,578 - 100,344 845,323
---------- ---------- ---------- ---------- -------- ---------- -----------
Total SQFT Expiring 46,815 188,982 66,312 44,535 11,356 243,918 1,214,244
========== ========== ========== ========== ======== ========== ===========
Percent of Total 3.9% 15.6% 5.5% 3.7% 0.1% 20.1% 100.0%
RENT EXPIRING
PROPERTY TYPE
Retail 708,067 1,688,202 2,415,126 1,006,658 580,173 2,903,557 13,385,149
Office 816,578 3,754,666 502,698 728,237 - 2,453,028 20,430,517
---------- ---------- ---------- ---------- -------- ---------- -----------
Total Rent Expiring $1,524,645 $5,442,868 $2,917,824 $1,734,895 $580,173 $5,356,585 $33,815,666
========== ========== ========== ========== ======== ========== ===========
Percent of Total 4.5% 16.1% 8.6% 5.1% 1.7% 15.8% 100.0%
Average $ per SQFT $ 32.57 $ 28.80 $ 44.00 $ 38.96 $ 51.09 $ 21.96 $ 27.85
</TABLE>
S-84
<PAGE>
COPLEY PLACE: THE LOAN
Security. The Copley Loan is a nonrecourse loan, secured by first mortgage
liens on the Copley Ground Leases and the ground leasehold estates in the
Copley Property created thereby, the improvements, appurtenances and
equipment, and certain other collateral relating thereto (including an
assignment of leases and rents, an assignment of certain agreements and the
funds in certain accounts) (collectively referred to herein as the "Loan
Documents"). Other than with respect to the Copley Class A Note, the obligee
under all agreements and instruments evidencing and securing the Copley Loan
is MetLife, as agent on behalf of the holders of the Copley Notes. The
mortgagee is a named insured under the title insurance policies which insure,
among other things, that the Copley Mortgage constitutes a valid and
enforceable first lien on the ground leasehold estates held by the Copley
Borrower in the Copley Property, subject to certain exceptions and exclusions
from coverage set forth therein. Such title insurance policies, together with
the Copley Class A Note and all of the Copley Class A Noteholder's right,
title and interest in and to the Copley Mortgage and the other documents and
agreements evidencing and securing the Copley Loan will be assigned to the
Trust Fund. The Copley Class B Note will not be deposited in the Trust Fund.
The Guarantor. Overseas Partners Capital Corp. ("OPCC"), a Delaware
corporation, and JMB Realty Corporation ("JMB"), a Delaware corporation,
(collectively, the "Copley Guarantor") are affiliates of the Copley Borrower
and have executed a Guaranty Agreement (the "Copley Guaranty") in favor of
the holder of the Copley Loan (the "mortgagee") whereby the Copley Guarantor
has guaranteed the punctual and complete performance and observance by the
Copley Borrower of any Recourse Obligations. "Recourse Obligations" are those
recourse obligations of the Copley Borrower under the Copley Mortgage to pay
losses of the mortgagee resulting from fraud or intentionally misapplied
condemnation awards, insurance proceeds and security deposits, and under an
environmental indemnity agreement pursuant to which the Copley Borrower is
required to indemnify and hold harmless the mortgagee from environmental
claims.
Payment Terms. The Copley Loan matures on August 1, 2007 (the "Copley
Maturity Date") and bears interest from July 30, 1997 (the "Advance Date")
through and including the Copley Maturity Date at a combined fixed rate per
annum equal to 7.44% (the "Copley Loan Interest Rate"). The interest on the
Copley Class A Note accrues from the Advance Date at a fixed rate of 6.75%
per annum (the "Class A Interest Rate"). The interest on the Copley Class B
Note accrues from the Advance Date as follows: (a) interest on the principal
amount evidenced by the Copley Class B Note at a fixed rate per annum of
7.36% (the "Class B Interest Rate"); plus (b) interest at a rate of .08% per
annum (the "Class B Strip Interest") on the principal sum evidenced by the
Copley Class B Note; plus (c) interest at a rate of .08% per annum (the
"Class A-1 Strip Interest Rate") on the outstanding principal of the Copley
Class A Note (the "Class A Strip Interest"); plus (d) interest at a rate of
.61% per annum (the "Class A-2 Strip Interest Rate") on the outstanding
principal of the Copley Class A Note (the "Class A-2 Strip Interest").
Interest on the Copley Loan is calculated on the basis of a 360-day year of
twelve 30-day months.
The payment date for the Copley Loan is the first business day of each
month (each, a "Payment Date"), subject to a seven day grace period (plus
notice thereof not more often than once every calendar year), for the payment
of principal or interest. Commencing on the Payment Date on September 1, 1997
and continuing through and including the Payment Date on July 1, 2007, the
Copley Loan requires equal monthly payments of principal and interest (the
"Copley Monthly Debt Service Payments") of $1,355,465.67, based on an
amortization period of 30 years. The Copley Notes require that the Copley
Monthly Debt Service Payments be applied to the principal and interest on the
Copley Class A Note, minus the amount of scheduled interest payments due on
the Copley Class B Note, until the principal of the Copley Class A Note and
all accrued interest thereon has been paid in full. On the Maturity Date,
unless sooner paid in full, final payment of the unpaid principal balance of
the Copley Notes, together with all remaining accrued and unpaid interest
thereon, is required.
If an Event of Default (as defined below) shall have occurred and be
continuing, all amounts tendered by the Copley Borrower or otherwise
available for payment of the Copley Loan, will be applied in the following
order of priority: (a) to accrued and unpaid Class A-1 Strip Interest under
the Copley
S-85
<PAGE>
Class B Note and to accrued and unpaid Class B Strip Interest under the
Copley Class B Note; (b) to accrued and unpaid interest on the Copley Class A
Note at the Class A Interest Rate; (c) to the principal of the Copley Class A
Note until such principal has been paid in full; (d) to accrued and unpaid
interest on the Copley Class B Note at the Class B Interest Rate and to
accrued and unpaid Class A-2 Strip Interest under the Copley Class B Note;
(e) to the principal of the Copley Class B Note until such principal has been
paid in full; (f) to any Note Prepayment Fee (as defined below) or Default
Prepayment Fee (as defined below) on the Copley Class A Note and the Copley
Class B Note, in that order; (g) to any default interest on the Copley Class
A Note and the Copley Class B Note, in that order; (h) to late charges; and
(i) to any other amounts payable under the Copley Mortgage or any other
documents which evidence the Copley Loan.
If the Copley Borrower defaults in the payment of any monthly installment
of principal or interest for seven days after a Payment Date, it is required
to pay a late payment charge in an amount equal to 4% of the amount of the
installment not paid. Upon the occurrence of any Event of Default (as defined
below), the entire unpaid principal amount of the Copley Loan and any other
amounts payable, including interest, will bear interest at a default rate
equal to the lesser of (a) the maximum rate permitted by applicable law and
(b) the Copley Loan Interest Rate plus 4% (the "Copley Default Rate").
Event of Default. The occurrence of any of the following constitutes an
Event of Default under the Copley Mortgage ("Event of Default"): (a) failure
to make any payment of interest or principal on the Copley Mortgage Note when
due, subject to a grace period of seven days with notice given once during
any calendar year (a "Payment Default"), or failure to pay the principal
balance of the Copley Mortgage Note when due (a "Maturity Default"); (b)
failure to comply with the Copley Mortgage covenants regarding transfers, the
accuracy of ground lease representations and the requirement that the Copley
Borrower remain a single purpose entity; (c) the occurrence of certain
bankruptcy events; (d) furnishing of information pursuant to the terms of the
Copley Loan Documents which is materially false or misleading, which default
is not cured within 30 days after notice from the mortgagee; (e) impairment
or the threat of impairment to title to the Copley Property, which default is
not cured within 30 days after notice from the mortgagee; (f) a breach of the
Copley Management Agreement not cured within applicable cure periods, or an
assignment or termination of the Management Agreement without prior written
consent of the mortgagee; (g) a default in the provisions of the Copley
Guaranty; and (h) any other default in the performance or payment, or breach,
of any material covenant, warranty, representation or agreement set forth in
the documents which evidence the Copley Loan, with such default continuing
for 30 business days, and any applicable extension period, after mortgagee
delivers written notice thereof to the Copley Borrower.
Prepayment. Voluntary prepayment is prohibited under the Copley Loan
subject to limited exceptions for the changing of laws currently in force for
the taxation of mortgages, and for instances of casualty and condemnation
(the "Limited Exceptions"). Such Limited Exceptions shall not be considered a
prepayment event under the Copley Class A Note and shall not require payment
of the Copley Class A Note Prepayment Fee or the Default Prepayment Fee (both
as hereinafter defined). In the event any partial prepayment of the Copley
Loan is required in connection with the Limited Exceptions, any principal
amount prepaid shall, if no Event of Default has occurred and be continuing,
be applied first to the payment of any Class A-1 Strip Interest and Class B
Strip Interest payable under the Copley Class B Note through the next Payment
Date, pro rata in accordance with the amounts of such interest that is
payable, next to the payment of interest due under the Copley Class A Note
through the next Payment Date and next to the payment of the principal amount
outstanding under the Class A Note, prior to payment of interest and
principal due on the Class B Note. The Copley Borrower has the right to
prepay the entire principal sum evidenced by the Copley Place Notes, together
with all accrued interest thereon and all other sums due and payable provided
that: (i) all monthly installment payments due on or before the date of
prepayment have been paid in full; (ii) the Class A Noteholder and the Class
B Noteholder have received a written notice of prepayment which shall specify
an estimated date of prepayment no less than 60 days subsequent to such
holder's receipt of such notice; (iii) the holder of each of the Copley Notes
has received 10 business days' notice of the actual date of prepayment; and
(iv) the Note Prepayment Fee (as defined herein) is paid by the Borrower to
the holder of the Copley Class A Note and
S-86
<PAGE>
the holder of the Copley Class B Note on the date of prepayment. The "Note
Prepayment Fee" means an amount equal to the difference between (a) the
present value of all remaining payments of principal and interest including
without limitation, the outstanding principal due on the Copley Maturity
Date, discounted at a rate which, when adjusted for a monthly payment
interval, equals the Enhanced Treasury Rate (as defined herein) and (b) the
amount of the principal being prepaid. In no event shall the Note Prepayment
Fee be less than zero dollars. The "Enhanced Treasury Rate" means the bond
equivalent yield on securities issued by the United States Treasury having a
maturity equal to the remaining term on the Loan as of the date on which
prepayment is made, plus 50 basis points.
Any other prepayment of all or a portion of the principal amount of the
Loan constitutes a prohibited prepayment. In the event (i) of an occurrence
of an event of default or (ii) the acceleration of the Copley Maturity Date,
any payment on the outstanding balance of the Loan by the Borrower which
would satisfy all sums due under the Copley Loan made at any time prior to,
during, or after foreclosure of the Mortgage, is deemed an evasion of the
payment terms and is deemed a prohibited prepayment and will include a
"Default Prepayment Fee" which is equal to the Note Prepayment Fee.
Loan Servicing and Escrow Accounts. The Copley Loan is subject to
servicing arrangements that differ in some respects from the servicing
arrangements for the other Mortgage Loans. The Copley Loan will be
sub-serviced by MetLife (in such capacity, the "Copley Sub-Servicer")
pursuant to a servicing agreement dated as of July 31, 1997 by and among the
Class A Noteholder and MetLife, as both the Class B Noteholder and as Copley
Sub-Servicer (the "Copley Servicing Agreement"). Such servicing arrangements
are described herein under "THE POOLING AND SERVICING AGREEMENT--Servicing of
the Mortgage Loans; Collection of Payments".
As compensation for its services under the Copley Servicing Agreement, the
Copley Sub-Servicer is entitled to (i) a monthly sub-servicing fee equal to
0.08% of the principal amount of the Copley Loan paid in monthly
installments, together with any late fees or assumption fees collected by it
in the performance of its duties under the Copley Servicing Agreement.
Escrow Deposits. Pursuant to the terms of the Copley Mortgage, the Copley
Borrower is required to pay to the mortgagee on the Payment Date an amount
equal to one-twelfth of the estimated annual payments of insurance premiums,
taxes, assessments, water and sewer charges, vault and other license or
permit fees, levies, fines, penalties, interest, impositions and other
similar claims of any kind whatsoever which may be assessed, levied,
confirmed, imposed upon or arise out of or become due and payable out of, or
become a lien on or against the Copley Property (collectively,
"Impositions"), and other property-related charges to enable the mortgagee to
pay same at least 30 days before the same become due and payable. The Copley
Borrower is further required to pay upon demand by the mortgagee any
additional sums necessary to pay such charges. Such funds, pursuant to the
terms of the Copley Servicing Agreement, are to be segregated and held in the
form of a time deposit or demand account, which may be interest bearing, in
the name of the mortgagee for the benefit of the Copley Borrower. In the
event that the Copley Borrower does not pay such funds, the mortgagee may
make the payments on its behalf and is entitled to reimbursement by the
Copley Borrower.
Pursuant to the Copley Servicing Agreement and the Pooling and Servicing
Agreement, the escrow deposits will be held in an Escrow Account in the name
of the Copley Sub-Servicer, in trust for the Trust Fund, as the Class A
Noteholder, the Class B Noteholder and the Copley Borrower, such Escrow
Account to be held by the Trustee.
Transfer of Properties and Interest in Borrower; Encumbrances; Other
Debt. The Copley Borrower is generally prohibited from transferring or
encumbering the Copley Property without the prior written consent of the
mortgagee. Notwithstanding the foregoing, the mortgagee's consent is not
required for: (i) a transfer by JMB, OPCC and/or Urban of all or any portion
of their membership interests in the Copley Borrower among each other or to
an affiliate, or (ii) a conversion of JMB, OPCC or Urban to another type of
entity reflecting a mere change in legal form. With the mortgagee's consent,
the Copley Borrower has a one-time right to transfer the Copley Property to a
third party provided: (a) there is no Event of Default then continuing; (b)
the mortgagee gives its written approval of the proposed third party
transferee; (c) the proposed transferee makes representations that it is not
an employee benefits plan
S-87
<PAGE>
under ERISA, that no partner, member or stockholder of such transferee is or
will be an officer or director of the mortgagee, and that it is not a foreign
person within the meaning of the Internal Revenue Code; (d) in the reasonable
opinion of mortgagee, the net annual income derived from the Copley Property
shall be no less than 1.6 times the annual debt service of the Copley Loan;
(e) the loan-to-value ratio of the Copley Property at the time of the
transfer shall not be greater than 65%; (f) the Copley Borrower will pay a
fee ("Transfer Fee") equal to 0.5% of the outstanding balance of the Copley
Notes at the time of the transfer, plus a processing fee in the amount of
$10,000; (g) the proposed transferee will expressly assume the borrower's
obligations under the Copley Loan Documents; (h) the creditworthiness of the
proposed transferee must be reasonably acceptable to the mortgagee; (i) the
proposed transferee must be experienced in the ownership, management and
leasing of properties similar to the Copley Property; (j) the Copley Borrower
or proposed transferee must pay all of mortgagee's reasonable expenses in
connection with the transfer; (k) the mortgagee shall have reasonably
approved substitute guarantors who will assume all obligations under the
Copley Guaranty; (l) the proposed transferee must be an entity which meets
all the securitization requirements of S&P, Duff and Phelps Credit Rating
Co., Moody's or Fitch Investor Services, LP; (m) such transfer will not cause
a reduction, withdrawal or revocation of the then rating of the Offered
Certificates; (n) the Copley Borrower shall have obtained any approvals to
the transfer required under the Copley Ground Leases; (o) all necessary
deferred maintenance on the Copley Property shall have been completed or
reserved against to the reasonable satisfaction of the mortgagee; (p) there
shall be no outstanding deferred amounts payable to the managers under the
terms of the Copley Management Agreements which are not paid in connection
with such transfer; and (q) the proposed transferee, its affiliates and
related entities are free from any bankruptcy or criminal proceedings and
have not been a litigant in any suit brought against the mortgagee.
Insurance. The Copley Borrower is required to maintain for the Copley
Property (a) insurance against all perils included within the classification
"All Risks of Physical Loss" with extended coverage in an amount not less
than the full insurable value of the improvements and equipment; (b) business
interruption and/or loss of "business income" insurance to cover the loss of
at least 12 months income; (c) flood insurance meeting the requirements of
the Federal Insurance Administration; (d) broad-form boiler and machinery
insurance and insurance against loss of occupancy or use arising from any
related breakdown in an amount equal to the full replacement cost of all
equipment installed at the improvements; (e) upon the request of the
mortgagee, during any period of repair or restoration, builder's "all risk"
insurance in an amount not less than the full insurable value of the Copley
Property; (f) comprehensive general liability insurance maintained on an
"occurrence" basis with a combined single limit of not less than $25,000,000,
subject to change at the request of mortgagee; (g) statutory workers'
compensation insurance and employer's liability insurance with a limit of at
least $1,000,000; and (h) at the mortgagee's reasonable request, such other
insurance against loss or damage of the kind customarily insured against and
in such amounts as are generally required by institutional lenders for
comparable properties.
Any such insurance shall be issued by companies, and be in form, amount
and content, and have an expiration date, approved by mortgagee. All
insurance policies are required to provide that all proceeds (except with
respect to proceeds of workers' compensation insurance) be payable to the
mortgagee except as described below under "--Casualty and Condemnation." The
Copley Mortgage requires the Copley Borrower to obtain the insurance
described above from insurance carriers having a general policy rating of A
or better and a financial class of X or better by A.M. Best Company, Inc. and
a claims paying ability of BBB or better by S&P.
Condemnation and Casualty. The Copley Borrower is required to notify the
mortgagee in writing promptly upon obtaining knowledge of the institution of
any condemnation proceedings, or the occurrence of any damage or destruction
to all or any part of the Copley Property. Provided that (a) an Event of
Default does not currently exist and (b) the mortgagee has determined that
(i) its security has not been materially impaired, and (ii) the repair,
restoration and rebuilding of any portion of the Copley Property that has
been partially damaged or destroyed can be accomplished, in full compliance
with certain requirements, to the same condition, character and general
utility, and to at least equal in value,
S-88
<PAGE>
as it existed prior to the damage or destruction, then the Copley Borrower
will commence an diligently pursue to complete the restoration. The mortgagee
will hold and disburse the insurance proceeds less (x) reasonable fees and
expenses, and (y) the proceeds of the business interruption insurance.
Prior to the commencement of any work or services in connection with the
restoration of the Copley Property (the "Work"), the Copley Borrower must
deliver to the mortgagee: (i) complete plans and specifications for the Work,
with respect to which the Copley Borrower shall have received all the
required approvals of governmental authorities, which are approved by an
architect satisfactory to the mortgagee and accompanied by the architect's
signed estimate of the total cost of the Work; (ii) an amount of money which,
as reasonably determined by the mortgagee, when added to the insurance
proceeds will cover the entire cost of the restoration; (iii) copies of all
permits and approvals required by law; (iv) a satisfactory construction
contract executed by the Copley Borrower and a contractor reasonably
acceptable to the mortgagee; and (v) if the Work is in excess of $2,000,000,
a surety bond or guarantee of payment, reasonably satisfactory to the
mortgagee, signed by the surety or guarantor in an amount not less that the
architect's estimated cost. Throughout the Work period, so long as no Event
of Default exists, the mortgagee will disburse to the Copley Borrower from
time to time insurance proceeds to pay Work costs provided: (a) the architect
is in charge of the Work; (b) the Copley Borrower requested payment in
writing giving 10 days prior notice, an architect's certificate stating that
all completed Work was done in accordance with the approved plans and
specifications, evidence that there are no mechanics liens, and evidence that
the balance of the restoration funds will be sufficient to pay for the
balance of the Work; (c) no lease affecting more than 10% of the Copley
Property shall have been canceled or cancellable due to the casualty, or the
mortgagee, in its reasonable opinion, determines that the net income of the
Copley Property shall be no less than 1.0 times the annual debt service on
the Copley Loan; and (d) any request for payment is accompanied by
certification that occupancy of the improvements is legal. If within 90 days
after the occurrence of the damage the Copley Borrower fails to submit and
receive the mortgagee's approval of plans and specifications, or if within 30
days after receiving such approval the Copley Borrower fails to commence and
diligently continue the Work, or if the Copley Borrower becomes delinquent in
payment to mechanics or materialmen, then after 10 days' written notice of
such failure, the mortgagee may apply the restoration funds to reduce the
secured indebtedness as it may determine and in its sole discretion, the
mortgagee may declare the Copley Loan immediately due and payable.
In the event that the above conditions for restoration have not been met,
the mortgagee may apply the insurance proceeds to the reduction of the debt
under the Copley Loan and may declare the entire Copley Loan immediately due
and payable and the remaining proceeds, if any, will be paid to the Copley
Borrower.
Financial Reporting. The Copley Borrower is required to furnish to the
mortgagee: (a) annually within 120 days after the end of each calendar year,
a copy of its year-end financial statement audited by an independent
certified public accountant reasonably acceptable to the mortgagee (with a
copy to the Rating Agencies); (b) annually within 180 days after the end of
each calendar year, a copy of the year-end financial statement of JMB audited
by an independent certified public accountant reasonably acceptable to the
mortgagee; (c) annually within 120 days after the end of each calendar year,
an unaudited copy of the year-end financial statement of OPCC prepared by an
independent certified public accountant reasonably acceptable to the
mortgagee; (d) quarterly within 45 days of each calendar quarter (except the
fourth quarter of any calendar year), quarterly unaudited financial
statements (with a copy to the Rating Agencies); (e) a complete rent roll, as
requested by mortgagee; and (f) as soon as practicable, such further
information regarding the Copley Property as the mortgagee or the Rating
Agencies may reasonably request in writing.
S-89
<PAGE>
DAIN BOSWORTH PLAZA / GAVIIDAE COMMON PHASES I & II
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$60,000,000 $59,754,386
ORIGINATION DATE: MAY 13, 1997
ANTICIPATED
REPAYMENT
DATE ("ARD"): JUNE 1, 2007
MATURITY DATE: JUNE 1, 2027
INTEREST RATE: 8.00%
AMORTIZATION: 30 YEARS
HYPERAMORTIZATION: SUBSEQUENT TO JUNE 1, 2007, THE INTEREST RATE
WILL INCREASE TO THE GREATER OF 13.00% OR 500
BASIS POINTS PLUS THE INTERPOLATED UST RATE WITH
A TERM APPROXIMATING THE PERIOD FROM THE ARD TO
THE MATURITY DATE (THE "REVISED INTEREST RATE").
ADDITIONALLY, ALL EXCESS CASH FLOW WILL BE
CAPTURED UNDER THE TERMS OF THE CASH COLLATERAL
AGREEMENT AND APPLIED TO THE OUTSTANDING
PRINCIPAL BALANCE OF THE NOTE. INTEREST DUE
UNDER THE REVISED INTEREST RATE ABOVE THAT WHICH
IS DUE UNDER THE INITIAL INTEREST RATE WILL BE
PAYABLE SUBSEQUENT TO THE PAYMENT OF PRINCIPAL.
ANY INTEREST DUE UNDER THE NOTE BUT NOT PAID
WILL BE ACCRUED.
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: PREPAYMENT IS NOT PERMITTED UNTIL 180 DAYS PRIOR
TO THE ARD OF JUNE 1, 2007 BEYOND WHICH THE
PREPAYMENT IN FULL WITHOUT PENALTY IS PERMITTED.
DEFEASANCE WILL BE PERMITTED THE EARLIER OF FOUR
YEARS FROM THE DATE OF CLOSING AND TWO YEARS
FROM THE DATE ON WHICH THE MORTGAGE LOAN WAS
DEPOSITED INTO A REMIC.
THE BORROWERS:
THE BORROWING ENTITY, BROOKFIELD DB INC., AS
WELL AS THE GENERAL PARTNER OF THE BORROWER IS
ORGANIZED AS A SPECIAL-PURPOSE,
BANKRUPTCY-REMOTE ENTITY.
MASTER LEASE: AS ADDITIONAL COLLATERAL FOR THE MORTGAGE LOAN,
BROOKFIELD ARC INC. HAS ENTERED INTO A MASTER
LEASE OF APPROXIMATELY 20,000 SQUARE FEET OF
RETAIL SPACE IN GAVIIDAE COMMON PHASE II. THE
MASTER LEASE IS GUARANTEED BY THE EDPER GROUP
LIMITED AND WILL REMAIN IN EFFECT UNTIL THE
EARLIER OF (I) MAY 1, 2007 OR (II) SUCH TIME AS
DAIN BOSWORTH PLAZA AND GAVIIDAE COMMON PHASES I
AND II ACHIEVE A DEBT SERVICE COVERAGE RATIO OF
1.50X WITH RESPECT TO THE PRIOR SIX MONTHS.
PLEDGE OF GAVIIDAE
COMMON PHASE I: FIRST LIEN INTEREST IN GAVIIDAE COMMON PHASE I
HAS BEEN PLEDGED AS ADDITIONAL COLLATERAL FOR
THE MORTGAGE LOAN UNTIL SUCH TIME THAT DAIN
BOSWORTH PLAZA AND GAVIIDAE COMMON PHASE II
ACHIEVE A DEBT SERVICE COVERAGE RATIO OF 1.50X
WITH RESPECT TO THE PRIOR SIX MONTHS.
CAPITAL AND TI
RESERVE: COMMENCING ONE YEAR PRIOR TO THE EXPIRATION OF
ANY MATERIAL LEASE, THE BORROWER SHALL ESCROW
MONTHLY (1)/(12( THE PRODUCT OF (I) $35/SQ. FT.
FOR ANY MATERIAL LEASE WHICH IS AN OFFICE LEASE
OR $15/SQ. FT. FOR ANY LARGE LEASE WHICH IS A
RETAIL LEASE AND (II) THE SQUARE FOOTAGE OF THE
APPLICABLE LEASE. A MATERIAL LEASE IS DEFINED AS
A LEASE IN EXCESS OF 20,000 SQUARE FEET FOR
SPACE WITHIN DAIN BOSWORTH PLAZA AND 10,000
SQUARE FEET FOR SPACE WITHIN GAVIIDAE COMMON
PHASE II. THE RESERVE IS EFFECTIVE ONLY AFTER
THE RELEASE OF THE GAVIIDAE I PLEDGE AND UNTIL A
FULLY EXECUTED LEASE IS DELIVERED FOR THE
APPLICABLE SPACE.
PROPERTY INFORMATION
PROPERTY TYPE: MIXED-USE OFFICE/RETAIL
OCCUPANCY: DAIN BOSWORTH/GAVIIDAE PHASE II 95.3%
GAVIIDAE PHASE I 97.2%
WEIGHTED AVERAGE TOTAL 95.6%
YEAR BUILT: DAIN BOSWORTH PLAZA/ GAVIIDAE PHASE II 1991
GAVIIDAE PHASE I 1989
THE COLLATERAL:(1) DAIN BOSWORTH PLAZA AND GAVIIDAE COMMON PHASE
II. GAVIIDAE COMMON PHASE I WILL PROVIDE
ADDITIONAL COLLATERAL UNTIL RELEASE REQUIREMENTS
ARE SATISFIED.
RETAIL/OFFICE MIX: DAIN BOSWORTH PLAZA/GAVIIDAE PHASE II
RETAIL 188,864 SQ. FT.
OFFICE 592,953 SQ. FT.
GAVIIDAE PHASE I
RETAIL 136,142 SQ. FT.
PROPERTY MANAGEMENT: BROOKFIELD MANAGEMENT SERVICES, LLC
1996 NET OPERATING
INCOME: DAIN BOSWORTH/GAVIIDAE PHASE II $4,628,483
GAVIIDAE PHASE I $693,564
TOTAL $5,322,047
UNDERWRITTEN
CASHFLOW: DAIN BOSWORTH/GAVIIDAE PHASE II $6,908,912
GAVIIDAE PHASE I $1,012,636
TOTAL $7,921,547
APPRAISED VALUE: DAIN BOSWORTH/GAVIIDAE PHASE II $86,000,000
GAVIIDAE PHASE I $12,000,000
TOTAL $98,000,000
APPRAISED BY: LUNZ MASSOPUST REID DECASTER & LAMMERS INC.
APPRAISAL DATE: MARCH 1, 1997
LTV AS OF 12/1/97: 60.9%
ANNUAL DEBT SERVICE: 5,283,105
DSC: 1.50X
LOAN/SQ. FT. AS OF 12/1/97: $65.09 / SQ. FT.
- --------------
(1) Gaviidae Common Phase I will be released upon the achievement of certain
debt service coverage tests as described in the Loan Information above.
S-90
<PAGE>
BROOKFIELD LOAN: THE BORROWER; THE PROPERTY
The Loan. The Loan (the "Brookfield Loan") was originated by Midland Loan
Services, L.P., a Missouri limited partnership ("Midland"), and acquired
simultaneously therewith by Merrill Lynch Mortgage Capital, Inc. ("MLMC") on
May 13, 1997. The Brookfield Loan had a principal balance at origination of
Sixty Million Dollars ($60,000,000) and has a principal balance as of the
cut-off date of $59,754,386. The Brookfield Loan is evidenced by an Amended
and Restated Mortgage Note in the original principal amount of Sixty Million
Dollars ($60,000,000) (the "Brookfield Note") which is secured by an Amended
and Restated Mortgage, Security Agreement, Financing Statement, Fixture
Filing and Assignment of Leases, Rents and Security Deposits (the "Brookfield
Mortgage") encumbering the property commonly known as Dain Bosworth Plaza and
Gaviidae Common Phase II, located in Minneapolis, Minnesota, (the "Brookfield
Property").
The Borrower. The borrower under the Brookfield Loan is Brookfield DB
Inc., a special-purpose Minnesota corporation (the "Brookfield Borrower").
The articles of incorporation of the Brookfield Borrower provide that it is
organized for the sole purpose of owning the ground subleasehold estate in
the Brookfield Property pursuant to the ground sublease with the Minneapolis
Community Development Agency, a Minnesota public body corporate and politic,
as landlord (the "MCDA"), dated as of December 19, 1991, as well as leasing,
managing, operating and mortgaging the same, and carrying on all activities
incidental or related thereto (see "--Ground Sublease").
The Property. The Brookfield Property consists of Dain Bosworth Plaza
("Dain") and Gaviidae Common Phase II ("Gaviidae II") (collectively, the
"Brookfield Property"), which is a mixed-use office and retail development
located in the downtown core, or the financial district, of Minneapolis,
Minnesota. The property consists of a 40-story, 592,953 square foot Class A
office tower, a 119,271 square foot department store occupied by Neiman
Marcus and a 69,593 square foot four level vertical retail mall. Three
subterranean levels provide off street parking with 220 underground parking
stalls and a central loading dock serving both the tower and the retail
components. The Brookfield Property is linked on the second and fourth floors
with Gaviidae Common Phase I ("Gaviidae I"). The Brookfield Property is also
connected via skyway with the F&M Building, the 510 Marquette Building and
the Nicollet Center.
Dain Bosworth, a regional brokerage and investment banking concern is the
largest tenant of Dain, the office portion of the Dain Bosworth Property.
Dain Bosworth operates under its parent, Interra Financial (ticker, IFI), a
publicly traded entity listed on the New York Stock Exchange, which is
currently the fifteenth largest securities firm in the United States and
which has approximately 650 branch offices. Dain Bosworth occupies 207,062
square feet, or 34.9%, of the total square footage of the Dain Bosworth
Property and is the single largest tenant. Dain is approximately 94.4%
occupied and as the lease expiration schedule provided herein indicates has
34.4% of the square footage expiring over the next five years.
Gaviidae II is the four level specialty retail component of the Brookfield
Property measuring 188,864 square feet. Gaviidae II contains 18 tenants and
is anchored by Neiman Marcus which occupies a four level store measuring
119,271 square feet. Gaviidae II is presently 98.0% occupied and as indicated
by the lease expiration schedule provided herein has approximately 20.0% of
leases expiring over the next five years.
As indicated herein (see "Brookfield Loan: The Borrower; The Property: The
Loan") Gaviidae I will serve as additional collateral until certain release
tests are met. Gaviidae I is a five level retail center which contains
254,480 square feet and is anchored by Saks Fifth Avenue which occupies
118,338 square feet, or approximately 46.5% of the total area available, on
four levels. A four level retail mall measuring 136,142 square feet, a
portion of which has been converted to general office space, occupies the
remainder of Gaviidae I and serves as additional collateral under the Pledge.
Four subterranean levels provide for off street parking, with 490 spaces, and
a central loading dock. Gaviidae I is presently 97.2% occupied and as
indicated by the lease expiration schedule provided herein has approximately
15.4% of leases expiring over the next five years.
Market Overview and Competition. According to an appraisal performed by
Lunz, Massopust Reid Decaster & Lammers Inc., the downtown Minneapolis office
market has absorbed in excess of 2.6 million square feet of office space
since 1991 thereby reducing overall vacancy to approximately 9.5%. The Class
A vacancy rate in the downtown Minneapolis office market has fallen from a
high of 22.6% in 1992 to a current low of 3.9%.
S-91
<PAGE>
The downtown Minneapolis retail market is comprised of 1,800,000 square
feet of store, restaurant and service space including an extensive skyway
retail component. The vacancy rate in retail space has declined from 24.7% in
1991 to 15.6% currently.
Location/Access. The Brookfield Property is located in the Minneapolis
Central Business District at the intersection of South 6th Street and the
Nicolet Mall. The property is linked on the second and fourth floors with
Gaviidae I and is connected via skyway with other retail developments and
office buildings. Gaviidae II has the highest number of linkages via the
skyway of any retail development in downtown Minneapolis. Minneapolis is
served by Interstate 35E/35W and Interstate 94 which run north/south and
east/west respectively and Interstate 494/694, which provides access
throughout the entire metropolitan area.
Environmental Report. A Phase I environmental site assessment was
performed dated February 28, 1997 on the Dain Bosworth Property. The Phase I
environmental site assessment did not reveal any environmental liability that
the Depositor believes would have a material adverse effect on the borrower's
business, assets or results of operations taken as a whole. Nevertheless,
there can be no assurance that all environmental conditions and risks were
identified in such environmental assessment.
Engineering Report. A Property Condition Report was completed on the Dain
Bosworth Property on March 4, 1997 by a third party due diligence firm. The
Property Condition Report concluded that the Dain Bosworth Property was in
very good condition and identified no deferred maintenance requirements.
Ground Lease. DB Holdings, Inc., a Minnesota corporation and an affiliate
of the Brookfield Borrower ("DB Holdings"), is the fee simple owner of the
Brookfield Property. DB Holdings entered into a Ground Lease Agreement dated
as of December 30, 1988 with the MCDA, as lessee (the "Ground Lease"), which
Ground Lease was amended by a First Amendment to Lease dated June 6, 1989 and
by a Second Amendment to Lease dated June 6, 1989. The Ground Lease
terminates on January 31, 2086. By Subordination Agreement dated as of May
13, 1997, DB Holdings agreed that its rights and interest in and to the
Brookfield Property were fully subordinate and subject to the lien of the
Brookfield Mortgage.
Ground Sublease. The Brookfield Borrower subleases the Brookfield Property
from the MCDA pursuant to a Ground Lease Agreement dated as of December 19,
1991 made by Brookfield Development California Inc., a California corporation
and affiliate of the Brookfield Borrower, as subtenant, which was
subsequently assigned to Brookfield Borrower by Assignment of Sublease dated
as of January 31, 1995 (the "MCDA Sublease"). The MCDA Sublease extends for a
term of seventeen (17) years, through December 18, 2008, and provides the
Brookfield Borrower with an opportunity to extend the term of the Sublease
for one additional year or to purchase the MCDA's interest in the Brookfield
Property for a sum of $7,000,000. By Subordination Agreement dated as of May
13, 1997, the MCDA agreed that its rights and interest in and to its
leasehold interest in the Brookfield Property were fully subordinate and
subject to the lien of the Brookfield Mortgage.
Property Management. The Brookfield Property is managed by Brookfield
Management Services LLC, a Delaware limited liability company (the
"Manager"), pursuant to a management agreement dated May 1, 1997 by and
between the Manager and the Brookfield Borrower (the "Brookfield Management
Agreement"). The Brookfield Management Agreement provides for a management
fee equal to 4% of the gross revenues of Gaviidae Common Phase II and 3.5% of
the gross revenues of Dain Bosworth Plaza. The Brookfield Management
Agreement extends for a term of ten (10) years, unless sooner terminated by
either party thereto.
Pursuant to a manager's consent and subordination of management agreement
executed with respect to the Brookfield Management Agreement by the Manager
and Brookfield Borrower in favor of the holder of the Brookfield Loan (the
"mortgagee"), the Manager has agreed (i) not to terminate the Brookfield
Management Agreement without the consent of the mortgagee, except for
nonpayment of management fees (in which case the mortgagee has a 60-day cure
period), (ii) that all liens, rights and interests owned, claimed or held by
the Manager in and to the Brookfield Property are and will be in all
S-92
<PAGE>
respects subordinate to the lien and security interest securing the
Brookfield Loan, including the lien of the Brookfield Mortgage, (iii) that
during the continuance of an Event of Default (as defined below) under the
Brookfield Loan, the Manager will continue to perform under the Brookfield
Management Agreement provided that the mortgagee performs or causes to be
performed the obligations of the Brookfield Borrower thereunder, (iv) that,
notwithstanding anything in the Brookfield Management Agreement to the
contrary, the mortgagee, or the Brookfield Borrower at the mortgagee's
direction, shall have the right to terminate the Brookfield Management
Agreement (a) upon default by Manager under the Brookfield Management
Agreement or (b) at any time for cause (including, but not limited to,
Manager's gross negligence, willful misconduct or fraud), (v) not to amend or
modify the Brookfield Management Agreement without the prior written consent
of the mortgagee, and (vi) prior to an Event of Default (or in the event of
an occurrence of default, within 10 days after a request from the mortgagee
therefor) Brookfield Manager will deliver to mortgagee, not later than 45
days after the end of each fiscal quarter of the Brookfield Borrower's
operations, a true and complete rent roll for the Brookfield Property and a
schedule of all contracts and other agreements relating to the Brookfield
Property. In addition, the Brookfield Management Agreement shall
automatically terminate on the Brookfield Effective Maturity Date (as
hereinafter defined).
S-93
<PAGE>
Operating History. The following table shows operating historical and
underwritten performance for Dain Bosworth Plaza and Gaviidae Common Phases I
& II:
DAIN BOSWORTH PLAZA/GAVIIDAE COMMON PHASES I & II
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------- ------------- ------------- --------------
Revenues.............. $20,052,517 $20,872,775 $20,895,681 $26,563,388
Expenses.............. 14,159,531 13,715,052 15,573,634 16,539,322
------------- ------------- ------------- --------------
Net Operating Income . $ 5,892,986 $ 7,157,723 $ 5,322,047 $10,024,066
Adjustments to NOI ... 2,102,519
Net Cash Flow......... $ 7,921,547
==============
Occupancy............. 95.6%
Sales per Square Foot
(Retail only)........ $ 196.08 $ 281.30 $ 282.41 $ 299.42
12/1/97 Loan Balance . $59,754,386
Appraised Value....... $98,000,000
12/1/97 LTV........... 60.9%
Annual Debt Service .. $ 5,283,105
DSCR.................. 1.50x
DAIN BOSWORTH PLAZA AND GAVIIDAE COMMON PHASE II
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------- ------------- ------------- --------------
Revenues............. $12,462,364 $14,804,365 $16,110,301 $21,188,490
Expenses............. 10,042,486 10,066,474 11,481,818 12,430,495
------------- ------------- ------------- --------------
Net Operating
Income.............. $ 2,419,878 $ 4,737,891 $ 4,628,483 $ 8,757,995
Adjustments to NOI .. 1,849,083
Net Cash Flow........ $ 6,908,912
==============
Occupancy............ 95.3%
Appraised Value...... $86,000,000
GAVIIDAE COMMON PHASE I
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------ ------------ ------------ --------------
Revenues............. $7,590,153 $6,068,410 $4,785,380 $ 5,374,898
Expenses............. 4,117,045 3,648,578 4,091,816 4,108,827
------------ ------------ ------------ --------------
Net Operating
Income.............. $3,473,108 $2,419,832 $ 693,564 $ 1,266,071
Adjustments to NOI .. 253,435
Net Cash Flow........ $ 1,012,636
==============
Occupancy............ 97.2%
Appraised Value...... $12,000,000
</TABLE>
S-94
<PAGE>
UNDERWRITTEN CASHFLOW--DAIN BOSWORTH PLAZA/GAVIIDAE COMMON PHASES I AND II
<TABLE>
<CAPTION>
DAIN BOSWORTH GAVIIDAE I GAVIIDAE II CONSOLIDATED
------------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
GROSS REVENUE 7,520,317 1,352,681 2,036,065 10,909,063
Rental Sales Percent Revenue -- -- 359,176 359,176
Total Reimbursement Revenue 8,321,456 2,868,550 3,275,461 14,465,467
Garage 769,562 1,425,453 -- 2,195,015
Miscellaneous 21,637 11,103 -- 32,740
--------- --------- --------- ----------
TOTAL GROSS REVENUE 16,632,972 5,657,787 5,670,702 27,961,461
General Vacancy @ 5.0% of TGR 831,649 282,889 283,535 1,398,073
--------- --------- --------- ----------
EFFECTIVE GROSS REVENUE 15,801,323 5,374,898 5,387,167 26,563,388
OPERATING EXPENSES
Management Fee @ 3.0% of EGR 474,040 -- -- 474,040
Management Fee @ 4.0% of EGR -- 214,996 215,487 430,483
Electric 20,080 7,661 21,264 49,005
Cleaning 716,215 316,433 242,835 1,275,483
Plumbing 1,448 2,460 2,663 6,571
HVAC 138,444 112,218 40,780 291,442
Elevator 107,065 63,923 68,008 238,996
Security 166,979 122,011 118,337 407,327
General Building 345,785 253,542 57,219 656,546
Landscaping 7,235 21,964 20,135 49,334
Dock 48,916 55,364 33,119 137,399
Communications 198,778 58,502 41,646 298,926
Utilities 1,246,712 286,187 586,984 2,119,883
Administration 207,254 168,080 143,491 518,825
Marketing -- 57,761 61,121 118,882
Insurance 42,264 18,048 17,514 77,826
Real Estate Taxes 4,781,479 1,059,272 1,537,186 7,377,937
Promo Fund -- 221,545 205,556 427,101
Parking Expenses 481,860 1,048,806 -- 1,530,666
Other 19,036 13,961 3,710 36,707
Legal Fees 2,097 6,093 7,754 15,944
--------- --------- --------- ----------
TOTAL OPERATING EXPENSES 9,005,687 4,108,827 3,424,809 16,539,322
--------- --------- --------- ----------
NET OPERATING INCOME 6,795,637 1,266,071 1,962,358 10,024,066
========= ========= ========= ==========
LEASING & CAPITAL COSTS
Tenant Improvements 1,013,950 149,252 73,504 1,236,706
Leasing Commissions 532,324 76,954 83,487 692,765
Replacement Reserves 118,591 27,228 27,228 173,047
--------- --------- --------- ----------
TOTAL LEASING & CAPITAL COSTS 1,664,864 253,435 184,220 2,102,519
--------- --------- --------- ----------
NET CASH FLOW 5,130,773 1,012,636 1,778,139 7,921,547
========= ========= ========= ==========
</TABLE>
S-95
<PAGE>
1996 ACTUAL--DAIN BOSWORTH PLAZA/GAVIIDAE COMMON PHASES I AND II
1996 ACTUAL
DAIN BOSWORTH 1996 ACTUAL 1996 ACTUAL
AND GAVIIDAE II GAVIIDAE I CONSOLIDATED
--------------- ---------- ------------
INCOME:
Base Rental Revenue 6,806,493 1,065,144 7,871,637
Expense Recoveries 4,234,337 1,547,504 5,781,841
Tax Recoveries 4,405,229 808,033 5,213,262
Replacement Reserves -- --
Percentage Rents 25,525 17,746 43,271
Parking 736,175 1,332,847 2,069,022
Misc Operating Income 1,824 14,106 15,930
---------- --------- ----------
POTENTIAL GROSS INCOME: 16,209,583 4,785,380 20,994,963
Less: Bad Debt/Collection
Loss 99,282 99,282
---------- --------- ----------
TOTAL ECONOMIC VACANCY 99,282 -- 99,282
EFFECTIVE GROSS INCOME 16,110,301 4,785,380 20,895,681
EXPENSES:
OPERATING EXPENSES
Management Fees 557,150 137,157 694,307
Contract Services 1,153,340 383,716 1,537,056
Repairs & Maintenance 995,653 685,182 1,680,835
Payroll -- --
Administrative 609,081 468,601 1,077,682
Parking Expense 503,512 1,059,273 1,562,785
Utilities 1,620,553 241,163 1,861,716
CAM -- --
Replacement Reserves -- -- --
Legal Fees 39,605 3,917 43,522
Misc. Expense 361,612 156,658 508,270
FIXED EXPENSES --
Insurance 45,410 17,124 62,534
Taxes 5,605,902 939,025 6,544,927
Ground Rent -- -- --
---------- --------- ----------
TOTAL EXPENSES 11,481,818 4,091,816 15,573,634
---------- --------- ----------
NET OPERATING INCOME 4,628,483 693,564 5,322,047
========== ========= ==========
S-96
<PAGE>
Major Tenant Summary. The following table shows certain information
regarding the major tenants of Dain Bosworth Plaza and Gaviidae Common Phases
I & II:
DAIN BOSWORTH PLAZA/GAVIIDAE COMMON PHASES I & II
<TABLE>
<CAPTION>
CREDIT RATING % OF
OF PARENT COMPANY SQUARE TOTAL LEASE
TENANT PARENT COMPANY (MOODY'S/S&P) FEET R.S.F. EXPIRATION
- --------------------------------------------------------------------------------------------------------------------
OFFICE
<S> <C> <C> <C> <C> <C>
Interra Financial Group Interra Financial Group Baa1/NA 226,130 38.1% 12/1/06
Martin/Williams Martin/Williams Advertising, Inc. NR/NR 77,836 13.1% 11/30/04
National City Bank National City Corporation A1/A 70,308 11.9% 3/31/06
Marquette Bancshares Marquette Bancshares, Inc. NR/NR 50,306 8.5% 5/6/02
Decision Systems Olivette SpA NR/NR 38,518 6.5% 12/15/00
--------- --------
TOTAL -MAJOR OFFICE TENANTS 463,098 78.1%
TOTAL -OFFICE 592,953 100.0%
RETAIL
Neiman Marcus Harcourt General, Inc. Baa1/BBB+ 119,271 26.9% 7/31/06
National City Bank National City Corporation A1/A 25,449 5.7% 3/31/06
--------- --------
TOTAL -MAJOR RETAIL TENANTS 144,720 44.5%
TOTAL -RETAIL 325,006 100.0%
TOTAL -MAJOR TENANTS 607,818 66.2%
TOTAL -PROPERTY POOL 917,959 100.0%
</TABLE>
Lease Expiration Summary. The following tables present certain information
regarding the future lease expiries at the Brookfield Properties.
<TABLE>
<CAPTION>
FOR THE YEARS YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
ENDING OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002 OCT-2003
- ---------------- -------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
SQUARE FEET
EXPIRING
BUILDING
Gaviidae I 1,446 3,458 13,839 780 1,464 764
Gaviidae II 669 14,214 1,025 1,823 20,127 2,287
Dain Bosworth 20,592 19,489 20,012 66,387 77,787 47,310
-------- -------- -------- ---------- ---------- ----------
Total SQFT
Expiring 22,707 37,161 34,876 68,990 99,378 50,361
======== ======== ======== ========== ========== ==========
Percent of Total 2.5% 4.0% 3.8% 7.5% 10.8% 5.5%
RENT EXPIRING
BUILDING
Gaviidae I 34,831 79,988 360,294 24,913 55,222 31,836
Gaviidae II 14,370 344,690 21,628 54,076 415,722 58,878
Dain Bosworth 569,987 555,631 587,552 2,007,543 2,423,065 1,517,705
-------- -------- -------- ---------- ---------- ----------
Total Rent
Expiring $619,188 $980,309 $969,473 $2,086,532 $2,894,009 $1,608,419
======== ======== ======== ========== ========== ==========
Percent of Total 2.6% 4.1% 4.0% 8.6% 12.0% 6.7%
Average $ per
SQFT $ 27.27 $ 26.38 $ 27.80 $ 30.24 $ 29.12 $ 31.94
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
FOR THE YEARS YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
ENDING OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND TOTAL
- ---------------- -------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
SQUARE FEET
EXPIRING
BUILDING
Gaviidae I 5,198 6,955 95,201 3,247 3,790 136,142
Gaviidae II 2,249 7,100 127,463 3,292 8,615 188,864
Dain Bosworth 6,440 77,836 -- 224,099 33,001 592,953
-------- ---------- ---------- ---------- ---------- -----------
Total SQFT
Expiring 13,887 91,891 222,664 230,638 45,406 917,959
======== ========== ========== ========== ========== ===========
Percent of Total 1.5% 10.0% 24.3% 25.1% 4.9% 100.0%
RENT EXPIRING
BUILDING
Gaviidae I 140,141 176,483 1,010,595 75,391 90,448 2,080,142
Gaviidae II 47,866 160,451 825,826 75,758 226,822 2,246,086
Dain Bosworth 212,842 2,649,537 -- 8,092,215 1,227,307 19,843,385
-------- ---------- ---------- ---------- ---------- -----------
Total Rent
Expiring $400,849 $2,986,471 $1,836,421 $8,243,364 $1,544,578 $24,169,613
======== ========== ========== ========== ========== ===========
Percent of Total 1.7% 12.4% 7.6% 34.1% 6.4% 100.0%
Average $ per
SQFT $ 28.87 $ 32.50 $ 8.25 $ 35.74 $ 34.02 $ 26.33
</TABLE>
S-97
<PAGE>
DAIN BOSWORTH PLAZA
- -------------------------------------------------------------------------------
Lease Expiration Schedule
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
FOR THE YEARS ENDING OCT--1998 OCT--1999 OCT--2000 OCT--2001 OCT--2002 OCT--2003
- -------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Interra Financial Group 4,731 -- -- -- -- --
Korridor Capital 1,610 -- -- -- -- --
Impark 3,048 -- -- -- -- --
Dalhen 4,973 -- -- -- -- --
Dahlen Storage 342 -- -- -- -- --
Amer Intl Comp. 3,348 -- -- -- -- --
James Selmer 2,540 -- -- -- -- --
Norwest -- 6,179 -- -- -- --
Information Res. -- 4,329 -- -- -- --
John Blair -- 3,442 -- -- -- --
Storage Tek -- 5,539 -- -- -- --
Wilson Group -- -- 2,497 -- -- --
Whitecliff -- -- 4,658 -- -- --
SAP AMERICA -- -- 7,444 -- -- --
SAP AMERICA -- -- 2,521 -- -- --
Woodland -- -- 1,864 -- -- --
Onyx -- -- 1,028 -- -- --
Decision Systems -- -- -- 6,384 -- --
Decision Systems -- -- -- 32,134 -- --
Firstaff -- -- -- 3,387 -- --
Firstaff -- -- -- 963 -- --
SAS Insitutute -- -- -- 6,650 -- --
Wilshire Assoc -- -- -- 2,533 -- --
Reden & Anders -- -- -- 10,585 -- --
Reden & Anders -- -- -- 2,367 -- --
Interep -- -- -- 1,384 -- --
Marquette Bank -- -- -- -- 1,033 --
Marq. Bancshares -- -- -- -- 43,064 --
Marq. Capital -- -- -- -- 6,209 --
Fish & Richardson -- -- -- -- 16,114 --
Diversified Business CR -- -- -- -- 9,737 --
Diversified Business -- -- -- -- 1,630 --
Mitchel Hutchins -- -- -- -- -- 7,542
Bruce Goldstein -- -- -- -- -- 2,844
Winthrop -- -- -- -- -- 17,989
Winthrop -- -- -- -- -- 4,970
Radio 100 -- -- -- -- -- 2,318
Radio 100 -- -- -- -- -- 11,647
Coral Group -- -- -- -- -- --
Executive Speaking -- -- -- -- -- --
Martin Williams Storage -- -- -- -- -- --
Martin Williams -- -- -- -- -- --
Martin Williams -- -- -- -- -- --
Martin Williams -- -- -- -- -- --
Interra Financial Group -- -- -- -- -- --
Interra Financial Group -- -- -- -- -- --
Interra Financial Group -- -- -- -- -- --
Interra Financial Group -- -- -- -- -- --
Interra Financial Group -- -- -- -- -- --
Interra Financial Group -- -- -- -- -- --
Interra Financial Group -- -- -- -- -- --
Vacant -- -- -- -- -- --
Vacant -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total SQFT Expiring 20,592 19,489 20,012 66,387 77,787 47,310
========= ========= ========= ========= ========= =========
Percent of Total 3.5% 3.3% 3.4% 11.2% 13.1% 8.0%
Total Rent Expiring $569,987 $555,631 $587,552 $2,007,543 $2,423,065 $1,517,705
Percent of Total 2.9% 2.8% 3.0% 10.1% 12.2% 7.6%
Average $ per SQFT $ 27.68 $ 28.51 $ 29.36 $ 30.24 $ 31.15 $ 32.08
</TABLE>
<TABLE>
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
FOR THE YEARS ENDING OCT--2004 OCT--2005 OCT--2006 OCT--2007 AND BEYOND
- -------------------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Interra Financial Group -- -- -- -- --
Korridor Capital -- -- -- -- --
Impark -- -- -- -- --
Dalhen -- -- -- -- --
Dahlen Storage -- -- -- -- --
Amer Intl Comp. -- -- -- -- --
James Selmer -- -- -- -- --
Norwest -- -- -- -- --
Information Res. -- -- -- -- --
John Blair -- -- -- -- --
Storage Tek -- -- -- -- --
Wilson Group -- -- -- -- --
Whitecliff -- -- -- -- --
SAP AMERICA -- -- -- -- --
SAP AMERICA -- -- -- -- --
Woodland -- -- -- -- --
Onyx -- -- -- -- --
Decision Systems -- -- -- -- --
Decision Systems -- -- -- -- --
Firstaff -- -- -- -- --
Firstaff -- -- -- -- --
SAS Insitutute -- -- -- -- --
Wilshire Assoc -- -- -- -- --
Reden & Anders -- -- -- -- --
Reden & Anders -- -- -- -- --
Interep -- -- -- -- --
Marquette Bank -- -- -- -- --
Marq. Bancshares -- -- -- -- --
Marq. Capital -- -- -- -- --
Fish & Richardson -- -- -- -- --
Diversified Business CR -- -- -- -- --
Diversified Business -- -- -- -- --
Mitchel Hutchins -- -- -- -- --
Bruce Goldstein -- -- -- -- --
Winthrop -- -- -- -- --
Winthrop -- -- -- -- --
Radio 100 -- -- -- -- --
Radio 100 -- -- -- -- --
Coral Group 4,353 -- -- -- --
Executive Speaking 2,087 -- -- -- --
Martin Williams Storage -- 967 -- -- --
Martin Williams -- 66,042 -- -- --
Martin Williams -- 6,139 -- -- --
Martin Williams -- 4,688 -- -- --
Interra Financial Group -- -- -- 19,259 --
Interra Financial Group -- -- -- 154,072 --
Interra Financial Group -- -- -- 5,000 --
Interra Financial Group -- -- -- 9,672 --
Interra Financial Group -- -- -- 13,737 --
Interra Financial Group -- -- -- 9,830 --
Interra Financial Group -- -- -- 9,829 --
Vacant -- -- -- 2,700 --
Vacant -- -- -- -- 33,001
--------- --------- --------- --------- ----------
TOTAL
Total SQFT Expiring 6,440 77,836 -- 224,099 33,001 592,953
========= ========= ========= ========= ========== =========
Percent of Total 1.1% 13.1% 0.0% 37.8% 5.6% 100.0%
Total Rent Expiring $212,842 $2,649,537 $ 0 $8,092,215 $1,227,307 $19,843,385
Percent of Total 1.1% 13.4% 0.0% 40.8% 6.2% 100.0%
Average $ per SQFT $ 33.05 $ 34.04 $0.00 $ 36.11 $ 37.19 $ 33.47
</TABLE>
S-98
<PAGE>
GAVIIDAE I
- -------------------------------------------------------------------------------
Lease Expiration Schedule
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
FOR THE YEARS ENDING OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002 OCT-2003
- -------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TENANT
S. Vincent Jewelers 958 -- -- -- -- --
Van Havern's Flowerwork 488 -- -- -- -- --
Gaviidae Pendleton -- 2,197 -- -- -- --
Ritz Camera -- 739 -- -- -- --
Sunglass Hut -- 522 -- -- -- --
Bostonian -- -- 1,015 -- -- --
The Museum Company -- -- 2,666 -- -- --
Pretzeltime -- -- 508 -- -- --
San Francisco Music Box -- -- 905 -- -- --
Eddie Bauer -- -- 5,443 -- -- --
Charter Club -- -- 3,302 -- -- --
The Custom Shop -- -- -- 780 -- --
Trailmark -- -- -- -- 1,464 --
Mothers Work -- -- -- -- -- 764
Bruegger's -- -- -- -- -- --
Franklin Quest -- -- -- -- -- --
Caribou Coffee -- -- -- -- -- --
Cole Haan -- -- -- -- -- --
Totally Organized -- -- -- -- -- --
National City Bank -- -- -- -- -- --
National City Bank -- -- -- -- -- --
National City Bank -- -- -- -- -- --
National City
Bank--Office -- -- -- -- -- --
National City
Bank--Office -- -- -- -- -- --
St. Croix Knits -- -- -- -- -- --
Vacancy -- -- -- -- -- --
Vacancy -- -- -- -- -- --
Vacancy -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total SQFT Expiring 1,446 3,458 13,839 780 1,464 764
======== ======== ======== ======== ======== ========
Percent of Total 1.1% 2.5% 10.2% 0.6% 1.1% 0.6%
Total Rent Expiring $34,831 $79,988 $360,294 $24,913 $55,222 $31,836
Percent of Total 1.7% 3.8% 17.3% 1.2% 2.7% 1.5%
Average $ per SQFT $ 24.09 $ 23.13 $ 26.03 $ 31.94 $ 37.72 $ 41.67
</TABLE>
<TABLE>
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
FOR THE YEARS ENDING OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND
- -------------------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
TENANT
S. Vincent Jewelers -- -- -- -- --
Van Havern's Flowerwork -- -- -- -- --
Gaviidae Pendleton -- -- -- -- --
Ritz Camera -- -- -- -- --
Sunglass Hut -- -- -- -- --
Bostonian -- -- -- -- --
The Museum Company -- -- -- -- --
Pretzeltime -- -- -- -- --
San Francisco Music Box -- -- -- -- --
Eddie Bauer -- -- -- -- --
Charter Club -- -- -- -- --
The Custom Shop -- -- -- -- --
Trailmark -- -- -- -- --
Mothers Work -- -- -- -- --
Bruegger's 2,474 -- -- -- --
Franklin Quest 1,655 -- -- -- --
Caribou Coffee 1,069 -- -- -- --
Cole Haan -- 3,542 -- -- --
Totally Organized -- 3,413 -- -- --
National City Bank -- -- 3,710 -- --
National City Bank -- -- 3,454 -- --
National City Bank -- -- 17,729 -- --
National City
Bank--Office -- -- 22,306 -- --
National City
Bank--Office -- -- 48,002 -- --
St. Croix Knits -- -- -- 1,352 --
Vacancy -- -- -- 1,895 --
Vacancy -- -- -- -- 1,895
Vacancy -- -- -- -- 1,895
-------- -------- -------- -------- ----------
TOTAL
Total SQFT Expiring 5,198 6,955 95,201 3,247 3,790 136,142
======== ======== ======== ======== ========== =========
Percent of Total 3.8% 5.1% 69.9% 2.4% 2.8% 100.0%
<PAGE>
Total Rent Expiring $140,141 $176,483 $1,010,595 $75,391 $90,448 $2,080,142
Percent of Total 6.7% 8.5% 48.6% 3.6% 4.3% 100.0%
Average $ per SQFT $ 26.96 $ 25.37 $ 10.62 $ 23.22 $ 23.87 $ 15.28
</TABLE>
S-99
<PAGE>
GAVIIDAE II
- -------------------------------------------------------------------------------
Lease Expiration Schedule
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
FOR THE YEARS ENDING OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002 OCT-2003
- -------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Subway 669 -- -- -- -- --
Scarlet Letter -- -- 1,025 -- -- --
Urban Traveler -- -- -- 1,064 -- --
Chicago Steak -- -- -- 759 -- --
Mortons -- -- -- -- 7,759 --
Talbots -- -- -- -- 5,328 --
Lin -- -- -- -- 350 --
Horst -- -- -- -- 4,300 --
Manchu Wok -- -- -- -- 614 --
Joan Vass -- -- -- -- 1,776 --
Villa Pizza -- -- -- -- -- 1,331
McDonalds -- -- -- -- -- 956
Aveda -- -- -- -- -- --
Caribou Coffee -- -- -- -- -- --
Richard James -- -- -- -- -- --
Limit Up Pasta -- -- -- -- -- --
La Tortiarilla -- -- -- -- -- --
Neiman Marcus -- -- -- -- -- --
Jessica McClintock -- -- -- -- -- --
D'Amico -- -- -- -- -- --
Management Office -- -- -- -- -- --
Betlach -- -- -- -- -- --
Vacant -- -- -- -- -- --
Vacant -- -- -- -- -- --
Vacant -- -- -- -- -- --
Ann Taylor -- -- -- -- -- --
Vacant -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total SQFT Expiring 669 14,214 1,025 1,823 20,127 2,287
======== ======== ======== ======== ======== ========
Percent of Total 0.4% 7.5% 0.5% 1.0% 10.7% 1.2%
Total Rent Expiring $14,370 $344,690 $21,628 $54,076 $415,722 $58,878
Percent of Total 0.6% 15.3% 1.0% 2.4% 18.5% 2.6%
Average $ per SQFT $ 21.48 $ 24.25 $ 21.10 $ 29.66 $ 20.65 $ 25.74
</TABLE>
<TABLE>
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
FOR THE YEARS ENDING OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND
- -------------------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Subway -- -- -- -- --
Scarlet Letter -- -- -- -- --
Urban Traveler -- -- -- -- --
Chicago Steak -- -- -- -- --
Mortons -- -- -- -- --
Talbots -- -- -- -- --
Lin -- -- -- -- --
Horst -- -- -- -- --
Manchu Wok -- -- -- -- --
Joan Vass -- -- -- -- --
Villa Pizza -- -- -- -- --
McDonalds -- -- -- -- --
Aveda 1,600 -- -- -- --
Caribou Coffee 649 -- -- -- --
Richard James -- 5,868 -- -- --
Limit Up Pasta -- 681 -- -- --
La Tortiarilla -- 551 -- -- --
Neiman Marcus -- -- 119,271 -- --
Jessica McClintock -- -- 2,104 -- --
D'Amico -- -- 3,216 -- --
Management Office -- -- 2,872 -- --
Betlach -- -- -- 1,592 --
Vacant -- -- -- 1,700 --
Vacant -- -- -- -- 1,700
Vacant -- -- -- -- 1,700
Ann Taylor -- -- -- -- 4,768
Vacant -- -- -- -- 447
-------- -------- -------- -------- ----------
TOTAL
Total SQFT Expiring 2,249 7,100 127,463 3,292 8,615 188,864
======== ======== ======== ======== ========== ==========
Percent of Total 1.2% 3.8% 67.5% 1.7% 4.6% 100.0%
Total Rent Expiring $47,866 $160,451 $825,826 $75,758 $226,822 $2,246,086
Percent of Total 2.1% 7.1% 36.8% 3.4% 10.1% 100.0%
Average $ per SQFT $ 21.28 $ 22.60 $ 6.48 $ 23.01 $ 26.33 $ 11.89
</TABLE>
<PAGE>
BROOKFIELD: THE LOAN
Security. The Brookfield Loan is a non-recourse loan, secured by (i) the
subleasehold estate held by the Brookfield Borrower in the Brookfield
Property and certain other collateral relating thereto (including a mortgage,
an assignment of leases and rents and cash collateral account security), (ii)
a pledge of a note in the amount of Thirty Million Dollars ($30,000,000) made
by Brookfield Retail Centers Inc., a Minnesota corporation (the "Gaviidae I
Note") which is secured by a collateral assignment of the First Mortgage,
Security Agreement and Fixture Financing Statement encumbering the property
commonly known as Gaviidae Common Phase I located in Minneapolis, Minnesota
(the "Pledge") and (iii) the lease of retail space by and between Brookfield
Borrower, as landlord, and Brookfield Arc Inc., a Minnesota corporation, as
tenant (the "Master Lease"), which provides for a term commencing on May 1,
1997 and ending on the earlier to occur of (x) May 1, 2007 and (y) the date
the requisite Brookfield DSCR (as hereinafter defined) is met. The rent
payable under the Master Lease, or $720,000 per annum, is guaranteed by the
Edper Group Limited, an Ontario corporation ("Guarantor"), pursuant to an
unconditional guaranty of payment, dated as of May 13, 1997, which was
delivered for the benefit of Brookfield Borrower (the "Edper Guaranty")
(collectively with all other security documents referenced
S-100
<PAGE>
herein, the "Loan Documents"). Both the Pledge and Master Lease shall be
released upon the satisfaction of certain debt service coverage tests more
particularly set forth in "-Release of Pledge and Master Lease". The
mortgagee is the insured under the title insurance policies which insure,
among other things, that the Brookfield Mortgage constitutes a valid and
enforceable lien on the Brookfield Property, subject to certain exceptions
and exclusions from coverage set forth therein. Such title insurance
policies, together with the Brookfield Note, the Brookfield Mortgage, the
Pledge and the other documents and agreements evidencing and securing the
Brookfield Loan, will be assigned to the Trust Fund.
Release of Pledge and Master Lease. At such time as Brookfield Borrower
shall achieve a Brookfield DSCR (as hereinafter defined) for the Brookfield
Property with respect to the preceding six (6) month period of not less than
1.5 to 1.0, mortgagee shall release the Pledge. Brookfield DSCR means for any
period the ratio of net operating income to debt service on the Brookfield
Note for such period. For the purposes of the calculation of the Brookfield
DSCR, operating expenses shall include real estate taxes attributable to the
Brookfield Property during the preceding six (6) month period and insurance
premiums attributable to the Brookfield Property during such period, whether
or not actually paid during such period. All calculations of the Brookfield
DSCR shall be subject to verification by mortgagee.
Prior to May 1, 2007, the Master Lease may be terminated at such time as
Brookfield Borrower shall achieve, and provide evidence to mortgagee of the
achievement of, a Brookfield DSCR for the Brookfield Property with respect to
the preceding six (6) month period of not less than 1.5 to 1.0. For the
purposes of the calculation of the Brookfield DSCR, (i) operating expenses
shall include real estate taxes attributable to the Brookfield Property
during the preceding six (6) month period and insurance premiums attributable
to the Brookfield Property during such period, whether or not actually paid
during such period, and (ii) net operating income shall include the excess of
income over expenses from Gaviidae I (before debt service payment on the
Gaviidae I Note).
Payment Terms. The Brookfield Loan matures on June 1, 2027 (the
"Brookfield Loan Maturity Date") and bears interest (a) at a fixed rate per
annum equal to 8.00% (the "Brookfield Initial Interest Rate") through but not
including June 1, 2007 (the "Brookfield Effective Maturity Date") and (b)
from and after the Brookfield Effective Maturity Date, through and including
the date the Brookfield Note is paid in full, at a rate per annum equal to
the greater of (i) the Brookfield Initial Interest Rate plus five percent
(5%) or (ii) the Treasury Rate (as defined below) plus five percent (5%). The
"Brookfield Treasury Rate" means the yield, calculated by linear
interpolation of the yield of noncallable United States Treasury obligations
with terms (one longer and one shorter) most nearly approximating the period
from the date of such prepayment to the Brookfield Maturity Date. Any
interest accrued at the excess of the Brookfield Revised Interest Rate over
the Brookfield Initial Interest Rate is deferred and added to the outstanding
indebtedness under the Brookfield Loan and earns interest at the Brookfield
Revised Interest Rate (such deferred interest and interest thereon, the
"Brookfield Accrued Interest"). Interest on the Brookfield Loan is calculated
on the basis of a 360-day year of 30-day months.
The payment date for the Brookfield Loan is the first business day of each
month (each, a "Payment Date"), with no grace period for a default in the
payment of scheduled principal or interest. Commencing on July 1, 1997, the
Brookfield Loan requires 360 equal monthly payments of principal and interest
of $440,258.74 (each, a "Brookfield Debt Service Payment"). Each Brookfield
Debt Service Payment, is due and payable on each Payment Date, and shall be
applied first to the interest at the Brookfield Initial Interest Rate and the
remainder thereof to the reduction of principal. In the event of a default,
interest will accumulate thereon at the applicable interest rate plus five
percent (5%) per annum (the "Default Rate"). On the Brookfield Loan Maturity
Date, payment of the remaining unpaid balance of principal, if any, together
with all interest accrued thereon and all other sums payable under the Note
or under the Loan Documents is required.
Commencing with the first Payment Date after the Brookfield Effective
Maturity Date and continuing on each Payment Date thereafter through and
including the Brookfield Maturity Date, the Brookfield Borrower is required
to apply 100% of the rents and other revenues from the Brookfield Property
received on or before such day to the following items in the following order
of priority: (a) to payment of interest accruing at the Default Rate, and
late payment charges, if any; (b) to payment of 1/12
S-101
<PAGE>
of annual taxes and insurance premiums (the "Brookfield Mortgage Escrow
Amount") into the Mortgage Escrow Account (as defined below under "--Lockbox
and Reserves"); (c) to the deposit of all cash expenses set forth in the
annual budget submitted to the mortgagee for approval, which cash expenses
shall include the operating expenses for the operation and maintenance of the
Brookfield Property (the "Cash Expenses"; see "--Lockbox and Reserves" for
detail of current Cash Expenses); (d) to payment of extraordinary expenses
not provided for in the annual budget and approved by mortgagee, if any (the
"Extraordinary Expenses"); (e) to payment to mortgagee to be applied against
the outstanding principal due under the Note until such principal amount is
paid in full; (f) payments to mortgagee for Brookfield Accrued Interest; and
(g) to payment to mortgagee of any other amounts due under the Loan
Documents. Any excess amounts shall be paid to the Brookfield Borrower. The
scheduled principal balance of the Brookfield Loan as of the Brookfield
Effective Maturity Date is approximately $52,634,822.34.
Event of Default. The occurrence of any of the following constitutes and
"Event of Default" under the Brookfield Mortgage: (a) failure to make any
payment of interest or principal when due, or failure to pay the principal
balance when due; (b) failure to pay any other amount payable pursuant to the
Brookfield Note or the Brookfield Mortgage when due and payable, with such
failure continuing for ten (10) days after mortgagee delivers written notice
thereof to the Brookfield Borrower; (c) failure to keep in force the
insurance required under the Brookfield Mortgage to be maintained or failure
to comply with any other covenant relating to insurance requirements, which
failure continues for five (5) business days after the mortgagee delivers
written notice thereof to the Brookfield Borrower; (d) failure to comply with
certain Brookfield Mortgage covenants which require the Brookfield Borrower
to keep the Brookfield Property free from liens and encumbrances (with such
default continuing for five (5) business days after mortgagee delivers
written notice thereof to the Brookfield Borrower), and which, prohibit the
sale of the Brookfield Property and transfers of direct and indirect
beneficial interests in the Brookfield Borrower; (e) any attempt by the
Brookfield Borrower to assign its rights under the Brookfield Mortgage; (f)
any other default in the performance or payment, or breach, of any material
covenant, warranty, representation or agreement set forth in the documents
which evidence and secure the Brookfield Loan, with such default continuing
for thirty (30) business days after mortgagee delivers written notice thereof
to the Brookfield Borrower; (g) the occurrence of certain bankruptcy events;
(h) the termination of the Brookfield Mortgage, or the failure of the
Brookfield Mortgage to continue to be valid and effective (or the ceasing of
any lien granted thereunder to be a perfected first priority lien) or any of
the Loan Documents evidencing the Brookfield Loan; and (i) any event of the
default under any other of the Loan Documents which evidence the Brookfield
Loan.
If the Brookfield Borrower defaults in the payment of any Brookfield Debt
Service Payment on the Payment Date then the Brookfield Borrower shall pay to
mortgagee a late payment charge in an amount equal to five percent (5%) of
the amount of the installment not paid. If the Brookfield Borrower defaults
in the payment of any Brookfield Debt Service Payment on the Payment Date
due, or defaults in any other manner so as to constitute an Event of Default,
then mortgagee at its option and without further notice to the Brookfield
Borrower may declare the entire unpaid amount of principal with interest at
the Default Rate together with all other sums due, if any, due and payable
immediately.
Prepayment. Voluntary prepayment of the principal of the Brookfield Note
is prohibited at any time prior to the 180-day period prior to the Brookfield
Effective Maturity Date, at which time the Brookfield Borrower may prepay the
Note in whole or in part on any Payment Date without Prepayment Premium. If
the Brookfield Note is accelerated as a result of an Event of Default, the
Brookfield Borrower shall also owe a prepayment premium (the "Brookfield
Yield Maintenance Premium") equal to the greater of (a) 1% of the principal
amount being prepaid or (b) the product of (i) a fraction whose numerator is
an amount equal to the portion of the principal balance being paid and whose
denominator is the entire outstanding principle balance on the date of such
prepayment, and (ii) an amount equal to the remainder obtained by subtracting
(x) an amount equal to the entire outstanding principal as of the date of
such prepayment from (y) the present value as of the date of such prepayment
of the remaining scheduled payments of principal and interest determined by
discounting such payments at the Brookfield Discount Rate (as hereinafter
defined). The "Brookfield Discount Rate" means the rate which, when
compounded monthly, is equal to the Brookfield Treasury Rate.
S-102
<PAGE>
No Brookfield Yield Maintenance Premium or other premium or penalty is
required to be paid in connection with any prepayment resulting from the
application of insurance or condemnation proceeds to repayment of the
Brookfield Loan in accordance with the requirements of the Brookfield
Mortgage.
Defeasance Collateral. For the purposes of this section, "Defeasance
Collateral" shall mean obligations or securities not subject to prepayment,
call or early redemption which are direct obligations of, or obligations
fully guaranteed as to timely payment by, the United States of America or any
agency or instrumentality of the United States of America, or the obligations
of which are backed by the full faith and credit of the United States of
America, the ownership of which will not cause the mortgagee to be an
investment company under the Investment Company Act of 1940, included as
collateral under the Brookfield Loan. For the purposes of this section, the
"Defeasance Collateral Requirement" shall mean an amount sufficient to pay
100% of the loan amount, and sufficient to pay scheduled interest and
principal payments on the loan amount through and including the Brookfield
Effective Maturity Date together with the outstanding principal balance of
the Brookfield Loan as of such date.
The Brookfield Borrower shall be entitled to defease the Brookfield
Property on any Payment Date from and after the earlier to occur of (x) May
13, 2001 and (y) the second anniversary of the Delivery Date, in connection
with the delivery of Defeasance Collateral, provided that: (i) the mortgagee
shall have received from the Brookfield Borrower at least 30 days' prior
written notice of the date proposed for such release (the "Brookfield Release
Date"); (ii) no Event of Default shall have occurred and be continuing as of
the date of such notice and the Brookfield Release Date; (iii) the Brookfield
Borrower shall deliver on the Brookfield Release Date, Defeasance Collateral
in such amount as shall satisfy the Defeasance Collateral Requirement with
respect to the Brookfield Property; (iv) the Brookfield Borrower shall have
delivered a certificate of an officer of the Brookfield Borrower (an
"Officer's Certificate") dated the Brookfield Release Date, confirming the
matters referred to in clause (ii) above, certifying that the applicable
provisions of clause (iii) above have been complied with and certifying that
all conditions precedent for such release have been complied with; and (v)
the Brookfield Borrower shall have delivered to mortgagee the opinions of
counsel required by the Brookfield Mortgage upon a defeasance of the lien.
Lockbox and Reserves. Pursuant to a cash collateral account security,
pledge, assignment and control agreement (the "Brookfield Cash Collateral
Agreement"), the Brookfield Borrower has established with Comerica Bank in
the name of Comerica Bank, as agent for the mortgagee (the "Brookfield Agent
Bank"), as secured party, an interest-bearing cash collateral account (the
"Brookfield Lockbox Account"). The Brookfield Agent Bank, as agent for
Brookfield Borrower, has delivered irrevocable written instructions to First
Bank, N.A., the holder of the property account for the Brookfield Property
(the "Brookfield Property Account"), to deposit on a daily basis by wire
transfer to the Brookfield Lockbox Account, upon receipt, all operating
revenue from the Property and other amounts received in the Brookfield
Property Account. The Brookfield Borrower has instructed and is required to
instruct all tenants to mail all checks or wire all funds with respect to
rent due under the leases to the Brookfield Property Account, and has
covenanted to deposit all operating revenue from the Brookfield Property into
the Brookfield Property Account.
The Brookfield Borrower has established with the Brookfield Agent Bank (a)
an operating account (the "Brookfield Operating Account") to receive deposits
daily of amounts on deposit in the Brookfield Lockbox Account, (b) an
interest escrow account (the "Brookfield Interest Escrow Account") to be
funded each month before the Brookfield Effective Maturity Date in an amount
equal to the amount of interest and principal due on the next Payment Date,
(c) a real estate taxes and insurance premium escrow account (the "Brookfield
Mortgage Escrow Account") funded each month before the Brookfield Effective
Maturity Date in an amount equal to the monthly Brookfield Mortgage Escrow
Amount, and (d) a capital and tenant improvement reserve account (the
"Brookfield Capital and TI Reserve Account") for leases demising to a single
tenant space equal to or more than 20,000 square feet (each, a "Large Lease")
to be funded by the Brookfield Borrower as follows. From and after the date
the Pledge is released (see "-Release of Pledge and Master Lease"),
Brookfield Borrower shall be required to deposit into the Brookfield Capital
and TI Reserve Account reserves with respect to Large Leases (x) of office
space at Dain Bosworth Plaza, equal to the product of $35 and the square
footage of the expiring Large Lease or (y) of retail space at Gaviidae Common
Phase II, equal to the product of $15 and the square
S-103
<PAGE>
footage of the expiring Large Lease (the "Brookfield Capital/TI Reserve
Amounts"). Brookfield Borrower is required to deliver to Brookfield Agent
Bank and mortgagee a monthly certificate of an officer of Brookfield Borrower
certifying as of the date thereof, (x) the name of the tenant(s) under the
Large Lease(s) expiring within one year of the date thereof and the
expiration date of such Large Lease(s), (y) the Brookfield Capital/TI Reserve
Amounts to be deposited by Borrower into the Brookfield Capital and TI
Reserve Account with respect to the expiring Large Lease, and (z) the
anticipated Operating Expenses (as defined below) of the Brookfield Property
for the applicable month. The Brookfield Capital/TI Reserve Amounts
applicable to an expiring Large Lease shall be funded on a monthly basis, in
twelve (12) equal installments, from Brookfield Borrower's available cash
flows after payment of principal and interest on the Brookfield Note,
Brookfield Mortgage Escrow Amounts, Brookfield Reserve Amounts (as
hereinafter defined) and anticipated operating expenses. Brookfield Borrower
shall deliver to the Brookfield Agent Bank and mortgagee, on the fifteenth
day of each month, or, if the fifteenth day shall not be a business day, on
the business day following the fifteenth day of the month, a certificate of
an officer of Brookfield Borrower certifying as of the date thereof, (y) the
anticipated operating expenses of the Brookfield Property for the next month,
and (z) the actual operating expenses of the Brookfield Property for the
preceding month. The difference between actual and budgeted operating
expenses for the previous month shall be adjusted by Brookfield Borrower out
of or to available cash flows to be paid by Brookfield Borrower to Brookfield
Agent Bank.
Until the Brookfield Effective Maturity Date, the Brookfield Agent Bank
will withdraw from the Brookfield Operating Account on the first business day
of each month or as soon thereafter as there shall be collected funds in the
Brookfield Operating Account, funds in the following amounts and in the
following order of priority: (i) funds in an amount equal to the amount of
interest and principal due on the next payment date and deposit the same into
the Brookfield Interest Escrow Account; (ii) funds in an amount equal to the
monthly Brookfield Mortgage Escrow Amounts and deposit the same into the
Brookfield Mortgage Escrow Account; (iii) funds in an amount equal to the
Brookfield Reserve Amounts (as defined below), if any, and deposit the same
into the Brookfield Mortgage Escrow Account; (iv) funds in an amount equal to
the Brookfield Capital/TI Reserve Amounts as may be required to be deposited
from time to time, and deposit the same into the Brookfield Capital and TI
Reserve Account. The Brookfield Borrower has instructed the Brookfield Agent
Bank to withdraw on each Payment Date the amounts on deposit in the
Brookfield Interest Escrow Account necessary to pay principal and interest
when due and to pay the same to the mortgagee, to withdraw when and as
applicable amounts on deposit in the Brookfield Mortgage Escrow Account and
to use the same to pay real estate taxes and insurance premiums with respect
to the Brookfield Property as the same become due and to make withdrawals
from the other accounts and to disburse funds so withdrawn for their intended
purposes as described and specified in the Brookfield Cash Collateral
Agreement.
Prior to the Brookfield Effective Maturity Date, provided that (a) no
Event of Default shall have occurred and be continuing; (b) the Brookfield
Borrower certifies that there are no payables more than 60 days past due,
unless the same are being contested in good faith, and no other obligations
of the Brookfield Borrower are past due; and (c) the Brookfield Borrower
certifies that it has delivered instructions to the Brookfield Agent Bank to
transfer from the Brookfield Lockbox Account to the Brookfield Mortgage
Escrow Account an amount equal to 125% of any amounts being contested in
connection with any payables which exceed $250,000 in the aggregate
("Brookfield Reserve Amounts"), then the Brookfield Borrower may at any time
during the remainder of such month, instruct the Brookfield Agent Bank to
transfer amounts from the Brookfield Lockbox Account to such account or
accounts of the Brookfield Borrower as instructed to pay operating expenses
of the Brookfield Property, to make distribution to the shareholders of
Brookfield Borrower, or otherwise.
After the Brookfield Effective Maturity Date, the Brookfield Agent Bank
will withdraw from the Brookfield Operating Account on the first business day
of each month or as soon thereafter as there shall be collected funds in the
Brookfield Operating Account, funds in the following amounts and in the
following order of priority: (i) funds in an amount equal to the amount of
interest and principal due on the next payment date and deposit the same into
the Brookfield Interest Escrow Account; (ii) funds in an amount equal to the
monthly Brookfield Mortgage Escrow Amounts and deposit the same into the
S-104
<PAGE>
Brookfield Mortgage Escrow Account; (iii) funds in an amount equal to the
Brookfield Reserve Amounts, if any, and deposit the same into the Brookfield
Mortgage Escrow Account; (iv) funds in an amount equal to 1/12 of the
Operating Expenses (as hereinafter defined) in the Annual Budget approved by
mortgagee; (v) funds in an amount equal to the Brookfield Capital/TI Reserve
Amounts as may be required to be deposited from time to time, and deposit the
same into the Brookfield Capital and TI Reserve Account; (vi) funds to be
applied against the outstanding principal due under the Brookfield Note until
such principal amount is paid in full; and (vii) funds payable to mortgagee
in an amount equal to the Accrued Interest, including interest at the Default
Rate.
Transfer of Properties and Interest in Borrower; Encumbrance; Other
Debt. The Brookfield Borrower is generally prohibited from transferring or
encumbering the Brookfield Property except for a transfer of the Brookfield
Property that has been released as described under "--Defeasance Collateral".
The Brookfield Borrower may, without the consent of mortgagee, (i) make
immaterial transfers of portions of the Brookfield Property to Governmental
Authorities for dedication or public use or to other third parties for the
purpose of erecting and operating additional structures whose use is
integrated with the use of such Property, and (ii) grant easements,
restrictions, covenants, reservations, and rights of way in the ordinary
course of business for access, water and sewer lines, telephone and telegraph
lines, electric lines or other utilities, provided, however, that neither of
the transfers contemplated by (i) and (ii) shall materially impair the
utility and operation of the Brookfield Property or materially adversely
affect the value of the Brookfield Property taken as a whole. In connection
with any transfer or any series of transfers that affects (on a cumulative
basis) more than 10% of the value of the Brookfield Property (not including
leasing in the normal course of business), a tax opinion and a
non-disqualification opinion of counsel shall be furnished to the mortgagee.
Mortgagee's approval is not required for a transfer of any direct or
indirect beneficial interests in the Brookfield Borrower, provided that (i)
no Event of Default shall have occurred and be continuing; (ii) the
Brookfield Borrower (or such transferor of interest) shall deliver notice
thereof to mortgagee and the Rating Agencies at least 15 business days prior
to the effective date of such transfer; (iii) the Brookfield Borrower shall
remain a single purpose entity; (iv) no transfer of limited partner,
non-managing member of shareholder interests shall result in any one Person
(or any group of affiliates) other than Brookfield Commercial Properties
Inc., a California corporation or an affiliate thereof (collectively, a
"Permitted Transferee") owning, directly or indirectly, 50% of more of the
beneficial ownership interests of the Brookfield Borrower; and (v) Brookfield
Commercial Properties Inc. or any Permitted Transferee shall at all times
directly or indirectly own not less than 51% of the beneficial interests in
the Brookfield Borrower. If 10% or more of direct beneficial interests in the
Brookfield Borrower are transferred, other than to a Permitted Transferee, or
if any transfer shall result in a Person or group of Affiliates, other than
one or more Permitted Transferees, acquiring more than a 50% interests, the
Brookfield Borrower shall deliver to the Rating Agencies and mortgagee (a) an
opinion of counsel addressed to the Rating Agencies and mortgagee as to
nonconsolidation in bankruptcy and (b) an Officer's Certificate certifying
that the transfer is not an Event of Default, provided, however, that the
Rating Agencies shall deliver written confirmation that any such transfer
will not result in the withdrawal, qualification or downgrading of the then
current ratings of the Certificates.
The Brookfield Borrower is not permitted to incur, create, or assume any
additional debt or liabilities without the consent of mortgagee, provided,
however, that if no Event of Default shall have occurred and be continuing,
the Brookfield Borrower, may, without the consent of mortgagee, incur the
following indebtedness: (i) the Brookfield Note and all other indebtedness
provided for in the Loan Documents; (ii) unsecured indebtedness for operating
expenses incurred in the ordinary course of business which does not exceed,
at any time, $1,200,000 and is paid within 60 days of the date incurred
unless (a) the Brookfield Borrower is in good faith contesting its obligation
to pay such indebtedness in a manner satisfactory to the mortgagee, (b)
adequate reserves with respect thereto are maintained on the books of the
Brookfield Borrower in accordance with GAAP, (c) such contest operates to
suspend collection of such amounts or enforcement of such obligations, and
(d) no Event of Default exists and is continuing; and (iii) unsecured
indebtedness for amounts payable or reimbursable to any tenant on account of
work performed at the Brookfield Property by such tenant or for costs
incurred by such tenant in connection with its occupancy of space, including
for tenant improvements.
S-105
<PAGE>
Insurance. The Brookfield Borrower is required to maintain the following
types of insurance with respect to the Brookfield Property (a) property
insurance against all perils included within the classification "All Risks of
Physical Loss" with extended coverage in an amount at all times sufficient to
prevent the Brookfield Borrower from becoming a co-insurer, but in any event
equal to the full insurable value of the improvements and equipment, (b)
comprehensive general liability insurance in such amounts as are generally
required by institutional lenders for comparable properties but in no event
less than $5,000,000 per occurrence and with an aggregate limit of not less
than $10,000,000, (c) statutory worker's compensation insurance, (d) loss of
"rental value" or "business interruption" insurance to cover the loss of at
least 12 months income, (e) during any period of repair or restoration,
builder's "all risk" insurance in an amount not less than the full insurable
value of the Brookfield Property (including fire and extended coverage and
collapse of the Improvements), (f) broad-form boiler and machinery insurance
and insurance against loss of occupancy or use arising from any related
breakdown in such amounts as are generally available at a commercially
reasonable premium and are generally required by institutional lenders for
properties comparable to the Brookfield Property, (g) flood insurance, if
available, with respect to the Brookfield Property to the extent located
within a federally designated flood hazard zone in an amount equal to the
lesser of the loan amount for the Brookfield Property and the maximum limit
of coverage available with respect to the Brookfield Property, and (h) at the
mortgagee's reasonable request, such other insurance, including but not
limited to earthquake insurance, with respect to the Brookfield Property
against loss or damage of the kind customarily insured against in similar
buildings in the Minneapolis/St.Paul area and in such amounts as are
generally required by institutional lenders for comparable properties to the
Brookfield Property.
Any such insurance may be effected under a blanket policy so long as any
such blanket policy shall specify, except in the case of public liability
insurance, the portion of the total coverage of such policy that is allocated
to the Brookfield Property and any sublimits in such blanket policy
applicable to the Brookfield Property, which amounts may not be less than the
amounts required pursuant to, and which must in any case comply in all other
respects with the requirements of the Brookfield Loan. All insurance policies
are required to name the mortgagee as an additional name insured, to provide
that all proceeds (except with respect to proceeds of general liability and
workers' compensation insurance) be payable to the mortgagee except as
described below under "--Condemnation and Casualty" and to contain: (i) a
standard "noncontributory mortgagee" endorsement or its equivalent relating,
inter alia, to recovery by the mortgagee notwithstanding the negligent or
willful acts or omissions of the Brookfield Borrower; (ii) a waiver of
subrogation endorsement in favor of the mortgagee; (iii) an endorsement
providing that no policy shall be impaired or invalidated by virtue of any
act, failure to act, negligence of, or violation of declarations, warranties
or conditions contained in such policy by the Brookfield Borrower, the
mortgagee or any other named insured, additional insured or loss payee,
except for willful misconduct of the mortgagee knowingly in violation of the
conditions of such policy; (iv) an endorsement providing for a deductible per
loss of an amount not more than that which is customarily maintained by
prudent owners of first class properties comparable to, and in the general
vicinity of, the Brookfield Property, but in no event in excess of $100,000
except in the case of earthquake coverage for the Brookfield Property for
which such deductible shall not be in excess of that generally required by
institutional lenders on loans of similar amounts secured by comparable
properties; and (v) a provision that such policies shall not be cancelled,
terminated or expired without at least 30 days prior written notice to the
mortgagee, in each instance. The Brookfield Loan requires the Brookfield
Borrower to obtain the insurance described above from insurance carriers
having claims-paying-abilities rated (x) not less than "AA" by Standard &
Poor's Ratings Services and "AA" or its equivalent by one or more of the
other Rating Agencies and (y) not less than "A" by Alfred M. Best Company,
Inc. with a financial size category of not less than IX.
Condemnation and Casualty. Promptly after the occurrence of any damage or
destruction to all or any portion of the Brookfield Property or a
condemnation of a portion of the Brookfield Property, in either case which
does not constitute a Brookfield Total Loss, the Brookfield Borrower is
obligated promptly either (1) to pay in full the principal and interest and
all other amounts due on the Brookfield Loan, or (2) to commence and
diligently complete the repair, restoration and rebuilding of the Brookfield
Property.
S-106
<PAGE>
"Brookfield Total Loss" means (x) a casualty, damage or destruction of
the Brookfield Property, the cost of restoration of which would exceed 50% of
the loan amount, and with respect to which the Brookfield Borrower is not
required, under the applicable leases to apply the Proceeds (as hereinafter
defined) to the restoration of the Brookfield Property or (y) a permanent
taking of 50% or more of the GLA of the Brookfield Property or so much of the
Brookfield Property, in either case, such that it would be impracticable, in
mortgagee's sole discretion, even after restoration, to operate the
Brookfield Property as an economically viable whole and with respect to which
the applicable lease does not require such restoration.
In the event of any taking, casualty, injury, or damage, the Brookfield
Borrower shall assign to mortgagee all rights in any insurance or other
payments (the "Proceeds") received. Such Proceeds shall be applied by
mortgagee (unless mortgagee, in its sole discretion, otherwise elects) to
prepay the Brookfield Note without prepayment premium or penalty, if (i) the
Proceeds shall equal or exceed the loan amount, (ii) an Event of Default
shall have occurred and be continuing, (iii) a Brookfield Total Loss shall
have occurred, (iv) the work of restoration is not capable of being completed
before the earlier to occur of the date which is six months prior to the
Brookfield Loan Maturity Date and the date on which the business interruption
insurance expires, unless the Brookfield Borrower delivers a Letter of Credit
to mortgagee, in which case the period shall be extended for a period
reasonably determined by mortgagee, (v) the Brookfield Property is not
capable of being restored substantially to its condition prior to the
casualty or condemnation, or (vi) the Brookfield Borrower is unable to
demonstrate to the mortgagee's reasonable satisfaction its continuing ability
to pay the Brookfield Loan.
In the event of (i) a Brookfield Total Loss resulting from a casualty,
damage or destruction, if either (A) the cost to repair the Brookfield
Property would exceed $3,000,000 (the "Brookfield Threshold Amount") and the
restoration of the Brookfield Property cannot reasonably be completed before
the date which is the later to occur of the date of expiration of any
business interruption insurance or the date of expiration of any letter of
credit posted in lieu thereof or in addition thereto and under such
circumstances the Brookfield Borrower is not required under any tenant lease
to make the Proceeds available to restore the Brookfield Property or (B) the
mortgagee elects not to permit the Brookfield Borrower to restore the
Brookfield Property, or (ii) a Brookfield Total Loss resulting from a
condemnation, then the Brookfield Borrower must prepay the Brookfield Loan to
the extent the casualty or taking Proceeds received, up to an amount equal to
the outstanding principal thereof.
If any insurance or taking Proceeds (other than business interruption
insurance proceeds) are in excess of the Brookfield Threshold Amount, then
all such Proceeds will be applied to amounts due under the Brookfield Loan
and the prepayment of the principal amount outstanding thereon, without
prepayment premium or penalty, only if: (A)(i) an Event of Default shall have
occurred and be continuing, or, (ii) the Proceeds shall equal or exceed the
loan amount of the Brookfield Loan with respect to the Brookfield Property,
(iii) a Brookfield Total Loss shall have occurred, (iv) the amount of the
Proceeds is equal to or greater than the outstanding principal amount of the
Note, or (v) either (x) the Work is not capable of being completed before the
earlier to occur of the date which is six months prior to the Brookfield Loan
Maturity Date, and the date on which the business interruption insurance
expires or the extension period after delivery of a Letter of Credit shall
expire, or (y) the casualty or taking occurs on a date which is less than six
months prior to the Brookfield Loan Maturity Date, or (vi) the Brookfield
Borrower is unable to demonstrate to mortgagee's reasonable satisfaction its
continuing ability to pay the Loan or (B) such proceeds were the result of a
taking and after restoration is completed there are excess Proceeds which
were not required to effect the restoration, in which event prepayment shall
be made to the extent of such unneeded Proceeds. Any such excess Proceeds
shall be applied to the prepayment of Indebtedness or, at the Brookfield
Borrower's election, shall be deposited in a segregated cash collateral
account established in the name of Brookfield Agent Bank (the "Proceeds
Account"), as additional funds.
To the extent that the Proceeds do not exceed the Brookfield Threshold
Amount such Proceeds are to be paid directly to the Brookfield Borrower to be
applied to the restoration of the Brookfield Property. To the extent that
such Proceeds exceed the Brookfield Threshold Amount, all casualty and taking
Proceeds are required to be paid to the Brookfield Borrower to be used for
restoration. In the event that any insurance or taking Proceeds (other than
business interruption insurance proceeds) are in excess of
S-107
<PAGE>
the Brookfield Threshold Amount and are not required to be applied to the
payment or prepayment of the Brookfield Loan then mortgagee is obligated to
make all casualty and taking Proceeds (other than business interruption
insurance proceeds) available to the Brookfield Borrower or the applicable
tenant for payment or reimbursement of the costs and expenses of repair,
restoration and rebuilding of the Brookfield Property if, among other
conditions: (i) at the time of loss or damage or at any time thereafter while
the Brookfield Borrower is holding any portion of the Proceeds, there shall
be no continuing Event of Default, (ii) the mortgagee is furnished with an
estimate of the cost of the work accompanied by appropriate plans and
specifications for the work of restoration and an independent architect's
certification as to such costs and (iii) in the case that the cost of the
work exceeds the Proceeds, the Brookfield Borrower, at its option, either
deposits with or delivers to the mortgagee (and promptly following any such
deposit or delivery, provides written notice of same to the Rating
Agencies)(A) cash and cash equivalents, (B) a letter or letters of credit in
an amount equal to the estimated cost of the work less the Proceeds available
or (C) such other evidence of the Brookfield Borrower's ability to meet such
excess costs as is reasonably satisfactory to the mortgagee and the Rating
Agencies.
Approval Rights. For each calendar year commencing on the Brookfield
Effective Maturity Date and thereafter, the Brookfield Borrower shall submit
to the mortgagee for the mortgagee's approval an annual budget (the "Annual
Budget") not later than 60 days prior to the commencement of such calendar
year. In the event that the Brookfield Borrower must incur an extraordinary
operating expense or capital expenses not set forth in the Annual Budget, it
is required promptly to deliver to the mortgagee, for the mortgagee's
approval, a reasonably detailed explanation of such proposed expense.
If during the term of the Brookfield Loan, the Brookfield Borrower wishes
to designate another property manager acceptable to the mortgagee, the
Brookfield Borrower must notify the mortgagee and the Rating Agencies in
writing and obtain from the Rating Agencies written confirmation that the
retention of the proposed property manager will not result in a downgrade,
withdrawal or qualification of the then ratings of the Certificates. The
mortgagee has the right to replace the property manager upon the occurrence
of an Event of Default and at any time following the 10th anniversary of the
Brookfield Mortgage or May 13, 2007.
The Brookfield Borrower may not, without the consent of mortgagee, amend,
modify or waive the provisions of any Brookfield Material Lease or terminate,
reduce rents under or shorten the term of any Brookfield Material Lease in
any manner which would have a material adverse effect on the Brookfield
Property taken as a whole. "Brookfield Material Lease" shall mean (i) for
Gaviidae Common Phase II, all space demised under leases in excess of 10,000
square feet, and (ii) for Dain Bosworth Plaza, all space demised under leases
in excess of 20,000 square feet.
Financial Reporting. The Brookfield Borrower is required to furnish the
mortgagee: (a) annually within 120 days after the end of each fiscal year, a
copy of its year-end financial statement audited by an Independent
Accountant; (b) quarterly within 45 days of each calendar quarter (except the
fourth quarter of any calendar year), quarterly unaudited financial
statements; (c) annually within 90 days after the end of each calendar year a
complete rent roll showing the GLA of the Property leased as of the last day
of the preceding calendar quarter, the percentage of lease roll-overs for the
Brookfield Property for the preceding calendar quarter, a summary of new
lease signings and lease terminations for the preceding calendar quarter, the
current annual rent for the Brookfield Property, the expiration date of each
lease, renewal options and sublease information, if any; (d) annually within
90 days after the end of each calendar year a written report containing the
percentage of leases which expired pursuant to scheduled expiration dates
during the preceding calendar year, a list of leases which are triple net
leases and a list of leases which are not triple net leases, a summary of
each lease, a list of leases terminated in the preceding calendar year, a
summary of renewal options available under each lease, any information
relating to the subletting of any leases, and whether any portion of the
Brookfield Property is vacant; (e) annually within 90 days after the end of
each calendar year during the term of the Notes an annual summary of any and
all capital expenditures made at the Brookfield Property during the prior
twelve month period; and (f) promptly such further information regarding the
Brookfield Property as the mortgagee or the Rating Agencies may reasonably
request in writing. Concurrently with delivery of the financial statements to
the mortgagee, the Brookfield Borrower is required to provide a copy of the
foregoing items to the Rating Agencies.
S-108
<PAGE>
TOWER 45/ONE ORLANDO CENTER PORTFOLIO
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$107,000,000 $107,000,000
ORIGINATION DATE: NOVEMBER 26, 1997
ANTICIPATED
REPAYMENT
DATE ("ARD"): NOVEMBER 1, 2004
MATURITY DATE: NOVEMBER 1, 2027
BLENDED INTEREST
RATE: 6.8174%
AMORTIZATION: 2 YEARS INTEREST ONLY, THEN 28 YEAR
AMORTIZATION SCHEDULE
HYPER-AMORTIZATION: SUBSEQUENT TO NOVEMBER 1, 2004, THE INTEREST
RATE WILL INCREASE TO THE GREATER OF 8.8174%
OR 200 BASIS POINTS PLUS THE INTERPOLATED
15-YEAR UST RATE. ADDITIONALLY, ALL EXCESS
CASH FLOW WILL BE CAPTURED UNDER THE TERMS OF
THE CASH COLLATERAL AGREEMENT AND APPLIED TO
THE OUTSTANDING PRINCIPAL BALANCE OF THE NOTE.
INTEREST DUE UNDER THE REVISED INTEREST RATE,
WHICH IS IN EXCESS OF THAT WHICH IS DUE UNDER
THE INITIAL INTEREST RATE, WILL BE PAYABLE
SUBSEQUENT TO THE PAYMENT OF PRINCIPAL. ANY
INTEREST DUE UNDER THE NOTE BUT NOT PAID WILL
BE ACCRUED.
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: PREPAYMENT IS LOCKED OUT THROUGH OCTOBER 31,
2004. SUBSEQUENT TO AND INCLUDING NOVEMBER 1,
2004, THE NOTE IS PREPAYABLE WITHOUT PENALTY.
SUBSEQUENT TO THE EARLIER OF OCTOBER 16, 2000
OR THE SECOND ANNIVERSARY OF THE DATE OF
SECURITIZATION OF THIS LOAN, DEFEASANCE WILL
BE PERMITTED UPON THE DELIVERY OF APPROPRIATE
DEFEASANCE COLLATERAL. PARTIAL DEFEASANCE IS
PERMITTED UPON DELIVERY OF 125% OF THE
ALLOCATED LOAN AMOUNT.
THE BORROWER: THE BORROWING ENTITY, MAGNOLIA ASSOCIATES,
LTD., AS WELL AS ITS GENERAL PARTNER, IS
ORGANIZED AS A SPECIAL-PURPOSE,
BANKRUPTCY-REMOTE ENTITY.
TENANT IMPROVEMENT &
LEASING COMMISSION
RESERVES:
TOWER 45: ONGOING RESERVES EQUAL TO 1/12 THE PRODUCT OF
$2.00 AND THE TOTAL SQUARE FOOTAGE. ONE YEAR
PRIOR TO EXPIRATION OF A MATERIAL LEASE, AN
ADDITIONAL MONTHLY RESERVE EQUAL TO 1/12 THE
PRODUCT OF $35, ADJUSTED ON AN ANNUAL BASIS
FOR CPI, AND THE SQUARE FOOTAGE OF SPACE
LEASED TO TENANTS WITH MATERIAL LEASES.
MATERIAL LEASES ARE THOSE LEASES COMPRISING AT
LEAST 25,000 SQUARE FEET.
ONE ORLANDO
CENTER: ONGOING RESERVES EQUAL TO 1/12 THE PRODUCT OF
$1.50 AND THE TOTAL SQUARE FOOTAGE. ONE YEAR
PRIOR TO EXPIRATION OF A MATERIAL LEASE, AN
ADDITIONAL MONTHLY RESERVE EQUAL TO 1/12 THE
PRODUCT OF $25, ADJUSTED ON AN ANNUAL BASIS
FOR CPI, AND THE SQUARE FOOTAGE OF SPACE
LEASED TO TENANTS WITH MATERIAL LEASES.
MATERIAL LEASES ARE THOSE LEASES COMPRISING AT
LEAST 20,000 SQUARE FEET.
CROSS-COLLATERALIZATION/
DEFAULT: Yes
PROPERTY INFORMATION
PROPERTY TYPE: OFFICE
LOCATION: TOWER 45
120 WEST 45TH STREET
NEW YORK, NEW YORK
ONE ORLANDO CENTER
800 NORTH MAGNOLIA AVENUE
ORLANDO, FLORIDA
OCCUPANCY: TOWER 45 99.2%
ONE ORLANDO CENTER 100.0%
WEIGHTED AVERAGE 99.5%
RENTABLE
SQUARE FEET: TOWER 45 455,033
ONE ORLANDO CENTER 355,164
TOTAL 810,197
YEAR BUILT: TOWER 45 1989
ONE ORLANDO CENTER 1987
THE COLLATERAL: TOWER 45
ONE ORLANDO CENTER
PROPERTY MANAGEMENT: TOWER REALTY OPERATING PARTNERSHIP L.P.
1996 NET OPERATING
INCOME: TOWER 45 $11,909,991
ONE ORLANDO CENTER $5,391,638
TOTAL $17,301,629
UNDERWRITTEN
CASHFLOW: TOWER 45 $9,994,189
ONE ORLANDO CENTER $4,054,729
TOTAL $14,048,919
APPRAISED VALUE: TOWER 45 $95,000,000
ONE ORLANDO CENTER $55,000,000
TOTAL $150,000,000
APPRAISED BY: CUSHMAN & WAKEFIELD
APPRAISAL DATE: TOWER 45 SEPTEMBER 26, 1997
ONE ORLANDO CENTER SEPTEMBER 23, 1997
LTV AS OF 12/1/97: 71.3%
ANNUAL DEBT
SERVICE: 8,572,328
DSC: 1.64X
LOAN/SQ. FT. AS OF 12/1/97: $132.07
S-109
<PAGE>
TOWER REALTY LOAN: THE BORROWERS; THE PROPERTY
The Loan. The Loan (the "Original Tower Loan") was originated in the
amount of $54,000,000 by Midland Loan Services, L.P. ("Midland") on October
16, 1997 and acquired simultaneously therewith by Merrill Lynch Mortgage
Capital, Inc. ("MLMC"). On November 26, 1997, the principal amount of the
Original Tower Loan was increased by $53,000,000, and the Original Tower Loan
was consolidated, amended and restated to form a single lien on the Tower
Realty Properties (as defined below) with a principal balance on such date of
$107,000,000 (the "Tower Realty Loan"). The Tower Realty Loan has a principal
balance as of the Cut-Off Date of approximately $107,000,000. The Tower
Realty Loan is evidenced by a Consolidated, Amended and Restated Mortgage
Note in the original principal amount of $107,000,000 (the "Tower Realty
Note") which is secured by a Consolidated, Amended and Restated Fee and
Subleasehold Mortgage, Security Agreement, Financing Statement, Fixture
Filing and Assignment of Leases, Rents and Security Deposit (the "Tower
Realty Mortgage") encumbering the Tower Realty Borrower's (as hereinafter
defined) fee simple interest in the office tower commonly known as One
Orlando Center located in Orlando, Florida ("One Orlando Center") and the
Tower Realty Borrower's fee simple and ground subleasehold interest in Tower
45, located in New York, New York ("Tower 45", and collectively with One
Orlando Center, the "Tower Realty Properties").
The Borrowers. Magnolia Associates, LTD. (the "Tower Realty Borrower") is
a special-purpose Florida limited partnership whose purpose and business is
limited to holding ownership and leasehold interests in the Tower Realty
Properties, leasing, managing, operating and mortgaging the same, and
carrying on all activities thereto incidental or related. The Tower Realty
Borrower owns no material asset other than the Tower Realty Properties. The
sole general partner of the Tower Realty Borrower is Tower Orlando GP LLC, a
Delaware special-purpose limited liability company (the "Tower General
Partner"). The operating agreement of the Tower General Partner provides that
it is organized for the sole purpose of acting as general partner of the
Tower Realty Borrower and to engage in activities related thereto. The
managing member of the Tower General Partner is Tower QRS No. 3 Corp., a
Delaware special-purpose corporation (the "Tower Managing Member"). The
certificate a incorporation of the Tower Managing Member provides that it is
organized for the sole purpose of acting as managing member of the Tower
General Partner and to engage in activities related thereto. Each of the
Tower Realty Borrower, the Tower General Partner and the Tower Managing
Member are direct wholly-owned subsidiaries of Tower Realty Operating
Partnership, L.P.
The Properties. The Tower Realty Properties securing the Tower Realty Loan
are comprised of the Tower Realty Borrower's fee simple interest in the
office tower located in Orlando, Florida and the Tower Realty Borrower's fee
simple and ground subleasehold interest in the office tower located in New
York, New York.
Tower 45 is a 40 story Class A office building constructed in 1989 on a
15,565 square foot site located in midtown Manhattan. Tower 45 contains
approximately 455,033 rentable square feet (443,086 square feet of net
rentable square feet), including 425,871 square feet of office space on
floors 2 through 40, 4,583 square feet of retail space and an on-site
47-space parking garage. The building's entrance is characterized by a
soaring open air atrium 175 feet high. The two largest tenants, D.E. Shaw &
Co., L.P. and Equitable Life Assurance Society of the United States, occupy
63,871 square feet (14.5% of GLA), and 44,081 square feet (10% of GLA),
respectively. The market value of Tower 45, based on the appraisal performed
by Cushman & Wakefield, Inc. dated as of September 23, 1997, is $95,000,000.
One Orlando Center is a 19 story Class A office building constructed in
1987, with a detached multi-level parking garage. One Orlando Center contains
approximately 355,164 rentable square feet, of which First Union Bank and
United Healthcare, the two (2) largest tenants, occupy 69,363 square feet
(19.5% of GLA), and 39,245 square feet (11.1% of GLA), respectively. As of
September 23, 1997, One Orlando Center was approximately 100% leased. The
Property, which is situated on an approximately 5.53 acre parcel, also
features a seven-level detached structural parking garage containing parking
for 1,390 cars. The market value of One Orlando Center, based on the
appraisal performed by Cushman & Wakefield, Inc. dated as of September 23,
1997, is $55,000,000.
S-110
<PAGE>
Location/Access.
Tower 45 is located at 120 West 45th Street, between Avenue of the
Americas and Seventh Avenue, New York, New York. Tower 45 is located within
the Plaza District of midtown Manhattan, which is considered Manhattan's
premier office and retail location.
One Orlando Center is located at 800 North Magnolia Avenue, Orlando
Florida. The property is located four blocks north of the Orlando central
business district and is two blocks from the new downtown courthouse complex.
Vehicular access to the site is available via driveways on the west side of
North Magnolia Avenue, the east side of Orange Avenue, and the north side of
Park Lane Street.
Market Overviews.
Midtown Manhattan Market. According to the appraisal prepared by Cushman &
Wakefield, Inc., the midtown Manhattan office market is currently the largest
in the country and contains over 220 million square feet of space in 778
properties. In the midtown Manhattan market, Class A space accounts for 76
percent of the total inventory, with a total of 168 million square feet in
342 buildings. As of June 30, 1997, the reported vacancy rate among Class A
buildings in midtown Manhattan was 9.1%, with average asking rental rates of
$36.91 per square foot. By comparison, Class A buildings located within the
Plaza District evidenced an 8.6% primary vacancy rate as of June 30, 1997,
with average asking rental rates of $41.90 per square foot.
Orlando Market. According to the appraisal prepared by Cushman &
Wakefield, Inc., the greater Orlando office market consists of 18.9 million
square feet of inventory in eleven submarkets. Of this total, approximately
9.4 million square feet or 49.7% is considered Class A space. The Orlando
central business district market contains a total of 5.1 million square feet
of which 3.27 million square feet is considered Class A. As of September 30,
1997, the overall Class A vacancy rate was reported at 4.0% with average
asking rents of $20.55 per square foot. Central business district Class A
statistics were 3.4% and $23.44 per square foot, respectively.
Environmental Report. A Phase I environmental site assessment was
performed dated December 11, 1996 on the One Orlando Center Property. The
Phase I environmental assessment did not reveal any environmental liability
that the Depositor believes would have a material adverse effect on the
Borrower's business, assets or results of operations taken as a whole.
Nevertheless, there can be no assurance that all environmental conditions and
risks were identified in such environmental assessment.
A Phase I environmental site assessment dated as of March 26, 1997 was
performed on the Tower 45 Property. The Phase I environmental site assessment
did not reveal any environmental liability that the Depositor believes would
have a material adverse effect on the Borrower's business, assets or results
of operations taken as a whole. Nevertheless, there can be no assurance that
all environmental conditions and risks were identified in such environmental
assessment.
Engineering Report. A Property Condition Report was completed on One
Orlando Center on November 20, 1997 by a third party due diligence firm. The
Property Condition Report concluded that One Orlando Center was generally in
good physical condition. At origination of the Tower Realty Loan, the
Borrower established a deferred maintenance reserve account with respect to
One Orlando Center, into which Tower Realty Borrower deposited $194,127 to
fund the cost of addressing the identified items. A Property Condition Report
was completed on Tower 45 on March 26, 1997 by a third party due diligence
firm. The Property Condition Report concluded that Tower 45 was generally in
good physical condition and identified approximately $258,000 in deferred
maintenance requirements. At origination of the Tower Realty Loan, the
Borrower established a deferred maintenance reserve account with respect to
Tower 45, into which Tower Realty Borrower deposited equal to $258,000 to
fund the cost of addressing the identified items.
Property Management. The Tower Realty Properties are managed by Tower
Realty Operating Partnership, L.P., which is an affiliated entity with Tower
Realty Trust Inc., the operating partnership of Tower Realty Trust, Inc.
There are presently no third party management agreements in effect related to
the Tower Realty Properties.
S-111
<PAGE>
Ground Leases, Ground Sublease, Air Rights Lease and Option Agreement. By
Indenture of Ground Lease dated as of November 13, 1986, the Tower Realty
Borrower leased Tower 45 to Belasco Theatre Corporation, a New York
corporation ("Belasco") (the "Belasco Ground Lease"). The Belasco Ground
Lease extends for a term commencing on the date of the Belasco Ground Lease
and terminates on the earlier to occur of (a) 250 years from the date of the
Belasco Ground Lease, (b) the date of the destruction of Tower 45, (c) the
date title is conveyed pursuant to the Option Agreement (as hereinafter
defined), and (d) the date of termination of the Air Rights Lease (as
hereinafter defined). A nominal rent of Ten Dollars ($10) for the term of the
Belasco Ground Lease has been prepaid by Belasco.
By Indenture of Sublease dated as of November 13, 1986, the Tower Realty
Borrower ground subleases Tower 45 from Belasco for the same term as set
forth above (the "Belasco Ground Sublease"). A nominal rent of Ten Dollars
($10) for the term of the Belasco Ground Sublease has been prepaid by the
Tower Realty Borrower.
By Indenture of Air-Rights Lease dated as of November 13, 1986, the Tower
Realty Borrower leases and hires from Belasco the right to use 124,000 square
feet of development rights for the development of Tower 45 (the "Air Rights
Lease"). The Air Rights Lease extends for a term commencing on the date of
the Air Rights Lease and terminating on the earlier to occur of (a) 250 years
from the date of the Air Rights Lease, and (b) the date of the destruction of
Tower 45. The rent is $575,000 per annum.
By Option Agreement dated as of November 13, 1986, Belasco granted the
Tower Realty Borrower the option to purchase the property known as 111-121
West 44th Street, together with all improvements and all development rights
associated therewith for a sum of $11,000,000 (as escalated by one-half of
the increase in the Consumer Price Index) (the "Option Agreement"). The
option is exercisable through October 31, 2001.
Operating History. The following table presents certain information
regarding the operating history of Tower 45 and One Orlando Center on a
combined basis:
TOWER 45/ONE ORLANDO CENTER COMBINED
UNDERWRITTEN
1995 1996 CASHFLOW
------------- ------------- --------------
Revenues............... $23,995,315 $28,128,727 $ 26,930,514
Expenses............... 10,409,812 10,827,098 10,387,214
------------- ------------- --------------
Net Operating Income .. $13,585,503 $17,301,629 $ 16,543,300
Adjustments to NOI .... 2,494,381
--------------
Net Cash Flow.......... $ 14,048,919
==============
Occupancy.............. 99.6%
12/1/97 Loan Balance .. $107,000,000
Appraised Value........ $150,000,000
12/1/97 LTV............ 71.3%
Annual Debt
Service(*)............ $ 8,572,328
DSCR................... 1.64x
- ------------
(*) Represents principal and interest commencing in year 3 of the loan.
S-112
<PAGE>
TOWER 45
UNDERWRITTEN
1995 1996 CASHFLOW
------------- ------------- --------------
Revenues............. $20,598,664 $19,990,003 $18,953,025
Expenses............. 9,087,260 8,080,012 7,586,472
------------- ------------- --------------
Net Operating
Income.............. $11,511,404 $11,909,991 $11,366,553
Adjustments to NOI .. 1,372,364
--------------
Net Cash Flow........ $ 9,994,189
==============
Occupancy............ 99.1% 99.3% 99.2%
12/1/97 Loan
Balance............. $67,000,000
Appraised Value...... $95,000,000
12/1/97 LTV.......... 70.5%
Annual Debt Service . $ 5,367,719
DSCR................. 1.86x
ONE ORLANDO CENTER
UNDERWRITTEN
1995 1996 CASHFLOW
------------ ------------ --------------
Revenues............. $3,396,651 $8,138,724 $ 7,977,488
Expenses............. 1,322,552 2,747,086 2,800,742
------------ ------------ --------------
Net Operating
Income.............. $2,074,099 $5,391,638 $ 5,176,747
Adjustments to NOI .. 1,122,017
--------------
Net Cash Flow........ $ 4,054,729
==============
Occupancy............ 99.1% 99.3% 100.0%
12/1/97 Loan
Balance............. $40,000,000
Appraised Value...... $55,000,000
12/1/97 LTV.......... 72.7%
Annual Debt Service . $ 3,204,609
DSCR................. 1.27x
S-113
<PAGE>
UNDERWRITTEN CASHFLOW--TOWER REALTY LOAN
- -----------------------------------------------------------------------------
TOWER ORLANDO CONSOLIDATED
------------- ------------ --------------
GROSS REVENUE................... $16,149,828 $7,499,245 $23,649,073
Porters' Wage Revenue........... 575,375 -- 575,375
CPI & Other Adjustment Revenue . 34,205 40,303 74,508
Total Reimbursement Revenue .... 2,808,145 566,443 3,374,588
Overtime Electric............... 233,000 77,219 310,219
Parking......................... -- 181,898 181,898
Storage......................... -- 11,348 11,348
Miscellaneous Services.......... 150,000 20,900 170,900
------------- ------------ --------------
TOTAL GROSS REVENUE............. 19,950,553 8,397,356 28,347,909
General Vacancy @ 5.0% of TGR .. 997,528 419,868 1,417,395
------------- ------------ --------------
EFFECTIVE GROSS REVENUE......... 18,953,025 7,977,488 26,930,514
OPERATING EXPENSES
Administration................. 59,199 196,687 255,886
Utilities...................... 545,073 676,008 1,221,081
Repairs & Maintenance.......... 697,499 306,932 1,004,431
Building Cleaning.............. 805,147 183,590 988,737
Other Cleaning................. 59,529 37,666 97,195
Landscaping.................... 83,217 42,345 125,562
Real Estate Taxes.............. 3,676,520 856,562 4,533,082
Insurance...................... 91,144 44,336 135,480
Rubbish........................ 47,260 15,774 63,034
Promotion...................... -- 27,804 27,804
G&A............................ -- 33,807 33,807
Payroll/Tax/Benefits........... 345,304 8,496 353,800
Security....................... 293,400 131,410 424,810
Other ......................... 23,885 -- 23,885
Management Fee @ 3.0% of EGR .. -- 239,325 239,325
Management Fee @ 1.5% of EGR .. 284,295 -- 284,295
Air Rights Lease............... 575,000 -- 575,000
TOTAL OPERATING EXPENSES........ 7,586,472 2,800,742 10,387,214
------------- ------------ --------------
NET OPERATING INCOME............ 11,366,553 5,176,747 16,543,300
============= ============ ==============
LEASING & CAPITAL COSTS
Tenant Improvements............ 808,396 827,946 1,636,341
Leasing Commissions............ 498,511 240,494 739,005
Reserves....................... 65,457 53,577 119,034
------------- ------------ --------------
TOTAL LEASING & CAPITAL COSTS .. 1,372,364 1,122,017 2,494,381
------------- ------------ --------------
CASH FLOW BEFORE DEBT SERVICE &
INCOME TAX..................... 9,994,189 4,054,729 14,048,919
============= ============ ==============
S-114
<PAGE>
1996 ACTUAL--TOWER REALTY LOAN
- -----------------------------------------------------------------------------
1996 ACTUAL 1996 ACTUAL 1996 ACTUAL
TOWER ORLANDO CONSOLIDATED
------------- ------------- --------------
INCOME:
Base Rental Revenue ............. $14,861,422 $7,602,781 $22,464,203
Expense Recoveries ............... 1,679,892 488,970 2,168,862
Tax Recoveries ................... 2,807,157 - 2,807,157
Replacement Reserves.............. - - -
Percentage Rents ................. - - -
Parking .......................... - - -
Misc. Operating Income ........... 821,563 216,066 1,037,629
------------- ------------- --------------
POTENTIAL GROSS INCOME: ............ 20,170,034 8,307,817 28,477,851
Less: Absorption & Turnover
Vacancy........................... - - -
Less: General Vacancy ............ 124,378 169,093 293,471
Less: Bad Debt/Collection Loss ... 55,653 - 55,653
------------- ------------- --------------
TOTAL ECONOMIC VACANCY ............. 180,031 169,093 349,124
------------- ------------- --------------
EFFECTIVE GROSS INCOME ............. 19,990,003 8,138,724 28,128,727
EXPENSES:
OPERATING EXPENSES
Management Fees.................... 1,070,284 236,211 1,306,495
Contract Services ................. 1,209,659 423,437 1,633,096
Repairs & Maintenance ............. 446,453 277,874 724,327
Payroll............................ 739,742 196,056 935,798
Administrative .................... 206,814 149,114 355,928
Parking Expense ................... - - -
Utilities ......................... 539,176 648,865 1,188,041
CAM................................ - - -
Replacement Reserves .............. - - -
Legal Fees ........................ 69,027 2,398 71,425
Misc. Expense ..................... - - -
FIXED EXPENSES
Insurance ......................... 78,867 55,076 133,943
Taxes ............................. 3,719,990 758,055 4,478,045
Ground Rent........................ - - -
------------- ------------- --------------
TOTAL EXPENSES ..................... 8,080,012 2,747,086 10,827,098
------------- ------------- --------------
NET OPERATING INCOME ............... $11,909,991 $5,391,638 $17,301,629
============= ============= ==============
S-115
<PAGE>
Major Tenant Summary. The following tables present certain information
regarding the major tenants at each of the Tower Realty Properties.
TOWER 45
<TABLE>
<CAPTION>
TENANT NET
RENTABLE AREA % OF TOTAL NET LEASE CREDIT RATING
TENANT NAME (SF) RENTABLE AREA EXPIRATION (MOODY'S/S&P)
- ---------------------- --------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
D.E. Shaw & Co......... 75,981 14.42% 10/31/01 NR/NR
Equitable Life......... 44,081 9.95 05/31/01 A3/AA
Brown, Raysman......... 38,237 8.63 05/31/05 NR/NR
King & Spaulding....... 35,874 8.10 12/31/05 NR/NR
Berlack, Israels....... 26,380 5.95 05/31/05 NR/NR
EL AL Airlines......... 26,342 5.95 04/30/04 NR/NR
Kellwood Corp.......... 25,780 5.82 10/31/04 NR/NR
--------------- --------------
TOTAL MAJOR TENANTS .. 272,675 58.81
OTHER TENANTS......... 182,358 41.19
TOTAL NET RENTABLE
SF.................... 455,033 100.00%
=============== ==============
</TABLE>
ONE ORLANDO CENTER
<TABLE>
<CAPTION>
TENANT NET
RENTABLE AREA % OF TOTAL NET LEASE CREDIT RATING
TENANT NAME (SF) RENTABLE AREA EXPIRATION (MOODY'S/S&P)
- ---------------------- --------------- -------------- ------------ ---------------
<S> <C> <C> <C> <C>
First Union Bank....... 69,363 19.53% 12/31/02 A1/A
United Healthcare...... 39,240 11.05 07/31/02 NR/A+
Hansen Lind Meyer...... 30,000 8.45 12/31/02 NR/NR
R.W. Beck.............. 25,541 7.19 08/31/06 NR/NR
Educational Inst....... 24,592 6.92 06/30/07 NR/NR
Dean Mead.............. 22,264 6.27 04/30/04 NR/NR
--------------- --------------
TOTAL MAJOR TENANTS .. 211,000 59.41
OTHER TENANTS......... 144,164 40.59
TOTAL NET RENTABLE
SF.................... 355,164 100.00%
=============== ==============
</TABLE>
S-116
<PAGE>
Lease Expiration Summary. The following tables present certain
information regarding the future lease expirations at the Tower Realty
Properties.
<TABLE>
<CAPTION>
SQUARE FEET
EXPIRING YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
FOR THE YEARS ENDING OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002 OCT-2003
- -------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BUILDING
Tower 45 - 30,971 6,430 99,189 30,815 47,790
One Orlando Center 10,635 19,940 29,390 39,703 10,088 147,690
-------- ---------- -------- ---------- ---------- ----------
Total SQFT Expiring 10,634 50,911 35,820 138,892 40,903 195,480
======== ========== ======== ========== ========== ==========
Percent of Total 1.3% 6.4% 4.5% 17.5% 5.2% 24.7%
ESCALATED
RENT EXPIRING
BUILDING
Tower 45 - 747,370 228,329 3,235,620 1,135,469 1,086,564
One Orlando Center 198,239 314,185 519,835 754,680 195,337 2,973,192
-------- ---------- -------- ---------- ---------- ----------
Total Rent Expiring $198,239 $1,065,555 $748,164 $3,990,301 $1,330,806 $4,059,756
======== ========== ======== ========== ========== ==========
Percent of Total 0.9% 4.9% 3.4% 18.3% 6.1% 18.6%
Average $ per SQFT $ 17.52 $ 20.77 $ 19.76 $ 28.73 $ 32.54 $ 20.13
</TABLE>
<TABLE>
<CAPTION>
SQUARE FEET
EXPIRING YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
FOR THE YEARS ENDING OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND TOTAL
- -------------------- -------- -------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
BUILDING
Tower 45 71,544 67,761 55,981 12,110 14,115 436,706
One Orlando Center 31,708 400 25,541 38,270 1,800 355,164
---------- ---------- ---------- ---------- -------- -----------
Total SQFT Expiring 103,252 68,161 81,522 50,380 15,915 791,870
========== ========== ========== ========== ======== ===========
Percent of Total 13.0% 8.6% 10.3% 6.4% 2.0% 100.0%
ESCALATED
RENT EXPIRING
BUILDING
Tower 45 2,694,401 2,654,697 2,202,745 511,405 438,978 14,935,579
One Orlando Center 735,633 2,888 438,539 760,542 - 6,893,071
---------- ---------- ---------- ---------- -------- -----------
Total Rent Expiring $3,430,034 $2,657,585 $2,641,284 $1,271,947 $438,978 $21,828,650
========== ========== ========== ========== ======== ===========
Percent of Total 15.7% 12.2% 12.1% 5.8% 2.0% 100.0%
Average $ per SQFT $ 33.22 $ 38.99 $ 32.39 $ 25.25 $ 27.58 $ 27.34
</TABLE>
S-117
<PAGE>
TOWER 45
- ------------------------------------------------------------------------------
Lease Expiration Schedule
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
FOR THE YEARS ENDING OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002 OCT-2003
- -------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Washington Life - 6,643 - - - -
Washington Life - 12,645 - - - -
Washington Life - 400 - - - -
Roth & Liebman - 2,086 - - - -
Scott Paper Co. - 2,176 - - - -
Gage & Buschman - 2,882 - - - -
Gage & Buschman - 2,255 - - - -
Hazama Corp. - 1,884 - - - -
Haggar Apparel Co. - - 6,430 - - -
Marvin F. Poer Co. - - - 3,790 - -
Equitable - - - 9,711 - -
Equitable - - - 9,711 - -
Equitable - - - 9,711 - -
Equitable - - - 5,931 - -
Equitable - - - 9,017 - -
Metropolitan Fiber - - - 500 - -
Feldman Temporary - - - 3,648 - -
NEC Business Comm. - - - 11,858 - -
Winnebago/Nec - - - 3,342 - -
Shell Mining Co. - - - 11,858 - -
D.E. Shaw & Co. - - - 4,230 - -
D.E. Shaw & Co. - - - 15,882 - -
Lipsky Goodkin - - - - 9,711 -
Lipsky Goodkin - - - - 300 -
Space #1 Scott Rudin - - - - 2,176 -
Jiji Press - - - - 4,883 -
Restaurant Assoc. - - - - 13,745 -
GSA - - - - - 11,386
Nippon Travel - - - - - 8,079
Altman & Selvaggi - - - - - 6,756
D.E. Shaw & Co. - - - - - 11,858
D.E. Shaw & Co. - - - - - 9,711
El Al Airlines - - - - - -
El Al Airlines - - - - - -
Metropolitan Fiber - - - - - -
D.E. Shaw - - - - - -
Kellwood Corp. - - - - - -
Jetour - - - - - -
Berlack, Israels - - - - - -
Berlack, Israels - - - - - -
Brown, Raysman - - - - - -
Brown, Raysman - - - - - -
Jyoti (Soft Touch News) - - - - - -
Soft Touch News - - - - - -
Randa Corp. - - - - - -
King & Spalding - - - - - -
King & Spalding - - - - - -
King & Spalding - - - - - -
King & Spalding - - - - - -
King & Spalding - - - - - -
D.E. Shaw/Dominion - - - - - -
D.E. Shaw & Co. - - - - - -
Man'Tan Park (GAR) - - - - - -
My Most Favorite - - - - - -
----- -------- -------- ---------- ---------- ----------
Total SQFT Expiring - 30,971 6,430 99,189 30,815 47,790
===== ======== ======== ========== ========== ==========
Percent of Total 0.0% 6.8% 1.4% 21.8% 7.1% 10.5%
Total Rent Expiring $ 0 $747,370 $228,329 $3,235,620 $1,135,469 $1,086,564
Percent of Total 0.0% 5.0% 1.5% 20.7% 7.6% 6.9%
Average $ per SQFT $0.00 $ 24.13 $ 35.51 $ 32.62 $ 36.85 $ 22.74
</TABLE>
<TABLE>
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
FOR THE YEARS ENDING OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND
- -------------------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Washington Life - - - - -
Washington Life - - - - -
Washington Life - - - - -
Roth & Liebman - - - - -
Scott Paper Co. - - - - -
Gage & Buschman - - - - -
Gage & Buschman - - - - -
Hazama Corp. - - - - -
Haggar Apparel Co. - - - - -
Marvin F. Poer Co. - - - - -
Equitable - - - - -
Equitable - - - - -
Equitable - - - - -
Equitable - - - - -
Equitable - - - - -
Metropolitan Fiber - - - - -
Feldman Temporary - - - - -
NEC Business Comm. - - - - -
Winnebago/Nec - - - - -
Shell Mining Co. - - - - -
D.E. Shaw & Co. - - - - -
D.E. Shaw & Co. - - - - -
Lipsky Goodkin - - - - -
Lipsky Goodkin - - - - -
Space #1 Scott Rudin - - - - -
Jiji Press - - - - -
Restaurant Assoc. - - - - -
GSA - - - - -
Nippon Travel - - - - -
Altman & Selvaggi - - - - -
D.E. Shaw & Co. - - - - -
D.E. Shaw & Co. - - - - -
El Al Airlines 24,710 - - - -
El Al Airlines 1,632 - - - -
Metropolitan Fiber 9,711 - - - -
D.E. Shaw 9,711 - - - -
Kellwood Corp. 25,780 - - - -
Jetour - 2,944 - - -
Berlack, Israels - 25,780 - - -
Berlack, Israels - 600 - - -
Brown, Raysman - 37,437 - - -
Brown, Raysman - 800 - - -
Jyoti (Soft Touch News) - 100 - - -
Soft Touch News - 100 - - -
Randa Corp. - - 7,628 - -
King & Spalding - - 5,350 - -
King & Spalding - - 4,504 - -
King & Spalding - - 2,004 - -
King & Spalding - - 23,716 - -
King & Spalding - - 300 - -
D.E. Shaw/Dominion - - 12,479 - -
D.E. Shaw & Co. - - - 12,110 -
Man'Tan Park (GAR) - - - - 9,732
My Most Favorite - - - - 4,383
---------- ---------- ---------- -------- --------
Total SQFT Expiring 71,544 67,761 55,981 12,110 14,115 436,706
========== ========== ========== ======== ======== ===========
Percent of Total 15.7% 14.9% 12.8% 2.7% 3.2% 100.0%
Total Rent Expiring $2,694,401 $2,654,697 $2,202,745 $511,405 $438,978 $14,935,579
Percent of Total 17.2% 17.0% 14.7% 3.3% 2.9% 100.0%
Average $ per SQFT $ 37.66 $ 39.18 $ 39.35 $ 42.23 $ 31.10 $ 34.20
</TABLE>
S-118
<PAGE>
ONE ORLANDO CENTER
- -------------------------------------------------------------------------------
Lease Expiration Schedule
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
FOR THE YEARS ENDING OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002 OCT-2003
- -------------------- -------- --------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Central Fl. Copy 1,727 - - - - -
Firos Kanji 577 - - - - -
ECC of Orlando 8,330 - - - - -
Hanover Reassurance - 6,633 - - - -
Prudential Insurance - 7,418 - - - -
LDDS Communication - 5,889 - - - -
World Wide Travel - - 864 - - -
Nature's Table - - 1,349 - - -
Fluor Daniel, Inc. - - 3,375 - - -
American Exp. Fin - - 6,119 - - -
IDS Financial - - 1,173 - - -
IDS Financial - - 6,095 - - -
American Phoenix - - 8,700 - - -
William Pickering - - 1,715 - - -
Productivity Soft. - - - 1,530 - -
Hanover Reassurance - - - 3,112 - -
Productivity Software - - - 3,112 - -
Business Telecom - - - 3,763 - -
Cellcom (Expan.) - - - 1,050 - -
Cellcom, Inc. - - - 418 - -
Legg, Mason - - - 8,819 - -
Acacia Insurance - - - 5,295 - -
Turner Construction - - - 6,112 - -
Turner Construction - - - 1,171 - -
Wade Development - - - 1,764 - -
Wade Development - - - 3,557 - -
Met Life (Expan.) - - - - 4,466 -
Metropolitan Life - - - - 5,622 -
First Union Bank - - - - - 10,503
Credit Data Serv. - - - - - 7,245
First Union Bank - - - - - 19,620
First Union Bank - - - - - 19,620
First Union Bank - - - - - 19,620
Hansen Lind Meyer - - - - - 10,380
Hanson Lind Meyer - - - - - 19,620
United Healthcare - - - - - 9,431
United Healthcare - - - - - 29,809
Alternative Resources - - - - - 1,842
Dean Mead - - - - - -
Dean Mead - - - - - -
Smith Barney - - - - - -
Metro Fiber Sys. - - - - - -
Beck, R.W. - - - - - -
Prudential Securities - - - - - -
Educational Inst. - - - - - -
Leasing Office - - - - - -
-------- -------- -------- -------- -------- ----------
Total SQFT Expiring 10,634 19,940 29,390 39,703 10,088 147,690
======== ======== ======== ======== ======== ==========
Percent of Total 3.0% 5.6% 8.3% 11.2% 2.8% 41.6%
Total Rent Expiring $198,239 $314,185 $519,835 $754,680 $195,337 $2,973,192
Percent of Total 2.9% 4.6% 7.5% 10.7% 2.8% 43.1%
Average $ per SQFT $ 18.64 $ 15.76 $ 17.69 $ 19.01 $ 19.36 $ 20.13
</TABLE>
<TABLE>
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
FOR THE YEARS ENDING OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND
- -------------------- -------- -------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Central Fl. Copy - - - - -
Firos Kanji - - - - -
ECC of Orlando - - - - -
Hanover Reassurance - - - - -
Prudential Insurance - - - - -
LDDS Communication - - - - -
World Wide Travel - - - - -
Nature's Table - - - - -
Fluor Daniel, Inc. - - - - -
American Exp. Fin - - - - -
IDS Financial - - - - -
IDS Financial - - - - -
American Phoenix - - - - -
William Pickering - - - - -
Productivity Soft. - - - - -
Hanover Reassurance - - - - -
Productivity Software - - - - -
Business Telecom - - - - -
Cellcom (Expan.) - - - - -
Cellcom, Inc. - - - - -
Legg, Mason - - - - -
Acacia Insurance - - - - -
Turner Construction - - - - -
Turner Construction - - - - -
Wade Development - - - - -
Wade Development - - - - -
Met Life (Expan.) - - - - -
Metropolitan Life - - - - -
First Union Bank - - - - -
Credit Data Serv. - - - - -
First Union Bank - - - - -
First Union Bank - - - - -
First Union Bank - - - - -
Hansen Lind Meyer - - - - -
Hanson Lind Meyer - - - - -
United Healthcare - - - - -
United Healthcare - - - - -
Alternative Resources - - - - -
Dean Mead 19,620 - - - -
Dean Mead 2,644 - - - -
Smith Barney 9,444 - - - -
Metro Fiber Sys. - 400 - - -
Beck, R.W. - - 25,541 - -
Prudential Securities - - - 13,678 -
Educational Inst. - - - 24,592 -
Leasing Office - - - - 1,800
-------- ------ -------- -------- ------
Total SQFT Expiring 31,708 400 25,541 38,270 1,800 355,164
======== ====== ======== ======== ====== ==========
Percent of Total 8.9% 0.1% 7.2% 10.8% 0.5% 100.0%
Total Rent Expiring $735,633 $2,888 $438,539 $760,542 $ 0 $6,893,071
Percent of Total 10.4% 0.0% 6.2% 10.8% 0.0% 100.0%
Average $ per SQFT $ 23.20 $ 7.22 $ 17.17 $ 19.87 $ 0.00 $ 19.41
</TABLE>
S-119
<PAGE>
TOWER REALTY: THE LOAN
Security. The Tower Realty Loan is a nonrecourse loan, secured only by the
Tower Realty Borrower's fee interest in One Orlando Center and the fee and
ground subleasehold interest in Tower 45, and certain other collateral
relating thereto (including assignment of leases and rents, and a cash
collateral account security). The mortgagee is the insured under the title
insurance policies which insure, among other things, that the Tower Realty
Mortgage constitutes a valid and enforceable first lien on each of the Tower
Realty Properties, subject to certain exceptions and exclusions from coverage
set forth therein. Such title insurance policies, together with the Tower
Note, the Tower Realty Mortgage and other documents and agreements evidencing
and securing the Tower Realty Loan (collectively, with all other security
documents referenced herein, the "Loan Documents"), will be assigned to the
Trust Fund.
Payment Terms. The Tower Realty Loan matures on November 1, 2027 (the
"Tower Realty Maturity Date") and bears interest at (a) a fixed rate per
annum equal to 6.82% (the "Tower Realty Initial Interest Rate") through and
including October 31, 2004 and (b) from and including November 1, 2004 (the
"Tower Realty Anticipated Repayment Date"), at a fixed rate per annum equal
to the greater of (i) the Tower Realty Initial Interest Rate plus 2% or (ii)
the Tower Realty Treasury Rate (as defined below) plus 2% (the "Tower Realty
Applicable Interest Rate"). The "Tower Realty Treasury Rate" means the yield,
calculated by linear interpolation of the yield of noncallable United States
Treasury obligations with terms (one longer and one shorter) most nearly
approximating the period from the date of such prepayment to the Tower Realty
Maturity Date. Any interest accrued at the excess of the Tower Realty Revised
Interest Rate over the Tower Realty Initial Interest Rate is deferred and
added to the outstanding indebtedness under the Tower Realty Loan and earns
interest at the Tower Realty Revised Interest Rate (such deferred interest
and interest thereon, the "Tower Realty Accrued Interest"). Interest on the
Tower Realty Loan is calculated on the basis of a 360-day year of 30-day
months.
The payment date for the Tower Realty Loan is the first business day of
each month (each, a "Payment Date"), with a one day grace period for a
default prior to the Tower Realty Effective Maturity Date, in the payment of
scheduled principal or interest. Commencing on January 1, 1998 and continuing
through November 1, 1999, 23 equal monthly installments of interest equal to
$607,884.83 each shall be due and payable. Thereafter, commencing on December
1, 1999, the Tower Realty Loan requires 336 equal monthly installments of
principal and interest (the "Tower Realty Debt Service Payments") of
$714,360.64 monthly (based on 336-month amortization schedule and the Tower
Realty Initial Interest Rate). In the event of a default in payments,
interest will accumulate thereon at the applicable interest rate plus five
percent (5.0%) per annum (the "Default Rate").
Commencing with the first Payment Date after the Tower Realty Effective
Maturity Date and continuing on each Payment Date thereafter through and
including the Tower Realty Maturity Date, the Tower Realty Borrower is
required to apply 100% of rents and other revenues from the Tower Realty
Properties to the following items in the following order of priority: (a) to
payment of interest accruing at the Tower Realty Default Rate and late
payment charges; (b) to payment of required monthly amounts of real estate
taxes, insurance premiums and rent on the Air Rights Lease (the "Tower Realty
Mortgage Escrow Amounts"); (c) to payment of the Tower Realty Monthly Debt
Service Payments; (d) to payment of monthly cash expenses pursuant to the
annual budget approved by the mortgagee (the "Cash Expenses"); (e) to payment
of extraordinary expenses approved by the mortgagee, if any (the
"Extraordinary Expenses"); (f) to payments to be applied against the
outstanding principal of the loan until such principal amount is paid in
full; and (g) to payments of the Tower Realty Accrued Interest; and (h) to
payments of any other amounts due under the Loan Documents. Any excess
amounts shall be paid to the Tower Realty Borrower. The scheduled principal
balance of the Tower Realty Loan as of the Tower Realty Effective Maturity
Date is approximately $99,413,008.
Event of Default. The occurrence of any of the following constitutes and
"Event of Default" under the Tower Realty Mortgage: (a) failure to make any
payment of interest or principal when due, or failure to pay the principal
balance when due; (b) failure to pay any other amount payable pursuant to the
Tower Realty Note or the Tower Realty Mortgage when due and payable, with
such failure continuing for ten (10) days after mortgagee delivers written
notice thereof to the Tower Realty Borrower; (c) failure to
S-120
<PAGE>
keep in force the insurance required under the Tower Realty Mortgage to be
maintained or failure to comply with any other covenant relating to insurance
requirements, which failure continues for five (5) business days after the
mortgagee delivers written notice thereof to the Tower Realty Borrower; (d)
failure to comply with certain Tower Realty Mortgage covenants which require
the Tower Realty Borrower to keep the Tower Realty Property free from liens
and encumbrances (with such default continuing for five (5) business days
after mortgagee delivers written notice thereof to the Tower Realty
Borrower), and which, prohibit the sale of the Tower Realty Property and
transfers of direct and indirect beneficial interests in the Tower Realty
Borrower; (e) any attempt by the Tower Realty Borrower to assign its rights
under the Tower Realty Mortgage; (f) any other default in the performance or
payment, or breach, of any material covenant, warranty, representation or
agreement set forth in the documents which evidence and secure the Tower
Realty Loan, with such default continuing for thirty (30) business days after
mortgagee delivers written notice thereof to the Tower Realty Borrower; (g)
the occurrence of certain bankruptcy events; (h) the termination, or the
failure to continue to be valid and effective, of the Tower Realty Mortgage
(or the ceasing of any lien granted thereunder to be a perfected first
priority lien) or any of the Loan Documents evidencing the Tower Realty Loan;
and (i) any event of the default under any other of the Loan Documents which
evidence the Tower Realty Loan.
If the Tower Realty Borrower defaults in the payment of any Tower Realty
Debt Service Payment on the Payment Date then the Tower Realty Borrower shall
pay to mortgagee a late payment charge in an amount equal to five percent
(5%) of the amount of the installment not paid, which late payment charge
shall be assessed if such payment default has not been cured within ten (10)
days thereof. If the Tower Realty Borrower defaults in the payment of any
Tower Realty Debt Service Payment on the Payment Date due, or defaults in any
other manner so as to constitute an Event of Default, then mortgagee at its
option and without further notice to the Tower Realty Borrower may declare
the entire unpaid amount of principal with interest at the Default Rate
together with all other sums due, if any, due and payable immediately.
Prepayment. Voluntary prepayment is prohibited under the Tower Realty
Loan. Prepayments made following an Event of Default under the Tower Realty
Mortgage or an acceleration by the mortgagee shall be deemed to be voluntary
and shall be subject to a prepayment premium ("Tower Realty Yield Maintenance
Premium") equal to the greater of (a) 1% of the principal amount being
prepaid or (b) the product of (i) a fraction whose numerator is an amount
equal to the portion of the principal balance being paid and whose
denominator is the entire outstanding principle balance on the date of such
prepayment, and (ii) an amount equal to the remainder obtained by subtracting
(x) an amount equal to the entire outstanding principal as of the date of
such prepayment from (y) the present value as of the date of such prepayment
of the remaining scheduled payments of principal and interest determined by
discounting such payments at the Tower Realty Discount Rate. The "Tower
Realty Discount Rate" means the rate which, when compounded monthly, equals
the Tower Realty Treasury Rate.
No Tower Realty Yield Maintenance Premium or other premium or penalty is
required to be paid in connection with any prepayment resulting from the
application of insurance or condemnation proceeds to repayment of the Tower
Realty Loan in accordance with the requirements of the Tower Realty Mortgage.
Defeasance Collateral. For the purposes of this section, "Defeasance
Collateral" shall mean obligations or securities not subject to prepayment,
call or early redemption which are direct obligations of, or obligations
fully guaranteed as to timely payment by, the United States of America or any
agency or instrumentality of the United States of America, or the obligations
of which are backed by the full faith and credit of the United States of
America, the ownership of which will not cause the mortgagee to be an
investment company under the Investment Company Act of 1940, included as
collateral under the Tower Realty Loan. For the purposes of this section, the
"Minimum Defeasance Collateral Requirement" shall mean an amount sufficient
to pay 125% of the amount of the Tower Realty Loan allocated to each of the
Tower Realty Properties (in any case, the "Tower Allocated Loan Amount"), and
sufficient to pay scheduled interest and principal payments on the loan
amount through and including the Tower Realty Effective Maturity Date
together with the outstanding principal balance of the Tower Realty Loan as
of such date.
S-121
<PAGE>
The Tower Realty Borrower shall be entitled on any Payment Date to
defease one (a "Tower Partial Defeasance") or both of the Tower Realty
Properties from and after the earlier to occur of (x) October 16, 2000 and
(y) the second anniversary of the Delivery Date, in connection with the
delivery of Defeasance Collateral, provided that: (i) the mortgagee shall
have received from the Tower Realty Borrower at least 30 days' prior written
notice of the date proposed for such release (the "Tower Realty Release
Date"); (ii) no Event of Default shall have occurred and be continuing as of
the date of such notice and the Tower Realty Release Date; (iii) the Tower
Realty Borrower shall deliver on the Tower Realty Release Date, Defeasance
Collateral in such amount as shall satisfy the Minimum Defeasance Collateral
Requirement with respect to the Tower Realty Property being defeased; (iv)
the Tower Realty Borrower shall have delivered a certificate of an officer of
the Tower Realty Borrower (an "Officer's Certificate") dated the Tower Realty
Release Date, confirming the matters referred to in clause (ii) above,
certifying that the applicable provisions of clause (iii) above have been
complied with and certifying that all conditions precedent for such release
have been complied with; (v) with respect to a Tower Partial Defeasance, the
Tower Realty Borrower, at its sole cost and expense, shall have delivered one
or more endorsements to the policies of title insurance delivered to the
mortgagee on the closing date, insuring that, after giving effect to such
release, (A) the mortgagee's liens are first priority liens on the remaining
Tower Realty Property and (B) that such policy is in full force and effect;
(vi) with respect to a Tower Partial Defeasance, after giving effect to such
proposed release, the Tower DSCR (as defined below) would not be less than
1.50:1; (vii) with respect to a Tower Partial Defeasance, the Tower Realty
Borrower shall deliver with respect to matters referred to in clause (vi),
(A) statements of the net operating income and debt service for the most
recent four consecutive calendar quarters ending on or prior to the date of
such Tower Partial Defeasance, and (B) based upon the foregoing statements of
net operating income and debt service, calculations of the Tower DSCR both
with and without giving effect to the proposed release, (C) calculations of
the ratios referred to in such clause (vi), accompanied by an Officer's
Certificate stating that such statements, calculations and information are
true, correct and complete in all material respects, and (viii) the Tower
Realty Borrower shall have delivered to mortgagee the opinions of counsel
required by the Tower Realty Mortgage upon a defeasance of the lien.
"Tower DSCR" means for any period the ratio of net operating income to
debt service on the Tower Realty Note for such period.
Lockbox and Reserves. The Tower Realty Borrower has established with The
Chase Manhattan Bank (the "Tower Realty Agent Bank") two cash collateral
accounts in the name of Tower Realty Agent Bank, as agent for mortgagee, as
secured party (the "Tower Realty Lockbox Accounts"). The Tower Realty
Borrower has instructed tenants to mail all checks or to wire all funds with
respect to rent due under the leases to the Tower Realty Lockbox Accounts and
has covenanted to deposit all operating revenues received directly into the
Tower Realty Lockbox Accounts.
The Tower Realty Borrower has established with the Tower Realty Agent Bank
(a) two operating accounts (each, a "Tower Realty Operating Account") to
receive deposits daily of amounts on deposit in the Tower Realty Lockbox
Account, (b) a P&I escrow account (the "Tower Realty P&I Escrow Account") to
be funded each month before the Tower Realty Effective Maturity Date in an
amount equal to the amount of interest and principal due on the next Payment
Date, (c) a real estate taxes, insurance premium, and Air Rights Lease rent
escrow account (the "Tower Realty Mortgage Escrow Account"), (d) a capital
expenditure reserve account (the "Tower Realty Capital Expenditure Reserve
Account") as described below, (d) a tenant improvement and leasing reserve
account (the "Tower Realty TI and Leasing Reserve Account") as described
below, (e) a security deposit account (the "Security Deposit
Account/Orlando"), (f) a security deposit account (the "Security Deposit
Account/Tower 45") and (g) a security deposit account for D. E. Shaw (the "D.
E. Shaw Security Deposit Account"). The sum of $452,127 was deposited in the
Tower Realty Capital Expenditure Reserve Account as of the closing date.
Thereafter, an amount equal to $0.15 per square foot, or $10,085, for the
Tower Realty Properties shall be funded on a monthly basis into the Tower
Realty Capital Expenditure Reserve Account by Tower Realty Borrower. The
Tower Realty TI and Leasing Reserve Account shall be funded in two
components: (a) the Tower Realty Borrower shall deposit into the Tower Realty
TI and Leasing Reserve Account, on a monthly basis, an amount equal to $1.50
per square foot, or $45,000, for One Orlando Center and $2.00
S-122
<PAGE>
per square foot, or $73,333, for Tower 45, which amounts shall be disbursed
by the Tower Realty Agent Bank upon delivery by Tower Realty Borrower that
certain costs have been incurred in connection with tenant improvements,
leasing commissions and other customary leasing costs; and (b) the Tower
Realty Borrower shall be required to deposit into the Tower Realty TI and
Leasing Reserve Account reserves with respect to leases demising space to a
single tenant in excess of 20,000 square feet at One Orlando Center and
25,000 square feet at Tower 45 (each, a "Material Lease") which are expiring
within one year, which reserves shall equal the product of (x) either (i) $25
per square foot for the Orlando Property or (ii) $35 per square foot for
Tower 45 and (y) the square footage of the expiring Material Lease (subject
to adjustment based upon increases in the Consumer Price Index published by
the United States Department of Labor, Bureau of Labor Statistics (the "Tower
Realty Lease Expiration Reserve Amounts")), which amounts may be funded out
of the amounts deposited in the Tower Realty TI and Leasing Reserve Account
under clause (a) above to the extent amounts therein exceed $540,000 for One
Orlando Center and $880,000 for Tower 45. The Tower Realty Lease Expiration
Reserve Amounts shall be funded monthly to the extent of available cash in
the Tower Realty Operating Account and shall be disbursed to Tower Realty
Borrower upon delivery of a fully executed lease complying in all respects
with the terms set forth in the Tower Realty Mortgage.
Until the Tower Realty Effective Maturity Date, the Tower Realty Agent
Bank will withdraw from the applicable Tower Realty Operating Account by
12:00 p.m. New York time on the first business day of each month, funds in
the following amounts and in the following order of priority: (i) funds in an
amount equal to the monthly amount of interest and principal payable on the
Tower Realty Note (the "Tower Realty Monthly Amount") and deposit the same
into the Tower Realty P&I Escrow Account; (ii) funds in an amount equal to
the monthly Tower Realty Mortgage Escrow Amounts and deposit the same into
the Tower Realty Mortgage Escrow Account; (iii) funds in an amount equal to
the Tower Realty Reserve Amounts (as hereinafter defined), if any, and
deposit the same into the Tower Realty Mortgage Escrow Account; (iv) funds in
an amount equal to the monthly Tower Realty Capex Amount and deposit same
into the Tower Realty Capital Expenditure Reserve Account;(v) funds in an
amount equal to the monthly Tower Realty TI and Leasing Reserve Amount and
deposit same into the Tower Realty TI and Leasing Reserve Account; and (vi)
from time to time, funds in an amount equal to the Tower Realty Lease
Expiration Reserve Amounts and deposit same into the Tower Realty TI and
Leasing Reserve Account.
Provided that (a) no Event of Default shall have occurred and be
continuing, (b) the Tower Realty Borrower certifies that there are no trade
payables of the Tower Realty Borrower outstanding that are more than 60 days
past due, unless the same are being contested by the Tower Realty Borrower in
good faith, and no other obligations of the Tower Realty Borrower that are
past due, and (c) the Tower Realty Borrower certifies that it has delivered
instructions to the Tower Realty Agent Bank to transfer from the applicable
Tower Realty Operating Account to the Tower Realty Mortgage Escrow Account,
an amount equal to 125% of any amounts being contested in connection with any
trade payables which exceed $250,000 in the aggregate (the "Tower Realty
Reserve Amounts"), then the Tower Realty Borrower may, at any time during a
month, instruct the Tower Realty Agent Bank in writing to transfer all
amounts remaining on deposit from the Tower Realty Operating Accounts after
all withdrawals for such month have been made, to such accounts as Tower
Realty Borrower may determine (the "Tower Realty Borrowing Accounts"), in
order for the Tower Realty Borrower to pay operating expenses of the
Premises, to make distributions to the partners of the Tower Realty Borrower,
or otherwise.
After the Tower Realty Effective Maturity Date, the Tower Realty Agent
Bank shall withdraw from the applicable Tower Realty Operating Account by
12:00 p.m. New York time on the first Business Day of each month, the
following amounts in the following order of priority, based on the
information set forth in a statement delivered to the Tower Realty Agent Bank
at least two (2) business days prior to the date of withdrawal and upon which
the Tower Realty Agent Bank may conclusively rely: (i) funds in an amount
equal to the Tower Realty Monthly Amount due on the Tower Realty Note on the
next Payment Date and deposit same into the Tower Realty P&I Escrow Account;
(ii) funds in an amount equal to the monthly Tower Realty Mortgage Escrow
Amounts, and deposit the same into the Tower Realty Mortgage Escrow Account;
(iii) funds in an amount equal to the Tower Realty Reserve Amounts, if any,
as certified
S-123
<PAGE>
by Tower Realty Borrower, and deposit same into the Tower Realty Mortgage
Escrow Account, (iv) funds in an amount equal to the monthly allocation of
cash expenses in the annual budget approved by mortgagee ("Tower Realty
Approved Operating Expenses") and approved extraordinary expenses ("Tower
Realty Approved Extraordinary Expenses"), if any, and pay the same to the
mortgagee, (v) funds in an amount equal to the monthly Tower Realty Capex
Amount, and deposit the same into the Tower Realty Capital Expenditure
Reserve Account; (vi) funds in an amount equal to the Tower Realty Monthly TI
and Leasing Amounts and deposit the same into the Tower Realty TI and Leasing
Reserve Account, (vii) funds in an amount equal to the lesser of the
outstanding principal due under the Tower Realty Note and the balance of
funds in the Tower Realty Operating Accounts until such principal amount is
paid in full, and (vii) funds in an amount equal to the Tower Realty Accrued
Interest, including, if applicable, interest at the Default Rate applicable
from and after the Tower Realty Effective Maturity Date; and (viii) funds in
an amount equal to the Tower Realty Accrued Interest, including, if
applicable, interest at the Default Rate applicable from and after the Tower
Realty Effective Maturity Date and pay the same to the mortgagee.
Transfer of Properties and Interest in Borrower; Encumbrance; Other
Debt. The Tower Realty Borrower is generally prohibited from transferring or
encumbering the Tower Realty Properties except for a transfer of a Tower
Realty Property that has been released as described under "--Defeasance
Collateral". The Tower Realty Borrower may, without consent of the mortgagee,
(i) make immaterial transfers of portions of the Tower Realty Properties to
government authorities for dedication or public use, or portions of the Tower
Realty Properties to third parties, including owners of outparcels, or other
properties for the purpose of erecting and operating additional structures
whose use is integrated with the use of the Tower Realty Properties, and (ii)
grant easements, restrictions, covenants, reservations and rights of way in
the ordinary course of business for access, water and sewer lines, telephone
and telegraph lines, electric lines or other utilities or for other similar
purposes or amend the operating agreements, provided that no such transfer,
conveyance or encumbrance set forth in clauses (i) and (ii) above shall
materially impair the utility and operation of the Tower Realty Properties or
materially adversely affects the value of the Tower Realty Properties taken
as a whole. In connection with any transfer or any series of transfers that
affect (on a cumulative basis) more than 10% of the value of the Tower Realty
Property (not including leasing in the ordinary course of business), a tax
opinion and a non-disqualification opinion of counsel shall be furnished to
mortgagee.
Mortgagee's approval is not required for a transfer of any direct or
indirect beneficial interests in the Tower Realty Borrower, provided that (i)
no Event of Default shall have occurred and be continuing, (ii) the Tower
Realty Borrower (or the transferor of such interest) shall deliver notice
thereof to the mortgagee at least 15 business days prior to the effective
date of such transfer, (iii) the Tower Realty Borrower shall remain a single
purpose entity, (iv) no transfer of limited partner, non-managing member or
shareholder interests shall result in any one person (or any group of
affiliates) owning, directly or indirectly, 50% of more of the beneficial
ownership interests of the Tower Realty Borrower, and (iv) Tower Realty
Operating Partnership, L.P. shall own not less than 51% of the beneficial
interests in the Tower Realty Borrower, and if the Tower Realty Borrower
shall be a partnership, all general partners shall be wholly-owned
subsidiaries of Tower Realty Operating Partnership, L.P. If 10% or more of
direct beneficial interests in the Tower Realty Borrower are transferred or
if any transfer shall result in a person or a group of affiliates acquiring a
50% or greater interest as set forth above, the Tower Realty Borrower shall
deliver or cause to be delivered to the mortgagee (x) an opinion of counsel
addressed to the Rating Agencies and the mortgagee and dated as of the date
of the transfer to the effect that in a properly presented case, a bankruptcy
court in a case involving such transferee, or any affiliate thereof, would
not disregard the corporate or partnership forms of such entity, their
affiliates and/or their partners, as the case may be, so as to consolidate
the assets and liabilities of such entity or entities and/or their affiliates
with those of the Tower Realty Borrower or their Tower Realty GP, and (y) an
Officer's Certificate certifying that such transfer is not an Event of
Default, provided, however that the Rating Agencies shall deliver written
confirmation that any such transfer will not result in the withdrawal,
qualification or downgrading of the then current ratings of the Offered
Certificates. For the purposes of this section, a sale of stock in Tower
Realty Trust, Inc. on a publicly traded exchange is not an indirect transfer
of beneficial interest in the Tower Realty Borrower.
S-124
<PAGE>
The Tower Realty Borrower is not permitted to incur, create or assume any
additional debt or liabilities without the consent of mortgagee; provided,
however, that if no Event of Default shall have occurred and be continuing,
the Tower Realty Borrower may, without the consent of the mortgagee, incur,
create or assume any or all of the following indebtedness (collectively,
"Permitted Debt"): (i) the Tower Realty Note and the other obligations,
indebtedness and liabilities specifically provided for in the Loan Documents;
(ii) unsecured indebtedness for trade payables incurred in the ordinary
course of business (other than liens being contested in accordance with the
provisions of the Tower Realty Mortgage), not to exceed $2,000,000 and which
is paid within 60 days following the date on which each such amount was
actually due and payable unless unless (a) the Tower Realty Borrower is in
good faith contesting its obligation to pay such indebtedness in a manner
satisfactory to the mortgagee, (b) adequate reserves with respect thereto are
maintained on the books of the Tower Realty Borrower in accordance with GAAP,
(c) such contest operates to suspend collection of such amounts or
enforcement of such obligations, and (d) no Event of Default exists and is
continuing; and (iii) unsecured indebtedness for amounts payable or
reimbursable to any tenant on account of work performed at the Tower Realty
Property by such tenant or for costs incurred by such tenant in connection
with its occupancy of space, including for tenant improvements.
Insurance. The Tower Realty Borrower is required to maintain for each
Tower Realty Property (a) insurance against all perils included within the
classification "All Risks of Physical Loss" with extended coverage in amounts
at all times sufficient to prevent the Tower Realty Borrower from becoming a
co-insurer, but in any event equal to the full insurable value of the
improvements and equipment, (b) comprehensive general liability insurance in
such amounts as are generally required by institutional lenders for
comparable properties but in no event less than $5,000,000 per occurrence and
with an aggregate limit of not less than $10,000,000 per Tower Realty
Property, (c) statutory worker's compensation insurance, (d) business
interruption and/or loss of "rental value" insurance to cover the loss of at
least 12 months income, (e) during any period of repair or restoration,
builder's "all risk" insurance in an amount not less than the full insurable
value of the Tower Realty Properties, (f) broad form boiler and machinery
insurance and insurance covering all boilers or other pressure vessels,
machinery and equipment, if any, located in, on or about each Tower Realty
Property and insurance against loss of occupancy or use arising from any such
breakdown in such amounts as are generally available at commercially
reasonable premiums and are generally required by institutional lenders for
properties comparable to each Tower Realty Property against loss of occupancy
or use arising from any such breakdown in such amounts as are generally
available at commercially reasonable premiums and are generally required by
institutional lenders for properties comparable to the Tower Realty
Properties; (g) flood insurance, if available, with respect to any of the
Tower Realty Properties located within a designated "flood prone" zone or
"special flood hazard area" in an amount equal to the lesser of the Tower
Realty Loan and the maximum limit of coverage available with respect to the
applicable Tower Realty Property; (h) windstorm insurance with respect to One
Orlando Center with such limits and deductibles as are generally required by
institutional lenders for similar properties in Orlando, Florida and, in any
event, at least equal to the lesser of the Tower Allocated Loan Amount for
One Orlando Center and the maximum limit of coverage available with respect
to such property; and (i) at the mortgagee's reasonable request, such other
insurance, including but not limited to earthquake insurance, against loss or
damage of the kinds from time to time customarily insured against and in such
amounts as are generally required by institutional lenders on loans of
similar amounts and secured by comparable properties.
The insurance coverage may be effected under a blanket policy or policies
provided that any such blanket policy shall specify, except in the case of
public liability insurance, the portion of the total coverage of such policy
that is allocated to the Tower Realty Properties, and any sublimits in such
blanket policy applicable to the Tower Realty Properties, which amounts shall
not be less than the amounts required pursuant to this section and which
shall in any case comply in all other respects with the requirements of the
Tower Realty Loan. All insurance policies are required to name the mortgagee
as an additional named insured, to provide that all proceeds (except with
respect to proceeds of general liability and workers' compensation insurance)
be payable to the mortgagee as and to the extent described below in
"Condemnation and Casualty", and shall contain: (i) a standard
"non-contributory mortgagee"
S-125
<PAGE>
endorsement or its equivalent relating, inter alia, to recovery by the
mortgagee notwithstanding the negligent or willful acts or omissions of the
Tower Realty Borrower; (ii) a waiver of subrogation endorsement in favor of
the mortgagee; (iii) an endorsement providing that no policy shall be
impaired or invalidated by virtue of any act, failure to act, negligence of,
or violation of declarations, warranties or conditions contained in such
policy by the Tower Realty Borrower, the mortgagee or any other named
insured, additional insured or loss payee, except for the willful misconduct
of the mortgagee knowingly in violation of the conditions of such policy;
(iv) an endorsement providing for a deductible per loss of an amount not more
than that which is customarily maintained by prudent owners of first class
properties comparable to and in the general vicinity of the property, but in
no event in excess of $100,000, except in the case of earthquake coverage,
for which such deductible shall not be in excess of that generally required
by institutional lenders on loans of similar amounts secured by comparable
properties; and (v) a provision that such policies shall not be cancelled,
terminated or expired without at least thirty (30) days' prior written notice
to the mortgagee, in each instance. The Tower Realty Loan requires the Tower
Realty Borrower to obtain the insurance coverage described above, from
domestic primary insurers having (x) a claims-paying-ability rating by S&P of
not less than "AA" and its equivalent by any other Rating Agency, and (y) an
Alfred M. Best Company, Inc. rating of "A" or better and a financial size
category of not less than IX. All insurers providing insurance required by
the Tower Realty Mortgage shall be authorized to issue insurance in each
state where the Tower Realty Properties are located.
Condemnation and Casualty. The Tower Realty Borrower will promptly notify
the mortgagee in writing upon obtaining knowledge of (i) the institution of
any proceedings relating to any taking, or (ii) the occurrence of any
casualty, damage or injury to, the Tower Realty Properties or any portion
thereof the restoration of which is estimated by the Tower Realty Borrower in
good faith to cost more than the $3,000,000 with respect to the Orlando
Property and $5,000,000 with respect to Tower 45 (each, the "Tower Realty
Threshold Amount"). In addition, such notice shall set forth such good faith
estimate of the cost of repairing or restoring such casualty, damage, injury
or taking in reasonable detail if the same is then available and, if not, as
soon thereafter as it can reasonably be provided.
In the event of any taking of or casualty or other damage or injury to
either of the Tower Realty Properties, the Tower Realty Borrower's right,
title and interest in and to all compensation, awards, proceeds, damages,
claims, insurance recoveries, causes and rights of action (whether accrued
prior to or after the initial closing of the Tower Realty Loan) and payments
which the Tower Realty Borrower may receive or to which it may become
entitled or any part thereof other than payments received in connection with
any liability or loss of rental value or business interruption insurance
(collectively, the "Tower Realty Proceeds"), in connection with any such
taking of, or casualty or other damage or injury to, any Tower Realty
Property or any part thereof are assigned by the Tower Realty Borrower to,
and shall be paid to, the mortgagee.
A "Tower Realty Total Loss" shall mean (i) a casualty, damage or
destruction of a Tower Realty Property, the cost of restoration of which
would exceed 50% of the amount of the Tower Realty Loan, and with respect to
which the Tower Realty Borrower is not required, under the applicable leases
to apply insurance and condemnation proceeds to the restoration of such Tower
Realty Property or (ii) a permanent taking of 50% or more of the gross
leasable area of a Tower Realty Property or so much of a Tower Realty
Property, in either case, such that it would be impracticable, in the
mortgagee's sole discretion, even after restoration, to operate such Tower
Realty Property as an economically viable whole and with respect to which the
applicable lease does not require such restoration.
In the event of any taking, casualty, injury or damage, the Tower Realty
Borrower shall assign to mortgagee all rights in any insurance or other
payments in excess of the Tower Realty Threshold Amounts (the "Proceeds").
Such Proceeds shall be applied by mortgagee (unless mortgagee, in its sole
discretion, otherwise elects) to prepay the Tower Realty Note without
prepayment premium or penalty, if: (i) the proceeds shall equal or exceed the
Tower Allocated Loan Amount with respect to the applicable Tower Realty
Property, (ii) an Event of Default shall have occurred and be continuing,
(iii) a Tower Realty Total Loss has occurred, (iv) the work is not capable of
being completed before the earlier to occur of (x) the date which is 6 months
prior to the Tower Realty Maturity Date, and (y) the date on which the
business interruption insurance carried by the Tower Realty Borrower shall
expire, (v) the applicable
S-126
<PAGE>
Tower Realty Property is not capable of being restored substantially to its
condition prior to such taking or casualty, or (vi) the Tower Realty Borrower
is unable to demonstrate to the mortgagee's satisfaction its continuing
ability to pay the Tower Realty Loan.
Notwithstanding anything to the contrary contained in the Tower Realty
Mortgage, and excluding situations requiring prepayment, to the extent
insurance and condemnation proceeds do not exceed the Tower Realty Threshold
Amount, such insurance and condemnation proceeds are to be paid directly to
the Tower Realty Borrower to be applied to restoration of the applicable
Tower Realty Property. Promptly after the occurrence of any damage or
destruction to all or any portion of such Tower Realty Property or a taking
of a portion of such Tower Realty Property, in either case which shall not
constitute a Tower Realty Total Loss, the Tower Realty Borrower shall either
cause such Tower Realty Property to be released, or shall commence and
diligently prosecute to completion the repair, restoration and rebuilding of
such Tower Realty Property (in the case of a partial taking, to the extent it
is capable of being restored) so damaged, destroyed or remaining after such
taking in full compliance with all material legal requirements and free and
clear of any and all liens except permitted encumbrances. Except upon the
occurrence and during the continuance of an Event of Default, the Tower
Realty Borrower may settle any insurance claim with respect to proceeds which
does not exceed the Tower Realty Threshold Amount. If an Event of Default
shall have occurred and be continuing, or if the Tower Realty Borrower fails
to file and/or prosecute any insurance claim for a period of fifteen (15)
business days following the Tower Realty Borrower's receipt of written notice
from the mortgagee, the Tower Realty Borrower empowers the mortgagee to file
and prosecute such claim (including settlement thereof) with counsel
satisfactory to the mortgagee and to collect and to make receipt for any such
payment, all at the Tower Realty Borrower's expense.
In the event of (i) a Tower Realty Total Loss resulting from a casualty,
damage or destruction, if either (A) the cost to repair the Tower Realty
Property would exceed the Tower Realty Threshold Amount and the restoration
of the Tower Realty Property cannot reasonably be completed before the date
which is the later to occur of the date of expiration of any business
interruption insurance or the date of expiration of any letter of credit
posted in lieu thereof or in addition thereto and under such circumstances
the Tower Realty Borrower is not required under the any tenant lease to make
insurance and casualty proceeds available for restoration of the Tower Realty
Property, or (B) the mortgagee elects not to permit the Tower Realty Borrower
to restore such Tower Realty Property, or (ii) a Tower Realty Total Loss
resulting from a condemnation, then the Tower Realty Borrower must prepay the
Tower Realty Loan to the extent of the casualty or condemnation Proceeds
received.
If any insurance and condemnation proceeds (other than business
interruption insurance proceeds) are in excess of the Tower Realty Threshold
Amount, then all such proceeds shall be paid to the mortgagee and shall be
applied first toward reimbursement of the mortgagee's reasonable costs and
expenses in connection with recovery of such proceeds and disbursement
thereof, including, without limitation, reasonable administrative costs and
inspection fees, and then, to the prepayment of the Tower Realty Loan,
without prepayment premium or penalty, only if: (i)(A) the amount of the such
proceeds is equal to or greater than the outstanding principal amount, (B)
the casualty or taking occurs on a date which is less than 180 days prior to
the Tower Realty Maturity Date, or (C) more than 25% of the rentable area of
the applicable Tower Realty Property has been the subject of a casualty or
has been taken, or (ii) such proceeds were the result of a taking, and after
restoration is completed, there are excess proceeds which were not required
for the restoration, then prepayment shall be made to the extent of such
unneeded proceeds. Any excess proceeds shall be applied to the prepayment of
the Tower Realty Loan.
Upon the occurrence and during the continuance of an Event of Default, or
in the event that any insurance and condemnation proceeds are required to be
paid to the mortgagee, all such proceeds shall be paid over to the mortgagee
and shall be applied first toward reimbursement of the mortgagee's reasonable
costs and expenses actually incurred in connection with recovery of the
insurance and condemnation proceeds and disbursement of such proceeds,
including reasonable administrative costs and inspection fees.
To the extent that the Proceeds do not exceed the Tower Realty Threshold
Amount such Proceeds are to be paid directly to the Tower Realty Borrower to
be applied to the restoration of the applicable
S-127
<PAGE>
Tower Realty Property. If such Proceeds exceed the Tower Realty Threshold
Amount, all casualty and taking Proceeds are required to be paid to the Tower
Realty Borrower to be used for restoration. In the event that any insurance
or taking Proceeds (other than business interruption insurance) are in excess
of the Tower Realty Threshold Amount and are not required to be applied to
the payment or prepayment of the Tower Realty Loan then mortgagee is
obligated to make all casualty and taking Proceeds (other than business
interruption insurance proceeds) available to the Tower Realty Borrower for
payment or reimbursement of the Tower Realty Borrower's or the applicable
tenant's costs and expenses incurred with respect to the work of restoration,
only if: (i) at the time of loss or damage or at any time thereafter while
the Tower Realty Borrower is holding any portion of such proceeds, there
shall be no continuing Event of Default; (ii) if the estimated cost of the
work of restoration shall exceed the such proceeds, the Tower Realty Borrower
shall, at its option either deposit with or deliver to the mortgagee (A) cash
and cash equivalents, (B) a letter or letters of credit in an amount equal to
the estimated cost of the work of restoration less such proceeds available,
or (C) such other evidence of the Tower Realty Borrower's ability to meet
such excess costs and which is satisfactory to the mortgagee and the Rating
Agencies; and (iii) the mortgagee shall, within a reasonable period of time
prior to request for initial disbursement, be furnished with an estimate of
the cost of the work of restoration accompanied by an independent architect's
certification as to such costs and appropriate plans and specifications for
such work.
Approval Rights. Under the Tower Realty Loan, for each calendar year
commencing on the first day of January following the Tower Realty Effective
Maturity Date and for each calendar year thereafter, the Tower Realty
Borrower is required to submit to the mortgagee, for the mortgagee's written
approval, an annual budget not later than 60 days prior to the commencement
of each calendar year. In the event the mortgagee notifies the Tower Realty
Borrower within 15 days of any objections to such budget, the Tower Realty
Borrower is required within 3 days after receipt of such objections to revise
the same and resubmit it to the mortgagee. The mortgagee shall then advise
the Tower Realty Borrower of any objections to such annual budget within 10
days after such resubmission, and the Tower Realty Borrower is required to
promptly revise same and resubmit it to the mortgagee until an annual budget
is approved; provided, however, that if the mortgagee shall not advise the
Tower Realty Borrower of its objections to any proposed annual budget within
the applicable time period set forth herein, then such proposed annual budget
shall be deemed approved by the mortgagee. In the event the Tower Realty
Borrower must incur an extraordinary operating expense or a capital expense
not set forth in the approved annual budget, it is required to deliver to the
mortgagee a reasonably detailed explanation, for the mortgagee's approval, of
such proposed expense.
The Tower Realty Borrower may not, without the consent of mortgagee,
amend, modify or waive the provisions of any Material Lease or terminate,
reduce rents under or shorten the term of any Material Lease in any manner
which would have a material adverse effect on a Tower Realty Property taken
as a whole.
Financial Reporting. The Tower Realty Borrower is required to furnish to
the mortgagee: (a) annually within 90 days after the end of each fiscal year,
a copy of the Tower Realty's year-end financial statement reviewed by an
independent accountant, accompanied by an officer's certificate certifying to
the best of the signor's knowledge, (i) that such statements fairly represent
the financial condition and results of operations of the Tower Realty in
accordance with GAAP consistently applied, (ii) that as of the date of such
officer's certificate, no default exists or, if so, specifying the nature and
status of each such default and the action then being taken by the Tower
Realty Borrower or proposed to be taken to remedy such default, (iii) the
DSCR for the preceding calendar quarter and calendar year, and (iv) that as
of the date of each officer's certificate, no litigation exists involving the
Tower Realty Borrower or the Tower Realty Properties in which the amount
involved is $250,000 or more, or, if so, specifying such litigation and the
actions being taking in relation thereto (a "Tower Realty Officer's
Certificate"); (b) quarterly within 45 days after each calendar quarter,
quarterly unaudited financial statements, which shall be accompanied by a
Tower Realty Officer's Certificate; (c) quarterly (as to the preceding
calendar quarter) within 45 days of each calendar quarter, a complete rent
roll, which shall be accompanied by a Tower Realty Officer's Certificate; (d)
annually within 45 days after the end of each calendar year, an annual
summary of all capital expenditures made at each Tower Realty Property during
the prior 12-month period; and (e) promptly, such further information
regarding the Tower Realty Properties as the mortgagee may reasonably
request.
S-128
<PAGE>
FRANKLIN MILLS/LIBERTY PLAZA
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$130,000,000 $129,493,575
ADDITIONAL AMOUNT: THE BORROWER MAY REQUEST AN ADDITIONAL
INCREASE IN THE PRINCIPAL AMOUNT TO AN AMOUNT
(THE "ADDITIONAL AMOUNT") BY GIVING AN
ADDITIONAL INCREASE NOTICE NOT LESS THAN
THIRTY (30) DAYS PRIOR TO THE FIRST
ANNIVERSARY OF THE CLOSING DATE. THIS INCREASE
WILL BE FUNDED PARI PASU BY MERRILL LYNCH,
SEPARATE FROM THIS TRANSACTION. THE ADDITIONAL
AMOUNT WILL NOT CAUSE THE DSCR TO FALL BELOW
1.50X NOR CAUSE THE LTV TO INCREASE ABOVE 65%,
AND IT WILL BE LIMITED TO $35 MILLION. THE
TRUST FUND WILL NOT BE OBLIGATED TO ADVANCE
THE ADDITIONAL AMOUNT AND THE ADDITIONAL
AMOUNT WILL NOT BE ON ASSET OF THE TRUST FUND.
FRANKLIN MILLS
ALLOCATED LOAN AMOUNT 120,000,000
LIBERLY PLAZA ALLOCATED
LOAN AMOUNT 10,000,000
ORIGINATION DATE: $110,000,000 -JUNE 1, 1997,
$ 20,000,000 -AUGUST 8, 1997
ANTICIPATED REPAYMENT
DATE ("ARD"): JUNE 1, 2007
MATURITY DATE: JUNE 1, 2027
BLENDED INTEREST
RATE: 7.814%
AMORTIZATION: 30 YEARS
HYPERAMORTIZATION: SUBSEQUENT TO JUNE 1, 2007, THE INTEREST RATE
WILL INCREASE TO THE GREATER OF 12.81% OR 500
BASIS POINTS PLUS THE INTERPOLATED 15-YEAR UST
RATE WITH A TERM APPROXIMATING THE PERIOD FROM
THE ARD TO THE MATURITY DATE (THE "REVISED
INTEREST RATE"). ADDITIONALLY, ALL EXCESS CASH
FLOW WILL BE CAPTURED UNDER THE TERMS OF THE
CASH COLLATERAL AGREEMENT AND APPLIED TO THE
OUTSTANDING PRINCIPAL BALANCE OF THE NOTE.
INTEREST DUE UNDER THE REVISED INTEREST RATE
ABOVE THAT WHICH IS DUE UNDER THE INITIAL
INTEREST RATE WILL BE PAYABLE SUBSEQUENT TO
THE PAYMENT OF PRINCIPAL. ANY INTEREST DUE
UNDER THE NOTE BUT NOT PAID WILL BE ACCRUED.
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: PREPAYMENT IS LOCKED OUT THROUGH NOVEMBER 5,
2006. SUBSEQUENT TO AND INCLUDING NOVEMBER 6,
2006, THE NOTE IS PREPAYABLE WITHOUT PENALTY.
DEFEASANCE IS PERMITTED UPON THE SECOND
ANNIVERSARY OF SECURITIZATION OF THE NOTE.
PARTIAL DEFEASANCE IS PERMITTED UPON DELIVERY
OF 125% OF THE ALLOCATED LOAN AMOUNT.
CASH FLOW FROM BOTH PROPERTIES IS AVAILABLE
FOR DEBT SERVICE, BUT LIBERTY PLAZA MAY BE
RELEASED FROM THE LIEN UPON A 1.5X DSCR AND
POSTING OF DEFEASANCE COLLATERAL AMONG OTHER
THINGS. ADDITIONALLY, THE BORROWER MAY SELL
PADS UNDER A GROUND LEASE SUBJECT TO RATING
AGENCY APPROVAL.
THE BORROWERS: THE BORROWING ENTITIES, FRANKLIN MILLS
ASSOCIATES L.P. AND LIBERTY PLAZA L.P., AS
WELL AS THEIR GENERAL PARTNERS, ARE ORGANIZED
AS SPECIAL-PURPOSE, BANK-RUPTCY-REMOTE
ENTITIES.
CAPITAL REPLACEMENT RESERVE: A MONTHLY RESERVE EQUAL TO (1)/(12 OF THE
PRODUCT OF $0.25 AND THE SQUARE FOOTAGE OF
SPACE LEASED TO TENANTS.
CROSS-COLLATERALIZATION/
DEFAULT: YES
PROPERTY INFORMATION
PROPERTY TYPE: RETAIL
LOCATION: FRANKLIN MILLS
LIBERTY PLAZA SHOPPING CENTER
PHILADELPHIA, PA
THE COLLATERAL: A SUPER REGIONAL OUTLET MALL AND POWER
SHOPPING CENTER WITH AN AGGREGATE GROSS
LEASEABLE AREA OF 1,965,742 SQUARE FEET.
ANCHORS INCLUDE: SPIEGEL, JC PENNEY,
BURLINGTON COAT FACTORY, MARSHALLS, GENERAL
CINEMA, SAM'S WHOLESALE CLUB AND PHAR-MOR.
WEIGHTED AVERAGE
OCCUPANCY: 88.5%
TOTAL SQUARE FEET: 1,965,742
YEAR BUILT: 1989
PROPERTY
MANAGEMENT: MANAGEMENT ASSOCIATES L.P.
1996 NET
OPERATING INCOME: $18,314,963
UNDERWRITTEN
CASHFLOW: $18,545,245
AGGREGATE APPRAISED VALUE: $214,000,000
APPRAISED BY: CUSHMAN & WAKEFIELD
APPRAISAL DATE: APRIL 16, 1997
LTV AS OF 12/1/97: 60.6%
ANNUAL DEBT
SERVICE: 11,245,596
DSC: 1.65X
LOAN/SQ. FT. AS OF 12/1/97: $65.92
S-129
<PAGE>
FRANKLIN MILLS LOAN: THE BORROWER; THE PROPERTY
The Loan and the Trust Certificates. The Loan (the "Franklin Mills Loan")
was originated by Midland Loan Services, L.P. and acquired simultaneously
therewith by the Mortgage Loan Seller on May 5, 1997 (the "Closing Date").
The Franklin Mills Loan had a principal balance at origination of
$110,000,000 (the "Original Amount"). On August 8, 1997, at the election of
the borrower under the Franklin Mills Loan (the "Franklin Mills Borrower"),
the principal amount of the mortgage note evidencing the Franklin Mills Loan
(the "Franklin Mills Note") was increased by $20,000,000 (the "Initial
Additional Amount"). Subject to the terms of the Franklin Mills Note, the
Franklin Mills Borrower may request an additional increase in principal (the
"Additional Amount") up to an aggregate principal indebtedness of
$165,000,000 (the "Current Franklin Mills Indebtedness"). Any Additional
Amount that may be funded pursuant to the terms of the Franklin Mills will
not be deposited in the Trust Fund. The Trust Fund will not be obligated to
advance any such Additional Amounts. The Franklin Mills Loan has a principal
balance as of the Cut-Off Date of approximately $129,493,575. It is secured
by, among other things, a Fee and Leasehold Indenture of Open-End Mortgage,
Security Agreement, Financing Statement, Fixture Filing and Assignment of
Leases, Rents and Security Deposits (the "Franklin Mills Mortgage")
encumbering a shopping center complex in Philadelphia, Pennsylvania commonly
known as the Franklin Mills Mall (the "Franklin Mills Property").
The Borrower. The Franklin Mills Borrower is Franklin Mills Associates
Limited Partnership, a special-purpose District of Columbia limited
partnership, and Liberty Plaza Limited Partnership, a special-purpose
Delaware limited partnership (collectively, the "Franklin Mills Borrower").
The limited partnership agreement of each Franklin Mills Borrower provides
that the purpose and business of each partnership is limited to holding an
ownership and leasehold interests, as the case may be, in the Franklin Mills
Property, leasing, managing, developing, operating, maintaining, financing
and otherwise using, and as necessary improving, the Franklin Mills Property
and related interests. The Franklin Mills Borrower owns no material asset
other than the Franklin Mills Property and related interests. The general
partner of Franklin Mills Associates Limited Partnership is Franklin Mills
GP, Inc., a special-purpose Delaware corporation. The general partner of
Liberty Plaza Limited Partnership is Liberty Plaza GP, Inc., a
special-purpose Delaware corporation. The limited partner of both of the
entities which are collectively the Franklin Mills Borrower is The Mills
Limited Partnership, a Delaware limited partnership.
The Property. Franklin Mills Outlet Mall is a 1.7 million square foot,
super regional outlet shopping mall that opened in 1989 and was renovated in
1997; the space is configured as seven single story connected legs joined in
a zigzag pattern, with each leg representing different merchandise price
points. Anchors are located on each end of the legs. Parking is available
on-site for up to 7,100 cars. Also as part of the collateral for the Franklin
Mills loan Liberty Plaza located across the street from Franklin Mills Outlet
Mall is also part of the collateral package. Liberty Plaza contains 304,463
rentable square feet and parking for 1,700 cars.
Anchor space in Franklin Mills Outlet Mall is approximately 576,736 square
feet and includes Boscov's (152,370 square feet expires May 2009), Burlington
Coat Factory (128,950 square feet expires October 2003, JC Penny (101,620
square feet expires May 1999) and two outparcel tenants on their own pads
Sam's Wholesale Club and Phar-Mor (both contribute to CAM & promotions.)
Remaining non-anchor retail space is comprised of many tenants including
Saks Fifth Avenue (46,406 square feet expires November 2006), Nordstrom
(42,241 square feet expires January 2004), Bed, Bath & Beyond (40,232 square
feet expires May 1999) and other notable tenants such as Brooks Brothers,
Nautica, Tommy Hilfiger, Polo and Eddie Bauer. Average base rent for anchor
space is $6 and in-line space is $20 per square foot. The average lease term
is 10 years for anchors (with various option periods thereafter, minimum of
two 5 year options) and 5 years for in-line space. Total occupancy including
the General Cinema is approximately 94.5% with over 226 tenants.
Anchor space in Liberty Plaza, which is configured as a power center
totals 280.098 and currently has in tenancy Dick's Sporting Goods (77,586
square feet expires March 2011) and Service Merchandise (53,274 square feet
expires January 2005). Current occupancy at Liberty Plaza is approximately
56.05% with one 149,238 square foot space available, the site of a former
Bradlee's.
S-130
<PAGE>
Market Overview. Driven by its size and number of stores, anchor/mall
store mix, configuration and value orientation, Franklin Mills' primary trade
area has the consumer and trade area patterns of a dominant, super-regional
mall, attracting customers from a much wider geographic area than typically
found at a regional mall. The 40-mile radius primary trade area, from which
the center draws 85.6%(2) of its customer base, has a population of 6,081,614
permanent residents. Average household income in the primary trade area is
$54,773 compared with $48,758 for the United States as a whole. Retail sales
in the Philadelphia Metropolitan Area are currently estimated to approach $44
billion annually. The Philadelphia area ranked fifth nationally behind
Chicago, Los Angeles, New York, and Washington, D.C. on total retail sales
for 1995. Retail sales in the area have increased at a compound annual rate
of 3.6% since 1989. Annual retail sales within Philadelphia for 1995 were 3.9
billion, unchanged from the previous year. Pennsylvania ranked 11th in the
nation in new centers constructed with 28 built in 1996.
Competition. Competition for Franklin Mills comes primarily from three
malls. The first is Neshaminy Mall, a regional mall approximately 3 miles
north of the subject. It has 945,000 square feet of rentable area and was
constructed and renovated in 1968 and 1995 respectively. Anchors include
Sears, Strawbridge's and Boscov's. The $6.8 million renovation include moving
the food court, renovation of the common areas, and conversion of a former
Bon-Ton Department store to a Boscov's department store. A 24 screen movie
theater and additional retail space is under consideration. The mall is 88%
leased with some vacancies due to bankruptcies. Management of the mall is
attempting to create larger spaces for tenants such as Eddie Bauer and The
Disney Store. Mall store sales were $256 per square foot in 1995.
The second competition is Oxford Valley Mall, which is located in a 1.12
million square foot two level regional mall. The mall was constructed in 1973
and is located nine miles northeast of Franklin Mills. Anchors include
Macy's, Sears, JC Penney, and Strawbridge's. The most recent renovation was
in 1990. Occupancy is at 95% and total mall sales were $252 per square foot
for 1995 with a projected increase of 3% for 1996. Mall sales have been
negatively impacted by construction of a new power center across from the
mall.
The third competitor is Willow Grove Mall. This 961,000 square foot
regional mall is located in Abington Township, Montgomery County
approximately 11 miles from Franklin Mills. The mall opened in 1982 as a
fashion mall due to the characteristics of its immediate trade area, however
it is currently now positioned as a middle market mall. Current anchors
include Sears, Strawbridge's and Bloomingdales. Occupancy and sales per
square foot for 1995 were 96% and $368, respectively.
Location/Access. Franklin Mills is located 15 miles northeast of
Philadelphia's Center City. Located just west of Interstate 95, Franklin
Mills has excellent access to all parts of its primary trade area, which
consists of the region within a 40-mile radius. It is located in the Parkwood
neighborhood of Northeast Philadelphia and Besalem Township in Buck's County.
The neighborhood is approximately 15 miles northeast of Philadelphia's
central business district.
Franklin Mills is located just off of Interstate 95 at the intersection of
Woodhaven road (PA 63) and Knights Road. I-95 connects with both the
Pennsylvania Turnpike and the New Jersey Turnpike. Access to Franklin Mills
is also provided from US 1.
Environmental Report. A Phase I environmental site assessment was
performed dated July 9, 1997 on the Franklin Mills Outlet Mall Property. The
Phase I environmental site assessment did not reveal any environmental
liability that the Depositor believes would have a material adverse effect on
the borrower's business, assets or results of operations taken as a whole.
Nevertheless, there can be no assurance that all environmental conditions and
risks were identified in such environmental assessment.
Engineering Report. A Property Condition Report was completed on the
Franklin Mills Outlet Mall Property on April, 1997 by a third party due
diligence firm. The Property Condition Report concluded that the Franklin
Mills Outlet Mall Property was in very good condition and identified
approximately no deferred maintenance requirements.
The Real Estate Collateral. The real estate collateral is comprised of all
of the Franklin Mills Borrower's right, title and interest in and to two
parcels of land and the improvements and equipment located thereon. Franklin
Mills Associates Limited Partnership owns one parcel of the Franklin Mills
S-131
<PAGE>
Property in fee simple and Liberty Plaza Limited Partnership owns a ground
leasehold estate in the other parcel comprising the Franklin Mills Property
pursuant to the "Liberty Plaza Ground Lease" dated as of May 5, 1997 made by
The Mills Limited Partnership ("Fee Owner"), as lessor, and Liberty Plaza
Limited Partnership, as lessee (the "Lessee") (the "Franklin Mills Ground
Lease"). The term of the Franklin Mills Ground Lease expires on May 1, 2026
and may be extended for a single renewal term of 11 years and two months at
Lessee's option. The Franklin Mills Ground Lease provides that: (i) Lessee
may mortgage the Franklin Mills Ground Lease and the ground leasehold estate
created thereby; (ii) Lessee may assign its interest therein to the holder of
the Franklin Mills Loan, its successors and assigns (the "mortgagee"); (iii)
Fee Owner is required to give notice of any default by Lessee to the
mortgagee and the mortgagee is permitted to cure such default and has as much
time to do so as is provided to the Lessee; and (iv) Fee Owner is required to
enter into a new lease with the mortgagee upon termination of the Franklin
Mills Ground Lease for any reason on all of the terms and provisions
(including rent and renewal options) which are contained in the Franklin
Mills Ground Lease. By execution of the Franklin Mills Mortgage, Fee Owner
consented thereto and agreed that its rights and interest in and to the
Franklin Mills Property were fully subordinate and subject to the lien of the
Franklin Mills Mortgage.
The base rent under the Franklin Mills Ground Lease is $120.00 per year
payable in equal monthly installments of $10.00 per month for the initial
term, and a Fair Market Rental Rate (as defined below) payable in equal
monthly installments for the extension term. The "Fair Market Rental Rate" is
(i) an amount agreed to by the Franklin Mills Borrower, as lessee, and the
ground lessor, or (ii) an amount approximating the annual base rental rate
for 11 year leases similar in economic terms commencing on or around the
commencement date of the extension term.
Property Management. The Franklin Mills Mall is managed by Management
Associates Limited Partnership (the "Franklin Mills Manager"), a Delaware
limited partnership, pursuant to (i) a management agreement dated March 4,
1988, by and between Franklin Mills Borrower and Western Management
Corporation, as amended and assigned to Franklin Mills Manager and (ii) a
management agreement dated as of April 21, 1994, by and between The Mills
Limited Partnership and Franklin Mills Manager (collectively, the "Franklin
Mills Management Agreement").
Pursuant to a manager's consent and subordination of management agreement
executed with respect to the Franklin Mills Management Agreement by the
Manager and Franklin Mills Borrower in favor of the mortgagee, the Manager
has agreed (i) not to terminate the Franklin Mills Management Agreement
without the consent of the mortgagee, except for nonpayment of management
fees (in which case the mortgagee has a 60-day cure period), (ii) that all
liens, rights and interests owned, claimed or held by the Manager in and to
the Franklin Mills Property are and will be in all respects subordinate to
the lien and security interest securing the Franklin Mills Loan, including
the lien of the Franklin Mills Mortgage, (iii) that during the continuance of
an Event of Default (as defined below) under the Franklin Mills Loan, the
Manager will continue to perform under the Franklin Mills Management
Agreement provided that the mortgagee performs or causes to be performed the
obligations of the Franklin Mills Borrower thereunder, (iv) that,
notwithstanding anything in the Franklin Mills Management Agreement to the
contrary, the mortgagee, or the Franklin Mills Borrower at the mortgagee's
direction, shall have the right to terminate the Franklin Mills Management
Agreement (a) upon default by Manager under the Franklin Mills Management
Agreement, (b) at any time for cause (including, but not limited to,
Manager's gross negligence, willful misconduct or fraud), or (c) upon a 50%
or more change in control of the ownership of the Franklin Mills Manager, (v)
not to amend or modify the Franklin Mills Management Agreement without the
prior written consent of the mortgagee, and (vi) prior to an Event of Default
(or in the event of an occurrence of default, within 10 days after a request
from the mortgagee therefor) Franklin Mills Manager will deliver to
mortgagee, not later than 45 days after the end of each fiscal quarter of the
Franklin Mills Borrower's operations, a true and complete rent roll for the
Franklin Mills Property and a schedule of all contracts and other agreements
relating to the Franklin Mills Property. In addition, the Franklin Mills
Management Agreement shall automatically terminate on the Franklin Mills
Effective Maturity Date (as hereinafter defined).
S-132
<PAGE>
Operating History. The table below presents information regarding the
operating performance of Franklin Mills and Liberty Plaza:
FRANKLIN MILLS/LIBERTY PLAZA
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------- ------------- ------------- --------------
Revenues............. $29,585,591 $31,661,917 $30,556,892 $ 31,251,663
Expenses............. 10,490,705 11,394,590 12,241,929 12,306,418
------------- ------------- ------------- --------------
Net Operating
Income.............. $19,094,886 $20,267,327 $18,314,963 $ 18,945,245
Adjustments to NOI .. 400,000
Net Cash Flow........ $ 18,545,245
==============
12/1/97 Loan
Balance............. $129,493,575
Appraised Value...... $214,000,000
12/1/97 LTV.......... 60.5%
Annual Debt Service . $ 11,245,596
DSCR................. 1.65x
FRANKLIN MILLS
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------- ------------- ------------- --------------
Revenues.............. $28,141,388 $28,988,130 $28,481,588 $28,652,836
Expenses.............. 10,322,386 10,517,437 11,403,321 11,523,639
------------- ------------- ------------- --------------
Net Operating Income . $17,819,002 $18,470,693 $16,988,556 $17,129,197
Adjustments to NOI ... 393,909
--------------
Net Cash Flow......... $16,735,288
==============
Occupancy ............ 98% 95% 93% 92%
Sales per Square Foot
Anchor ............. $ 174 $ 158 $ 182
Non -Anchor ........ 245 236 254
LIBERTY PLAZA
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------ ------------ ------------ ---------------
Revenues............. $1,444,203 $2,673,787 $2,075,304 $2,598,827(1)
Expenses............. 168,319 877,153 748,897 782,779
------------ ------------ ------------ ---------------
Net Operating
Income.............. $1,275,884 $1,796,634 $1,326,407 $ 1,816,048
Adjustments to NOI .. 6,091
---------------
Net Cash Flow........ $ 1,809,957
===============
Occupancy ........... 67% 69% 45% 48%
(1) Includes a 131,812 square foot lease to Wal Mart signed on 8/25/97.
S-133
<PAGE>
UNDERWRITTEN CASHFLOW--FRANKLIN MILLS/LIBERTY PLAZA
<TABLE>
<CAPTION>
UNDERWRITTEN UNDERWRITTEN ACTUAL
1996 FRANKLIN 1996 LIBERTY 1996 UNDERWRITTEN
ACTUAL MILLS ACTUAL PLAZA CONSOLIDATED CONSOLIDATED
------------ -------------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Minimum Rental Revenue 16,121,261 15,344,556 1,488,408 1,501,608 17,609,669 16,846,184
New Leases Revenue -- 1,166,000 -- 790,872 -- 1,956,872
Percentage Rent 373,019 515,796 -- -- 373,019 515,796
Temporary Tenant Income 693,631 675,122 -- -- 693,631 675,122
Miscellaneous 528,853 374,163 (10,806) 3,000 518,047 377,163
------------ -------------- ----------- -------------- -------------- --------------
TOTAL GROSS REVENUE 17,716,764 18,075,637 1,477,602 2,295,480 19,194,366 20,371,117
Cam Recoveries -- 17,716,764 -- 6,999,479 85,748 7,085,227
Real Estate Tax Recoveries -- 3,577,721 -- 217,549 -- 3,795,320
------------ -------------- ----------- -------------- -------------- --------------
TOTAL RECOVERIES 10,764,825 10,577,200 597,702 303,347 11,362,527 10,880,547
------------ -------------- ----------- -------------- -------------- --------------
EFFECTIVE GROSS REVENUE 28,481,588 28,652,836 2,075,304 2,598,827 30,556,892 31,251,663
OPERATING EXPENSES
Management Fee 689,144 689,146 74,420 851,318 763,564 965,842
Salaries 3,264,519 3,308,195 15,553 16,091 3,280,072 3,324,286
Utilities 758,517 796,641 3,458 23,474 761,975 820,115
Administration -- 73,247 14,036 2,050 14,036 75,297
Insurance -- 661,338 14,036 (26,561) 14,036 634,777
Real Estate Taxes 3,907,930 3,938,479 399,294 400,529 4,307,224 4,339,007
Maintenance 1,073,410 864,474 154,166 105,934 1,227,576 970,408
Other 1,799,512 1,029,949 73,934 146,538 1,873,446 1,176,587
------------ -------------- ----------- -------------- -------------- --------------
TOTAL OPERATING EXPENSES 11,403,321 11,523,639 748,897 782,779 12,241,929 12,306,418
------------ -------------- ----------- -------------- -------------- --------------
NET OPERATING INCOME 16,988,556 17,129,197 1,326,407 1,816,048 18,314,963 18,945,245
============ ============== =========== ============== ============== ==============
LEASING & CAPITAL COSTS
Replacement Reserves 393,909 6,091 400,000
-------------- ----------- -------------- -------------- --------------
NET CASH FLOW 16,735,288 1,809,957 18,545,245
============== =========== ============== ============== ==============
</TABLE>
S-134
<PAGE>
Major Tenant Summary. The following table shows certain information
regarding tenants of Franklin Mills and Liberty Plaza with greater than
20,000 rentable square feet:
FRANKLIN MILLS/LIBERTY PLAZA
CREDIT RATING
OF PARENT
COMPANY
TENANT PARENT COMPANY PROPERTY (MOODY'S/S&P)
- ----------------------- ------------------------ -------------- --------------
Boscov's Boscov's Franklin Mills NR/NR
Sam's Wholesale Club Wal-Mart Stores Franklin Mills Aa2/AA
Burlington Coat Factory Burlington Coat Factory
Warehouse Corporation Franklin Mills NR/NR
J.C. Penny J.C. Penny Co., Inc Franklin Mills A2/A
Dick's Clothing & Dick's Clothing &
Sporting Goods Sporting Goods Liberty Plaza NR/NR
Phar-Mor Phar-Mor, Inc. Franklin Mills B3/B
Marshalls TJX Companies, Inc. Franklin Mills Baa1/BBB+
Spiegel Spiegel Franklin Mills NR/NR
Service Merchandise Service Merchandise
Company, Inc. Liberty Plaza B2/BB-
Saks Fifth Avenue Saks Fifth Avenue Franklin Mills Ba3/BB-
Nordstrom Nordstrom, Inc. Franklin Mills NR/A+
Bed, Bath & Beyond Bed, Bath & Beyond, Inc. Franklin Mills NR/NR
Off 5th Clearinghouse Off 5th Clearinghouse Franklin Mills NR/NR
Filene's Basement Filene's Basement, Inc Franklin Mills NR/NR
Modell's Sporting Goods Henry Modell &
Company, Inc. Franklin Mills NR/NR
OfficeMax, Inc. OfficeMax, Inc. Franklin Mills NR/NR
Neiman Marcus Harcourt General, Inc. Franklin Mills Baa1/BBB+
SYMS SYMS Corporation Franklin Mills NR/NR
TOTAL -MAJOR TENANTS
TOTAL -PROPERTY POOL
(RESTUBBED TABLE CONTINUED FROM ABOVE)
% OF SALES/
SQUARE TOTAL SQUARE LEASE
TENANT FEET R.S.F. FOOT EXPIRATION
- ----------------------- ----------- -------- -------- ------------
Boscov's 152,370 7.8% $108 5/7/09
Sam's Wholesale Club 133,010 6.8% N/A N/A
Burlington Coat Factory
128,950 6.6% $108 10/31/03
J.C. Penny 100,200 5.1% $342 5/31/99
Dick's Clothing &
Sporting Goods 77,586 3.9% N/A 4/30/11
Phar-Mor 75,592 3.8% $155 N/A
Marshalls 70,701 3.6% $140 1/31/01
Spiegel 60,115 3.1% $123 7/29/00
Service Merchandise
53,274 2.7% N/A 1/20/05
Saks Fifth Avenue 46,406 2.4% $376 11/30/06
Nordstrom 42,241 2.1% $202 1/31/04
Bed, Bath & Beyond 40,232 2.0% $153 5/10/99
Off 5th Clearinghouse 34,918 1.8% N/A 6/30/02
Filene's Basement 32,637 1.7% $189 1/29/00
Modell's Sporting Goods
30,608 1.6% $215 5/10/07
OfficeMax, Inc. 30,237 1.5% $118 4/30/02
Neiman Marcus 26,900 1.4% $207 3/31/03
SYMS 25,127 1.3% $212 10/31/98
----------- --------
TOTAL -MAJOR TENANTS 997,636 50.8%
TOTAL -PROPERTY POOL 1,965,742 100.0%
=========== ========
S-135
<PAGE>
FRANKLIN MILLS
LEASE EXPIRATION SCHEDULE
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
For the Years Ending OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002 OCT-2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
TENANT
Kasper 2,522 -- -- -- -- --
So Fun Kids 1,840 -- -- -- -- --
Popcorn World 225 -- -- -- -- --
Faraone Oriental Rugs 3,727 -- -- -- -- --
Accent on Animals 881 -- -- -- -- --
J. Riggings 11,827 -- -- -- -- --
Capacity 2,971 -- -- -- -- --
Affordable Airbrush 1,478 -- -- -- -- --
Peepers Optical 1,449 -- -- -- -- --
Decor & Gift Outlet 2,261 -- -- -- -- --
Kid City 10,646 -- -- -- -- --
Sno Biz 765 -- -- -- -- --
Portraits Plus 584 -- -- -- -- --
Lollipop Boutique 650 -- -- -- -- --
Paul Harris 6,284 -- -- -- -- --
No Name 3,300 -- -- -- -- --
America's Halloween 5,041 -- -- -- -- --
Lorianna 5,882 -- -- -- -- --
O2 Kool 1,730 -- -- -- -- --
Wearguard Work Wear 3,685 -- -- -- -- --
Magic Moments 1,264 -- -- -- -- --
Casual Corner 4,559 -- -- -- -- --
Nodic Track 2,736 -- -- -- -- --
H & R Block 1,281 -- -- -- -- --
Jockey 3,509 -- -- -- -- --
London Fog 6,241 -- -- -- -- --
Confection Connection 1,259 -- -- -- -- --
Diesel 3,353 -- -- -- -- --
Banister Shoes 8,837 -- -- -- -- --
First Choice 3,703 -- -- -- -- --
United Check Cashing 355 -- -- -- -- --
Martinos Italian Eatery 2,982 -- -- -- -- --
Baby Guess 1,495 -- -- -- -- --
Syms 25,127 -- -- -- -- --
Zales Jewelers 2,218 -- -- -- -- --
Dollar Mania 5,207 -- -- -- -- --
Wicker Discount Center 3,000 -- -- -- -- --
ATM Machine 160 -- -- -- -- --
Brookstone 12,092 -- -- -- -- --
Vacant 66,355 -- -- -- -- --
St. John Outlet -- 1,396 -- -- -- --
Injeanius -- 2,122 -- -- -- --
Subway -- 490 -- -- -- --
JC Penney -- 100,200 -- -- -- --
Bed, Bath & Beyond -- 40,232 -- -- -- --
Footquarters -- 6,354 -- -- -- --
Bally of Switzerland -- 5,450 -- -- -- --
Van Heusen -- 3,736 -- -- -- --
Leslies Handbags -- 1,636 -- -- -- --
Rack Room -- 5,409 -- -- -- --
Watches Galore -- 317 -- -- -- --
Briefcase Unlimited -- 1,201 -- -- -- --
Wall -- 7,546 -- -- -- --
Haircuttery -- 1,056 -- -- -- --
Dress Barn -- 4,940 -- -- -- --
Izod -- 3,967 -- -- -- --
The Camera Shop -- 1,561 -- -- -- --
O.J. Art Gallery -- 1,088 -- -- -- --
Mr. Bulky -- 2,295 -- -- -- --
Hamilton Luggage -- 3,227 -- -- -- --
Ritz Camera -- 1,437 -- -- -- --
Original Cookie Company -- 574 -- -- -- --
Bains Deli -- 1,171 -- -- -- --
Sbarro -- 951 -- -- -- --
Mandarin Express -- 654 -- -- -- --
Haagen Dazs -- 627 -- -- -- --
Sunglass Hut -- 546 -- -- -- --
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
For the Years Ending OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
TENANT
Kasper -- -- -- -- --
So Fun Kids -- -- -- -- --
Popcorn World -- -- -- -- --
Faraone Oriental Rugs -- -- -- -- --
Accent on Animals -- -- -- -- --
J. Riggings -- -- -- -- --
Capacity -- -- -- -- --
Affordable Airbrush -- -- -- -- --
Peepers Optical -- -- -- -- --
Decor & Gift Outlet -- -- -- -- --
Kid City -- -- -- -- --
Sno Biz -- -- -- -- --
Portraits Plus -- -- -- -- --
Lollipop Boutique -- -- -- -- --
Paul Harris -- -- -- -- --
No Name -- -- -- -- --
America's Halloween -- -- -- -- --
Lorianna -- -- -- -- --
O2 Kool -- -- -- -- --
Wearguard Work Wear -- -- -- -- --
Magic Moments -- -- -- -- --
Casual Corner -- -- -- -- --
Nodic Track -- -- -- -- --
H & R Block -- -- -- -- --
Jockey -- -- -- -- --
London Fog -- -- -- -- --
Confection Connection -- -- -- -- --
Diesel -- -- -- -- --
Banister Shoes -- -- -- -- --
First Choice -- -- -- -- --
United Check Cashing -- -- -- -- --
Martinos Italian Eatery -- -- -- -- --
Baby Guess -- -- -- -- --
Syms -- -- -- -- --
Zales Jewelers -- -- -- -- --
Dollar Mania -- -- -- -- --
Wicker Discount Center -- -- -- -- --
ATM Machine -- -- -- -- --
Brookstone -- -- -- -- --
Vacant -- -- -- -- --
St. John Outlet -- -- -- -- --
Injeanius -- -- -- -- --
Subway -- -- -- -- --
JC Penney -- -- -- -- --
Bed, Bath & Beyond -- -- -- -- --
Footquarters -- -- -- -- --
Bally of Switzerland -- -- -- -- --
Van Heusen -- -- -- -- --
Leslies Handbags -- -- -- -- --
Rack Room -- -- -- -- --
Watches Galore -- -- -- -- --
Briefcase Unlimited -- -- -- -- --
Wall -- -- -- -- --
Haircuttery -- -- -- -- --
Dress Barn -- -- -- -- --
Izod -- -- -- -- --
The Camera Shop -- -- -- -- --
O.J. Art Gallery -- -- -- -- --
Mr. Bulky -- -- -- -- --
Hamilton Luggage -- -- -- -- --
Ritz Camera -- -- -- -- --
Original Cookie Company -- -- -- -- --
Bains Deli -- -- -- -- --
Sbarro -- -- -- -- --
Mandarin Express -- -- -- -- --
Haagen Dazs -- -- -- -- --
Sunglass Hut -- -- -- -- --
</TABLE>
S-136
<PAGE>
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
For the Years Ending OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002 OCT-2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Payless Shoe Source -- 3,714 -- -- -- --
Martys Warehouse Outet -- 7,424 -- -- -- --
Card and Gift Outlet -- 3,532 -- -- -- --
Auntie Annes -- 300 -- -- -- --
Spains Cards & Gifts -- 3,787 -- -- -- --
Hollywood eyes -- 1,308 -- -- -- --
Nathans -- 674 -- -- -- --
9 West & Co. -- -- 3,104 -- -- --
Mellon Independence -- -- 1,195 -- -- --
Arbys -- -- 1,025 -- -- --
Philly Steak -- -- 637 -- -- --
Enzo Angiolini -- -- 1,460 -- -- --
Ann Taylor -- -- 8,647 -- -- --
Filenes Basement -- -- 32,637 -- -- --
Guess? -- -- 7,289 -- -- --
Elegance -- -- 1,133 -- -- --
$9.99 Stockroom -- -- 3,893 -- -- --
American Outpost -- -- 3,017 -- -- --
Aeropostale -- -- 4,865 -- -- --
Dress Barn -- -- 5,562 -- -- --
Levis -- -- 15,845 -- -- --
Childerns Place Outlet -- -- 4,350 -- -- --
Bugel Boy Outlet -- -- 8,971 -- -- --
Earring World -- -- 1,021 -- -- --
Radio Shack -- -- 3,438 -- -- --
The Fudgery -- -- 794 -- -- --
Athletes Foot Outlet -- -- 4,167 -- -- --
Episode -- -- 1,468 -- -- --
Casual Male Big & Tall -- -- 4,011 -- -- --
Perfumania -- -- 1,410 -- -- --
Spiegel -- -- 60,115 -- -- --
Anita Belle -- -- 954 -- -- --
Maidenform -- -- 3,217 -- -- --
Wall -- -- 5,684 -- -- --
Aldo for Less -- -- 2,636 -- -- --
Sentimental Jewelery -- -- 1,362 -- -- --
Toy Works -- -- 13,040 -- -- --
Palace Electronics -- -- 1,475 -- -- --
U.S. Postal Service -- -- -- 1,690 -- --
Carters Childrenswear -- -- -- 4,812 -- --
House of Perfumes -- -- -- 924 -- --
Equifax Quick Test -- -- -- 2,370 -- --
Swatch -- -- -- 1,721 -- --
Marshalls -- -- -- 70,701 -- --
Sam's Wholesale Club -- -- -- 133,010 -- --
Eddie Bauer -- -- -- 6,208 -- --
Remington Factory Outle -- -- -- 1,232 -- --
Payless Shoe Source -- -- -- 3,108 -- --
Quails Outlet -- -- -- 3,084 -- --
Bostonian -- -- -- 3,056 -- --
Brooks Brothers -- -- -- 4,856 -- --
P.S. Plus Sizes -- -- -- 4,995 -- --
Flag Shop -- -- -- 958 -- --
Tommy Hilfiger -- -- -- 4,357 -- --
CR Jewelers Outlet -- -- -- 1,255 -- --
Encore Books -- -- -- 13,216 -- --
Gap -- -- -- 12,135 -- --
Benetton Outlet -- -- -- 2,899 -- --
Royal Jewelers -- -- -- 583 -- --
Famous Brand House -- -- -- 3,721 -- --
Archie Jacobson -- -- -- 4,622 -- --
Perfume Romance -- -- -- 455 -- --
Electronics Boutique -- -- -- 1,000 -- --
A Formal Celebration -- -- -- 4,091 -- --
Samsonite Company Store -- -- -- 2,897 -- --
Philly Leather Outlet -- -- -- 4,094 -- --
Maternity Works -- -- -- 1,466 -- --
Class Perfume -- -- -- 1,437 -- --
Lets Talk Cellular -- -- -- 915 -- --
Claires -- -- -- 1,455 -- --
Wilsons Leather Outlet -- -- -- 3,675 -- --
Games N Gadgets -- -- -- -- 1,107 --
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
For the Years Ending OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Payless Shoe Source -- -- -- -- --
Martys Warehouse Outet -- -- -- -- --
Card and Gift Outlet -- -- -- -- --
Auntie Annes -- -- -- -- --
Spains Cards & Gifts -- -- -- -- --
Hollywood eyes -- -- -- -- --
Nathans -- -- -- -- --
9 West & Co. -- -- -- -- --
Mellon Independence -- -- -- -- --
Arbys -- -- -- -- --
Philly Steak -- -- -- -- --
Enzo Angiolini -- -- -- -- --
Ann Taylor -- -- -- -- --
Filenes Basement -- -- -- -- --
Guess? -- -- -- -- --
Elegance -- -- -- -- --
$9.99 Stockroom -- -- -- -- --
American Outpost -- -- -- -- --
Aeropostale -- -- -- -- --
Dress Barn -- -- -- -- --
Levis -- -- -- -- --
Childerns Place Outlet -- -- -- -- --
Bugel Boy Outlet -- -- -- -- --
Earring World -- -- -- -- --
Radio Shack -- -- -- -- --
The Fudgery -- -- -- -- --
Athletes Foot Outlet -- -- -- -- --
Episode -- -- -- -- --
Casual Male Big & Tall -- -- -- -- --
Perfumania -- -- -- -- --
Spiegel -- -- -- -- --
Anita Belle -- -- -- -- --
Maidenform -- -- -- -- --
Wall -- -- -- -- --
Aldo for Less -- -- -- -- --
Sentimental Jewelery -- -- -- -- --
Toy Works -- -- -- -- --
Palace Electronics -- -- -- -- --
U.S. Postal Service -- -- -- -- --
Carters Childrenswear -- -- -- -- --
House of Perfumes -- -- -- -- --
Equifax Quick Test -- -- -- -- --
Swatch -- -- -- -- --
Marshalls -- -- -- -- --
Sam's Wholesale Club -- -- -- -- --
Eddie Bauer -- -- -- -- --
Remington Factory Outle -- -- -- -- --
Payless Shoe Source -- -- -- -- --
Quails Outlet -- -- -- -- --
Bostonian -- -- -- -- --
Brooks Brothers -- -- -- -- --
P.S. Plus Sizes -- -- -- -- --
Flag Shop -- -- -- -- --
Tommy Hilfiger -- -- -- -- --
CR Jewelers Outlet -- -- -- -- --
Encore Books -- -- -- -- --
Gap -- -- -- -- --
Benetton Outlet -- -- -- -- --
Royal Jewelers -- -- -- -- --
Famous Brand House -- -- -- -- --
Archie Jacobson -- -- -- -- --
Perfume Romance -- -- -- -- --
Electronics Boutique -- -- -- -- --
A Formal Celebration -- -- -- -- --
Samsonite Company Store -- -- -- -- --
Philly Leather Outlet -- -- -- -- --
Maternity Works -- -- -- -- --
Class Perfume -- -- -- -- --
Lets Talk Cellular -- -- -- -- --
Claires -- -- -- -- --
Wilsons Leather Outlet -- -- -- -- --
Games N Gadgets -- -- -- -- --
</TABLE>
S-137
<PAGE>
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
For the Years Ending OCT-1998 OCT-1999 OCT-2000 OCT-2001 OCT-2002
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Cosmetic Center -- -- -- -- 1,808
Dairy Queen -- -- -- -- 633
Bavarian Pretzel -- -- -- -- 510
Bombay Company -- -- -- -- 3,600
Boston Traders -- -- -- -- 6,446
McDonalds -- -- -- -- 694
Prestige Fragrance -- -- -- -- 1,376
Cost Cutters -- -- -- -- 2,030
GNC -- -- -- -- 1,047
Burger King -- -- -- -- 1,600
Office Max -- -- -- -- 30,237
Perry Ellis -- -- -- -- 2,129
Donna Karan Company -- -- -- -- 4,582
Newsstand of Franklin -- -- -- -- 460
Lenscrafters -- -- -- -- 3,655
A & W Hot Dogs -- -- -- -- 485
China Buddha Inn -- -- -- -- 3,939
Polo -- -- -- -- 10,026
We're Entertainment -- -- -- -- 5,287
Factory Brand Shoes -- -- -- -- 6,630
China Buddha Express -- -- -- -- 218
Off 5th Clearing -- -- -- -- 34,918
Smalls Formalwear -- -- -- -- 817
Vitamin World -- -- -- -- 1,220
The Nailery -- -- -- -- 501
Boot Factory -- -- -- -- 1,615
Jean Outlet -- -- -- -- 3,042
Giorgio Bruntini -- -- -- -- 1,915
T.J. Cinnamons -- -- -- -- 649
Claires -- -- -- -- 932
Charter Club Outlet -- -- -- -- 2,404
Contempo Casuals -- -- -- -- --
Champs -- -- -- -- --
Talbots -- -- -- -- --
Neiman Marcus -- -- -- -- --
Burlington Coat Factory -- -- -- -- --
Arthur Treaches Fish & -- -- -- -- --
Cajun Gourmet -- -- -- -- --
Nordstrom -- -- -- -- --
Time Out -- -- -- -- --
Tropik Sun Fruit & Nut -- -- -- -- --
Sunglass Hut -- -- -- -- --
Italian Bistro -- -- -- -- --
Britches -- -- -- -- --
Suncoast Motion Picture -- -- -- -- --
Ruby Tuesday -- -- -- -- --
Group USA -- -- -- -- --
Lids for Less -- -- -- -- --
Daddys Deli -- -- -- -- --
Aerosoles -- -- -- -- --
Saks -- -- -- -- --
Modells Sporting Goods -- -- -- -- --
Boscov's -- -- -- -- --
Nautica -- -- -- -- --
Phar-Mor -- -- -- -- --
-- -- -- -- ------
Total SQFT Expiring 223,481 220,922 208,422 306,998 136,512
======= ======= ======= ======= =======
Percent of Total 13.5% 13.3% 12.5% 18.5% 8.2%
------- ------- ------- ------- -------
<CAPTION>
YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10 2008
For the Years Ending OCT-2003 OCT-2004 OCT-2005 OCT-2006 OCT-2007 AND BEYOND
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Cosmetic Center -- -- -- -- -- --
Dairy Queen -- -- -- -- -- --
Bavarian Pretzel -- -- -- -- -- --
Bombay Company -- -- -- -- -- --
Boston Traders -- -- -- -- -- --
McDonalds -- -- -- -- -- --
Prestige Fragrance -- -- -- -- -- --
Cost Cutters -- -- -- -- -- --
GNC -- -- -- -- -- --
Burger King -- -- -- -- -- --
Office Max -- -- -- -- -- --
Perry Ellis -- -- -- -- -- --
Donna Karan Company -- -- -- -- -- --
Newsstand of Franklin -- -- -- -- -- --
Lenscrafters -- -- -- -- -- --
A & W Hot Dogs -- -- -- -- -- --
China Buddha Inn -- -- -- -- -- --
Polo -- -- -- -- -- --
We're Entertainment -- -- -- -- -- --
Factory Brand Shoes -- -- -- -- -- --
China Buddha Express -- -- -- -- -- --
Off 5th Clearing -- -- -- -- -- --
Smalls Formalwear -- -- -- -- -- --
Vitamin World -- -- -- -- -- --
The Nailery -- -- -- -- -- --
Boot Factory -- -- -- -- -- --
Jean Outlet -- -- -- -- -- --
Giorgio Bruntini -- -- -- -- -- --
T.J. Cinnamons -- -- -- -- -- --
Claires -- -- -- -- -- --
Charter Club Outlet -- -- -- -- -- --
Contempo Casuals 3,703 -- -- -- -- --
Champs 8,841 -- -- -- -- --
Talbots 11,016 -- -- -- -- --
Neiman Marcus 26,900 -- -- -- -- --
Burlington Coat Factory 128,950 -- -- -- -- --
Arthur Treaches Fish & -- 503 -- -- -- --
Cajun Gourmet -- 735 -- -- -- --
Nordstrom -- 42,241 -- -- -- --
Time Out -- 3,288 -- -- -- --
Tropik Sun Fruit & Nut -- 761 -- -- -- --
Sunglass Hut -- 256 -- -- -- --
Italian Bistro -- 5,422 -- -- -- --
Britches -- 4,797 -- -- -- --
Suncoast Motion Picture -- -- 3,605 -- -- --
Ruby Tuesday -- -- 4,800 -- -- --
Group USA -- -- -- 5,003 -- --
Lids for Less -- -- -- 550 -- --
Daddys Deli -- -- -- 476 -- --
Aerosoles -- -- -- 2,011 -- --
Saks -- -- -- -- 46,406 --
Modells Sporting Goods -- -- -- -- 30,608 --
Boscov's -- -- -- -- -- 152,370
Nautica -- -- -- -- -- 6,110
Phar-Mor -- -- -- -- -- 75,592
------- ------ ----- ----- ------ -------
TOTAL
Total SQFT Expiring 179,410 58,003 8,405 8,040 77,014 234,072 1,661,279
======= ====== ===== ===== ====== ======= =========
Percent of Total 10.8% 3.5% 0.5% 0.5% 4.6% 14.1% 100.0%
------- ------ ----- ----- ------ -------
</TABLE>
S-138
<PAGE>
FRANKLIN MILLS MALL: THE LOAN
Security. The Franklin Mills Loan is a nonrecourse loan, secured by a
mortgage lien on the fee simple interest in one parcel of land and the fee
simple and leasehold estate interests of an adjacent parcel (collectively
referred to herein as the Franklin Mills Property), the improvements,
appurtenances and building equipment, and certain other collateral relating
thereto (including an assignment of leases, rents and security deposits, an
assignment of certain agreements and the funds in certain accounts)
(collectively with all other security documents referenced herein, the "Loan
Documents"). The mortgagee is a named insured under the title insurance
policy which insures, among other things, that the Franklin Mills Mortgage
constitutes a valid and enforceable first lien on the Franklin Mills
Property, subject to certain exceptions and exclusions from coverage set
forth therein. Such insurance policy, the Franklin Mills Note, the Franklin
Mills Mortgage and all other agreements and documents evidencing and securing
the Franklin Mills Loan will be assigned to the Trust Fund.
Payment Terms. The Franklin Mills Loan matures on June 1, 2027 (the
"Franklin Mills Maturity Date") and bears interest (a) on the Original Amount
at a fixed rate per annum equal to 7.882% and on the Initial Additional
Amount at a fixed rate per annum equal to 7.44% (collectively, the "Franklin
Mills Initial Interest Rate") through but not including May 5, 2007 (the
"Franklin Mills Effective Maturity Date") and (b) from and including the
Franklin Mills Effective Maturity Date through and including the Franklin
Mills Maturity Date, at a fixed rate per annum equal to the greater of (i)
the Franklin Mills Initial Interest Rate plus 5% or (ii) the Franklin Mills
Treasury Rate plus 5%. The "Franklin Mills Treasury Rate" means the yield, as
of the Franklin Mills Effective Maturity Date, calculated by the linear
interpolation of the yields of noncallable United States Treasury obligations
with terms most nearly approximating a fifteen (15) year period. Any interest
accrued after the Franklin Mills Effective Maturity Date at the excess of the
Franklin Mills Revised Interest Rate over the Franklin Mills Initial Interest
Rate shall be accrued and added to the outstanding indebtedness under the
Franklin Mills Loan and shall, to the extent permitted by applicable law,
earn interest at the Franklin Mills Revised Interest Rate (such accrued
interest and interest thereon, the "Franklin Mills Accrued Interest").
Interest on the Franklin Mills Loan is calculated on the basis of a 360-day
year of twelve 30-day months.
The payment date for the Franklin Mills Loan is the first business day of
each month (each, a "Payment Date"), with no grace period for a default in
the payment of scheduled principal or interest. Commencing on July 1, 1997,
the Original Amount requires 360 equal monthly payments of principal and
interest of $798,110.85. Commencing on October 1, 1997, the Initial
Additional Amount requires 358 equal monthly payments of $139,022.12
(collectively with the payment set forth in the preceding sentence, the
"Franklin Mills Debt Service Payment"). Each Franklin Mills Debt Service
Payment, due and payable on each Payment Date, shall be applied first to the
interest at the Franklin Mills Initial Interest Rate and the remainder
thereof to the reduction of principal. In the event of a default in payments,
interest will accumulate thereon at the applicable interest rate plus five
percent (5%) per annum (the "Default Rate"). On the Franklin Mills Maturity
Date, payment of the remaining unpaid balance of principal, if any, together
with all interest accrued thereon and all other sums payable under the Note
or under the Loan Documents is required.
The Franklin Mills Borrower may request an additional increase (the
"Additional Amount") in the principal of the Franklin Mills Loan so that the
aggregate principal amount shall not exceed $165,000,000; provided that: (i)
no Event of Default (as defined below) has occurred, (ii) the Franklin Mills
Borrower has secured additional title insurance, and (iii) the Additional
Amount is not greater than the greater of (x) an amount which when reviewed
by the Rating Agencies will not cause any class of Certificates to be rated
less than BBB-by S&P or Baa3 by Moody's, and (y) the lesser of (a) an amount
such that the principal indebtedness immediately following the funding of the
Additional Amount shall not exceed 65% of the value of the Franklin Mills
Property, and (b) an amount that will cause the Debt Service Coverage Ratio
to be less than 1.50:1. The "Debt Service Coverage Ratio" means the ratio of
net operating income from the Franklin Mills Property to debt service on the
Franklin Mills Note. The Franklin Mills Borrower may request the Additional
Amount by giving notice (the "Additional Increase Notice") prior to August
31, 1998. If the Franklin Mills Borrower elects to increase the principal of
the Franklin Mills Loan by the Additional Amount, the interest on the
Additional Amount will equal the interest rate on the 10-year
S-139
<PAGE>
United States Treasury Rate as of the date (the "Second Funding Date") which
is 30 days after the date of delivery of the Additional Increase Notice (or
if the same is not a business day, then the immediately succeeding business
day), plus 120 basis points (the "Second Additional Interest Rate"). The
Franklin Mills Monthly Debt Service Payment as of the first business day of
the first full month after the Second Funding Date shall be increased by an
amount equal to the amount of equal payments on the Additional Amount at the
Second Additional Interest Rate and with amortization payments based upon a
mortgage-style amortization and calculated based upon the number of months
then remaining prior to the Maturity Date. On the Franklin Mills Maturity
Date, payment of the then outstanding balance of the principal, if any,
together with all accrued and unpaid interest and all other sums payable
under the Loan Documents, is required.
Commencing with the first Payment Date after the Franklin Mills Effective
Maturity Date, and continuing on each Payment Date thereafter, the Franklin
Mills Borrower is required to apply 100% of rents and other revenues from the
Franklin Mills Property to the following items in the following order of
priority: (a) to payment of interest accruing at the Default Rate (as defined
herein) and late payment charges, if any; (b) to payment of required monthly
escrow amounts of taxes and insurance premiums; (c) to payment of the
Franklin Mills Monthly Debt Service Payments; (d) to payment of trade payable
reserves, if any; (e) to payment of monthly cash expenses pursuant to the
annual budget approved by the mortgagee and to payment of extraordinary,
unbudgeted operating or capital expenses approved by the mortgagee, if any;
(f) to payments to be applied against the outstanding principal of the loan
until such principal amount is paid in full; (g) to payments of Franklin
Mills Accrued Interest; and (h) to payments of any other amounts due under
the Loan Documents. Any excess amounts shall be paid to the Franklin Mills
Borrower.
Event of Default. The occurrence of any of the following constitutes an
"Event of Default" under the Franklin Mills Mortgage: (a) failure to make any
payment of interest or principal on the Franklin Mills Note when due, or
failure to pay the principal balance of the Franklin Mills Note when due; (b)
failure to pay any other amount payable pursuant to the Franklin Mills
Mortgage or Note when due and payable, with such failure continuing for 5
business days after mortgagee delivers written notice thereof to the Franklin
Mills Borrower; (c) failure to keep in force the insurance required under the
Franklin Mills Mortgage to be maintained or failure to comply with any other
covenant related to insurance requirements, with such failure continuing for
5 business days after mortgagee delivers written notice thereof to the
Franklin Mills Borrower; (d) failure to comply with certain Franklin Mills
Mortgage covenants which require the Franklin Mills Borrower to keep the
Franklin Mills Property free of liens and encumbrances (with such default
continuing for 5 business days after mortgagee delivers written notice
thereof to the Franklin Mills Borrower), and those which, with limited
exceptions, prohibit the sale of the Franklin Mills Property and transfers of
interests in the Franklin Mills Borrower; (e) any attempt by the Franklin
Mills Borrower to assign its rights under the Franklin Mills Mortgage; (f)
any other default in the performance or payment, or breach, of any material
covenant, warranty, representation or agreement set forth in the documents
which evidence the Franklin Mills Loan, with such default continuing for 30
business days, and any applicable extension period, after mortgagee delivers
written notice thereof to the Franklin Mills Borrower; (g) the occurrence of
certain bankruptcy events and (h) any event of default, as defined in any
Loan Document, shall occur.
If the Franklin Mills Borrower defaults in the payment of any Franklin
Mills Debt Service Payment on the Payment Date then the Franklin Mills
Borrower shall pay to mortgagee a late payment charge in an amount equal to
five percent (5%) of the amount of the installment not paid. If the Franklin
Mills Borrower defaults in the payment of any Franklin Mills Debt Service
Payment on the Payment Date due, or defaults in any other manner so as to
constitute an Event of Default, then mortgagee at its option and without
further notice to the Franklin Mills Borrower may declare the entire unpaid
amount of principal with interest at the Default Rate together with all other
sums due, if any, due and payable immediately.
Prepayment. Voluntary prepayment of the principal of the Franklin Mills
Note is prohibited at any time prior to the 180-day period prior to the
Franklin Mills Effective Maturity Date, at which time the Franklin Mills
Borrower may prepay the Franklin Mills Note in whole or in part on any
Payment Date without payment of a prepayment premium. If the Franklin Mills
Note is accelerated as a result of an
S-140
<PAGE>
Event of Default, Franklin Mills Borrower shall also pay a prepayment premium
(the "Franklin Mills Yield Maintenance Premium") equal to the greater of (a)
1% of the portion of the principal amount being prepaid and (b) the product
of (i) a fraction whose numerator is an amount equal to the portion of the
principal balance being prepaid and whose denominator is the entire
outstanding principal balance on the date of such prepayment, multiplied by
(ii) an amount equal to the remainder obtained by subtracting (x) an amount
equal to the entire outstanding principle balance as of the date of such
prepayment from (y) the present value as of the date of such prepayment of
the remaining scheduled payments of principle and interest (including any
final installment of principle payment on the Franklin Mills Effective
Maturity Date) determined by discounting such payments at a discount rate
equal to the Franklin Mills Discount Rate. The "Franklin Mills Discount Rate"
means the rate which, when compounded monthly, equals the yield, as of the
date of prepayment, calculated by linear interpolation of the yields of
noncallable U.S. Treasury obligations with terms (one longer and one shorter)
most nearly approximating the period from the date of the prepayment to the
Franklin Mills Effective Maturity Date.
No Franklin Mills Yield Maintenance Premium or other premium or penalty is
required to be paid in connection with any prepayment resulting from the
application of insurance or condemnation proceeds to repayment of the
Franklin Mills Loan in accordance with the requirements of the Franklin Mills
Mortgage.
Defeasance. For the purposes of this section, "Defeasance Collateral"
shall mean obligations or securities not subject to prepayment, call or early
redemption which are direct obligations of, or obligations fully guaranteed
as to timely payment by, the United States of America or any agency or
instrumentality of the United States of America, or the obligations of which
are backed by the full faith and credit of the United States of America, the
ownership of which will not cause the mortgagee to be an investment company
under the Investment Company Act of 1940, included as collateral under the
Franklin Mills Loan. For the purposes of this section, the "Defeasance
Collateral Requirement" shall mean an amount sufficient to pay 100% of the
loan amount, and sufficient to pay scheduled interest and principal payments
on the loan amount through and including the Franklin Mills Effective
Maturity Date together with the outstanding principal balance of the Franklin
Mills Loan as of such date.
The Franklin Mills Borrower shall be entitled to defease the Franklin
Mills Property on any Payment Date from and after the second anniversary of
the Delivery Date, in connection with the delivery of Defeasance Collateral,
provided that: (i) the mortgagee shall have received from the Franklin Mills
Borrower at least 30 days' prior written notice of the date proposed for such
release (the "Franklin Mills Release Date"); (ii) no Event of Default shall
have occurred and be continuing as of the date of such notice and the
Franklin Mills Release Date; (iii) the Franklin Mills Borrower shall deliver
on the Franklin Mills Release Date, Defeasance Collateral in such amount as
shall satisfy the Defeasance Collateral Requirement with respect to the
Franklin Mills Property; (iv) the Franklin Mills Borrower shall have
delivered a certificate of an officer of the Franklin Mills Borrower (an
"Officer's Certificate") dated the Franklin Mills Release Date, confirming
the matters referred to in clause (ii) above, certifying that the applicable
provisions of clause (iii) above have been complied with and certifying that
all conditions precedent for such release have been complied with; and (v)
the Franklin Mills Borrower shall have delivered to mortgagee the opinions of
counsel required by the Franklin Mills Mortgage upon a defeasance of the
lien.
Lockbox and Reserves. Pursuant to the terms of a cash collateral account
security, pledge and assignment agreement (the "Franklin Mills Cash
Collateral Agreement"), the Franklin Mills Borrower has established in the
name of LaSalle National Bank (the "Franklin Mills Agent"), as agent for the
mortgagee, as secured party, a cash collateral account (the "Franklin Mills
Lockbox Account") with such bank. The Franklin Mills Lockbox Account is
comprised of an interest-bearing cash collateral account, the "Franklin Mills
Operating Account" and three subaccounts: (i) an interest reserve escrow
account (the "Franklin Mills Interest Escrow Account"); (ii) a real estate
tax and insurance premium reserve escrow account (the "Franklin Mills
Mortgage Escrow Account"), which was funded at the initial closing of the
loan in the amount of $1,864,073.83; and (iii) a capital improvements reserve
escrow account (the "Franklin Mills Capital Reserve Account") (collectively,
the "Accounts").
S-141
<PAGE>
The Franklin Mills Borrower has instructed all tenants and is required to
instruct all future tenants to deposit all rent due under the leases at the
Franklin Mills Property to a deposit account established with NationsBank
(the "Franklin Mills Property Account"). The Franklin Mills Borrower has
delivered irrevocable written instructions to NationsBank to deposit on a
daily basis by wire or other transfer to the Franklin Mills Lockbox Account,
upon receipt, all operating revenue from the Franklin Mills Property and
other amounts received in the Franklin Mills Property Account.
Until the Franklin Mills Effective Maturity Date, the Franklin Mills Agent
will withdraw the funds on deposit in the Franklin Mills Lockbox Account on
the first business day of each month funds in the following amounts and in
the following order of priority: (i) funds in an amount equal to the Franklin
Mills Monthly Debt Service Payment (as the same may be increased due to a
borrowing of the Additional Amount), for deposit into the Franklin Mills
Interest Escrow Account; (ii) funds in an amount equal to one-twelfth of the
annual amounts payable for real estate taxes and insurance premiums; (iii)
funds in an amount equal to 125% of any amounts being contested in connection
with any payables which exceed $250,000 in the aggregate (the "Franklin Mills
Reserve Amounts"), if any, for deposit into the Franklin Mills Mortgage
Escrow Account; and (iv) funds in an amount equal to one-twelfth of the
product of $0.25 and the rentable square footage of the Franklin Mills
Property, for deposit into the Franklin Mills Capital Reserve Account.
Prior to the Franklin Mills Effective Maturity Date, provided that (a) no
Event of Default shall have occurred and be continuing; (b) the Franklin
Mills Borrower certifies that there are no payables more than 90 days past
due, unless the same are being contested in good faith, and no other
obligations of the Franklin Mills Borrower are past due; and (c) the Franklin
Mills Borrower certifies that it has delivered instructions to the Franklin
Mills Agent Bank to transfer from the Franklin Mills Lockbox Account to the
Franklin Mills Mortgage Escrow Account any Franklin Mills Reserve Amounts
due, then the Franklin Mills Borrower may at any time during the remainder of
such month, instruct the Franklin Mills Agent Bank to transfer amounts from
the Franklin Mills Lockbox Account to such account or accounts of the
Franklin Mills Borrower as instructed to pay operating expenses of the
Franklin Mills Property, to make distribution to the shareholders of Franklin
Mills Borrower, or otherwise. In the event that the Franklin Mills Borrower
has not paid the principal of and interest on the Franklin Mills Effective
Maturity Date, then commencing on the Franklin Mills Effective Maturity Date
and continuing on each payment date thereafter, 100% of the funds deposited
in the Franklin Mills Operating Account will be applied as specified above in
"--Payment Terms."
Transfer of Properties and Interest in Borrower; Encumbrances; Other
Debt. The Franklin Mills Borrower is generally prohibited from transferring
or encumbering the Franklin Mills Property. The Franklin Mills Borrower has
the right to sell (i) the real property commonly known as "Liberty Plaza"
after such property is released from the lien of the mortgage, from and after
the date which is the second anniversary of the closing date of this Offering
provided that: (a) the mortgagee receives from the Franklin Mills Borrower 30
days' prior written notice of the date proposed for such release (the
"Release Date"); (b) no Event of Default shall have occurred and be
continuing on the date such notice is given or on the Release Date; (c) the
Franklin Mills Borrower delivers to the mortgagee on the Release Date
sufficient Defeasance Collateral; (d) the Franklin Mills Borrower delivers on
the Release Date proof in the form of an officer's certificate that required
conditions have been satisfied; (e) the Franklin Mills Borrower delivers to
the mortgagee endorsements to the mortgagee's title insurance policy insuring
that the lien of the Franklin Mills Mortgage remains in full force and is
unaffected by such release; (f) the Debt Service Coverage Ratio after the
release would not be less than 1.5:1; (g) the fair market value of the
portion of the Franklin Mills Property not being released is not, after the
release, less than at the closing date of the Franklin Mills Loan; and (h)
the mortgagee and the Rating Agencies receive from the Franklin Mills
Borrower statements concerning the calculation of the Debt Service Coverage
Ratio, and (ii) the machinery, appliances, apparatus, equipment, fixtures,
materials and other articles of personal property (collectively, the
"Building Equipment") which is being replaced or which is no longer necessary
in connection with the operation of the Franklin Mills Property free from the
lien of the mortgage, subject to certain conditions which protect the value
of the collateral as a whole.
S-142
<PAGE>
Additionally, the Franklin Mills Borrower may (provided that no such
transfer shall materially impair the utility or operation of the Franklin
Mills Property taken as a whole), without the mortgagee's consent: (i) make
immaterial transfers of portions of the Franklin Mills Property to
governmental authorities for dedication or public use or portions of thereof
to third parties for the purpose of erecting and operating additional
structures whose use is integrated with the use of the Franklin Mills
Property; (ii) grant easements, restrictions, covenants, reservations and
rights of way in the ordinary course of business for utilities; (iii)
transfer or ground lease to a compatible user one or more non-income
producing pads consisting of undeveloped land; and (iv) transfer or ground
lease to a retail or other compatible user one or pads subject to existing
leases, subject, however, to written reaffirmation by the Rating Agencies
that such transfer or ground lease shall not then affect the then ratings of
the Offered Certificates.
With limited exceptions, the Franklin Mills Mortgage prohibits the
transfer of any interest in the Franklin Mills Borrower without the prior
written consent of the mortgagee. The mortgagee's consent is not required for
a one-time transfer of an interest that occurs by reason of the Fee Owner or
its affiliates merging into or consolidating with another person (the
"Identified Transaction"), provided that the following conditions are met:
(a) no Event of Default shall have occurred and be continuing; (b) the
Franklin Mills Borrower shall have given written notice of the terms of the
Identified Transaction not less than 60 days prior to the proposed closing
date, and along with the written notice, information concerning the person
with or into which Fee Owner shall be merging, as may be reasonably required
in evaluating the experience and financial condition of such person; (c) the
Franklin Mills Borrower and such person shall execute new financing
statements or amendments and any additional Loan Documents or amendments as
may be reasonably requested by the mortgagee; and (d) the Rating Agencies
shall have delivered written confirmation that the then rating of the
Certificates will not, as a result of the Identified Transaction, be
downgraded, withdrawn or qualified.
The Franklin Mills Borrower may request the mortgagee's consent to other
transfers of interest, and such consent shall be granted provided that: (i)
no Event of Default exists and is continuing; (ii) the request for consent is
delivered to mortgagee and the Rating Agencies 15 business days prior to the
proposed effective date of transfer; (iii) the Franklin Mills Borrower
remains a single purpose entity; (iv) no transfer of interests shall result
in any one person (or group of affiliates), other than Fee Owner and its
affiliates, owning and controlling 50% or more of the beneficial ownership
interests of the Franklin Mills Borrower; and (v) the Fee Owner and its
affiliates control or own not less than 51% of the beneficial interests in
the Franklin Mills Borrower.
The Franklin Mills Borrower is not permitted to incur any additional
indebtedness other than: (i) unsecured indebtedness for operating expenses
incurred in the ordinary course of business which is paid within 90 days of
the date incurred unless (a) the Franklin Mills Borrower is in good faith
contesting its obligation to pay such indebtedness in a manner satisfactory
to the mortgagee, (b) adequate reserves with respect thereto are maintained
on the books of the Franklin Mills Borrower in accordance with generally
accepted accounting principles, (c) such contest operates to suspend
collection of such amounts or enforcement of such obligations, and (d) no
Event of Default exists and is continuing and (ii) unsecured indebtedness
(not evidenced by a note or other instrument for borrowed money) for amounts
payable or reimbursable to any tenant on account of work performed at the
Franklin Mills Property by such tenant or for costs incurred by such tenant
in connection with its occupancy of space, including for tenant improvements.
Insurance. The Franklin Mills Borrower is required to maintain for the
Franklin Mills Property (a) insurance against all perils included within the
classification "All Risks of Physical Loss" with extended coverage in an
amount at all times sufficient to prevent the Franklin Mills Borrower from
becoming a co-insurer, but in any event equal to the full insurable value of
the improvements and equipment, (b) comprehensive general liability insurance
in such amounts as are generally required by institutional lenders for
comparable properties but in no event less than $5,000,000 per occurrence and
with an aggregate limit of not less than $10,000,000, (c) statutory workers'
compensation insurance, (d) business interruption and/or loss of "rental
value" insurance to cover the loss of at least 12 months income, (e) during
any period of repair or restoration, builder's "all risk" insurance in an
amount not less than the full insurable value of the Franklin Mills Property,
(f) broad-form boiler and machinery insurance and insurance against loss of
occupancy or use arising from any related breakdown in such amounts as are
S-143
<PAGE>
generally available at a commercially reasonable premium and are generally
required by institutional lenders for properties comparable to the Franklin
Mills Property, and (g) at the mortgagee's reasonable request, such other
insurance against loss or damage of the kind customarily insured against and
in such amounts as are generally required by institutional lenders for
comparable properties. Because the Franklin Mills Borrower has represented
that no Franklin Mills Property lies within a federally designated flood
hazard zone, no flood insurance has been required.
Any such insurance may be effected under a blanket policy so long as any
such blanket policy shall specify, except in the case of public liability
insurance, the portion of the total coverage of such policy that is allocated
to the Franklin Mills Property and any sublimate in such blanket policy
applicable to the Franklin Mills Property, which amounts may not be less than
the amounts required pursuant to, and which must in any case comply in all
other respects with the requirements of, the Franklin Mills Loan. All
insurance policies, with the exception of workers' compensation, are required
to name the mortgagee as an additional named insured, to provide that all
proceeds (except with respect to proceeds of general liability and workers'
compensation insurance) be payable to the mortgagee except as described below
under "--Condemnation and Casualty." The Franklin Mills Mortgage requires the
Franklin Mills Borrower to obtain the insurance describes above from
insurance carriers having claims paying abilities rated (i) not less than
"AA" by S&P and its equivalent by any other Rating Agencies and (ii) not less
than "A" by Alfred M. Best Company, Inc. with a financial size category of
not less than X.
Condemnation and Casualty. The Franklin Mills Borrower is required to
notify the mortgagee in writing promptly upon obtaining knowledge of (1) the
institution of any condemnation proceedings, or (2) the occurrence of any
damage or destruction to all or any part of the Franklin Mills Property the
restoration of which is estimated by the Franklin Mills Borrower to cost more
than $6,500,000 (the "Franklin Mills Threshold Amount"). In addition, the
Franklin Mills Borrower is obligated to include with the notice of any
casualty, damage, injury or condemnation, the restoration of which is
estimated by the Franklin Mills Borrower to cost more than the Franklin Mills
Threshold Amount (or to forward as soon thereafter as possible) an estimate
of the cost of repairing or restoring such casualty, damage, injury or
condemnation in reasonable detail.
Following a casualty or condemnation at the Franklin Mills Property, any
insurance and condemnation proceeds will be applied (after payment of the
mortgagee's reasonable expenses of collection thereof) to amounts due under
the Franklin Mills Loan and the prepayment of the principal amount
outstanding thereon, if: (i) the proceeds equal or exceed the outstanding
principal balance of the Franklin Mills Loan, or (ii) any Event of Default
has occurred or is continuing, or (iii) a Franklin Mills Total Loss (as
defined herein) has occurred, or (iv) the work of restoration cannot be
completed before the earlier of (a) the date which is six months before the
Franklin Mills Maturity Date or (b) the date on which the business
interruption insurance expires except if (1) after giving effect to the
condemnation, casualty or damage, the excess of operating income over
operating expenses (the "Net Operating Income") would be sufficient to cover
a Debt Service Coverage Ratio of 1.5:1 or (2) the Franklin Mills Borrower
posts additional collateral that is reasonably acceptable to the mortgagee,
or (v) the Franklin Mills Property is not capable of being restored
substantially to its condition prior to the casualty or condemnation, or (vi)
the Franklin Mills Borrower is unable to demonstrate to the mortgagee's
reasonable satisfaction its continuing ability to pay the Franklin Mills
Loan.
A "Franklin Mills Total Loss" means (x) a casualty, damage or destruction
of the Franklin Mills Property, the cost of restoration of which would exceed
50% of the outstanding principal balance of the Franklin Mills Loan, or (y) a
permanent taking by condemnation of 50% or more of the gross leasable area of
the Franklin Mills Property, in either case, such that it would be
impractical, in the mortgagee's sole discretion, even after restoration, to
operate the Franklin Mills Property as an economically viable whole and with
respect to which the applicable tenant leases do not require restoration.
In the event of (i) a Franklin Mills Total Loss resulting from casualty,
damage or destruction, if either (A) the cost to repair the Franklin Mills
Property would exceed the Franklin Mills Threshold Amount and the restoration
of the Franklin Mills Property cannot reasonably be completed before the date
which is the later to occur of the date of expiration of any business
interruption insurance or the date of expiration of any letter of credit
posted in lieu thereof or in addition thereto and under such circumstances
the
S-144
<PAGE>
Franklin Mills Borrower is not required under any tenant lease to make the
proceeds available to restore the Franklin Mills Property or (B) the
mortgagee elects not to make such proceeds available to the Franklin Mills
Borrower for the restoration of the Franklin Mills Property, or (ii) a
Franklin Mills Total Loss resulting from a condemnation, then the Franklin
Mills Borrower must prepay the Franklin Mills Loan to the extent of the
casualty or condemnation proceeds received, up to an amount equal to the
outstanding principal thereon (without prepayment premium or penalty).
If any insurance or condemnation proceeds (other than business
interruption insurance proceeds) are in excess of the Franklin Mills
Threshold Amount, then all such proceeds will be applied as follows: first,
toward reimbursement of the mortgagee's reasonable out-of-pocket costs and
expenses in connection with the recovery and disbursement of such proceeds,
second, to the cost of razing damaged improvements and removing rubble so
that the property is left in a safe condition, and then, to the prepayment of
the principal amount outstanding on the Franklin Mills Loan, without
prepayment premium or penalty, only if: (A)(i) the amount of such proceeds is
equal to or greater than the outstanding principal amount of the Franklin
Mills Loan, or (ii) the casualty or condemnation occurs less than 180 days
before the Franklin Mills Maturity Date, or (iii) more than 50% of the
rentable area of the Franklin Mills Property has been the subject the
casualty or condemnation, or (B) such proceeds are condemnation proceeds
received in excess of the amount needed to restore the Franklin Mills
Property after a partial taking by condemnation, in which case prepayment
will be made to the extent of such excess proceeds.
In the event that the casualty and condemnation proceeds (other than
business interruption insurance proceeds) are in excess of the Franklin Mills
Threshold Amount and are not required to be applied to the payment or
prepayment of the Franklin Mills Loan as described above, then the mortgagee
is obligated to make all casualty and condemnation proceeds (other than
business interruption insurance proceeds) available to the Franklin Mills
Borrower or the applicable tenant for payment or reimbursement of the costs
and expenses of the repair, restoration and rebuilding of the Franklin Mills
Property if, (i) at the time of the loss or damage or at any time thereafter
while the Franklin Mills Borrower is holding any portion of the proceeds,
there is no continuing Event of Default and (ii) the mortgagee is furnished
with an estimate of the cost of the work accompanied by appropriate plans and
specifications for the work of restoration and an independent architect's
certification as to such costs, and (iii) in the case that the cost of the
work exceeds the proceeds, the Franklin Mills Borrower, at its option, either
deposits with or delivers to the mortgagee (and promptly following any such
deposit or delivery, provides written notice of same to the Rating Agencies)
(A) cash and cash equivalents, (B) a letter or letters of credit in an amount
equal to the estimated cost of the work less the proceeds available or (C)
such other evidence of the Franklin Mills Borrower's ability to meet such
excess costs as is reasonably satisfactory to the mortgagee and the Rating
Agencies.
Approval Rights. Under the Franklin Mills Loan, for each calendar year
commencing after the Franklin Mills Effective Maturity Date the Franklin
Mills Borrower is required to submit to the mortgagee, for the mortgagee's
written approval, an annual budget not later than 60 days prior to the
commencement of such calendar year. In the event that the Franklin Mills
Borrower must incur an extraordinary operating expense or a capital expense
not set forth in the approved annual budget, it is required promptly to
deliver to the mortgagee, for the mortgagee's approval, a reasonably detailed
explanation of such proposed expense.
Financial Reporting. The Franklin Mills Borrower is required to furnish to
the mortgagee: (a) annually within 120 days after the end of each calendar
year, a copy of its year-end financial statement audited by Ernst & Young or
another firm of nationally recognized, independent certified public
accountants reasonably acceptable to the mortgagee; (b) quarterly within 60
days after each calendar quarter (except the fourth quarter of any calendar
year), quarterly unaudited financial statements; (c) quarterly within 60 days
after each calendar quarter, a complete rent roll; (d) annually within 45
days after each calendar year, a summary of all capital expenditures made at
the Franklin Mills Property during the prior 12-month period; and (e) as soon
as practicable, such further information regarding the Franklin Mills
Property as the mortgagee or the Rating Agencies may reasonably request in
writing. Concurrently with delivery of the financial statements to the
mortgagee, the Franklin Mills Borrower is required to provide a copy of the
foregoing items to the Rating Agencies. The Franklin Mills Borrower is also
required to provide the mortgagee with updated information concerning the tax
and insurance costs for the next succeeding calendar year prior to the
termination of each calendar year.
S-145
<PAGE>
NEWTON OLDACRE MCDONALD PORTFOLIO
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$89,502,000 $89,431,863
NON-PROPERTY RELATED
MEZZANINE DEBT: $ 5,000,000
ORIGINATION DATE: OCTOBER 14, 1997; NOVEMBER 28, 1997
ANTICIPATED REPAYMENT
DATE ("ARD"): NOVEMBER 1, 2012
MATURITY DATE: NOVEMBER 1, 2027
INTEREST RATE: 7.526% (BLENDED)
AMORTIZATION: 30 YEARS
HYPERAMORTIZATION: SUBSEQUENT TO NOVEMBER 1, 2012, THE INTEREST
RATE WILL INCREASE TO THE GREATER OF 200 BASIS
POINTS ABOVE THE APPLICABLE NOM INITIAL
INTEREST RATE OR 200 BASIS POINTS PLUS THE
INTERPOLATED UST RATE WITH A TERM
APPROXIMATING THE PERIOD FROM THE ARD TO THE
MATURITY DATE (THE "REVISED INTEREST RATE")
FOR EACH OF THE RESPECTIVE MORTGAGE LOANS.
ADDITIONALLY, ALL EXCESS CASH FLOW WILL BE
CAPTURED UNDER THE TERMS OF THE CASH
COLLATERAL AGREEMENT AND APPLIED TO THE
OUTSTANDING PRINCIPAL BALANCE OF THE NOTE.
INTEREST DUE UNDER THE REVISED INTEREST RATE
ABOVE THAT WHICH IS DUE UNDER THE INITIAL
INTEREST RATE WILL BE PAYABLE SUBSEQUENT TO
THE PAYMENT OF PRINCIPAL. ANY INTEREST DUE
UNDER THE NOTE BUT NOT PAID WILL BE ACCRUED.
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: PREPAYMENT IS NOT PERMITTED UNTIL NOVEMBER 1,
2012 BEYOND WHICH PREPAYMENT IN FULL WITHOUT
PENALTY IS PERMITTED. SUBSEQUENT TO THE THIRD
ANNIVERSARY OF THE DATE OF SECURITIZATION OF
THIS LOAN, DEFEASANCE WILL BE PERMITTED UPON
THE DELIVERY OF APPROPRIATE DEFEASANCE
COLLATERAL. RELEASE IS PERMITTED WITH PAYMENT
OF 125% OF ALLOCATED LOAN AMOUNT OR POSTING OF
DEFEASANCE COLLATERAL.
EXPANSION
PROVISIONS: BORROWER HAS A RIGHT TO EXPAND PROVIDED THAT
ALL OBLIGATIONS AND LIABILITIES OF THE
EXPANSION ARE BORNE BY INVESTMENT-GRADE
TENANTS.
THE BORROWERS: EACH OF THE FIFTHEEN (15) SEPARATE BORROWING
ENTITIES, AS WELL AS THE GENERAL PARTNER OF
EACH BORROWER, IS ORGANIZED AS A
SPECIAL-PURPOSE, BANKRUPTCY-REMOTE ENTITY.
CAPITAL REPLACEMENT
RESERVE: THROUGH THE MONTH OF THE FIFTH ANNIVERSARY OF
THE CLOSING OF THE MORTGAGE LOAN, A MONTHLY
RESERVE EQUAL TO 1/12 OF THE PRODUCT OF $0.05
AND THE SQUARE FOOTAGE OF SPACE LEASED TO
TENANTS NOT IDENTIFIED AS ANCHOR TENANTS.
SUBSEQUENT TO THE FIFTH ANNIVERSARY, 1/12 OF
THE PRODUCT OF $0.10 AND THE SQUARE FOOTAGE OF
SPACE LEASED TO TENANTS NOT IDENTIFIED AS
ANCHOR TENANTS. TENANT IMPROVEMENT AND LEASING
COMMISSION RESERVE: IF THE OCCUPANCY RATE OF ANY PROPERTY SHALL
FALL BELOW 92.5% AT ANY POINT DURING THE TERM
OF THE LOAN, A MONTHLY RESERVE EQUAL TO 1/12
OF THE PRODUCT OF $.50 AND THE RENTABLE SQUARE
FOOTAGE OF ANY PROPERTY IN WHICH OCCUPANCY
FALLS BELOW 92.5%.
CROSS-COLLATERALIZATION/
DEFAULT: YES
PROPERTY INFORMATION
PROPERTY TYPE: RETAIL
PROPERTY LOCATION BY ALLOCATED LOAN AMOUNT
[Pie Chart to Come]
WEIGHTED AVERAGE OCCUPANCY: 96.9%
TOTAL SQUARE FEET: 1,338,462
YEAR BUILT: SEE PROPERTY SUMMARY TABLE
THE COLLATERAL: 19 COMMUNITY SHOPPING CENTERS, ENCOMPASSING
TOTAL GLA OF 1,338,462 SF. ANCHORS INCLUDE:
WINN-DIXIE, WAL-MART, REVCO, DELCHAMPS,
REVCO/BIG B DRUGS (CVS), HARCO (RITE AID), TJX
AND ECKERD
PROPERTY
MANAGEMENT: NEWTON OLDACRE MCDONALD, L.L.C.
UNDERWRITTEN
CASHFLOW: $9,426,049
APPRAISED VALUE: $111,005,000
APPRAISED BY: H.J. PORTER ASSOCIATES
HUBER & LAMB APPRAISAL GROUP, INC.
APPRAISAL DATE: AUGUST 4, 1997 - NOVEMBER 20, 1997
LTV AS OF 12/1/97: 80.6%
ANNUAL DEBT
SERVICE: 7,609,166
DSC: 1.24X
LOAN /SQ. FT. AS OF 12/1/97: $66.82/SQ. FT.
S-146
<PAGE>
NEWTON OLDACRE MCDONALD LOAN: THE BORROWERS; THE PROPERTY
The Loan. The Newton Oldacre McDonald Loan was made to the NOM Borrower
(as defined below under "--The Borrowers") in two advances. The first advance
(the "First Advance") of the Newton Oldacre McDonald Loan, in the original
principal amount of $76,702,000 was originated by Midland Loan Services, L.P.
("Midland") on October 14, 1997 and acquired simultaneously therewith by
MLMC. Subsequently, the Newton Oldacre McDonald Loan was acquired by Midland
in connection with the origination of the second advance (the "Second
Advance") of $12,800,000 on November 26, 1997 and reacquired simultaneously
therewith by MLMC. The Newton Oldacre McDonald Loan has a principal balance
as of the Cut-Off Date of approximately $89,431,863, and is evidenced by a
consolidated amended and restated mortgage note (the "NOM Note") and secured
by, among other things, (A) an Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of Leases,
Rents and Security Deposits, dated as of October 14, 1997 (as the same has,
from time to time, been assigned, the "First Advance Mortgage"), as amended
by the First Amendment to Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of Leases,
Rents and Security Deposits, dated as of November 26, 1997 (the "Amendment to
the First Advance Mortgage") and (B) an Indenture of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and Assignment of
Leases, Rents and Security Deposits, dated as of November 26, 1997 (the
"Second Advance Mortgage" and, together with the First Advance Mortgage, as
amended, collectively, the "NOM Mortgage") encumbering 19 community and
neighborhood retail shopping centers located in Alabama, Florida, Kentucky,
Louisiana, Mississippi and Tennessee (the "NOM Properties").
The Borrowers. The borrowers under the Newton Oldacre McDonald Loan (each,
a "NOM Borrower Entity" and, collectively, the "NOM Borrower") are 15
special-purpose limited partnerships organized under the laws of the State of
Alabama, and qualified to do business in the State where their respective NOM
Properties are located, as applicable. The sole general partner of each NOM
Borrower Entity is N.O.M. Properties, Inc. (the "NOM Borrower GP"), an
Alabama corporation. The limited partnership agreement of each NOM Borrower
Entity provides that it is organized for the sole purpose of owning its
respective NOM Property or Properties, leasing, managing, operating and
mortgaging the same, and carrying on all incidental or related activities.
The certificate of incorporation of the NOM Borrower GP provides that its
sole and exclusive purpose is to acquire and hold the general partnership
interest in each of the NOM Borrower Entities and to engage in related
activities.
The Properties. The NOM Properties securing the Newton Oldacre McDonald
Loan are comprised of Newton Oldacre McDonald's fee interest in 19 community
and neighborhood retail shopping centers located in Alabama, Tennessee,
Florida, Mississippi, Kentucky and Louisiana. The NOM Properties range in
size from approximately 7,488 square feet to 191,787 square feet with an
average size of 66,923 square feet. As of November 1, 1997 the average
occupancy for the Newton Oldacre McDonald Properties was 96.9%. The aggregate
appraised value of the NOM Properties, based on the appraisals performed by
H.J. Porter & Associates and Huber & Lamb Appraisal Group, Inc. between
August 4, 1997 and December 1, 1997, is $111,005,000. The NOM Properties
range in age from less than one (1) year to approximately twenty-two (22)
years. Four (4), or 10.6% in terms of GLA, of the NOM Pool Properties have
opened within the twelve months prior to November 1, 1997 and thirteen of the
properties, or 67.8% in terms of GLA, of the properties have either opened or
undergone renovation within the past five years.
Description of the Tenants. As of November 1, 1997, approximately 64.6% of
the leased GLA of the NOM Properties is leased to tenants with square footage
in excess of 10,000 square feet. Supermarkets, drug stores and value-oriented
apparel stores represent the majority of the NOM Properties, in term of
square footage, with approximately 67.2% of the aggregate GLA. The largest
single tenant of the NOM Properties is Winn-Dixie. Twelve (12) of the NOM
Properties are anchored by Winn-Dixie, which represent 40.9% of the aggregate
square footage and 41.7% of the annualized base rent of the pool.
Environmental Report. Phase I environmental site assessments have been
performed on the NOM Properties between August 27, 1997 and September 5,
1997. The Phase I environmental site assessments
S-147
<PAGE>
did not reveal any environmental liabilities that the Depositor believes
would have a material adverse effect on the borrower's business, assets or
results of operations taken as a whole. Nevertheless, there can be no
assurance that all environmental conditions and risks were identified in such
environmental assessments.
Engineering Report. Property Condition Reports were completed on the NOM
Properties between July 29, 1997 and August 7, 1997 by a third party due
diligence firm. The Property Condition Reports concluded that the NOM
Properties were in above average condition and identified approximately
$247,235 in deferred maintenance requirements. At the origination of the NOM
Loan, the NOM Borrower established a deferred maintenance reserve account
equal to $309,044 (125% of estimated cost) to fund the cost of addressing the
identified items.
Property Management. The NOM Properties are managed by Newton Oldacre
McDonald, L.L.C. ("NOM Manager"), an Alabama limited liability company,
pursuant to 19 separate management agreements between, in each case, NOM
Manager and the NOM Borrower Entity which owns the applicable NOM Property
(each, a "NOM Management Agreement" and collectively, the "NOM Management
Agreements"). The NOM Management Agreements provide for a management fee
equal to 4% of the monthly gross receipts for each NOM Property. Each NOM
Management Agreement is for a term of one (1) year and is automatically
renewed for successive one (1) year terms unless sooner terminated by either
party thereto.
Pursuant to an amended and restated manager's consent and subordination of
management agreement, dated as of November 26, 1997 and executed with respect
to the NOM Management Agreements by the NOM Manager and each NOM Borrower
Entity in favor of the holder of the Newton Oldacre McDonald Loan (the
"mortgagee"), the NOM Manager has agreed (i) not to terminate the NOM
Management Agreements without the consent of the mortgagee, except for
non-payment of management fees (in which case the mortgagee has a 30-day cure
period), (ii) that all liens, rights and interests owned, claimed or held by
the NOM Manager in and to the NOM Properties are and will be in all respects
subordinate to the liens and security interests securing the Newton Oldacre
McDonald Loan, including the lien of the NOM Mortgage, (iii) that during the
continuance of an Event of Default (as defined below) under the Newton
Oldacre McDonald Loan, the NOM Manager will continue to perform under the NOM
Management Agreements provided that the mortgagee performs or causes to be
performed the obligations of the applicable NOM Borrower Entities thereunder,
(iv) that, notwithstanding anything in the NOM Management Agreements to the
contrary, the mortgagee, or the NOM Borrower at the mortgagee's direction,
shall have the right to terminate the NOM Management Agreements (a) upon
default by NOM Manager under the NOM Management Agreements or (b) at any time
for cause (including, but not limited to, NOM Manager's gross negligence,
willful misconduct or fraud), (v) not to amend or modify the NOM Management
Agreements without the prior written consent of the mortgagee, and (vi) prior
to an Event of Default (or in the event of an occurrence of default, within
10 days after a request from the mortgagee therefor) NOM Manager will deliver
to mortgagee, not later than 45 days after the end of each fiscal quarter of
the NOM Borrower's operations, a true and complete rent roll for the NOM
Properties and a schedule of all contracts and other agreements relating to
the NOM Properties. In addition, each of the NOM Management Agreements
automatically terminates on the date which is three (3) months after the NOM
Effective Maturity Date (as hereinafter defined).
S-148
<PAGE>
Property Summary. The following table sets forth certain information
regarding location, GLA, occupancy, financial history and the tenancy of the
NOM Properties:
<TABLE>
<CAPTION>
OPENED/ OCCUPANCY PROJECTED
PROPERTY NAME CITY STATE SQ. FT. RENOVATED 1-NOV-97 NOI (1)
- ----------------------- ----------- ----- --------- -------------- --------- ---------- -
<S> <C> <C> <C> <C> <C> <C>
Nine Mile Plaza ........ Pensacola FL 191,787 1985/1997 96.05% $1,136,985
Mandeville Marketplace . Mandeville LA 77,786 1988 100.00% $ 962,473
59 West ................ Bessemer AL 95,591 1996 100.00% $ 774,090
Chicot Crossing ........ Pascagoula MS 122,360 Purchased/1996 91.01% $ 781,439
River Square ........... Hueytown AL 89,303 Purchased 89.14% $ 668,557
Parker Center .......... Parker FL 68,680 1975/1997 100.00% $ 493,833
Greenbrier Station .... Anniston AL 62,840 1997 97.71% $ 496,748
Russell Crossing ....... Phenix City AL 72,312 1989 97.57% $ 517,990
Delchamps Plaza ........ Long Beach MS 62,859 1989 96.18% $ 473,134
29 North ............... Cantonment FL 58,040 1997 100.00% $ 453,634
Betts Crossing ......... Opelika AL 58,400 1996 96.92% $ 466,522
Bi-Lo Center ........... McMinnville TN 51,844 Purchased 100.00% $ 424,585
The "Y" ................ Panama City FL 64,848 1983/1996 92.80% $ 395,731
Clanton Marketplace ... Clanton AL 65,250 1993 100.00% $ 456,933
Brownsville Place ...... Brownsville TN 76,762 1989 98.44% $ 309,829
One Main Place ......... Moss Point MS 68,566 1988/1996 100.00% $ 263,957
Franklin Center ........ Franklin TN 10,908 1997 100.00% $ 276,556
Hollywood Video ........ Franklin TN 7,488 1997 100.00% $ 160,163
Opp Marketplace ........ Opp AL 25,350 1995 100.00% $ 127,222
Hollywood Video ........ Paducah KY 7,488 1997 100.00% $ 127,404
--------- --------- ----------
Total/Weighted Average 1,338,462 96.90% 9,767,785
========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
ANNUALIZED ANNUALIZED ORIGINAL
UNDERWRITTEN BASE RENT BASE RENT APPRAISED ALLOCATED
PROPERTY NAME NET CASH FLOW 1-NOV-97 11/1/97 PSF VALUE LOAN
- ----------------------- ------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Nine Mile Plaza ........ $1,097,609 $ 1,258,200 $ 6.56 13,000,000 $10,421,640
Mandeville Marketplace . $ 942,957 $ 1,029,143 $13.23 10,900,000 $ 9,206,235
59 West ................ $ 740,814 $ 826,330 $ 8.64 8,600,000 $ 7,346,848
Chicot Crossing ........ $ 737,116 $ 831,312 $ 6.79 8,720,000 $ 7,074,743
River Square ........... $ 648,231 $ 743,776 $ 6.21 7,850,000 $ 6,302,209
Parker Center .......... $ 477,223 $ 515,450 $ 7.51 5,600,000 $ 4,634,863
Greenbrier Station .... $ 489,877 $ 510,790 $ 8.13 5,500,000 $ 4,625,793
Russell Crossing ....... $ 505,260 $ 551,170 $ 7.62 5,500,000 $ 4,480,670
Delchamps Plaza ........ $ 460,522 $ 503,975 $ 8.02 5,410,000 $ 4,353,688
29 North ............... $ 449,866 $ 463,010 $ 7.98 5,050,000 $ 4,136,003
Betts Crossing ......... $ 456,055 $ 478,550 $ 8.19 5,000,000 $ 4,104,258
Bi-Lo Center ........... $ 395,682 $ 477,084 $10.23 4,800,000 $ 3,846,887
The "Y" ................ $ 388,745 $ 440,675 $ 6.80 4,385,000 $ 3,446,669
Clanton Marketplace ... $ 449,249 $ 475,249 $ 7.28 5,190,000 $ 3,256,196
Brownsville Place ...... $ 294,486 $ 353,698 $ 4.61 3,610,000 $ 2,947,809
One Main Place ......... $ 226,223 $ 302,822 $ 4.42 3,430,000 $ 2,766,406
Franklin Center ........ $ 276,556 $ 278,580 $25.54 3,050,000 $ 2,675,704
Hollywood Video ........ $ 151,402 $ 168,255 $22.47 2,530,000 $ 1,471,956
Opp Marketplace ........ $ 116,913 $ 147,875 $ 5.83 1,480,000 $ 1,224,475
Hollywood Video ........ $ 121,264 $ 142,609 $19.05 1,400,000 $ 1,178,948
---------- ----------- ----------- -----------
Total/Weighted Average 9,426,049 10,498,553 111,005,000 89,502,000
========== =========== =========== ===========
</TABLE>
- ------------
(1) Four centers opened in 1997 and therefore operating history is
unavailable for those centers. Projected NOI is calculated by
annualizing current rent rolls and using current (or anticipated)
expenses.
S-149
<PAGE>
Anchor Summary. The following table sets forth certain information
regarding the anchor tenants of the NOM Properties:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
ANCHOR TENANT SQUARE FOOTAGE
----------------------------------------------------------------------------
TOTAL % BASE REVCO/ BASE BASE
PROPERTIES SQ. FT. OCCUPIED WINN-DIXIE RENT EXPIR. BIG B RENT EXPIR. TJX RENT EXPIR. DELCHAMPS
- ------------------ --------- -------- ---------- ----- ------ ------ ---- ------ ------ ---- ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nine Mile Plaza 191,787 96.05% 46,372 8.60 Aug-06 - - - 78,000 4.25 Oct-12 -
Mandeville Mkt. 77,786 100.00% 53,986 11.95 May-17 - - - - - - -
59 West 95,591 100.00% 44,000 6.95 Jul-16 - - - - - - -
Chicot Crossing 122,360 100.00% 47,300 6.40 Apr-16 - - - - - - -
River Square 89,303 89.14% 45,500 9.25 Mar-05 - - - - - - -
Parker Center 68,680 100.00% 44,000 7.80 May-17 - - - - - - -
Greenbrier Station 62,840 97.71% 44,000 7.70 Jan-17 9,240 7.75 Jan-12 - - - -
Russell Crossing 72,312 97.57% 45,500 6.77 Dec-11 9,000 6.75 Nov-03 - - - -
Delchamps Plaza 62,859 96.18% - - - 9,000 7.50 Jun-99 - - - 35,059
29 North 58,040 100.00% 44,000 7.75 May-17 9,240 7.75 May-12 - - - -
Betts Crossing 58,400 96.92% 44,000 7.75 Dec-16 - - - - - - -
Bi-Lo Center 51,844 100.00% - - - - - - - - - -
The "Y" 64,848 97.67% 46,422 6.96 Oct-14 - - - - - - -
Clanton Mkt. 65,250 100.00% 45,500 7.32 May-17 - - - - - - -
Brownsville Place 76,762 98.44% - - - - - - - - - -
One Main Place (1) 68,566 100.00% - - - 10,064 6.81 May-05 - - - -
Franklin 10,908 100.00% - - - - - - - - - -
Hollywood Video 7,488 100.00% - - - - - - - - - -
Opp Marketplace 25,350 100.00% - - - - - - - - - -
Hollywood Video 7,488 100.00% - - - - - - - - - -
--------- ------ ------- ---- ---- ------ ---- ---- ------ ---- ---- ------
Total 1,338,462 97.95% 550,580 8.00 46,544 7.31 78,000 4.25 35,059
Individual Tenants as % of Total 41.14% 3.48% 5.83% 2.62%
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ANCHOR TENANT SQUARE FOOTAGE
------------------------------------------------------------------------------
BASE BASE BASE BASE ANCHOR
PROPERTIES RENT EXPIR. ECKERD RENT EXPIR. WAL-MART RENT EXPIR. HARCO RENT EXPIR. TOTAL % SQ. FT.
- ------------------ ---- ------ ------ ----- ------ -------- ---- ------ ------ ---- ------ ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Nine Mile Plaza - - 8,640 6.50 Sep-05 - - - - - - 133,012 69.35%
Mandeville Mkt. - - - - - - - - - - - 53,986 69.40%
59 West - - - - - - - - - - - 44,000 46.03%
Chicot Crossing - - - - - - - - 10,125 7.00 Jan-11 57,425 46.93%
River Square - - - - - - - - 8,450 8.00 Dec-02 53,950 60.41%
Parker Center - - - - - - - - - - - 44,000 64.07%
Greenbrier Station - - - - - - - - - - - 53,240 84.72%
Russell Crossing - - - - - - - - - - - 54,500 75.37%
Delchamps Plaza 8.58 Jul-09 - - - - - - - - - 44,059 70.09%
29 North - - - - - - - - - - - 53,240 91.73%
Betts Crossing - - - - - - - - - - - 44,000 75.34%
Bi-Lo Center - - - - - - - - - - - - 0.00%
The "Y" - - 10,356 5.26 Jul-03 - - - - - - 53,778 82.93%
Clanton Mkt. - - - - - - - - 8,450 7.50 Mar-08 53,950 82.68%
Brownsville Place - - - - - 54,962 3.35 Apr-10 - - - 54,962 71.60%
One Main Place (1) - - - - - - - - - - - 10,064 14.68%
Franklin - - 10,908 25.54 May-17 - - - - - - 10,908 100.00%
Hollywood Video - - - - - - - - - - - - 0.00%
Opp Marketplace - - - - - - - - 8,450 7.50 Nov-08 8,450 33.33%
Hollywood Video - - - - - - - - - - - - 0.00%
---- ---- ------ ----- ---- ------ ---- ---- ------ ---- ---- ------- -----
Total 8.58 29,904 13.02 54,962 3.35 35,475 7.48 827,524 61.83%
Individual Tenants as % of Total 2.23% 4.11% 2.65%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Bruno's occupies 47,802 square feet at One Main Place.
S-150
<PAGE>
Operating History. The following tables show certain information regarding
the operational history of the NOM Properties:
UNDERWRITTEN
1996 CASHFLOW
----------- --------------
CONSOLIDATED
Revenues................. 11,701,289
Expenses................. 1,933,505
--------------
Net Operating Income .... 9,767,784
Adjustments to NOI....... 341,736
Net Cash Flow............ 9,426,049
==============
Wtd. Ave. Occupancy...... 96.9%
12/1/97 Loan Balance .... $ 89,440,023
Appraised Value.......... $111,005,000
12/1/97 LTV.............. 80.6%
Annual Debt Service .... $ 7,609,166
DSCR .................... 1.24x
NINE MILE PLAZA
Revenues................. 1,392,984
Expenses................. 255,999
--------------
Net Operating Income .... 1,136,985
Adjustments to NOI....... 39,376
Net Cash Flow............ 1,097,608
==============
Occupancy................ 96.0%
MANDEVILLE MKT.
Revenues................. 1,052,707 1,163,609
Expenses................. 190,363 201,136
----------- --------------
Net Operating Income .... 862,344 962,473
Adjustments to NOI....... 19,516
Net Cash Flow............ 942,957
==============
Occupancy................ 100.0%
59 WEST
Revenues ................ 922,284
Expenses ................ 148,194
--------------
Net Operating Income ... 774,090
Adjustments to NOI ...... 33,276
Net Cash Flow ........... 740,814
==============
Occupancy ............... 100.00%
CHICOT CROSSING
Revenues................. 901,883
Expenses................. 120,444
--------------
Net Operating Income .... 781,439
Adjustments to NOI....... 44,323
Net Cash Flow............ 737,116
==============
Occupancy................ 91.0%
S-151
<PAGE>
UNDERWRITTEN
1996 CASHFLOW
----------- --------------
RIVER SQUARE
Revenues................. 468,172 783,235
Expenses ................ 124,824 114,678
----------- --------------
Net Operating Income ... 343,348 668,557
Adjustments to NOI ...... 20,326
Net Cash Flow ........... 648,230
==============
Occupancy ............... 89.1%
PARKER CENTER
Revenues................. 579,138
Expenses................. 85,305
--------------
Net Operating Income .... 493,833
Adjustments to NOI....... 16,610
Net Cash Flow............ 477,223
==============
Occupancy................ 100.0%
GREENBRIER STATION
Revenues ................ 593,662
Expenses ................ 96,914
--------------
Net Operating Income ... 496,748
Adjustments to NOI ...... 6,871
Net Cash Flow ........... 489,877
==============
Occupancy ............... 97.7%
RUSSELL CROSSING
Revenues................. 629,333 617,030
Expenses................. 88,829 99,040
----------- --------------
Net Operating Income .... 540,504 517,990
Adjustments to NOI....... 12,730
Net Cash Flow............ 505,259
==============
Occupancy................ 97.6%
DELCHAMPS PLAZA
Revenues................. 558,812 582,796
Expenses................. 136,746 109,662
----------- --------------
Net Operating Income .... 422,066 473,134
Adjustments to NOI....... 12,612
Net Cash Flow............ 460,522
==============
Occupancy................ 96.2%
29 NORTH
Revenues................. 543,592
Expenses................. 89,958
--------------
Net Operating Income .... 453,634
Adjustments to NOI....... 3,768
Net Cash Flow............ 449,866
==============
Occupancy................ 100.0%
S-152
<PAGE>
UNDERWRITTEN
1996 CASHFLOW
----------- --------------
BETTS CROSSING
Revenues................. 539,116
Expenses................. 72,594
--------------
Net Operating Income .... 466,522
Adjustments to NOI....... 10,467
Net Cash Flow............ 456,055
==============
Occupancy................ 96.9%
BI-LO CENTER
Revenues ................ 310,793 508,701
Expenses ................ 67,834 84,116
----------- --------------
Net Operating Income ... 242,961 424,585
Adjustments to NOI ...... 28,903
Net Cash Flow ........... 395,682
Occupancy ............... 100.0%
THE "Y"
Revenues................. 437,446 471,461
Expenses................. 88,653 75,730
----------- --------------
Net Operating Income .... 348,793 395,731
Adjustments to NOI....... 6,986
Net Cash Flow............ 388,745
==============
Occupancy................ 92.8%
CLANTON MKT.
Revenues................. 386,266 536,362
Expenses................. 62,216 79,429
----------- --------------
Net Operating Income .... 324,050 456,933
Adjustments to NOI....... 7,684
Net Cash Flow............ 449,249
==============
Occupancy................ 100.0%
BROWNSVILLE PLACE
Revenues ................ 371,900 399,769
Expenses ................ 76,031 89,940
----------- --------------
Net Operating Income ... 295,869 309,829
Adjustments to NOI ...... 15,343
Net Cash Flow ........... 294,486
==============
Occupancy ............... 98.4%
ONE MAIN PLACE
Revenues................. 360,404
Expenses................. 96,447
--------------
Net Operating Income .... 263,957
Adjustments to NOI....... 37,734
Net Cash Flow............ 226,223
==============
Occupancy................ 100.0%
S-153
<PAGE>
UNDERWRITTEN
1996 CASHFLOW
----------- --------------
FRANKLIN CENTER
Revenues ................ 298,319
Expenses ................ 21,763
--------------
Net Operating Income ... 276,556
Adjustments to NOI ...... -
Net Cash Flow ........... 276,556
==============
Occupancy ............... 100.0%
HOLLYWOOD VIDEO,
FRANKLIN
Revenues ................ 173,865
Expenses ................ 13,702
--------------
Net Operating Income ... 160,163
Adjustments to NOI ...... 8,761
Net Cash Flow ........... 151,402
==============
Occupancy ............... 100.0%
OPP MARKETPLACE
Revenues................. 163,732 181,392
Expenses................. 27,342 54,170
----------- --------------
Net Operating Income .... 136,390 127,222
Adjustments to NOI....... 10,309
Net Cash Flow............ 116,913
==============
Occupancy................ 100.0%
HOLLYWOOD VIDEO, PADUCAH
Revenues ................ 151,687
Expenses ................ 24,283
--------------
Net Operating Income ... 127,404
Adjustments to NOI ...... 6,140
Net Cash Flow ........... 121,263
==============
Occupancy ............... 100.0%
- ------------
(1) Represents financial information for properties which were operated for
full-year 1996.
S-154
<PAGE>
UNDERWRITTEN CASHFLOW--NEWTON OLDACRE MCDONALD
<TABLE>
<CAPTION>
NINE MILE MANDEVILLE 59 WEST CHICOT RIVER PARKER
------------ ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenue $1,258,200 $1,029,143 $826,330 $831,312 $743,776 $515,450
Total Reimbursement
Revenue 190,116 155,269 124,810 99,658 66,203 73,230
---------- ---------- -------- -------- -------- --------
Total Gross Revenue 1,448,366 1,184,412 951,140 930,970 809,979 588,680
General Vacancy 55,382 20,803 28,856 29,087 26,744 9,542
---------- ---------- -------- -------- -------- --------
Effective Gross
Revenue 1,392,984 1,163,609 922,284 901,883 783,235 579,138
Operating Expenses
Management Fees @
4.0% of EGR 55,719 46,544 36,891 36,075 31,329 23,166
Maintenance &
Repairs 72,746 48,503 47,908 17,675 31,736 18,330
Insurance 22,265 18,493 8,227 9,629 6,799 15,005
Taxes 95,560 75,781 40,650 50,871 31,084 18,373
Reserves 9,709 11,814 14,518 6,194 13,730 10,431
Total Operating
Expenses 255,999 201,136 148,194 120,444 114,678 85,305
---------- ---------- -------- -------- -------- --------
Net Operating Income 1,136,985 962,473 774,090 781,439 668,557 493,833
========== ========== ======== ======== ======== ========
Leasing & Capital
Costs
Tenant
Improvements 22,581 9,520 20,636 23,639 12,605 9,872
Leasing Commissions 16,795 9,996 12,640 20,684 7,721 6,738
Total Leasing &
Capital Costs 39,376 19,516 33,276 44,323 20,326 16,610
---------- ---------- -------- -------- -------- --------
Cash Flow Before
Debt Service &
Income Tax 1,097,608 942,957 740,813 737,116 648,230 477,224
========== ========== ======== ======== ======== ========
December 1, 1997
Principal Balance
Debt Service
DSCR
LTV
<CAPTION>
BI-LO
GREENBRIER RUSSELL DELCHAMPS 29 NORTH BETTS CENTER THE "Y" CLANTON BROWNSVILLE
------------ ---------- ----------- ---------- ---------- ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gross Revenue $510,790 $551,170 $503,975 $463,010 $478,550 $477,084 $440,675 $475,249 $353,698
Total Reimbursement
Revenue 88,454 76,121 89,021 83,390 68,120 55,471 36,826 69,728 61,371
-------- -------- --------- -------- -------- -------- -------- -------- --------
Total Gross Revenue 599,244 627,291 592,996 546,400 546,670 532,555 477,501 544,977 415,069
General Vacancy 5,582 10,261 10,200 2,808 7,554 23,854 6,040 8,615 15,300
-------- -------- --------- -------- -------- -------- -------- -------- --------
Effective Gross
Revenue 593,662 617,030 582,796 543,592 539,116 508,701 471,461 536,362 399,769
Operating Expenses
Management Fees @
4.0% of EGR 23,746 24,681 23,312 21,744 21,565 20,348 18,858 21,454 15,991
Maintenance &
Repairs 31,494 19,105 16,909 22,877 18,064 21,256 17,310 24,732 23,743
Insurance 5,408 6,429 6,256 6,464 5,020 5,314 22,214 4,860 3,746
Taxes 26,722 45,164 53,638 30,058 19,076 29,227 17,348 18,473 34,802
Reserves 9,544 3,661 9,547 8,815 8,869 7,971 -- 9,910 11,658
Total Operating
Expenses 96,914 99,040 109,662 89,958 72,594 84,116 75,730 79,429 89,940
-------- -------- --------- -------- -------- -------- -------- -------- --------
Net Operating Income 496,748 517,990 473,134 453,634 466,522 424,585 395,731 456,933 309,829
======== ======== ========= ======== ======== ======== ======== ======== ========
Leasing & Capital
Costs
Tenant
Improvements 3,752 6,952 7,233 1,920 5,582 20,738 4,109 4,520 8,584
Leasing Commissions 3,119 5,779 5,379 1,848 4,885 8,165 2,876 3,164 6,760
Total Leasing &
Capital Costs 6,871 12,730 12,612 3,768 10,467 28,903 6,986 7,684 15,343
-------- -------- --------- -------- -------- -------- -------- -------- --------
Cash Flow Before
Debt Service &
Income Tax 489,877 505,259 460,522 449,866 456,055 395,682 388,745 449,249 294,486
======== ======== ========= ======== ======== ======== ======== ======== ========
December 1, 1997
Principal Balance
Debt Service
DSCR
LTV
<CAPTION>
FRANKLIN - VIDEO - VIDEO - AGGREGATE
ONE MAIN ECKERD FRANKLIN OPP PADUCAH POOL
---------- ------------ ---------- ---------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Gross Revenue $302,822 $278,580 $168,255 $147,875 $142,609 $ 10,498,553
Total Reimbursement
Revenue 72,819 19,739 5,610 43,064 17,062 1,496,132
-------- -------- -------- -------- -------- ------------
Total Gross Revenue 375,641 298,319 173,865 190,939 159,671 11,994,685
General Vacancy 15,237 -- -- 9,547 7,984 293,396
-------- -------- -------- -------- -------- ------------
Effective Gross
Revenue 360,404 298,319 173,865 181,392 151,687 11,701,289
Operating Expenses
Management Fees @
4.0% of EGR 14,416 11,933 6,955 7,256 6,067 468,052
Maintenance &
Repairs 17,608 2,872 1,971 7,257 -- 462,096
Insurance 6,634 2,319 1,592 3,759 1,616 162,049
Taxes 47,376 2,982 2,047 32,048 15,446 686,726
Reserves 10,413 1,657 1,137 3,850 1,154 154,582
Total Operating
Expenses 96,447 21,763 13,702 54,170 24,283 1,933,505
-------- -------- -------- -------- -------- ------------
Net Operating Income 263,957 276,556 160,163 127,222 127,404 9,767,784
======== ======== ======== ======== ======== ============
Leasing & Capital
Costs
Tenant
Improvements 23,401 -- 2,995 6,760 2,995 198,395
Leasing Commissions 14,333 -- 5,766 3,549 3,145 143,341
Total Leasing &
Capital Costs 37,734 -- 8,761 10,309 6,140 341,736
-------- -------- -------- -------- -------- ------------
Cash Flow Before
Debt Service &
Income Tax 226,223 276,556 151,402 116,913 121,263 9,426,049
======== ======== ======== ======== ======== ============
December 1, 1997
Principal Balance 89,431,863
Debt Service 7,609,166
DSCR 1.24x
LTV 80.6 %
</TABLE>
S-155
<PAGE>
Anchor Tenant Summary. The following table sets forth certain information
regarding those tenants identified as Anchor Tenants:
<TABLE>
<CAPTION>
CREDIT RATINGS
---------------------
SQUARE % TOTAL
TENANT PROPERTY FEET SQ. FT. MOODY'S S&P
- ---------------------- ----------------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Winn-Dixie............ Various 550,580 40.9% NR A1 (1)
TJX.................... Nine Mile Plaza 78,000 5.8% Baa1 BBB+
Wal-Mart.............. Brownsville Place 54,962 4.1% Aa1 / Aa2 AA
Bruno's (Food World) .. One Main Place 47,807 3.6% NR NR
Big B / REVCO (2)...... Various 46,544 3.5% Baa1 A-
Harco (3).............. Various 35,475 2.7% A-
Delchamps.............. Delchamps Plaza 35,059 2.6% NR NR
Eckerd................. Various 29,904 2.2% NR NR
--------- ------
TOTAL-ANCHOR TENANTS . 830,524 61.8%
TOTAL-PROPERTY POOL .. 1,341,462 100.0%
========= ======
</TABLE>
- ------------
Based on borrower-provided rent roll as of 10/31/97
(1) Commercial paper rating.
(2) Big B and Revco have merged with CVS.
(3) Harco has merged with Rite Aid
S-156
<PAGE>
Lease Expiration Summary. The following table presents certain information
regarding the future lease expiries at the NOM Properties:
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6
MAY-1998 MAY-1999 MAY-2000 MAY-2001 MAY-2002 MAY-2003
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Nine Mile Plaza..... 19,141 2,875 1,795 18,250 6,038 9,326
Mandeville
Marketplace........ - 1,000 1,500 - 6,000 -
59 West............. 1,600 1,200 5,100 4,400 21,291 -
Chicot Crossing..... 1,240 4,800 - 17,640 13,820 -
River Square........ 10,227 6,826 3,800 5,516 1,704 15,730
Parker Center....... 4,800 - - - - -
Greenbrier Station . - - 1,200 - 6,960 1,440
Russell Crossing
Shopping........... 12,156 3,900 - - - 1,756
Delchamps Plaza..... 3,600 4,200 17,600 - - 2,400
Franklin Center..... - - - - - -
29 North............ - - 3,200 - 1,600 -
Betts Crossing...... - - 10,200 - 2,400 1,800
Bi-Lo Center........ 1,800 5,200 5,980 - - -
The "Y" Shopping
Center............. 1,350 2,050 - - 3,160 1,510
Clanton
Marketplace........ 3,500 4,800 3,000 - - -
Brownsville ........ 8,400 3,000 9,200 - - 1,200
One Main Place...... 5,100 - - - 5,600 -
Opp Marketplace..... - - - - - -
Hollywood Video,
Paducah............ - - - - - -
------ ------ ------ ------ ------ ------
Total............... 72,914 39,851 62,575 45,806 68,573 35,162
====== ====== ====== ====== ====== ======
Percent of Total ... 13.1% 7.2% 11.2% 8.2% 12.3% 6.3%
====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR 7 YEAR 8 YEAR 9 YEAR 10
MAY-2004 MAY-2005 MAY-2006 AND BEYOND
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Nine Mile Plaza..... - - 8,640 46,372
Mandeville
Marketplace........ 15,300 - - -
59 West............. - - - -
Chicot Crossing..... - - 27,435 -
River Square........ - 45,500 - -
Parker Center....... - - 19,880 -
Greenbrier Station . - - - -
Russell Crossing
Shopping........... 9,000 - - -
Delchamps Plaza..... - - - -
Franklin Center..... - - - -
29 North............ - - - -
Betts Crossing...... - - - -
Bi-Lo Center........ - 38,864 - -
The "Y" Shopping
Center............. 10,356 - - -
Clanton
Marketplace........ - - - -
Brownsville ........ - - - -
One Main Place...... - 10,064 - -
Opp Marketplace..... - - - -
Hollywood Video,
Paducah............ - - - -
------ ------ ------ ------ -------
Total............... 34,656 94,428 55,955 46,372 556,292
====== ====== ====== ====== =======
Percent of Total ... 6.2% 17.0% 10.1% 8.3% 100%
====== ====== ====== ====== =======
</TABLE>
S-157
<PAGE>
NEWTON OLDACRE MCDONALD: THE LOAN
Security. The Newton Oldacre McDonald Loan is a nonrecourse loan, secured
only by the NOM Mortgage encumbering the fee estate of the NOM Borrower
Entities in their respective NOM Properties and certain other collateral
relating thereto (including (a) an assignment of leases, rents and security
deposits executed in connection with the First Advance, as amended by the
Amendment to the First Advance Mortgage, (b) an assignment of leases, rents
and security deposits executed in connection with the Second Advance with
respect to those NOM Properties added to the collateral encumbered by the NOM
Mortgage in connection with the funding of the Second Advance, and (c) the
funds in certain accounts). The mortgagee is the insured under the title
insurance policies which insure, among other things, that the NOM Mortgage
constitutes a valid and enforceable first lien on each NOM Property, subject
to certain exceptions and exclusions from coverage set forth therein. Such
title insurance policies, together with the NOM Note, the NOM Mortgage and
the other documents and agreements evidencing and securing the Newton Oldacre
McDonald Loan, will be assigned to the Trust Fund.
Payment Terms. The Newton Oldacre McDonald Loan matures on November 1,
2027 (the "NOM Maturity Date") and bears interest at (a) a fixed rate per
annum equal to (i) 7.56% with respect to the outstanding principal amount of
the First Advance and (ii) 7.325% with respect to the outstanding principal
amount of the Second Advance (each such rate, as to the First Advance or the
Second Advance, as the case may be, the "NOM Initial Interest Rate") through
and including October 31, 2012 and (b) from and including November 1, 2012
(the "NOM Effective Maturity Date") through and including the NOM Maturity
Date, at a fixed rate per annum equal to the greater of (i) the NOM Initial
Interest Rate (as applicable to the outstanding balance of each of the First
Advance and the Second Advance) plus 2% and (ii) the NOM Treasury Rate (as
defined below) plus 2% (each such rate, as to the First Advance or the Second
Advance, as the case may be, the "NOM Revised Interest Rate"). Any interest
accrued at the excess of the applicable NOM Revised Interest Rate over the
related NOM Initial Interest Rate is deferred and added to the outstanding
indebtedness under the Newton Oldacre McDonald Loan and earns interest at the
applicable NOM Revised Interest Rate (such deferred interest and interest
thereon, the "NOM Deferred Interest"). Interest on the Newton Oldacre
McDonald Loan is calculated on the basis of a 360-day year and the actual
number of days elapsed in the applicable interest accrual period.
The payment date (each, a "Payment Date") for the Newton Oldacre McDonald
Loan is the first business day of each month, without grace with respect to
the payment of scheduled principal or interest. On December 1, 1997, the
Newton Oldacre McDonald Loan requires (i) a payment of principal and interest
with respect to the First Advance of $545,199.61 and (ii) a payment of
principal with respect to the Second Advance of $8,159.77. Thereafter, the
Newton Oldacre McDonald Loan requires 359 equal monthly payments of principal
and interest of (i) $545.199.61 with respect to the First Advance and (ii)
$88,897.55 with respect to the Second Advance (collectively, the "NOM Debt
Service Payments") . On the NOM Maturity Date, payment of the then
outstanding balance of the principal of both the First Advance and the Second
Advance, if any, together with all accrued and unpaid interest and all other
sums payable under the Loan Documents, is required. Commencing with the first
Payment Date after the NOM Effective Maturity Date and continuing on each
Payment Date thereafter through and including the NOM Maturity Date, the NOM
Borrower is required to apply 100% of rents and other revenues from the NOM
Properties received on or before such day to the following items in the
following order of priority: (a) to the deposit of 1/12 of annual taxes and
premiums (the "NOM Mortgage Escrow Amount") into the Mortgage Escrow Account
(as defined below under "--Lockbox and Reserves"); (b) to the deposit of
interest at the NOM Initial Interest Rate, including, if applicable, interest
at the applicable NOM Default Rate and principal due on the next Payment Date
into the Interest Escrow Account (as defined below under "--Lockbox and
Reserves"); (c) to the deposit of 1/12 of (i) during the period from the
initial closing through the fifth anniversary thereof, the product of $0.05
and the square footage of space leased to tenants which are not NOM Anchor
Tenants, and (ii) during the period from the fifth anniversary of the initial
closing until the NOM Effective Maturity Date, the product of $0.10 and the
square footage of space leased to tenants which are not NOM Anchor Tenants
(the "NOM Capital Replacement Reserve Amount") into the Capital Replacement
Reserve Account (as defined below under "--Lockbox and Reserves"); (d) to the
deposit of 1/12 of the product of $0.50 and the square footage of the entire
rentable
S-158
<PAGE>
space in such Property not identified as NOM Anchor Tenants (the "NOM Tenant
Improvement and Leasing Commission Reserve Amount") into the Tenant
Improvement and Leasing Commission Reserve Account (as defined below under
"--Lockbox and Reserves"); (e) to payment of monthly allocations of operating
expenses in the annual budget submitted to and approved by mortgagee (the
"NOM Operating Expenses") and extraordinary expenses not provided for in the
annual budget which are approved by mortgagee (the "NOM Extraordinary
Expenses") (f) to payment of the outstanding principal due until such
principal amount is paid in full; (g) to payment of the NOM Deferred
Interest, including, if applicable, interest at the NOM Default Rate
applicable from and after the NOM Effective Maturity Date; and to payment of
any other amounts due under the loan documents evidencing and securing the
Newton Oldacre McDonald Loan. The scheduled principal balance of the Newton
Oldacre McDonald Loan as of the NOM Effective Maturity Date will be
approximately $67,875,893.48.
Event of Default. The occurrence of any of the following constitutes an
"Event of Default" under the NOM Mortgage: (a) failure to make any payment of
interest or principal when due, or failure to pay the principal balance when
due; (b) failure to pay any other amount payable pursuant to the NOM Note or
the NOM Mortgage when due and payable, with such failure continuing for ten
(10) days after mortgagee delivers written notice thereof to the NOM
Borrower; (c) failure to keep in force the insurance required under the NOM
Mortgage to be maintained or failure to comply with any other covenant
relating to insurance requirements, which failure continues for five (5)
business days after the mortgagee delivers written notice thereof to the NOM
Borrower; (d) failure to comply with certain NOM Mortgage covenants which
require the NOM Borrower to keep the NOM Properties free from liens and
encumbrances (with such default continuing for five (5) business days after
mortgagee delivers written notice thereof to the NOM Borrower), and which,
prohibit the sale of the NOM Properties and transfers of direct and indirect
beneficial interests in the NOM Borrower Entities; (e) any attempt by the NOM
Borrower to assign its rights under the NOM Mortgage; (f) any other default
in the performance or payment, or breach, of any material covenant, warranty,
representation or agreement set forth in the documents which evidence and
secure the Newton Oldacre McDonald Loan, with such default continuing for
thirty (30) business days after mortgagee delivers written notice thereof to
the NOM Borrower; (g) the occurrence of certain bankruptcy events; (h) the
termination of the NOM Mortgage, or the failure of the NOM Mortgage to
continue to be valid and effective (or the ceasing of any lien granted
thereunder to be a perfected first priority lien) or the failure of any of
the loan documents which evidence the Newton Oldacre McDonald Loan to be
valid and effective; and (i) any event of the default under any other of the
loan documents which evidence the Newton Oldacre McDonald Loan.
If the NOM Borrower defaults in the payment of any monthly installment on
a Payment Date, it is required to pay a one-time late payment charge in an
amount equal to 5% of the amount of the installment not paid. Upon the
occurrence of any Event of Default, the entire unpaid principal amount of the
Newton Oldacre McDonald Loan and any other amounts payable, including
interest, will bear interest at a default rate equal to the applicable
interest rate on the Newton Oldacre McDonald Loan plus 5% (the "NOM Default
Rate").
Prepayment. Voluntary prepayment is prohibited under the Newton Oldacre
McDonald Loan prior to the NOM Effective Maturity Date. Thereafter, the
Newton Oldacre McDonald Loan may be voluntarily prepaid in whole or in part,
without a prepayment premium or penalty. Upon acceleration of the NOM Note
prior to the NOM Effective Maturity Date, the NOM Borrower shall be obligated
to pay a prepayment premium (the "NOM Yield Maintenance Premium") equal to
the greater of (a) 1% of the principal amount being prepaid or (b) the
product of (i) a fraction whose numerator is an amount equal to the portion
of the principal balance being prepaid and whose denominator is the entire
outstanding principal balance on the date of such prepayment, and (ii) an
amount equal to the remainder obtained by subtracting (x) an amount equal to
the entire outstanding principal balance as of the date of prepayment from
(y) the present value as of the date of such prepayment of the remaining
scheduled payments of principal and interest determined by discounting such
payments at the NOM Discount Rate. The "NOM Discount Rate" means the rate
which, when compounded monthly, equals the NOM Treasury Rate. The "NOM
Treasury Rate" means the yield, calculated by linear interpolation of
noncallable United States Treasury obligations with terms (one longer and one
shorter) most nearly approximating the period from the date of such
prepayment to the NOM Maturity Date.
S-159
<PAGE>
No NOM Yield Maintenance Premium or other premium or penalty is required
to be paid in connection with any prepayment resulting from the application
of insurance or condemnation proceeds to repayment of the Newton Oldacre
McDonald Loan in accordance with the requirements of the NOM Mortgage.
Defeasance Collateral. For the purposes of this section, (i) "Defeasance
Collateral" shall mean obligations or securities not subject to prepayment,
call or early redemption which are direct obligations of, or obligations
fully guaranteed as to timely payment by, the United States of America or any
agency or instrumentality of the United States of America, or the obligations
of which are backed by the full faith and credit of the United States of
America, the ownership of which will not cause the mortgagee to be an
investment company under the Investment Company Act of 1940, included as
collateral under the Newton Oldacre McDonald Loan; (ii) the "Minimum
Defeasance Collateral Requirement" shall mean an amount sufficient to pay
125% of the amount of the Newton Oldacre McDonald Loan allocated to the
applicable NOM Property (in any case, the "NOM Allocated Loan Amount") which
is the subject of the defeasance, and sufficient to pay scheduled interest
and principal payments on the applicable NOM Allocated Loan Amount through
and including the NOM Effective Maturity Date together with the outstanding
principal balance of the Newton Oldacre McDonald Loan as of such date and
(iii) "NOM DSCR" shall mean, with respect to any period, the ratio of net
operating income from the NOM Properties to debt service under the Newton
Oldacre McDonald Loan for such period.
The NOM Borrower shall be entitled on any Payment Date to defease (a) 1 or
more of the NOM Properties up to a maximum of 50% of such Properties (a "NOM
Partial Defeasance"), or (b) all of the NOM Properties (a "NOM Total
Defeasance"), from and after the third anniversary of the Delivery Date in
connection with a delivery of Defeasance Collateral, provided that: (i) the
mortgagee shall have received from the NOM Borrower at least 30 days' prior
written notice of the date proposed for such release (the "NOM Release
Date"); (ii) no Event of Default shall have occurred and be continuing as of
the date of such notice and the NOM Release Date; (iii) the NOM Borrower
shall deliver on the NOM Release Date, Defeasance Collateral in such amount
as shall satisfy the Minimum Defeasance Collateral Requirement with respect
to the applicable NOM Property; (iv) the NOM Borrower shall have delivered a
certificate of an officer of the NOM Borrower GP (an "Officer's Certificate")
dated the NOM Release Date, confirming the matters referred to in clause (ii)
above, certifying that the applicable provisions of clause (iii) above have
been complied with and certifying that all conditions precedent for such
release have been complied with; (v) with respect to a NOM Partial
Defeasance, the NOM Borrower, at its sole cost and expense, shall have
delivered, one or more endorsements to the policies of title insurance
delivered to the mortgagee insuring that, after giving effect to such
release, (x) the mortgagee's liens are first priority liens on the respective
remaining NOM Properties and (y) that such policy is in full force and
effect; (vi) with respect to a NOM Partial Defeasance, after giving effect to
such proposed release, the NOM DSCR would not be less than the greater of
such NOM DSCR without giving effect to such release, and 1.25:1; (vii) with
respect to a NOM Partial Defeasance, the fair market value of the NOM
Properties that will remain subject to the NOM Mortgage as of the date of the
proposed release shall not be less than the fair market value of such NOM
Properties as of the date of the NOM Mortgage; (viii) with respect to a NOM
Partial Defeasance, the NOM Borrower shall deliver with respect to the
matters referred to in clause (vi), (x) statements of the net operating
income of the NOM Properties and debt service under the Newton Oldacre
McDonald Loan for the most recent four consecutive calendar quarters ending
on or prior to the date of such Partial Defeasance, and (y) based on the
foregoing statements of net operating income and debt service, calculations
of the NOM DSCR both with and without giving effect to the proposed release,
and (z) calculations of the ratios referred to in such clause (vi),
accompanied by an Officer's Certificate stating that such statements,
calculations and information are true, correct, and complete in all material
respects.
Expansion. The NOM Borrower has the right to expand the NOM Properties,
which expansion may include acquisition of contiguous parcels of land,
demolition of existing improvements and construction of improvements thereon,
to provide expanded demised premises to tenants under their respective
leases, provided the following conditions are met: (i) all cost and expense
of the construction of improvements shall be the obligation of the tenants;
(ii) the tenant performs all work including all
S-160
<PAGE>
construction, and does so free of all liens and encumbrances; (iii) such
expansion shall not reduce the rent or additional rent or other sums payable
by the tenant; (iv) the performance of work and the construction of
improvements in connection with such expansion shall not materially interfere
with the quiet enjoyment of other tenants or give rise to a tenant's right to
terminate its respective lease; (v) all work, shall be capable, in the
reasonable opinion of the mortgagee, of being completed within 12 months, and
shall be so completed; (vi) the tenant performing such work shall be, at the
time of the commencement of same, rated "investment grade" (as hereinafter
defined); (v) the tenant performing such work assumes the rental obligations
under any leases for demised premises at the subject NOM Property which have
been demolished in connection with such expansion; (vi) the NOM Borrower
shall deliver not fewer than 30 days' written notice of its intention to
commence any such expansion together with a description of the nature and
scope thereof; (vii) at the time of such written notice and at the time of
the commencement of the expansion, no Event of Default shall be continuing;
(viii) if such expansion involves the acquisition of contiguous land, the
Newton Oldacre McDonald Loan shall encumber such additional land and such
additional land shall become part of the NOM Property; (ix) the NOM Borrower
shall have delivered to the mortgagee on or before the date on which the
expansion occurs an Officer's Certificate certifying that all the
aforementioned requirements have been met; (x) title to all land acquired and
improvements constructed shall remain vested in the NOM Borrower; and (xi)
upon the completion of such expansion, the NOM Borrower shall deliver to the
mortgagee (A) a revised "as-built" survey of the subject NOM Property and (B)
in the event that such expansion involves the acquisition of land, an
endorsement to the mortgagee's policy of lender's title insurance issued to
the mortgagee. "Investment grade" means a rating by a nationally recognized
statistical rating agency of not less than "BBB-" or its equivalent.
Lockbox and Reserves. Pursuant to an amended and restated cash collateral
account security, pledge, assignment and control agreement, dated as of
November 26, 1997 (the "NOM Cash Collateral Agreement") the NOM Borrower has
established with the retail accounts services of LaSalle National Bank (the
"NOM Lockbox Bank") a deposit account (the "NOM Lockbox"). Pursuant to the
terms of the NOM Cash Collateral Agreement, the NOM Borrower is required to
direct all tenants at the NOM Properties to pay all rents directly into the
NOM Lockbox and has covenanted to deposit all revenues received directly by
it into the NOM Lockbox within one business day of receipt. Pursuant to
irrevocable instructions given by the NOM Borrower, on a daily basis the NOM
Lockbox Bank withdraws from the NOM Lockbox all cleared funds deposited
therein and deposits the same by wire or other transfer into the NOM
Operating Account (as defined below).
The NOM Borrower has established with the trust accounts services of
LaSalle National Bank (the "NOM Collateral Account Bank") (a) an operating
account (the "NOM Operating Account") to receive deposits daily of amounts on
deposit in the NOM Lockbox, (b) an interest escrow account (the "NOM Interest
Escrow Account") to be funded each month before the NOM Effective Maturity
Date in an amount equal to the amount of interest and principal due on the
next payment date, (c) a real estate taxes and insurance premium escrow
account (the "NOM Mortgage Escrow Account") funded each month before the NOM
Effective Maturity Date in an amount equal to the monthly NOM Mortgage Escrow
Amount, (d) a capital replacement reserve account (the "NOM Capital
Replacement Reserve Account") funded at the initial closing of the Newton
Oldacre McDonald Loan in the amount of $309,044 and to be funded each month
before the NOM Effective Maturity Date in an additional amount equal to
$25,546.90 (the "NOM Capital Replacement Reserve Amount") and (e) a tenant
improvement and leasing commission reserve account (the "NOM Tenant
Improvement and Leasing Commission Reserve Account") to be funded monthly
commencing at such time as the occupancy rate for any NOM Property is less
than 92.5% (the "NOM Tenant Improvement and Leasing Commission Reserve
Amount").
Until the NOM Effective Maturity Date, the NOM Collateral Account Bank
will withdraw from the NOM Operating Account on the first business day of
each month or as soon thereafter as there shall be collected funds in the NOM
Operating Account, funds in the following amounts and in the following order
of priority: (i) funds in an amount equal to the amount of interest and
principal due on the next payment date and deposit the same into the NOM
Interest Escrow Account; (ii) funds in an amount equal to the monthly NOM
Mortgage Escrow Amounts and deposit the same into the NOM Mortgage Escrow
Account; (iii) funds in an amount equal to the NOM Reserve Amounts (as
hereinafter defined), if any,
S-161
<PAGE>
and deposit the same into the NOM Mortgage Escrow Account; (iv) funds in an
amount equal to the monthly NOM Capital Replacement Reserve Amount and
deposit same into the NOM Capital Replacement Reserve Account; and (v) funds
in an amount equal to the NOM Tenant Improvement and Leasing Commission
Reserve Amount as may be required to be deposited from time to time, and
deposit same into the NOM Tenant Improvement and Leasing Commission Reserve
Account. The NOM Borrower has instructed the NOM Collateral Account Bank to
withdraw on each Payment Date the amounts on deposit in the NOM Interest
Escrow Account necessary to pay principal and interest when due and to pay
the same to the mortgagee, to withdraw when and as applicable amounts on
deposit in the NOM Mortgage Escrow Account and to use the same to pay real
estate taxes and insurance premiums with respect to the NOM Properties as the
same become due and to make withdrawals from the other accounts and to
disburse funds so withdrawn for their intended purposes as described and
specified in the NOM Cash Collateral Agreement.
After the NOM Effective Maturity Date, the NOM Collateral Account Bank
will withdraw from the NOM Operating Account on the first business day of
each month or as soon thereafter as there shall be collected funds on deposit
in the NOM Operating Account, funds in the following amounts and in the
following order of priority: (i) funds in an amount equal to the monthly NOM
Mortgage Escrow Amounts, and deposit the same into the NOM Mortgage Escrow
Account for disbursement to pay real estate taxes and insurance premiums when
due; (ii) funds in an amount equal to the amount of interest at the NOM
Initial Interest Rate, including, if applicable, interest at the NOM Default
Rate applicable prior to the NOM Effective Maturity Date and principal due on
the next payment date and deposit the same into the NOM Interest Escrow
Account; (iii) funds in an amount equal to the monthly NOM Capital
Replacement Reserve Amount, and deposit the same into the NOM Capital
Replacement Reserve Account; (iv) funds in an amount equal to the monthly NOM
Tenant Improvement and Leasing Commission Reserve Amount as may be required
to be deposited from time to time, and deposit the same into the NOM Tenant
Improvement and Leasing Commission Reserve Account; (v) funds in an amount
equal to the NOM Approved Operating Expenses and approved NOM Extraordinary
Expenses, if any; (vi) funds to be paid to the mortgagee for application
against the outstanding principal until such principal amount is paid in
full; (vii) funds to be paid to the mortgagee in an amount equal to the NOM
Deferred Interest, including, if applicable, interest at the NOM Default Rate
applicable from and after the NOM Effective Maturity Date; and (viii) funds
to be paid to the mortgagee in an amount equal to any other amounts due under
the Newton Oldacre McDonald Loan Documents. The NOM Borrower has instructed
the NOM Collateral Account Bank to make withdrawals on each Payment Date (or
such other date as may be applicable) to withdraw from the foregoing accounts
amounts necessary to pay the obligations for which such amounts have been
reserved as described above and as more particularly described in the NOM
Cash Collateral Agreement.
Provided that (i) no Event of Default shall have occurred and be
continuing; (ii) the NOM Borrower shall have delivered an Officer's
Certificate with respect to the amounts needed with respect to a particular
month to pay operating expenses at the NOM Properties (subject to certain
reconciliation provisions in the NOM Cash Collateral Agreement, the "NOM
Operating Expense Amounts") and certifying, among other things, that there
are no trade payables of the NOM Borrower outstanding that are more than 60
days past due, unless the same are being contested by the NOM Borrower in
good faith, (iii) the NOM Borrower shall have delivered to or shall have
instructed the NOM Collateral Account Bank to transfer from the NOM Operating
Account to the NOM Mortgage Escrow Account, an amount equal to 125% of any
amounts being contested in connection with any trade payables which exceed
$250,000 in the aggregate (such amounts in excess of $250,000 delivered in
connection with any such contest in excess of $250,000 being hereinafter
referred to as the "Reserve Amounts"); (iv) the NOM Borrower makes all
required deposits into the accounts described above; and (v) no Event of
Default shall have occurred and be continuing under the NOM Mezzanine Loan
(as defined below under "--Mezzanine Debt"), then (A) while the NOM Mezzanine
Loan is outstanding, the NOM Borrower may instruct the NOM Collateral Account
Bank to withdraw from the NOM Collateral Account and to pay to the NOM
Borrower the NOM Operating Expense Amounts applicable for such month, which
the NOM Borrower is obligated to use to pay NOM Operating Expenses; on the
last business day of each month, amounts in the NOM Collateral Account in
excess of all monthly escrow deposits required to be made and in excess
S-162
<PAGE>
of amounts disbursed to the NOM Borrower as NOM Operating Expense Amounts are
transferred by the NOM Collateral Account Bank from the NOM Operating Account
into the collateral account for the NOM Mezzanine Loan (as defined below
under "--Mezzanine Debt") and (B) if the NOM Mezzanine Loan has been
satisfied, condition item (v) above shall not be applicable and the NOM
Borrower may instruct the NOM Collateral Account Bank to transfer amounts in
excess of all monthly escrow deposits required to be made pursuant hereto
from the NOM Operating Account to such account or accounts of NOM Borrower as
the NOM Borrower may direct to pay operating expenses of the NOM Properties,
to make distributions to the partners of the NOM Borrower, or otherwise.
Transfer of Properties and Interest in Borrower; Encumbrance; Other
Debt. The NOM Borrower is generally prohibited from transferring or
encumbering the NOM Properties except for a transfer of a NOM Property that
has been released as described under "--Defeasance Collateral" above. The NOM
Borrower may, (provided that no such transfer shall materially impair the
utility or operation of the applicable NOM Property or materially adversely
affect the value of the applicable NOM Property taken as a whole) without the
mortgagee's consent: (i) make immaterial transfers of portions of an NOM
Property to governmental authorities for dedication or public use or portions
of such NOM Property to third parties for the purpose of erecting and
operating additional structures whose use is integrated with the use of such
NOM Property; (ii) grant easements, restrictions, covenants, reservations and
rights of way in the ordinary course of business for utilities, (iii)
transfer or ground lease to a compatible user one or more non-income
producing pads consisting of undeveloped land, and (iv) transfer or ground
lease to a retail or other compatible user one or pads subject to existing
leases, subject, however, to written confirmation by the Rating Agency that
such transfer or ground lease shall not result in the withdrawal,
qualification or downgrading of the then current ratings of the Certificates.
The Newton Oldacre McDonald Loan generally prohibits the transfer of any
interest in the NOM Borrower without the prior written consent of the
mortgagee. However, the mortgagee's consent shall not be required with
respect to transfers of direct or indirect beneficial interests in the NOM
Borrower Entities, provided that (i) no Event of Default shall have occurred
and be continuing, (ii) the NOM Borrower (or the transferor of such interest)
shall deliver notice thereof to the mortgagee at least 15 business days prior
to the effective date of such transfer, (iii) the NOM Borrower Entities shall
remain single purpose entities, (iv) no transfer of limited partner,
non-managing member or shareholder interests shall result in any one person
(or any group of affiliates) owning, directly or indirectly, 50% of more of
the beneficial ownership interests of the NOM Borrower, and (v) Thomas E.
Newton, William A. Oldacre, Jr., and Mark McDonald shall at all times
directly or indirectly collectively own not less than 51% of the beneficial
interests in each NOM Borrower Entity, and if any of the NOM Borrower
Entities shall be a partnership, the NOM Borrower GP thereof shall be
directly or indirectly wholly-owned by Thomas E. Newton, William A. Oldacre,
Jr., and Mark McDonald. If 10% or more of direct beneficial interests in any
NOM Borrower Entity are transferred or if any transfer shall result in a
person or a group of affiliates acquiring a 50% or greater interest as set
forth above, the NOM Borrower shall deliver or cause to be delivered to the
mortgagee (x) an opinion of counsel addressed to the Rating Agencies and the
mortgagee and dated as of the date of the transfer to the effect that in a
properly presented case, a bankruptcy court in a case involving such
transferee, or any affiliate thereof, would not disregard the corporate or
partnership forms of such entity, their affiliates and/or their partners, as
the case may be, so as to consolidate the assets and liabilities of such
entity or entities and/or their affiliates with those of the NOM Borrower
Entity or its NOM Borrower GP, and (y) an Officer's Certificate delivered to
the mortgagee certifying that such transfer is not an Event of Default.
Notwithstanding the foregoing, provided that the NOM Borrower Entity and the
NOM GP remain special purpose entities, any limited partnership interests,
non-managing membership interests or shareholder interests in any entity
comprising the NOM Borrower or NOM GP, as applicable, may be transferred (i)
to any immediate family member of Thomas E. Newton, William A. Oldacre, Jr.,
and/or Mark McDonald or to any trust or other entity created for the benefit
of any such person or (ii) by will or intestacy, without the mortgagee's
consent or satisfaction of any of these requirements other than the proviso
contained in this sentence.
The NOM Borrower shall not incur, create or assume any debt or incur any
liabilities without the consent of mortgagee; provided, however, that if no
Event of Default shall have occurred and be
S-163
<PAGE>
continuing, the NOM Borrower may, without the consent of the mortgagee,
incur, create or assume any or all of the following indebtedness: (i) the
debt evidenced in Newton Oldacre McDonald Loan Documents; (ii) amounts, not
secured by liens on the NOM Properties, not to exceed $1,500,000, in respect
of the operation of the NOM Properties in the ordinary course of business.
Notwithstanding the foregoing, the NOM Borrower has certain rights of contest
with respect to disputed obligations as more specifically set forth in the
NOM Mortgage.
Insurance. The NOM Borrower is required to maintain for each NOM Property
(a) insurance against all perils included within the classification "All
Risks of Physical Loss" with extended coverage in an amount equal to the full
replacement costs of the improvements and equipment, (b) comprehensive
general liability insurance in such amounts as are generally required by
institutional lenders for comparable properties but in no event less than
$1,000,000 per occurrence and with an aggregate limit of not less than
$2,500,000 with respect to each NOM Property, (c) statutory worker's
compensation insurance, (d) business interruption and/or loss of "rental
value" insurance to cover the loss of at least 12 months, (e) during any
period of repair or restoration, builder's "all risk" insurance in an amount
not less than the full insurable value of the applicable NOM Property, (f)
broad form boiler and machinery insurance and insurance against loss of
occupancy or use arising from any such breakdown; (g) flood insurance, if
available, with respect to any of the NOM Properties located within a
federally designated flood hazard zone; (h) windstorm insurance with respect
to any NOM Properties located in the State of Florida, with such limits and
deductibles as are generally required by institutional lenders for similar
properties in the geographic area where the NOM Properties are located; and
(i) at the mortgagee's reasonable request, such other insurance, including
but not limited to earthquake insurance (to the extent commercially
reasonable), against loss or damage of the kinds from time to time
customarily insured against. Any such insurance coverage may be effected
under a blanket policy or policies so long as such blanket policy shall
specify, except in the case of public liability insurance, the portion of the
total coverage of such policy that is allocated to the NOM Properties, and
any sublimits in such blanket policy applicable to the NOM Properties. The
Newton Oldacre McDonald Loan requires the NOM Borrower to obtain the
insurance coverage described above, from domestic primary insurers acceptable
to the mortgagee, having both (x) a claims-paying-ability rating by S&P of
not less than "AA" and its equivalent by any other Rating Agency, and (y) an
Alfred M. Best Company, Inc. rating of "A" or better and a financial size
category of not less than X. All insurers providing insurance required by the
NOM Mortgage shall be authorized to issue insurance in the state where the
NOM Property insured is located.
Condemnation and Casualty. In the event of any taking of or casualty or
other damage or injury to any NOM Property, the NOM Borrower's right, title
and interest in and to all compensation, awards, proceeds, damages, claims,
insurance recoveries, causes and rights of action (whether accrued prior to
or after the initial closing of the Newton Oldacre McDonald Loan) and
payments which the NOM Borrower may receive or to which it may become
entitled with respect to the NOM Properties or any part thereof (other than
business interruption insurance proceeds) in connection with any such taking
of, or casualty or other damage or injury to, any NOM Property or any part
thereof are assigned by the NOM Borrower to, and shall be paid to, the
mortgagee.
"NOM Total Loss" means (x) a casualty, damage or destruction of a NOM
Property, the cost of restoration of which would exceed 25% of the amount of
the Newton Oldacre McDonald Loan allocated to such NOM Property, and with
respect to which the NOM Borrower is not required, under the applicable
leases to apply insurance and condemnation proceeds to the restoration of
such NOM Property or (y) a permanent taking of 25% or more of the gross
leasable area of a NOM Property or so much of a NOM Property, in either case,
such that it would be impracticable, in the mortgagee's sole discretion, even
after restoration, to operate such NOM Property as an economically viable
whole and with respect to which the applicable tenant leases do not require
such restoration.
Following a casualty or condemnation at any NOM Property, any insurance
and condemnation proceeds shall be applied to amounts due under the Newton
Oldacre McDonald Loan and the prepayment of the principal amount outstanding
thereon, if: (i) the proceeds shall equal or exceed the amount of the NOM
Allocated Loan Amount with respect to the applicable NOM Property, (ii) an
Event
S-164
<PAGE>
of Default has occurred, (iii) a NOM Total Loss has occurred, (iv) the work
of restoration is not capable of being completed within the required time,
(v) the applicable NOM Property is not capable of being restored, or (vi) the
NOM Borrower is unable to demonstrate its ability to pay the Newton Oldacre
McDonald Loan.
Excluding situations requiring prepayment, to the extent insurance and
condemnation proceeds do not exceed $1,000,000 (the "NOM Casualty Amount"),
or, if insurance and condemnation proceeds are less than the NOM Casualty
Amount but when aggregated with all other then unapplied insurance and
condemnation proceeds with respect to any NOM Property, do not exceed
$1,000,000 in the aggregate, such insurance and condemnation proceeds are to
be paid directly to the NOM Borrower to be applied to restoration of the NOM
Property. Promptly after the occurrence of any damage or destruction to all
or any portion of such NOM Property or a taking of a portion of such NOM
Property, in either case which shall not constitute a NOM Total Loss, the NOM
Borrower shall either cause such NOM Property to be released, or shall
commence and diligently prosecute to completion the repair, restoration and
rebuilding of such NOM Property (in the case of a partial taking, to the
extent it is capable of being restored) so damaged, destroyed or remaining
after such taking in full compliance with all material legal requirements and
free and clear of any and all liens except permitted encumbrances.
In the event of (i) a NOM Total Loss resulting from a casualty, damage or
destruction, if either (a) the cost to repair the NOM Property would exceed
the NOM Casualty Amount and the restoration of the NOM Property cannot
reasonably be completed before the date which is the later to occur of the
date of expiration of any business interruption insurance or the date of
expiration of any letter of credit posted in lieu thereof or in addition
thereto and under such circumstances the NOM Borrower is not required under
the applicable lease to make insurance and casualty proceeds available for
restoration of the NOM Property, or (b) the mortgagee elects not to permit
the NOM Borrower to restore such NOM Property or (ii) a NOM Total Loss
resulting from a taking, the mortgagee shall apply such insurance and
condemnation proceeds, first toward reimbursement of the mortgagee's
reasonable costs and expenses in connection with recovery of the insurance
and condemnation proceeds. Any insurance and condemnation proceeds remaining
after prepayment in part shall be paid to the NOM Borrower or as it may
direct in writing.
In the event that any insurance and condemnation proceeds (other than
business interruption insurance proceeds) are in excess of 10% of the NOM
Allocated Loan Amount for the applicable NOM Property (the "NOM Threshold
Amount"), then all such proceeds shall be paid to the mortgagee and shall be
applied first toward reimbursement of the mortgagee's reasonable costs and
expenses in connection with recovery of such proceeds and disbursement
thereof, and then, to the prepayment of the Newton Oldacre McDonald Loan,
without prepayment premium or penalty, only if: (A)(i) the amount of the such
proceeds is equal to or greater than the outstanding principal amount, (ii)
the casualty or taking occurs on a date which is less than 180 days prior to
the NOM Maturity Date, or (iii) more than 25% of the rentable area of the
applicable NOM Property has been the subject of a casualty or a taking, or
(B) such proceeds were the result of a taking, and after restoration is
completed, there are excess proceeds which were not required for the
restoration, then prepayment shall be made to the extent of such excess
proceeds.
If the insurance and condemnation proceeds are not required to be applied
towards payment of the Newton Oldacre McDonald Loan, then the mortgagee shall
make such proceeds which it is holding available to the NOM Borrower for
payment of the NOM Borrower's or the applicable tenant's expenses incurred
with respect to the work of restoration, only if: (i) there is no Event of
Default then continuing; (ii) if the estimated cost of the work of
restoration exceeds the such proceeds, the NOM Borrower shall either deliver
to the mortgagee (A) cash and cash equivalents, (B) a letter or letters of
credit in an amount equal to the estimated cost of the work of restoration
less such proceeds available, or (C) such other evidence of the NOM
Borrower's ability to meet such excess costs; and (iii) the mortgagee shall,
within a reasonable period of time prior to request for initial disbursement,
be furnished with an estimate of the cost of the work of restoration.
Approval Rights. Under the Newton Oldacre McDonald Loan, the NOM Borrower
is required to submit to the mortgagee, for the mortgagee's written approval,
an annual budget not later than 60 days
S-165
<PAGE>
prior to the commencement of each calendar year after the NOM Effective
Maturity Date. If the mortgagee notifies the NOM Borrower within 15 days of
any objections to such budget, the NOM Borrower is required within 5 days
after receipt of such objections to revise the same and resubmit it to the
mortgagee. The mortgagee shall then advise the NOM Borrower of any objections
to such annual budget within 10 days after such resubmission, and the NOM
Borrower is required to promptly revise same and resubmit it to the mortgagee
until an annual budget is approved (the "Approved Annual Budget"). In the
event the NOM Borrower must incur an extraordinary operating expense or a
capital expense not set forth in the Approved Annual Budget, it is required
to deliver to the mortgagee a reasonably detailed explanation, for the
mortgagee's approval, of such proposed expense.
Without the mortgagee's consent (which may not be unreasonably withheld,
delayed or conditioned), the NOM Borrower may not enter into any management
agreement. The NOM Borrower shall notify the mortgagee in writing (and shall
deliver a copy of the proposed management agreement) of any entity proposed
to be designated as a manager of all or any of the NOM Properties no less
than 30 days before such manager begins to manage such NOM Property(ies) and
shall obtain, prior to any appointment of a manager written notice from the
mortgagee that the Rating Agencies has delivered to the mortgagee written
confirmation that retention of a person (other than the NOM Manager, the NOM
Borrower and any entity under common control with the NOM Borrower, including
the NOM Borrower GP) as manager shall not result in a downgrade, withdrawal
or qualification of the then ratings of the Certificates.
Provided that no Event of Default shall have occurred and be continuing
hereunder, the NOM Borrower shall have the right, without the mortgagee's
consent, to undertake any alteration, improvement, demolition or removal of
any NOM Property or any portion thereof (any such alteration, improvement,
demolition or removal, a "NOM Alteration") so long as (i) the NOM Borrower
provides the mortgagee with prior written notice of any NOM Alteration,
which, when aggregated with all related alterations constituting a single
project, involves an estimated cost exceeding the greater of the NOM
Threshold Amount or $500,000 with respect to NOM Alterations being undertaken
at a single NOM Property at such time or $3,835,100 with respect to NOM
Alterations being undertaken at all the NOM Properties at such time and (ii)
any NOM Alteration will not upon completion materially adversely (A) affect
the value, use or operation of the affected NOM Property taken as a whole or
(B) reduce the NOM Net Operating Income for such NOM Property from the level
available immediately prior to commencement of such alteration. Any
alteration that does not meet the foregoing criteria may be undertaken only
with the mortgagee's written consent.
The NOM Borrower may not, without the consent of the mortgagee, amend,
modify or waive the provisions of any tenant lease or terminate, reduce rents
under or shorten the term of any tenant lease (x) in any manner which would
have a material adverse effect on the applicable NOM Property taken as a
whole, or (y) affecting 20,000 or more rentable square feet.
Financial Reporting. The NOM Borrower is required to furnish to the
mortgagee: (a) annually within 90 days after the end of each fiscal year, a
copy of the NOM's year-end financial statement reviewed by an independent
accountant, accompanied by an Officer's Certificate certifying to the best of
the signatory's knowledge, (i) that such statements fairly represent the
financial condition and results of operations of the NOM in accordance with
GAAP consistently applied, (ii) that as of the date of such Officer's
Certificate, no default exists or, if so, specifying the nature and status of
each such default and the action then being taken by the NOM Borrower or
proposed to be taken to remedy such default, (iii) the NOM DSCR for the
preceding calendar quarter and calendar year, and (iv) that as of the date of
such Officer's Certificate, no litigation exists involving the NOM Borrower
or the NOM Properties in which the amount involved is $250,000 or more, or,
if so, specifying such litigation and the actions being taking in relation
thereto; (b) quarterly within 45 days after the end of each of the first
three calendar quarters, unaudited financial statements, which shall be
accompanied by an Officer's Certificate addressing the matters described in
clause (a) above; (c) quarterly within 45 days of the end of each calendar
quarter, a certified rent roll; (d) annually within 45 days after the end of
each calendar year, an annual summary of all capital expenditures made at
each NOM Property during the prior 12-month period; and (e) promptly upon
request, such further information regarding the NOM Properties as the
mortgagee may reasonably request. The NOM Borrower is also required to
provide the mortgagee with updated information concerning the tax and
insurance costs for the next succeeding fiscal year prior to the termination
of each fiscal year.
S-166
<PAGE>
Mezzanine Debt. Corporate General, Inc., an Alabama corporation which is
the sole shareholder of the NOM Borrower GP, and of each of the limited
partners of the NOM Borrower Entities, are the borrowers (the "NOM Limited
Partners", and collectively with Corporate General, Inc., the "NOM Mezzanine
Borrowers") under a loan in the amount of $5,000,000 (the "NOM Mezzanine
Loan") originated on October 14, 1997 by Midland (the "NOM Mezzanine Lender")
and acquired simultaneously therewith by MLMC. The NOM Mezzanine Loan is
evidenced by a promissory note (the "Mezzanine Note") made by all of the NOM
Mezzanine Borrowers except one NOM Limited Partner (an individual who holds
5% limited partnership interests in each of two of the NOM Borrower
Entities), jointly and severally, as obligors and is secured by a pledge of
the NOM Limited Partners' limited partnership interests in the NOM Borrower
Entities and by a pledge by Corporate General, Inc. of 100% of the stock of
the NOM Borrower GP (collectively, the "NOM Pledged Interests"). The NOM
Pledged Interests include the limited partnership interests in the NOM
Borrower Entities held by the NOM Mezzanine Borrower who is not an obligor
under the Mezzanine Note.
The NOM Mezzanine Loan matures on May 1, 2005 and bears interest at a rate
based upon a reference rate applicable in the London interbank market for
one-month deposits in dollars in an amount approximately equal to the
outstanding principal of the NOM Mezzanine Loan for periods approximately
equal to each interest accrual period applicable to the NOM Mezzanine Loan
plus 4%.
As a condition to the exercise of remedies which may result in a transfer
of direct or indirect interests in the NOM Borrower Entities, including
foreclosure on the NOM Pledged Interests, the NOM Mezzanine Lender must first
obtain from the Rating Agencies a written confirmation that the exercise of
any remedies will not result in the withdrawal, qualification or downgrading
of the then current ratings of the Certificates. The NOM Mezzanine Loan is
freely transferable by MLMC and subsequent holders thereof. MLMC, in its
capacity as holder of the NOM Mezzanine Loan, delivered to Midland and the
NOM Borrower its consent to the making of the Second Advance and the
completion of the transactions consummated in connection therewith.
S-167
<PAGE>
FOUR SEASONS BILTMORE HOTEL, SANTA BARBARA, CA
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$63,000,000 $63,000,000
ORIGINATION DATE: NOVEMBER 24, 1997
ANTICIPATED REPAYMENT
DATE ("ARD"): DECEMBER 1, 2007
MATURITY DATE: DECEMBER 1, 2022
INTEREST RATE: 7.138%
AMORTIZATION: 25 YEARS
HYPERAMORTIZATION: N/A
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: THE LOAN IS NOT PREPAYABLE PRIOR TO THE DATE
THREE MONTHS PRIOR TO THE ARD. SUBSEQUENT TO
THIS DATE, PREPAYMENT IN FULL, BUT NOT IN
PART, IS PERMITTED WITHOUT PENALTY. SUBSEQUENT
TO THE THIRD ANNIVERSARY OF THE ORIGINATION
DATE OR THE SECOND ANNIVERSARY OF
SECURITIZATION OF THE LOAN, DEFEASANCE WILL BE
PERMITTED UPON THE DELIVERY OF APPROPRIATE
DEFEASANCE COLLATERAL.
THE BORROWER: THE BORROWING ENTITY, CHANNEL DRIVE, LLC, AS
WELL AS ITS GENERAL PARTNER, IS ORGANIZED AS A
SPECIAL-PURPOSE, BANKRUPTCY-REMOTE ENTITY.
LIEN POSITION: FIRST MORTGAGE LIEN ON THE FOUR SEASONS
BILTMORE HOTEL IN SANTA BARBARA, CA.
CROSS-COLLATERALIZATION/
DEFAULT: NO
PROPERTY INFORMATION
PROPERTY TYPE: HOTEL
OCCUPANCY: 1995 1996 TTM
---- ---- ---
73.9% 78.7% 80.3%
ADR: $205.34 $220.79 $254.99
RevPAR: $151.75 $173.76 $195.32
Rooms: 217
Year Built: 1927, 1937, 1983
Renovated in 1988 -90
The Collateral: The Four Seasons Biltmore Hotel, a
full-service hotel in Santa Barbara, CA.
Property
Management: Four Seasons Hotels Limited
1996 Net
Operating Income: $6,603,428
Underwritten
Cashflow: $8,616,344
Appraised Value: $90,500,000
Appraised By: PKF Consulting
Appraisal Date: October 1, 1997
LTV as of 12/1/97: 69.6%
Annual Debt Service: 5,460,269
DSC: 1.58x
Loan/Room as of 12/1/97: $290,323
S-168
<PAGE>
FOUR SEASONS BILTMORE HOTEL LOAN: THE BORROWER; THE PROPERTY
The Loan. The loan (the "Biltmore Loan") was originated by Midland Loan
Services, L.P. on November 24, 1997 (the "Closing Date") and acquired
simultaneously therewith by Merrill Lynch Mortgage Capital Inc. The Biltmore
Loan had a principal balance at origination of $63,000,000. It is evidenced
by a deed of trust note (the "Biltmore Note") and secured by, among other
things, a deed of trust (the "Biltmore Deed of Trust") encumbering a hotel in
Santa Barbara, California commonly known as the Four Seasons Biltmore Hotel
(the "Biltmore Property").
The Borrower. The borrower under the Biltmore Loan is Channel Drive LLC, a
special-purpose California limited liability company (the "Biltmore
Borrower"). The operating agreement of the Biltmore Borrower provides that
its purpose and business is limited to owning, managing, developing,
operating, maintaining, financing and otherwise using, and as necessary
improving, the Biltmore Property. The Biltmore Borrower owns no material
asset other than the Biltmore Property and related interests. The general
partner of the Biltmore Borrower is CAL SPE Corp., a special-purpose Delaware
corporation.
The Property. The Biltmore Property is comprised of all of the Biltmore
Borrower's right, title and interest in an to the fee simple estate in the
Biltmore Property. The Four Seasons Biltmore Hotel is a 217-room luxury hotel
located on approximately eighteen acres of oceanfront property near Santa
Barbara, California. It has been rated "Four A, Four Diamond" by the American
Automobile Association and has also received Mobil Travel Guide's prestigious
4 Star Award. The hotel features 15,000 square feet of meeting and banquet
spaces, four restaurants, a fully staffed health club and spa, three tennis
courts, and a private beach club called the Coral Casino Beach Club
(non-gaming related) which offers an Olympic-sized swimming pool. There are
also over 300 parking spaces and a gift shop located on the premises. The
Four Seasons Biltmore Hotel was originally built in 1927, had subsequent
improvements in 1937 and 1983, and was renovated between 1988-1990. Noted
landscape architect Ralph Stevens designed the grounds, which feature
hundreds of species of rare and exotic plants. There are also 13 guest
cottages, as well as a recreation area for croquet, shuffleboard, and a
putting green.
Each of the Biltmore's 217 rooms and suites overlook either the Pacific
Ocean, the Santa Ynez Mountains, the hotel's private gardens, or the swimming
pool. In addition, several of the rooms have patios, fireplaces, vaulted
ceilings and a few even have balconies or roof terraces. The rooms are
generally oversized by modern standards, having sitting areas or adjoining
rooms in suite arrangements. Most have king-sized beds, although there are 48
double-bed units, and all rooms features amenities such as a
refrigerator/mini-bar, color television, ceiling fans, room safe, and
individual climate controls.
For the twelve month period ended September 30, 1997, the average
occupancy rate for the Four Seasons Biltmore Hotel was approximately 80.3%
and the ADR was approximately $245.35. As of October 17, 1997, the appraised
value of the Four Seasons Biltmore Hotel was approximately $90,500,000.
Market Overview. An appraisal by PKF Consulting has designated that the
Four Seasons Biltmore, by virtue of its intended exclusivity, location,
amenities, services and other facilities, can be classified as a destination
resort. Therefore it has the ability to attract demand that might not
otherwise visit a destination, and is expected to compete within the
worldwide luxury resort market, with world-renowned coastal California
properties and throughout the Western United States, including Hawaii, as
well as other warm climate destinations. Total supply for the California
coastal-resort hotel market selected by PKF Consulting is 2,551 rooms,
including the Biltmore's 217 rooms. In addition, PKF Consulting has
identified five proposed coastal-oriented resort projects totaling 1,488
rooms as possible future additions to the market.
Location/Access. The Four Seasons Biltmore Hotel is located at 1260
Channel Drive in the community of Montecito, County of Santa Barbara and
State of California. The main entrance to the subject is via Channel Drive, a
two-lane arterial approximately 60 feet wide, with a parking lane, concrete
curb and concrete sidewalks in each direction. This arterial leads to the
circular driveway of the Four Seasons Biltmore and also to the parking spaces
in front of the Coral Casino Beach Club. Channel Drive looks immediately to
the south onto the Pacific Ocean and provides a scenic drive through the
Santa Barbara area along Montecito Shores.
S-169
<PAGE>
The site is accessible from U.S. Highway 101 via the Coast
Village/Montecito exit ramp. This freeway links the cities of Los Angeles and
San Francisco via a coastal route. The property is also accessible via
Amtrak, which stops daily in downtown Santa Barbara, running as far south as
San Diego and north to Seattle, Washington. The Santa Barbara Airport is
located approximately 15 miles west of the property providing accessibility
to and from major hub cities.
Competition. Six properties which have been identified as in the area of
the Four Seasons Biltmore Hotel and which may be competitive therewith are:
the Inn at Spanish Bay, a 270 room resort in the Pebble Beach area that
opened in 1987; the Lodge at Pebble Beach, a 161 room resort that opened in
1919 that is primarily known for its famous golf complex; a 393 room
Ritz-Carlton Laguna Niguel that opened in 1984; a 482 room La Costa Hotel and
Spa located 30 minutes north of San Diego, that is primarily known for its
golf complex and extensive spa facility; the Hotel del Coronado, a 691 room
hotel in San Diego that was substantially renovated in 1974; and the Four
Seasons Aviara, a 337 room hotel in Carlsbad that opened in 1997.
Environmental Report. A Phase I environmental site assessment dated as of
October 16, 1997 was performed by Law/Crandall on the Four Seasons Biltmore
Hotel. The Phase I environmental site assessment did not reveal any
environmental liability that the Depositor believes would have a material
adverse effect on the borrower's business, assets or results of operations
taken as a whole. Nevertheless, there can be no assurance that all
environmental conditions and risks were identified in such environmental
assessment.
Engineering Report. A Hotel Condition Report was completed on the Four
Seasons Biltmore Hotel on October 23, 1997 by a third party due diligence
firm. The Hotel Condition Report concluded that the Four Seasons Biltmore
Hotel was generally in good condition and identified no deferred maintenance
requirements.
Seismic Report. A Seismic Report was completed on March 25, 1996 by a
third party due diligence consulting firm on the Four Seasons Biltmore Hotel.
Based upon a site inspection on March 14, 1996, the "Probable Maximum Loss"
estimates using the more conservative of two generally accepted methods were
as follows:
Main building and meeting rooms ........................................ 15%
Rooms................................................................... 7%-30%
Shops & Housekeeping.................................................... 15%
Cottages................................................................ 7%
Coral Casino............................................................ 15%
Property Management. The Four Seasons Biltmore Hotel is operated by Four
Seasons Hotels Limited (the "Manager"), an Ontario corporation, pursuant to a
certain hotel management agreement dated as of November 8, 1995, by and
between Biltmore Borrower and Manager (the "Biltmore Management Agreement").
The Manager's initial term expires on December 31, 2010, but the Manager has
a right to extend the term of the Biltmore Management Agreement for two
additional fifteen year terms so long as the hotel achieves an average net
operating income for the three fiscal years prior to the extension term,
respectively, in a specified target amount and provided that the Manager has
not made (i) a cure payment during the last two years of the initial term or
of the first extension term, as the case may be, or (ii) one or more other
cure payments during the last seven years of the initial term or of the first
extension term, as the case may be.
Under the Biltmore Management Agreement, the Manager is entitled to a base
management fee of 4% of gross room revenue plus 1% of other hotel revenue.
The base management fee is subject to deferral in the event the hotel does
not meet stipulated levels of net operating income. The Biltmore Management
Agreement also provides for the payment of an annual incentive fee calculated
as a percentage (which increases as the level of net cash flow rises) of net
cash flow in excess of designated annual returns on Biltmore Borrower's
investment in the hotel, subject to adjustment for additional equity
contributions and subject to certain limitations. For the year ended December
31, 1996, the Biltmore Manager was paid a total of $880,000 in base fees and
incentive fees. Because the current Biltmore Management Agreement became
effective in November 1995, comparable information for the year ended
December 31, 1995, is not available.
S-170
<PAGE>
Pursuant to the Biltmore Management Agreement, bank accounts have been
established and maintained by the Manager in connection with the operation of
the Biltmore Property, and all funds derived from the operation of the
Biltmore Property have been and shall be deposited therein. The Biltmore
Borrower and the Manager have agreed to establish a segregated account for
the replacement and renewal of furniture, fixtures and equipment (the
"Biltmore FF&E Reserve Account") into which Manager shall fund, on a monthly
basis, an amount equal to 4% of monthly operating income. The Biltmore
Borrower and the Manager have agreed to establish a segregated account for
the payment of interest and principal due on the Biltmore Note (the "Biltmore
Interest Escrow Account") into which Manager shall deposit, on a monthly
basis, the principal and interest due on the Biltmore Note on the next
Payment Date. The Biltmore Borrower and the Manager have agreed to establish
a segregated account for the payment of tax and insurance premiums (the
"Biltmore Deed of Trust Escrow Account") into which the Manager shall
deposit, on a monthly basis, one twelfth of the annual insurance premiums for
insurance being maintained by Biltmore Borrower and one twelfth of the annual
taxes and assessments which shall become due and payable. The Biltmore FF&E
Reserve Account, the Biltmore Interest Escrow Account and the Biltmore Deed
of Trust Escrow Account are herein collectively referred to as the "Biltmore
Accounts".
Pursuant to a subordination, nondisturbance and attornment agreement (the
"Biltmore Subordination Agreement") executed with respect to the Biltmore
Management Agreement by the Manager and Biltmore Borrower in favor of the
holder of the Biltmore Loan (the "beneficiary"), the Manager has agreed (i)
to subordinate its rights under the Biltmore Management Agreement to the lien
of the Biltmore Deed of Trust; (ii) to make all payments to the Agent Bank
(as hereinafter defined) which otherwise would have been payable to Biltmore
Borrower as more particularly set forth in the Cash Collateral Agreement (as
defined under "Lockbox and Reserves"); (iii) to make all deposits of funds
into escrow for the payment of taxes and insurance and reserve deposits for
replacements or improvements to the Biltmore Property provided sufficient
funds shall be available for Manager to operate the Biltmore Property as set
forth in the Biltmore Management Agreement and to assign all accounts and
funds in such accounts to beneficiary or its designee to secure payment of
the obligations of Biltmore Borrower under the Biltmore Deed of Trust; (iv)
upon foreclosure or other enforcement proceedings, to attorn to and be bound
to a transferee of Biltmore Borrower with the same force and effect as if the
transferee was the "owner" under the Biltmore Management Agreement; (v) to
limit the obligations of any transferee succeeding to the interest of the
Biltmore Borrower under the Biltmore Management Agreement such that
transferee shall (a) be subject only to the obligations arising during such
period during which such transferee was the actual "owner" under the Biltmore
Management Agreement, (b) not be subject to any offset or counterclaim which
Manager might otherwise be entitled to assert against the transferee on
account of any obligation of the Biltmore Borrower, (c) if beneficiary is the
transferee, beneficiary shall not have any obligation to provide funds except
in accordance with the last annual plan approved by Biltmore Borrower prior
to the transfer, (d) if beneficiary is the transferee, beneficiary shall not
have any obligation to provide funds to repair or rebuild any improvements at
the Biltmore Property after damage or destruction or termination fees payable
in conjunction therewith, (e) if beneficiary is the transferee, beneficiary
shall not be obligated to repair or rebuild any of the improvements at the
Biltmore Property upon any damage or destruction thereof unless the insurance
proceeds payable with respect to such loss are sufficient to fully pay the
cost of such repair or rebuilding, (f) not be bound by any previous
modification of the Biltmore Management Agreement made without beneficiary's
prior written consent; and (vi) to give prompt written notice to beneficiary
of any default by Biltmore Borrower under the Biltmore Management Agreement,
and termination thereof shall not be effective unless beneficiary has
received notice thereof and failed to cure such default within the requisite
cure period. The Biltmore Subordination Agreement provides that, if a
nonmonetary default is of such a nature that it cannot be cured by
beneficiary, then beneficiary may, at its option, immediately succeed to the
interest of Biltmore Borrower under the Biltmore Management Agreement. If the
Biltmore Management Agreement is otherwise terminated by reason of Biltmore
Borrower default, Manager and beneficiary shall each be entitled to cause the
other to enter into a new management agreement upon the same terms set forth
in the Biltmore Management Agreement.
S-171
<PAGE>
UNDERWRITTEN CASHFLOW -- FOUR SEASONS BILTMORE HOTEL
1996 UNDERWRITTEN
ACTUAL CASH FLOW
------------- --------------
INCOME:
Room Department ................. $14,886,800 $16,217,700
Food & Beverage Department ..... 12,833,700 $14,216,800
Beach Club ...................... 2,557,600 $ 2,899,100
Other Department ................ 1,591,800 $ 2,090,900
------------- --------------
GROSS INCOME:..................... $31,869,900 $35,424,500
============= ==============
ALLOCATED EXPENSES
Room Department ................. 3,329,300 3,468,700
Food & Beverage Department ..... 9,979,700 10,506,100
Coral Casino .................... 1,457,200 1,581,000
Other Department ................ 796,400 1,026,300
------------- --------------
TOTAL ALLOCATED EXPENSES.......... 15,562,600 16,582,100
============= ==============
DEPARTMENT PROFITS:............... $16,307,300 $18,842,400
============= ==============
UNALLOCATED EXPENSES
Operating Expenses
Administration .................. 2,291,300 2,513,800
Maintenance & Repairs ........... 1,807,400 1,876,900
Energy .......................... 692,600 691,000
Management Fee .................. 880,000 956,376
Marketing & Corp. Service Charge 1,908,600 1,922,800
Fixed Expenses
Insurance ....................... -- --
Taxes and Insurance ............. 761,100 765,600
Rent & Miscellaneous ............ 87,300 82,600
Reserve FF&E .................... 1,274,772 1,416,980
------------- --------------
TOTAL UNALLOCATED EXPENSES........ $ 9,703,872 $10,226,056
============= ==============
NET OPERATING INCOME.............. $ 6,603,428 $ 8,616,344
============= ==============
NET CASH FLOW..................... $ 6,603,428 $ 8,616,344
============= ==============
Average Occupancy................. 78.7% 80.3%
Average Room Rate................. $ 220.79 $ 245.35
Debt Service Coverage Ratio ...... 1.58x
Loan to Value..................... 69.6%
S-172
<PAGE>
FOUR SEASONS BILTMORE HOTEL: THE LOAN
Security. The Biltmore Loan is a nonrecourse loan, secured by a mortgage
lien on the Biltmore Borrower's fee simple interest in the Biltmore Property,
and certain other collateral relating thereto (including an assignment of
leases, rents and security deposits, an assignment of certain agreements and
the funds in certain accounts) (collectively with all other security
documents referenced herein, the "Loan Documents"). The beneficiary is a
named insured under the title insurance policy which insures, among other
things, that the Biltmore Deed of Trust constitutes a valid and enforceable
first lien on the Biltmore Property, subject to certain exceptions and
exclusions from coverage set forth therein. Such insurance policy, the
Biltmore Note, the Biltmore Deed of Trust and all other agreements and
documents evidencing and securing the Biltmore Loan will be assigned to the
Trust Fund.
Payment Terms. The Biltmore Loan matures on December 1, 2022 ("the
Biltmore Maturity Date") and bears interest (a) at a fixed rate per annum
equal to 7.138% (the "Biltmore Initial Interest Rate") through but not
including December 1, 2007 (the "Biltmore Effective Maturity Date") and (b)
from and including the Biltmore Effective Maturity Date through and including
the Biltmore Maturity Date, at a fixed rate per annum equal to the greater of
(i) the Biltmore Initial Interest Rate plus 2% or (ii) the Biltmore Treasury
Rate plus 2%. The "Biltmore Treasury Rate" means the yield, as of the
Biltmore Effective Maturity Date, calculated by the linear interpolation of
the yields of noncallable United States Treasury obligations with terms of
ten (10) years, as determined by Biltmore Borrower on the basis of Federal
Reserve Statistical Release H.15 Selected Insurance rates or such other
recognized source of financial market information selected by Four Seasons
Hotel Biltmore, following consultation with beneficiary, for one week prior
to the Biltmore Effective Maturity Date. Any interest accrued after the
Biltmore Effective Maturity Date at the excess of the Biltmore Revised
Interest Rate over the Biltmore Initial Interest Rate shall be accrued and
added to the outstanding indebtedness under the Biltmore Loan and shall, to
the extent permitted by applicable law, earn interest at the Biltmore Revised
Interest Rate (such accrued interest and interest thereon, the "Biltmore
Accrued Interest"). Interest on the Biltmore Loan is calculated on the basis
of a 360-day year and the actual number of days elapsed in the applicable
period.
The payment date for the Biltmore Loan is the first business day of each
month (each, a "Payment Date"), with no grace period for a default in the
payment of scheduled principal or interest. Commencing on January 1, 1998,
the Biltmore Loan requires 300 equal monthly payments of principal and
interest of $455,022.40 (each, a "Biltmore Debt Service Payment"). Each
Biltmore Debt Service Payment, is due and payable on each Payment Date, and
shall be applied first to the interest at the Biltmore Initial Interest Rate
and the remainder thereof to the reduction of principal. In the event of a
default in payments, interest will accumulate thereon at the applicable
interest rate plus five percent (5%) per annum (the "Default Rate"). On the
Biltmore Maturity Date, payment of the remaining unpaid balance of principal,
if any, together with all interest accrued thereon and all other sums payable
under the Biltmore Note or under the Loan Documents is required.
Commencing with the first Payment Date after the Biltmore Effective
Maturity Date, and continuing on each Payment Date thereafter, the Biltmore
Borrower is required to apply 100% of rents and other revenues from the
Biltmore Property to the following items in the following order of priority:
(a) to payment of interest accruing at the Default Rate and late payment
charges, if any; (b) to payment of required monthly escrows of taxes and
insurance premiums; (c) to payment of the Biltmore Monthly Debt Service
Payments; (d) to payment of monthly cash expenses pursuant to the annual
budget approved by the beneficiary; (e) to payment of extraordinary,
unbudgeted operating or capital expenses approved by the beneficiary, if any;
(f) to payments to be applied against the outstanding principal of the loan
until such principal amount is paid in full; (g) to payments of Biltmore
Accrued Interest; and (h) to payments of any other amounts due under the Loan
Documents. Any excess amounts shall be paid to the Biltmore Borrower.
Event of Default. The occurrence of any of the following constitutes an
"Event of Default" under the Biltmore Deed of Trust: (a) failure to make any
payment of interest or principal on the Biltmore Note when due, or failure to
pay the principal balance of the Biltmore Note when due; (b) failure to pay
any
S-173
<PAGE>
other amount payable pursuant to the Biltmore Deed of Trust or Note when due
and payable, with such failure continuing for 10 business days after
beneficiary delivers written notice thereof to the Biltmore Borrower; (c)
failure to keep in force the insurance required under the Biltmore Deed of
Trust to be maintained or failure to comply with any other covenant related
to insurance requirements, with such failure continuing for 5 business days
after beneficiary delivers written notice thereof to the Biltmore Borrower;
(d) failure to comply with certain Biltmore Deed of Trust covenants which
require the Biltmore Borrower to keep the Biltmore Property free of liens and
encumbrances (with such default continuing for 5 business days after
beneficiary delivers written notice thereof to the Biltmore Borrower), and
those which, with limited exceptions, prohibit the sale of the Biltmore
Property and transfers of interests in the Biltmore Borrower; (e) any attempt
by the Biltmore Borrower to assign its rights under the Biltmore Deed of
Trust; (f) any other default in the performance or payment, or breach, of any
material covenant, warranty, representation or agreement set forth in the
documents which evidence the Biltmore Loan, with such default continuing for
30 business days, and any applicable extension period, after beneficiary
delivers written notice thereof to the Biltmore Borrower; and (g) the
occurrence of certain bankruptcy events.
If the Biltmore Borrower defaults in the payment of any Biltmore Debt
Service Payment on the Payment Date then the Biltmore Borrower shall pay to
beneficiary a late payment charge in an amount equal to five percent (5%) of
the amount of the installment not paid. If the Biltmore Borrower defaults in
the payment of any Biltmore Debt Service Payment on the Payment Date due, or
defaults in any other manner so as to constitute an Event of Default, then
beneficiary at its option and without further notice to the Biltmore Borrower
may declare the entire unpaid amount of principal with interest at the
Default Rate together with all other sums due, if any, due and payable
immediately.
Prepayment. Voluntary prepayment of the principal of the Biltmore Note is
prohibited at any time prior to the 90-day period prior to the Biltmore
Effective Maturity Date, at which time the Biltmore Borrower may prepay the
Note in whole or in part on any Payment Date without payment of any
prepayment premium.
Payments made following an Event of Default under the Biltmore Deed of
Trust or an acceleration by the beneficiary shall be deemed to be voluntary
and shall be subject to a prepayment premium (the "Biltmore Yield Maintenance
Premium") equal to the product of (i) a fraction whose numerator is an amount
equal to the portion of the principal balance being prepaid and whose
denominator is the entire outstanding principal balance on the date of such
prepayment, multiplied by (ii) an amount equal to the remainder obtained by
subtracting (x) an amount equal to the entire outstanding principle balance
as of the date of such prepayment from (y) the present value as of the date
of such prepayment of the remaining scheduled payments of principle and
interest (including any final installment of principle payment on the
Biltmore Effective Maturity Date) determined by discounting such payments at
a discount rate equal to the Biltmore Discount Rate. The "Biltmore Discount
Rate" means the rate which, when compounded monthly, equals the yield, as of
the date of prepayment, calculated by linear interpolation of the yields of
noncallable U.S. Treasury obligations with terms (one longer and one shorter)
most nearly approximating the period from the date of the prepayment to the
Biltmore Effective Maturity Date.
No Biltmore Yield Maintenance Premium or other premium or penalty is
required to be paid in connection with any prepayment resulting from the
application of insurance or condemnation proceeds to repayment of the
Biltmore Loan in accordance with the requirements of the Biltmore Deed of
Trust.
Defeasance. For the purposes of this section, "Defeasance Collateral"
shall mean obligations or securities not subject to prepayment, call or early
redemption which are direct obligations of, or obligations fully guaranteed
as to timely payment by, the United States of America or any agency or
instrumentality of the United States of America, or the obligations of which
are backed by the full faith and credit of the United States of America, the
ownership of which will not cause the beneficiary to be an investment company
under the Investment Company Act of 1940, included as collateral under the
Biltmore Loan. For the purposes of this section, the "Defeasance Collateral
Requirement" shall mean an
S-174
<PAGE>
amount sufficient to pay 100% of the loan amount, and sufficient to pay
scheduled interest and principal payments on the Biltmore Note through and
including the Biltmore Effective Maturity Date together with the outstanding
principal balance of the Biltmore Note as of such date.
The Biltmore Borrower shall be entitled to defease the Biltmore Property
on any Payment Date from and after the earlier of (x) the third anniversary
of the Closing Date and (y) the second anniversary of the Delivery Date, in
connection with the delivery of Defeasance Collateral, provided that: (i) the
Biltmore Borrower shall have delivered Defeasance Collateral in such amount
as shall satisfy the Defeasance Collateral Requirement with respect to the
Biltmore Property; (ii) the Biltmore Borrower shall have granted a first
priority security interest in the Defeasance Collateral and all proceeds;
(iii) the Biltmore Borrower shall have delivered a certificate of an officer
of the Biltmore Borrower (an "Officer's Certificate") dated the day of
delivery of the Defeasance Collateral (a) setting forth the aggregate face
amount or the unpaid principal amount, interest rate and maturity date of all
the Defeasance Collateral, accompanied with a copy of the transaction
journal, if any, and (b) stating in effect that the Biltmore Borrower owns
the Defeasance Collateral free and clear of any encumbrances, that it
consists solely of eligible investments as defined in the Biltmore Deed of
Trust, that it satisfies the Defeasance Collateral Requirement, and that such
defeasance shall not give rise to an Event of Default; (iv) the Biltmore
Borrower shall have delivered to beneficiary the opinions of counsel with
respect to beneficiary's interest in the Defeasance Collateral, as well as a
tax opinion and a nondisqualification opinion required under the Biltmore
Deed of Trust upon a defeasance of the lien; (v) beneficiary shall have
received from the Rating Agencies written affirmation that the credit ratings
of the securities secured in part by a pledge of the Biltmore Note as of the
date of such defeasance will not be qualified, downgraded or withdrawn as a
result of such defeasance.
Lockbox and Reserves. Pursuant to the terms of a cash collateral account
security, pledge and assignment agreement (the "Biltmore Cash Collateral
Agreement"), the Biltmore Borrower has established in the name of LaSalle
National Bank (the "Biltmore Agent"), as agent for the beneficiary, as
secured party, a cash collateral account (the "Biltmore Operating Account")
with such bank. The Biltmore Borrower has delivered irrevocable written
instructions to the Manager directing the Manager to deposit by wire transfer
to the Operating Account, all amounts due and payable to Biltmore Borrower,
pursuant to the Biltmore Management Agreement or otherwise, deriving from the
Biltmore Property.
Provided that (i) no Event of Default shall have occurred and be
continuing under the Loan Documents, (ii) Biltmore Borrower shall have
delivered to Biltmore Agent and beneficiary a certificate of an officer of
Borrower's managing member certifying that (A) no Event of Default has
occurred and is then continuing and (B) there are no trade payables more than
60 days past due, unless the same are being contested by Biltmore Borrower in
good faith, and (C) Biltmore Borrower shall have delivered to Biltmore Agent
to transfer from the Operating Account to the Deed of Trust Escrow Account,
an amount equal to 125% of any amounts being contested in connection with any
payables exceeding $250,000 in the aggregate, and (iii) all amounts required
to have been reserved by Manager have been so reserved, then Borrower may, at
any time, instruct Agent Bank to transfer amounts from the Operating Account
to such account or accounts of Biltmore Borrower as Biltmore Borrower may
direct.
In accordance with the Biltmore Deed of Trust and pursuant to that certain
letter agreement dated as of November 24, 1997, between Biltmore Borrower and
the Manager, Biltmore Borrower and the Manager have established three (3)
segregated accounts with Bank of America NT&SA, specifically, the Biltmore
Deed of Trust Escrow Account, the Biltmore FF&E Reserve Account and the
Biltmore Interest Reserve Account. (See "--Property Management").
Pursuant to the terms of the Biltmore Deed of Trust, Biltmore Borrower has
pledged to beneficiary a security interest in the Accounts. Pursuant to the
Biltmore Cash Collateral Agreement, Biltmore Borrower has pledged to
beneficiary a security interest in the Operating Account.
Transfer of Properties and Interest in Borrower; Encumbrances; Other
Debt. The Biltmore Borrower is generally prohibited from transferring or
encumbering the Biltmore Property. The Biltmore Borrower has the right to
sell the whole of its interest in the Biltmore Property provided that (a) the
Biltmore Borrower shall have caused to be delivered to the beneficiary a
written affirmation from
S-175
<PAGE>
applicable rating agencies that the securities secured by a pledge of the
Biltmore Note shall not be qualified, downgraded or withdrawn as a result of
such sale, (b) the purchaser is a single purpose entity controlled by a
Permitted Owner (as defined below), and (c) the Biltmore Property shall be
managed by a Qualifying Manager (as defined below). A "Qualifying Manager"
means a manager which is (1) an approved hotel operating company which
manages at least five First Class hotels with a minimum of 2500 rooms in the
aggregate, (2) the Manager or its affiliate, or (3) Four Seasons Hotel
Limited or its affiliate. A "Permitted Owner" means (1) any entity as to
which a rating agency confirmation would be issued, (2) Maritz, Wolff & Co.,
Hotel Equity Fund 1, L.P., Hotel Capital Partners, L.P. or any of their
affiliates, (3) any person with hotel assets of at least $100,000,000
exclusive of the Biltmore Property, and (4) any pension fund or separate
account or investment vehicle established by such entity or any publicly
traded real estate investment trust or corporation which owns hotel assets of
at least $100,000,000 exclusive of the Biltmore Property.
Biltmore Borrower is permitted to transfer or dispose of building
equipment which is being replaced or which is no longer necessary in
connection with the operation of the Biltmore Property provided that such
transfer or disposal will not materially adversely affect the value of the
Biltmore Property taken as a whole. The Biltmore Borrower may, (provided that
no such transfer shall materially impair the utility or operation of the
Biltmore Property taken as a whole) without the beneficiary's consent: (i)
make immaterial transfers of portions of the Biltmore Property to
governmental authorities for dedication or public use or portions of thereof
to third parties for the purpose of erecting and operating additional
structures whose use is integrated with the use of the Biltmore Property and
(ii) grant easements, restrictions, covenants, reservations and rights of way
in the ordinary course of business for utilities.
With limited exceptions, the Biltmore Deed of Trust prohibits the transfer
of any interest in the Biltmore Borrower without the prior written consent of
the beneficiary. The beneficiary's consent is not required for a transfer or
direct or indirect beneficial interests in the Biltmore Borrower provided
that: (i) after giving effect to such transfer, (A) in the case of a transfer
which results in a 49% or greater change in beneficial ownership of the
Biltmore Borrower to a single beneficial owner, or any transfer of the
interest of the general partner, a written confirmation from each of the
Rating Agencies shall be delivered to beneficiary that such Rating Agencies
will not downgrade, qualify or withdraw the then current ratings of the
securities secured by a pledge of the Biltmore Note as a result of such
transfer, and (B) (1) the Biltmore Borrower remains a single purpose entity,
(2) the Biltmore Borrower is controlled by a Permitted Owner, (3) any
transferee of such (x) direct interest in the Biltmore Borrower or (y)
indirect interest in the Biltmore Borrower if such transferee is to own any
general partnership interest in the entity which owns any general partnership
interest in the Biltmore Borrower, shall be a single purpose entity and (4) a
Qualifying Manager manages the Biltmore Property, and (ii) no Event of
Default has occurred and is continuing. If 10% or more of direct beneficial
interests in the Biltmore Borrower are transferred, or if any transfer shall
result in any one person or group of affiliates acquiring more than a 49%
interest or shall result in any transfer of the General Partner's interest,
the Biltmore Borrower shall deliver to the rating Agencies and beneficiary
(a) a non-consolidation opinion of counsel and (b) an Officer's Certificate
certifying that such transfer is not an event of default.
The Biltmore Borrower is not permitted to incur any additional
indebtedness other than: (i) the Biltmore Note and the other obligations,
indebtedness and liabilities provided for in any Loan Document evidencing or
securing the Biltmore Loan; (ii) unsecured indebtedness for trade payables,
provided that such amounts are paid within 60 days of the date incurred
unless the Biltmore Borrower is in good faith contesting its obligation to
pay such indebtedness in a manner satisfactory to the beneficiary; (iii)
unsecured indebtedness not to exceed 3% of the aggregate amount of the
Biltmore Loan, provided that such indebtedness is subordinated in all
respects to the Biltmore Loan and the provisions relating thereto be
satisfactory to beneficiary; and (iv) amounts loaned by the Manager to the
Biltmore Borrower as "operator loans," but only to the extent provided for in
the Biltmore Management Agreement.
Insurance. The Biltmore Borrower is required to maintain for the Biltmore
Property (a) insurance against all perils included within the classification
"All Risks of Physical Loss" with extended coverage in an amount at all times
sufficient to prevent the Biltmore Borrower from becoming a co-insurer, but
in any event equal to the full insurable value of the improvements and
equipment, (b) comprehensive general
S-176
<PAGE>
liability insurance in such amounts as are generally required by
institutional lenders for comparable properties but in no event less than
$5,000,000 per occurrence and with an aggregate limit of not less than
$50,000,000, (c) statutory workers' compensation insurance, (d) business
interruption and/or "loss of rental value" insurance to cover the loss of at
least 24 months income, (e) during any period of repair or restoration,
builder's "all risk" insurance in an amount not less than the full insurable
value of the Biltmore Property, (f) broad-form boiler and machinery insurance
and insurance against loss of occupancy or use arising from any related
breakdown in such amounts as are generally available at a commercially
reasonable premium and are generally required by institutional lenders for
properties comparable to the Biltmore Property, (g) flood insurance, if any
improvement on the Biltmore Property is located within an area designated as
"flood prone" or a "special flood hazard area," and (g) at the beneficiary's
reasonable request, such other insurance against loss or damage of the kind
customarily insured against and in such amounts as are generally required by
institutional lenders for comparable properties.
Any such insurance may be effected under a blanket policy so long as any
such blanket policy shall specify, except in the case of public liability
insurance, the portion of the total coverage of such policy that is allocated
to the Biltmore Property and any sublimate in such blanket policy applicable
to the Biltmore Property, which amounts may not be less than the amounts
required pursuant to, and which must in any case comply in all other respects
with the requirements of, the Biltmore Loan. All insurance policies, with the
exception of workers' compensation, are required to name the beneficiary as
an additional named insured, to provide that all proceeds (except with
respect to proceeds of general liability and workers' compensation insurance)
be payable to the beneficiary except as described below under "--Condemnation
and Casualty" and to contain: (i) a standard "noncontributory mortgagee"
endorsement or its equivalent relating, inter alia to recovery by the
mortgagee notwithstanding the negligent or willful acts or omissions of the
Biltmore Borrower; (ii) a waiver of subrogation endorsement in favor of
beneficiary; (iii) an endorsement providing that no policy shall be impaired
or invalidated by virtue of any act, failure to act, negligence of, or
violation of declarations, warranties or conditions contained in such policy
by Biltmore Borrower, beneficiary or any of other named insured, additional
insured or loss payee, except for willful misconduct of the beneficiary
knowingly in violation of the conditions of such policy; (iv) an endorsement
providing for a deductible per loss of an amount not more than that which is
customarily maintained by prudent owners of first class properties comparable
to and in the general vicinity of the Biltmore Property but in no event in
excess of $50,000 except in the case of earthquake coverage; and (v) a
provision that such policies shall not be cancelled, terminated or expired
without at least 30 days prior written notice to the beneficiary, in each
instance. The Biltmore Deed of Trust requires the Biltmore Borrower to obtain
the insurance described above from insurance carriers having claims paying
abilities rated (i) not less than "AA" by S&P and its equivalent by any other
Rating Agencies and (ii) not less than "A" by Alfred M. Best Company, Inc.
with a financial size category of not less than X.
Condemnation and Casualty. The Biltmore Borrower is required to notify the
beneficiary in writing promptly upon obtaining knowledge of (1) the
institution of any condemnation proceedings, or (2) the occurrence of any
damage or destruction to all or any part of the Biltmore Property the
restoration of which is estimated by the Biltmore Borrower to cost more than
5% of the Biltmore Loan amount (the "Biltmore Threshold Amount"). In
addition, the Biltmore Borrower is obligated to include with the notice of
any casualty, damage, injury or condemnation, the restoration of which is
estimated by the Biltmore Borrower to cost more than the Biltmore Threshold
Amount, (or to forward as soon thereafter as possible) an estimate of the
cost of repairing or restoring such casualty, damage, injury or condemnation
in reasonable detail.
Following a casualty or condemnation at the Biltmore Property, any
insurance and condemnation proceeds will be applied (after payment of the
beneficiary's reasonable expenses of collection thereof) to amounts due under
the Biltmore Loan and the prepayment of the principal amount outstanding
thereon, if: (i) the proceeds equal or exceed the outstanding principal
balance of the Biltmore Loan, or (ii) any Event of Default has occurred or is
continuing, or (iii) a Biltmore Total Loss (as defined herein) has occurred,
or (iv) the work of restoration cannot be completed before the earlier of (a)
the date which is six months before the Biltmore Maturity Date or (b) the
date on which the business interruption
S-177
<PAGE>
insurance expires, or (v) the Biltmore Property is not capable of being
restored substantially to its condition prior to the casualty or
condemnation, or (vi) the Biltmore Borrower is unable to demonstrate to the
beneficiary's reasonable satisfaction its continuing ability to pay the
Biltmore Loan. In the event that proceeds do not exceed the Biltmore
Threshold Amount, such proceeds are to be paid directly to Biltmore Borrower
to be applied to restoration of the Biltmore Property. The Biltmore Borrower
may settle any insurance claim with respect to proceeds which do not exceed
the Threshold Amount. All other insurance claims shall be settled by
beneficiary.
An "Biltmore Total Loss" means (x) a casualty, damage or destruction of
the Biltmore Property, the cost of restoration of which would exceed 50% of
the outstanding principal balance of the Biltmore Loan, or (y) a permanent
taking of 25% or more of the hotel guest rooms on the Biltmore Property or so
much of the Biltmore Property, in either case, such that it would be
impracticable, in beneficiary's reasonable discretion, even after
restoration, to operate the Biltmore Property as an economically viable
whole.
In the event of (i) a Biltmore Total Loss resulting from casualty, damage
or destruction, if either (A) the cost to repair the Biltmore Property would
exceed the Biltmore Threshold Amount and the restoration of the Biltmore
Property cannot reasonably be completed before the date which is the later to
occur of the date of expiration of any business interruption insurance or the
date of expiration of any letter of credit posted in lieu thereof or in
addition thereto and under such circumstances the Biltmore Borrower is not
required under any tenant lease to make the proceeds available to restore the
Biltmore Property or (B) the beneficiary elects not to make such proceeds
available to the Biltmore Borrower for the restoration of the Biltmore
Property, or (ii) a Biltmore Total Loss resulting from a condemnation, then
the Biltmore Borrower must prepay the Biltmore Loan to the extent of the
casualty or condemnation proceeds received, up to an amount equal to the
outstanding principal thereon (without prepayment premium or penalty).
If any insurance or condemnation proceeds (other than business
interruption insurance proceeds) are in excess of the Biltmore Threshold
Amount, then all such proceeds will be applied as follows: first, toward
reimbursement of the beneficiary's reasonable out-of-pocket costs and
expenses in connection with the recovery and disbursement of such proceeds,
and then, to the prepayment of the principal amount outstanding on the
Biltmore Loan, without prepayment premium or penalty, only if: (A)(i) the
amount of such proceeds is equal to or greater than the outstanding principal
amount of the Biltmore Note, or (ii) the casualty or condemnation occurs less
than 180 days before the Biltmore Maturity Date, or (iii) more than 25% of
the hotel guest rooms on the Biltmore Property have been damaged by a
casualty or shall have been taken, or (B) such proceeds are condemnation
proceeds received in excess of the amount needed to restore the Biltmore
Property after a partial taking by condemnation, in which case prepayment
will be made to the extent of such unneeded proceeds.
Upon an Event of Default or in the event the proceeds are required to be
paid to beneficiary, any such proceeds paid to beneficiary shall be applied
first toward reimbursement of beneficiary's reasonable costs and expenses
actually incurred in connection with recovery of the proceeds and
disbursement of the proceeds.
In the event that the casualty and condemnation proceeds (other than
business interruption insurance proceeds) are in excess of the Biltmore
Threshold Amount and are not required to be applied to the payment or
prepayment of the Biltmore Loan as described above, then the beneficiary is
obligated to make all casualty and condemnation proceeds (other than business
interruption insurance proceeds) available to the Biltmore Borrower or the
applicable tenant for payment or reimbursement of the costs and expenses of
the repair, restoration and rebuilding of the Biltmore Property if, (i) at
the time of the loss or damage or at any time thereafter while the Biltmore
Borrower is holding any portion of the proceeds, there is no continuing Event
of Default, (ii) in the case that the cost of the work exceeds the proceeds,
the Biltmore Borrower, at its option, either deposits with or delivers to the
beneficiary (and promptly following any such deposit or delivery, provides
written notice of same to the Rating Agencies) (A) cash and cash equivalents,
(B) a letter or letters of credit in an amount equal to the estimated cost of
the work less the proceeds available or (C) such other evidence of the
Biltmore Borrower's ability to
S-178
<PAGE>
meet such excess costs as is reasonably satisfactory to the beneficiary and
the Rating Agencies, and (iii) beneficiary shall be furnished with an
estimate of the cost of the work accompanied by an independent architect's
certification as to the costs and appropriate plans and specifications of the
work.
Approval Rights. Under the Biltmore Loan, for each calendar year
commencing after the Biltmore Effective Maturity Date the Biltmore Borrower
is required to submit to the beneficiary, for the beneficiary's written
approval, an annual budget not later than 60 days prior to the commencement
of such calendar year. In the event that the Biltmore Borrower must incur an
extraordinary operating expense or a capital expense not set forth in the
approved annual budget, it is required promptly to deliver to the
beneficiary, for the beneficiary's approval, a reasonably detailed
explanation of such proposed expense.
Financial Reporting. The Biltmore Borrower is required to furnish to the
beneficiary: (a) annually within 100 days after the end of each calendar
year, a copy of its year-end financial statement audited by an independent
accountant reasonably acceptable to the beneficiary in accordance with the
Uniform System of Account for Hotels (Eighth, or most recent Edition); (b)
quarterly within 45 days after each calendar quarter (except the fourth
quarter of any calendar year), quarterly unaudited financial statements
prepared in accordance with the Uniform System of Account for Hotels (Eighth,
or most recent, Edition); (c) annually within 45 days after each calendar
year, a summary of all capital expenditures made at the Biltmore Property
during the prior 12-month period; and (d) as soon as practicable, such
further information regarding the Biltmore Property as the beneficiary or the
Rating Agencies may reasonably request in writing. Concurrently with delivery
of the financial statements to the beneficiary, the Biltmore Borrower is
required to provide a copy of the foregoing items to the Rating Agencies. The
Biltmore Borrower is also required to provide the beneficiary with updated
information concerning the tax and insurance costs for the next succeeding
calendar year prior to the termination of each calendar year.
S-179
<PAGE>
RITZ-CARLTON HOTEL, ST. LOUIS, MO
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$41,850,000 $41,850,000
ORIGINATION DATE: NOVEMBER 24, 1997
ANTICIPATED REPAYMENT
DATE ("ARD"): DECEMBER 1, 2007
MATURITY DATE: DECEMBER 1, 2022
INTEREST RATE: 7.188%
AMORTIZATION: 25 YEARS
HYPERAMORTIZATION: N/A
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: THE LOAN IS NOT PREPAYABLE PRIOR TO THE DATE
THREE MONTHS PRIOR TO THE ARD. SUBSEQUENT TO
THIS DATE, PREPAYMENT IN FULL, BUT NOT IN
PART, IS PERMITTED WITHOUT PENALTY. SUBSEQUENT
TO THE THIRD ANNIVERSARY OF THE ORIGINATION
DATE OR THE SECOND ANNIVERSARY OF
SECURITIZATION OF THE LOAN, DEFEASANCE WILL BE
PERMITTED UPON THE DELIVERY OF APPROPRIATE
DEFEASANCE COLLATERAL.
THE BORROWER: THE BORROWING ENTITY, HEF 1 -- STL NO.1, LLC,
AS WELL AS ITS GENERAL PARTNER, IS ORGANIZED
AS A SPECIAL-PURPOSE, BANKRUPTCY-REMOTE
ENTITY.
LIEN POSITION: FIRST MORTGAGE LIEN ON THE RITZ-CARLTON HOTEL,
ST. LOUIS HOTEL IN CLAYTON, MO.
CROSS-COLLATERALIZATION/
DEFAULT: NO
PROPERTY INFORMATION
PROPERTY TYPE: HOTEL
OCCUPANCY: 1995 1996 TTM
---- ---- ---
74.3% 74.0% 75.6%
ADR: $136.49 $145.13 $149.72
RevPAR: $101.41 $107.40 $113.19
Rooms: 301
Year Built: 1990
The Collateral: The Ritz-Carlton-St. Louis Hotel, a
full-service hotel in Clayton, MO. Property
Management: The Ritz-Carlton Hotel Company, L.L.C.
1996 Net
Operating Income: $5,054,393
Underwritten
Cashflow: $5,879,133
Appraised Value: $60,000,000
Appraised By: PKF Consulting
Appraisal Date: October 1, 1997
LTV as of 12/1/97: 69.8%
Annual Debt
Service 3,643,604
DSC: 1.61x
Loan/Room as of 12/1/97: $139,037
S-180
<PAGE>
RITZ-CARLTON HOTEL, ST. LOUIS LOAN: THE BORROWER; THE PROPERTY
The Loan. The loan (the "Ritz Loan") was originated by Midland Loan
Services, L.P. on November 24, 1997 (the "Closing Date") and acquired
simultaneously therewith by Merrill Lynch Mortgage Capital Inc. The Ritz Loan
had a principal balance at origination of $41,850,000. It is evidenced by a
deed of trust note (the "Ritz Note") and secured by, among other things, a
deed of trust (the "Ritz Deed of Trust") encumbering a hotel in St. Louis,
Missouri commonly known as the Ritz-Carlton Hotel, St. Louis, Missouri (the
"Ritz Property").
The Borrower. The borrower under the Ritz Loan is HEF 1-STL No. 1, L.L.C.,
a special-purpose Missouri limited liability company (the "Ritz Borrower").
The operating agreement of the Ritz Borrower provides that its purpose and
business is limited to owning, managing, developing, operating, maintaining,
financing and otherwise using, and as necessary improving, the Ritz Property.
The Ritz Borrower owns no material asset other than the Ritz Property and
related interests. The general partner of the Ritz Borrower is STL SPE Corp.,
a special-purpose Delaware corporation.
The Property. The Ritz Property is comprised of all of the Ritz Borrower's
right, title and interest in and to the fee simple estate in the Ritz
Property. The Ritz-Carlton Hotel, St. Louis, Missouri is a multi-story,
301-room luxury hotel situated on approximately three acres in Clayton,
Missouri. It has been rated "Four A, Four Diamond" by the American Automobile
Association and has also received Mobil Travel Guide's 4 Star Award. The
hotel features 29,000 square feet of meeting and banquet spaces, two
restaurants, a fully staffed health club, a cigar club, an indoor swimming
pool and a sauna. The Ritz-Carlton Hotel, St. Louis was built in 1990. For
the twelve month period ended September 30, 1997, the average occupancy rate
for the Ritz-Carlton Hotel, St. Louis was approximately 76.4% and the average
daily room rate (the "ADR") was approximately $150.17. As of October 20,
1997, the appraised value of the Ritz-Carlton Hotel, St. Louis was
approximately $60,000,000.
The main hotel tower is a 17-story structure plus basement, making for a
total of 18 levels. Located behind the hotel tower is a two-level structure
housing the majority of the banquet and meeting facilities. Attached to the
rear of this structure is a seven-level parking garage with spaces for 745
cars. The main hotel tower is oriented with its entry facing west to
Carondelet Plaza and the central area of Clayton. The building was designed
so that all guest rooms face outside, either west or east, with balconies.
Location/Access. The Ritz-Carlton Hotel is located at 100 Carondelet
Plaza, at the eastern end of Carondelet Avenue near Forsyth Boulevard, in the
central business area of suburban Clayton, St. Louis, St. Louis County,
Missouri. The site is bounded to the west by Carondelet Plaza, to the east by
an adjoining vacant parcel, to the north by the continuation of Carondelet
Plaza, and to the south by Forest Park Parkway. The hotel has frontage along
all aforementioned streets and is visible to passing traffic in all
directions.
The Ritz-Carlton, St. Louis has general access to the neighborhood by
local expressways, such as Forest Park Parkway, and freeways, including
Interstates 64 and 170. Once reaching Clayton, the hotel site is accessible
only from Carondelet Avenue and Plaza, a four lane city street, which is
reached by off ramp from the Forest Park Parkway or from Forsyth Boulevard.
The Ritz-Carlton, St. Louis enjoys excellent visibility from the
surrounding area due to the height of the structure and its distinctive
architecture. The area immediately surrounding the subject is known as the
Plaza in Clayton and includes landscaped, vacant lots held for future
development. To the north of the subject property are commercial businesses,
such as Selkirks Department Store, and residential homes. East of the subject
is residential with a view to downtown St. Louis. To the west is the central
business district of Clayton including major offices such as the Mercantile
Bank. Southward, across Forest Park Parkway, are more residential homes and
an elevated walkway connecting the south side of the subject property across
Forest Park Parkway with the residential area to the south of the busy
expressway.
Market Overview. According to an appraisal prepared by PFK Consulting, the
St. Louis market offers more than 21,000 hotel rooms, of which some 5,300 are
located downtown. For year-end 1996, the composite average occupancy of the
overall St. Louis Metropolitan Area hotel market was 68.4 percent as reported
by PKF Consulting's St. Louis Trends in the Hotel Industry. The corresponding
year-end
S-181
<PAGE>
1996 ADR was $76.35. For the seven months ending July 1997, Trends reports an
average occupancy of 66.2 percent, decreased from 69.3 percent occupancy the
same period last year. On the other hand, July year-to-date ADR is up 10.3
percent from 1996, from $76.99 to $84.91. PKF Consulting's recent interviews
with area hoteliers reveal that many hotel properties are making an effort to
maintain occupancy levels while focusing growth efforts in the ADR sector.
After a period of occupancy growth from 1994 to 1996, overall market
occupancy is estimated to drop to 64.4 percent as of year-end 1997 and is
further projected to stabilize at 64.0 percent as of year-end 1998. This
decline in occupancy is not attributed to a decline in demand for hotel
accommodations, but is a result of an increase in the supply of hotel
accommodations in the form of new construction of limited service and
extended stay hotels in suburban regions of St. Louis.
In 1996 and 1997, six new limited-service properties and three extended
stay properties opened in the St. Louis region. At the present time, five
additional extended stay hotels are either under construction or are close to
opening. Further, we understand that three additional extended stay projects
are being considered to start construction in 1998. The limited service
hotels are characterized by Courtyard by Marriott, Hampton Inn, Holiday Inn
Express, and Ramada Limited-products. The extended stay properties are
characterized by Extended Stay America and other budget-oriented products. At
an average size of 100 to 120 rooms, the 17 new properties identified
represent approximately 2,000 new rooms being added to the metropolitan
market supply, or approximately a 9.5 percent increase in supply.
Competition. In a market characterized by good, but ordinary hotels, the
Ritz Property stands out as the quality and service leader. Operated in
accordance with the standards established by the Ritz Manager, the
Ritz-Carlton, St. Louis has superior day-to-day operational standards to any
other hotel in the St. Louis area.
The hotel is located in the upscale suburb of Clayton, halfway between
downtown St. Louis and the Lambert St. Louis International Airport. Clayton
is recognized as one of the leading office and residential areas of
metropolitan St. Louis, and it is home to the corporate headquarters of
several Fortune 500 companies.
As a result of the physical plant, service standards, and location of the
Ritz-Carlton, St. Louis, the Ritz-Carlton, St. Louis has no direct
competitors.
Environmental Report. A Phase I environmental site assessment was
performed dated October 17, 1997 on the Ritz-Carlton, St. Louis Hotel. The
Phase I environmental site assessment did not reveal any environmental
liability that the Depositor believes would have a material adverse effect on
the borrower's business, assets or results of operations taken as a whole.
Nevertheless, there can be no assurance that all environmental conditions and
risks were identified in such environmental assessment.
Engineering Report. A Hotel Condition Report was completed on the
Ritz-Carlton, St. Louis Hotel on October 21, 1997 by a third party due
diligence firm. The Hotel Condition Report concluded that the Ritz-Carlton,
St. Louis Hotel was in generally good condition and identified no deferred
maintenance requirements.
Property Management. The Ritz-Carlton Hotel, St. Louis is operated by The
Ritz-Carlton Hotel Company (the "Manager"), a Georgia corporation, pursuant
to a certain hotel management agreement dated as of November 16, 1988, by and
between Ritz Borrower and Manager (the "Ritz Management Agreement"). The
Manager's initial term expires on November 16, 2013, but the Manager has a
right to extend the term of the Ritz Management Agreement for four additional
ten year terms if, not more than one year and not less than 240 days prior to
the expiration of the initial operating term or any previously extended
operating term, as the case may be, Manager has given written notice to Ritz
Borrower of Manager's election to so extend.
Under the Ritz Management Agreement, the Manager is entitled to a base
management fee of 5% of gross room revenue plus 2% of other hotel revenue.
The Ritz Management Agreement also provides for the payment of an annual
incentive fee calculated as a percentage of gross operating profits, subject
S-182
<PAGE>
to certain adjustments and a limit based upon certain relationships to net
operating income and other performance criteria. For the years ending
December 31, 1996 and 1995, the Manager was paid a total of $1,515,763 and
$932,676, respectively, in base management fees and incentive fees.
Pursuant to the Ritz Management Agreement, bank accounts have been
established and maintained by the Manager in connection with the operation of
the Ritz Property, and all funds derived from the operation of the Ritz
Property have been and shall be deposited therein. The Ritz Borrower and the
Manager have agreed to establish a segregated account for the replacement and
renewal of furniture, fixtures and equipment (the "Ritz FF&E Reserve
Account") into which Manager shall fund, on a monthly basis, an amount equal
to 4% of monthly operating income. The Ritz Borrower and the Manager have
agreed to establish a segregated account for the payment of interest and
principal due on the Ritz Note (the "Ritz Interest Escrow Account") into
which Manager shall deposit, on a monthly basis, the principal and interest
due on the Ritz Note on the next Payment Date. The Ritz Borrower and the
Manager have agreed to establish a segregated account for the payment of tax
and insurance premiums (the "Ritz Deed of Trust Escrow Account") into which
the Manager shall deposit, on a monthly basis, one twelfth of the annual
insurance premiums for insurance being maintained by Ritz Borrower and one
twelfth of the annual taxes and assessments which shall become due and
payable. The Ritz FF&E Reserve Account, the Ritz Interest Escrow Account and
the Ritz Deed of Trust Escrow Account are herein collectively referred to as
the "Ritz Accounts".
Pursuant to a subordination, nondisturbance and attornment agreement (the
"Ritz Subordination Agreement") executed with respect to the Ritz Management
Agreement by the Manager and Ritz Borrower in favor of the holder of the Ritz
Loan (the "beneficiary"), the Manager has agreed (i) to subordinate its
rights under the Ritz Management Agreement to the lien of the Ritz Deed of
Trust; (ii) to make all payments to the Agent Bank (as hereinafter defined)
which otherwise would have been payable to Ritz Borrower as more particularly
set forth in the Cash Collateral Agreement (as defined under "Lockbox and
Reserves"); (iii) to make all deposits of funds into escrow for the payment
of taxes and insurance and reserve deposits for replacements or improvements
to the Property provided sufficient funds shall be available for Manager to
operate the Ritz Property as set forth in the Ritz Management Agreement and
to assign all accounts and funds in such accounts to beneficiary or its
designee to secure payment of the obligations of Ritz Borrower under the Ritz
Deed of Trust; (iv) upon foreclosure or other enforcement proceedings, to
attorn to and be bound to a transferee of Ritz Borrower with the same force
and effect as if the transferee was the "owner" under the Ritz Management
Agreement; (v) to limit the obligations of any transferee succeeding to the
interest of the Ritz Borrower under the Ritz Management Agreement such that
transferee shall (a) be subject only to the obligations arising during such
period during which such transferee was the actual "owner" under the Ritz
Management Agreement, (b) not be subject to any offset or counterclaim which
Manager might otherwise be entitled to assert against the transferee on
account of any obligation of the Ritz Borrower, and (c) not be bound by any
previous modification of the Ritz Management Agreement made without
beneficiary's prior written consent; and (vi) to give prompt written notice
to beneficiary of any default by Ritz Borrower under the Ritz Management
Agreement, and termination thereof shall not be effective unless beneficiary
has received notice thereof and failed to cure such default within the
requisite cure period. The Ritz Subordination Agreement provides that, if a
nonmonetary default is of such a nature that it cannot be cured by
beneficiary, then beneficiary may, at its option, immediately succeed to the
interest of Ritz Borrower under the Ritz Management Agreement. If the Ritz
Management Agreement is otherwise terminated by reason of Ritz Borrower's
default, Ritz Manager and beneficiary shall each be entitled to cause the
other to enter into a new management agreement upon the same terms set forth
in the Ritz Management Agreement.
S-183
<PAGE>
UNDERWRITTEN CASHFLOW -- RITZ-CARLTON HOTEL, ST. LOUIS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------- --------------
INCOME:
Room Department ................. $11,833,141 $12,604,243
Food & Beverage Department ..... 11,779,103 12,947,609
Other Department ................ 1,650,442 1,920,210
------------- --------------
GROSS INCOME:..................... $25,262,686 $27,472,062
============= ==============
ALLOCATED EXPENSES
Room Department ................. 2,995,056 3,292,485
Food & Beverage Department ..... 7,987,434 8,802,017
Other Department ................ 872,340 871,532
------------- --------------
TOTAL ALLOCATED EXPENSES.......... 11,854,830 12,966,034
============= ==============
DEPARTMENT PROFITS:............... 13,407,856 $14,506,028
============= ==============
UNALLOCATED EXPENSES
Operating Expenses
Administration .................. 1,641,447 1,695,152
Maintenance & Repairs ........... 816,806 822,189
Energy .......................... 715,066 680,306
Management Fee .................. 1,515,763 1,715,261
Marketing & Corp. Service Charge 1,649,324 1,628,207
Fixed Expenses
Taxes and Insurance ............. 943,269 895,942
Rent & Miscellaneous ............ 61,281 90,956
Reserve FF&E .................... 1,010,507 1,098,882
------------- --------------
TOTAL UNALLOCATED EXPENSES........ $ 8,353,463 $ 8,626,896
============= ==============
NET OPERATING INCOME.............. $ 5,054,393 $ 5,879,133
============= ==============
NET CASH FLOW..................... $ 5,054,393 $ 5,879,133
============= ==============
Average Occupancy................. 74.0% 75.6%
Average Room Rate ................ $ 145.13 $ 150.17
Debt Service Coverage Ratio ...... 1.61x
Loan to Value..................... 69.8%
S-184
<PAGE>
RITZ-CARLTON HOTEL, ST. LOUIS: THE LOAN
Security. The Ritz Loan is a nonrecourse loan, secured by a mortgage lien
on the Ritz Borrower's fee simple interest in the Ritz Property, and certain
other collateral relating thereto (including an assignment of leases, rents
and security deposits, an assignment of certain agreements and the funds in
certain accounts) (collectively with all other security documents referenced
herein, the "Loan Documents"). The beneficiary is a named insured under the
title insurance policy which insures, among other things, that the Ritz Deed
of Trust constitutes a valid and enforceable first lien on the Ritz Property,
subject to certain exceptions and exclusions from coverage set forth therein.
Such insurance policy, the Ritz Note, the Ritz Deed of Trust and all other
agreements and documents evidencing and securing the Ritz Loan will be
assigned to the Trust Fund.
Payment Terms. The Ritz Loan matures on December 1, 2022 ("the Ritz
Maturity Date") and bears interest (a) at a fixed rate per annum equal to
7.188% (the "Ritz Initial Interest Rate") through but not including December
1, 2007 (the "Ritz Effective Maturity Date") and (b) from and including the
Ritz Effective Maturity Date through and including the Ritz Maturity Date, at
a fixed rate per annum equal to the greater of (i) the Ritz Initial Interest
Rate plus 2% or (ii) the Ritz Treasury Rate plus 2%. The "Ritz Treasury Rate"
means the yield, as of the Ritz Effective Maturity Date, calculated by the
linear interpolation of the yields of noncallable United States Treasury
obligations with terms of ten (10) years, as determined by Ritz Borrower on
the basis of Federal Reserve Statistical Release H.15 Selected Insurance
rates or such other recognized source of financial market information
selected by Ritz-Carlton Hotel Ritz, following consultation with beneficiary,
for one week prior to the Ritz Effective Maturity Date. Any interest accrued
after the Ritz Effective Maturity Date at the excess of the Ritz Revised
Interest Rate over the Ritz Initial Interest Rate shall be accrued and added
to the outstanding indebtedness under the Ritz Loan and shall, to the extent
permitted by applicable law, earn interest at the Ritz Revised Interest Rate
(such accrued interest and interest thereon, the "Ritz Accrued Interest").
Interest on the Ritz Loan is calculated on the basis of a 360-day year and
the actual number of days elapsed in the applicable period.
The payment date for the Ritz Loan is the first business day of each month
(each, a "Payment Date"), with no grace period for a default in the payment
of scheduled principal or interest. Commencing on January 1, 1998, the Ritz
Loan requires 300 equal monthly payments of principal and interest of
$303,633.69 (each, a "Ritz Debt Service Payment"). Each Ritz Debt Service
Payment, due and payable on each Payment Date, shall be applied first to the
interest at the Ritz Initial Interest Rate and the remainder thereof to the
reduction of principal. In the event of a default in payments, interest will
accumulate thereon at the applicable interest rate plus five percent (5%) per
annum (the "Default Rate"). On the Ritz Loan Maturity Date, payment of the
remaining unpaid balance of principal, if any, together with all interest
accrued thereon and all other sums payable under the Note or under the Loan
Documents is required.
Commencing with the first Payment Date after the Ritz Effective Maturity
Date, and continuing on each Payment Date thereafter, the Ritz Borrower is
required to apply 100% of rents and other revenues from the Ritz Property to
the following items in the following order of priority: (a) to payment of
interest accruing at the Default Rate and late payment charges, if any; (b)
to payment of required monthly escrows of taxes and insurance premiums; (c)
to payment of the Ritz Monthly Debt Service Payments; (d) to payment of
monthly cash expenses pursuant to the annual budget approved by the
beneficiary; (e) to payment of extraordinary, unbudgeted operating or capital
expenses approved by the beneficiary, if any; (f) to payments to be applied
against the outstanding principal of the loan until such principal amount is
paid in full; (g) to payments of Ritz Accrued Interest; and (h) to payments
of any other amounts due under the Loan Documents. Any excess amounts shall
be paid to the Ritz Borrower.
Event of Default. The occurrence of any of the following constitutes an
"Event of Default" under the Ritz Deed of Trust: (a) failure to make any
payment of interest or principal on the Ritz Note when due, or failure to pay
the principal balance of the Ritz Note when due; (b) failure to pay any other
amount payable pursuant to the Ritz Deed of Trust or Note when due and
payable, with such failure continuing for 10 business days after beneficiary
delivers written notice thereof to the Ritz Borrower; (c) failure to
S-185
<PAGE>
keep in force the insurance required under the Ritz Deed of Trust to be
maintained or failure to comply with any other covenant related to insurance
requirements, with such failure continuing for 5 business days after
beneficiary delivers written notice thereof to the Ritz Borrower; (d) failure
to comply with certain Ritz Deed of Trust covenants which require the Ritz
Borrower to keep the Ritz Property free of liens and encumbrances (with such
default continuing for 5 business days after beneficiary delivers written
notice thereof to the Ritz Borrower), and those which, with limited
exceptions, prohibit the sale of the Ritz Property and transfers of interests
in the Ritz Borrower; (e) any attempt by the Ritz Borrower to assign its
rights under the Ritz Deed of Trust; (f) any other default in the performance
or payment, or breach, of any material covenant, warranty, representation or
agreement set forth in the documents which evidence the Ritz Loan, with such
default continuing for 30 business days, and any applicable extension period,
after beneficiary delivers written notice thereof to the Ritz Borrower; and
(g) the occurrence of certain bankruptcy events.
If the Ritz Borrower defaults in the payment of any Ritz Debt Service
Payment on the Payment Date then the Ritz Borrower shall pay to beneficiary a
late payment charge in an amount equal to five percent (5%) of the amount of
the installment not paid. If the Ritz Borrower defaults in the payment of any
Ritz Debt Service Payment on the Payment Date due, or defaults in any other
manner so as to constitute an Event of Default, then beneficiary at its
option and without further notice to the Ritz Borrower may declare the entire
unpaid amount of principal with interest at the Default Rate together with
all other sums due, if any, due and payable immediately.
Prepayment. Voluntary prepayment of the principal of the Ritz Note is
prohibited at any time prior to the 90-day period prior to the Ritz Effective
Maturity Date, at which time the Ritz Borrower may prepay the Note in whole
or in part on any Payment Date without payment of any prepayment premium.
Payments made following an Event of Default under the Ritz Deed of Trust
or an acceleration by the beneficiary shall be deemed to be voluntary and
shall be subject to a prepayment premium (the "Ritz Yield Maintenance
Premium") equal to the product of (i) a fraction whose numerator is an amount
equal to the portion of the principal balance being prepaid and whose
denominator is the entire outstanding principal balance on the date of such
prepayment, multiplied by (ii) an amount equal to the remainder obtained by
subtracting (x) an amount equal to the entire outstanding principle balance
as of the date of such prepayment from (y) the present value as of the date
of such prepayment of the remaining scheduled payments of principle and
interest (including any final installment of principle payment on the Ritz
Effective Maturity Date) determined by discounting such payments at a
discount rate equal to the Ritz Discount Rate. The "Ritz Discount Rate" means
the rate which, when compounded monthly, equals the yield, as of the date of
prepayment, calculated by linear interpolation of the yields of noncallable
U.S. Treasury obligations with terms (one longer and one shorter) most nearly
approximating the period from the date of the prepayment to the Ritz
Effective Maturity Date.
No Ritz Yield Maintenance Premium or other premium or penalty is required
to be paid in connection with any prepayment resulting from the application
of insurance or condemnation proceeds to repayment of the Ritz Loan in
accordance with the requirements of the Ritz Deed of Trust.
Defeasance. For the purposes of this section, "Defeasance Collateral"
shall mean obligations or securities not subject to prepayment, call or early
redemption which are direct obligations of, or obligations fully guaranteed
as to timely payment by, the United States of America or any agency or
instrumentality of the United States of America, or the obligations of which
are backed by the full faith and credit of the United States of America, the
ownership of which will not cause the beneficiary to be an investment company
under the Investment Company Act of 1940, included as collateral under the
Ritz Loan. For the purposes of this section, the "Defeasance Collateral
Requirement" shall mean an amount sufficient to pay 100% of the loan amount,
and sufficient to pay scheduled interest and principal payments on the Ritz
Note through and including the Ritz Effective Maturity Date together with the
outstanding principal balance of the Ritz Note as of such date.
The Ritz Borrower shall be entitled to defease the Ritz Property on any
Payment Date from and after the earlier of (x) the third anniversary of the
Closing Date and (y) the second anniversary of the Delivery Date, in
connection with the delivery of Defeasance Collateral, provided that: (i) the
Ritz Borrower shall
S-186
<PAGE>
have delivered Defeasance Collateral in such amount as shall satisfy the
Defeasance Collateral Requirement with respect to the Ritz Property; (ii) the
Ritz Borrower shall have granted a first priority security interest in the
Defeasance Collateral and all proceeds; (iii) the Ritz Borrower shall have
delivered a certificate of an officer of the Ritz Borrower (an "Officer's
Certificate") dated the day of delivery of the Defeasance Collateral (a)
setting forth the aggregate face amount or the unpaid principal amount,
interest rate and maturity date of all the Defeasance Collateral, accompanied
with a copy of the transaction journal, if any, and (b) stating in effect
that the Ritz Borrower owns the Defeasance Collateral free and clear of any
encumbrances, that it consists solely of eligible investments as defined in
the Deed of Trust, that it satisfies the Defeasance Collateral Requirement,
and that such defeasance shall not give rise to an Event of Default; (iv) the
Ritz Borrower shall have delivered to beneficiary the opinions of counsel
with respect to beneficiary's interest in the Defeasance Collateral, as well
as a tax opinion and a nondisqualification opinion required under the Ritz
Deed of Trust upon a defeasance of the lien; (v) beneficiary shall have
received from the Rating Agencies written affirmation that the credit ratings
of the securities secured in part by a pledge of the Ritz Note as of the date
of such defeasance will not be qualified, downgraded or withdrawn as a result
of such defeasance.
Lockbox and Reserves. Pursuant to the terms of a cash collateral account
security, pledge and assignment agreement (the "Ritz Cash Collateral
Agreement"), the Ritz Borrower has established in the name of LaSalle
National Bank (the "Ritz Agent"), as agent for the beneficiary, as secured
party, a cash collateral account (the "Ritz Operating Account") with such
bank. The Ritz Borrower has delivered irrevocable written instructions to the
Manager directing the Manager to deposit by wire transfer to the Operating
Account, all amounts due and payable to Ritz Borrower, pursuant to the Ritz
Management Agreement or otherwise, deriving from the Ritz Property.
Provided that (i) no Event of Default shall have occurred and be
continuing under the Loan Documents, (ii) Ritz Borrower shall have delivered
to Ritz Agent and beneficiary a certificate of an officer of Borrower's
managing member certifying that (A) no Event of Default has occurred and is
then continuing and (B) there are no trade payables more than 60 days past
due, unless the same are being contested by Ritz Borrower in good faith, and
(C) Ritz Borrower shall have delivered to Ritz Agent to transfer from the
Operating Account to the Deed of Trust Escrow Account, an amount equal to
125% of any amounts being contested in connection with any payables exceeding
$250,000 in the aggregate, and (iii) all amounts required to have been
reserved by Manager have been so reserved, then Borrower may, at any time,
instruct Agent Bank to transfer amounts from the Operating Account to such
account or accounts of Ritz Borrower as Ritz Borrower may direct.
In accordance with the Ritz Deed of Trust and pursuant to that certain
letter agreement dated as of November 24, 1997, between Ritz Borrower and the
Manager, Ritz Borrower and the Manager have established three (3) segregated
accounts with Nationsbank, NA, specifically, the Ritz Deed of Trust Escrow
Account, the Ritz FF&E Reserve Account and the Ritz Interest Reserve Account.
(See "--Property Management").
Pursuant to the terms of the Ritz Deed of Trust, Ritz Borrower has pledged
to beneficiary a security interest in the Accounts. Pursuant to the Ritz Cash
Collateral Agreement, Ritz Borrower has pledged to beneficiary a security
interest in the Operating Account.
Transfer of Properties and Interest in Borrower; Encumbrances; Other
Debt. The Ritz Borrower is generally prohibited from transferring or
encumbering the Ritz Property. The Ritz Borrower has the right to sell the
whole of its interest in the Ritz Property provided that (a) the Ritz
Borrower shall have caused to be delivered to the beneficiary a written
affirmation from applicable rating agencies that the securities secured by a
pledge of the Ritz Note shall not be qualified, downgraded or withdrawn as a
result of such sale, (b) the purchaser is a single purpose entity controlled
by a Permitted Owner (as defined below), and (c) the Ritz Property shall be
managed by a Qualifying Manager (as defined below). A "Qualifying Manager"
means a manager which is (1) an approved hotel operating company which
manages at least five First Class hotels with a minimum of 2500 rooms in the
aggregate, (2) the Manager or its affiliate, or (3) The Ritz-Carlton Hotel
Company, L.L.C. or its affiliate. A "Permitted Owner" means (1) any entity as
to which a rating agency confirmation would be issued, (2) Maritz, Wolff &
Co., Hotel Equity Fund 1,
S-187
<PAGE>
L.P., Hotel Capital Partners, L.P. or any of their affiliates, (3) any person
with hotel assets of at least $100,000,000 exclusive of the Ritz Property,
and (4) any pension fund or separate account or investment vehicle
established by such entity or any publicly traded real estate investment
trust or corporation which owns hotel assets of at least $100,000,000
exclusive of the Ritz Property.
The Ritz Borrower is permitted to transfer or dispose of building
equipment which is being replaced or which is no longer necessary in
connection with the operation of the Ritz Property provided that such
transfer or disposal will not materially adversely affect the value of the
Ritz Property taken as a whole. The Ritz Borrower may, (provided that no such
transfer shall materially impair the utility or operation of the Ritz
Property taken as a whole) without the beneficiary's consent: (i) make
immaterial transfers of portions of the Ritz Property to governmental
authorities for dedication or public use or portions of thereof to third
parties for the purpose of erecting and operating additional structures whose
use is integrated with the use of the Ritz Property and (ii) grant easements,
restrictions, covenants, reservations and rights of way in the ordinary
course of business for utilities.
With limited exceptions, the Ritz Deed of Trust prohibits the transfer of
any interest in the Ritz Borrower without the prior written consent of the
beneficiary. The beneficiary's consent is not required for a transfer or
direct or indirect beneficial interests in the Ritz Borrower provided that:
(i) after giving effect to such transfer, (A) in the case of a transfer which
results in a 49% or greater change in beneficial ownership of the Ritz
Borrower to a single beneficial owner, or any transfer of the interest of the
general partner, a written confirmation from each of the Rating Agencies
shall be delivered to beneficiary that such Rating Agencies will not
downgrade, qualify or withdraw the then current ratings of the securities
secured by a pledge of the Ritz Note as a result of such transfer, and (B)
(1) the Ritz Borrower remains a single purpose entity, (2) the Ritz Borrower
is controlled by a Permitted Owner, (3) any transferee of such (x) direct
interest in the Ritz Borrower or (y) indirect interest in the Ritz Borrower
if such transferee is to own any general partnership interest in the entity
which owns any general partnership interest in the Ritz Borrower, shall be a
single purpose entity and (4) a Qualifying Manager manages the Ritz Property,
and (ii) no Event of Default has occurred and is continuing. If 10% or more
of direct beneficial interests in the Ritz Borrower are transferred, or if
any transfer shall result in any one person or group of affiliates acquiring
more than a 49% interest or shall result in any transfer of the General
Partner's interest, the Ritz Borrower shall deliver to the rating Agencies
and beneficiary (a) a non-consolidation opinion of counsel and (b) an
Officer's Certificate certifying that such transfer is not an Event of
Default.
The Ritz Borrower is not permitted to incur any additional indebtedness
other than: (i) the Ritz Note and the other obligations, indebtedness and
liabilities provided for in any Loan Document evidencing or securing the Ritz
Loan; (ii) unsecured indebtedness for trade payables, provided that such
amounts are paid within 60 days of the date incurred unless the Ritz Borrower
is in good faith contesting its obligation to pay such indebtedness in a
manner satisfactory to the beneficiary; (iii) unsecured indebtedness not to
exceed 3% of the aggregate amount of the Ritz Loan, provided that such
indebtedness is subordinated in all respects to the Ritz Loan and the
provisions relating thereto be satisfactory to beneficiary; and (iv) amounts
loaned by the Manager to the Ritz Borrower as "operator loans," but only to
the extent provided for in the Ritz Management Agreement.
Insurance. The Ritz Borrower is required to maintain for the Ritz Property
(a) loss and damage by fire and all other casualties on or to the
improvements, the building equipment and any personal property as are
included in the form of casualty insurance commonly referred to as "extended
coverage" (including without limitation, windstorm, explosion and such other
risks as are typically insured against by owners of like properties in the
St. Louis area, including earthquake coverage to the extent available at
commercially reasonable extent customarily obtained for similar properties
operated by hotel managers in the St. Louis area) in no event less than 100%
of full replacement cost and in no event less than the amount required to
prevent the Ritz Borrower from becoming a co-insurer within the terms of the
applicable policies, (b) comprehensive public liability insurance on an
"occurrence basis" against claims for personal injury, including, without
limitation, bodily injury, death or property damage occurring on, in or about
the Ritz Property with a combined single limit of not less than $2,000,000
per occurrence and with an aggregate limit of not less than $23,000,000, or
such greater amounts as may from time to time be required by institutional
lenders on similar loans secured by properties similar to the Ritz Property,
(c)
S-188
<PAGE>
business interruption and/or "loss of rental value" insurance to cover the
loss of at least 24 months income, (d) flood insurance, if any improvement on
the Ritz Property is located within an area designated as "flood prone" or a
"special flood hazard area", (e) broad-form boiler and machinery insurance
and insurance against loss of occupancy or use arising from any related
breakdown in such amounts as are generally available at a commercially
reasonable premium and are generally required by institutional lenders for
properties comparable to the Ritz Property, (f) during the performance of any
material construction or renovations on or about the Ritz Property, broad
form builder's risk insurance on an all-risk, completed value basis, (g)
statutory workers' compensation insurance, and (h) at the beneficiary's
reasonable request, such other insurance against loss or damage of the kind
customarily insured against and in such amounts as are generally required by
institutional lenders for comparable properties.
Any such insurance may be effected under a blanket policy so long as any
such blanket policy shall specify, except in the case of public liability
insurance, the portion of the total coverage of such policy that is allocated
to the Ritz Property and any sublimate in such blanket policy applicable to
the Ritz Property, which amounts may not be less than the amounts required
pursuant to, and which must in any case comply in all other respects with the
requirements of, the Ritz Loan. All insurance policies, with the exception of
workers' compensation, are required to name the beneficiary as an additional
named insured, to provide that all proceeds (except with respect to proceeds
of general liability and workers' compensation insurance) be payable to the
beneficiary except as described below under "--Condemnation and Casualty" and
to contain: (i) an endorsement naming the beneficiary (and the trustees) as
additional insureds or loss payees, as applicable as their respective
interests shall appear; (ii) an endorsement providing that no policy shall be
impaired or invalidated by virtue of any act, failure to act, negligence of,
or violation of declarations, warranties or conditions contained in such
policy by Ritz Borrower, beneficiary or any of other named insured,
additional insured or loss payee, except for willful misconduct of the
beneficiary knowingly in violation of the conditions of such policy; (iii) a
provision that such policies shall not be cancelled, terminated or expired
without at least 30 days prior written notice to the beneficiary, in each
instance; (iv) a waiver of subrogation endorsement in favor of beneficiary;
and (v) a provision permitting beneficiary to pay the premiums and continue
any insurance upon failure of the Ritz Borrower to pay the premium when due.
The Ritz Deed of Trust requires the Ritz Borrower to obtain the insurance
describes above from insurance carriers having claims paying abilities rated
(i) not less than "AA" by S&P and its equivalent by any other Rating Agencies
and (ii) not less than "A" by Alfred M. Best Company, Inc. with a financial
size category of not less than X.
Condemnation and Casualty. The Ritz Borrower is required to notify the
beneficiary in writing promptly upon obtaining knowledge of (1) the
institution of any condemnation proceedings, or (2) the occurrence of any
damage or destruction to all or any part of the Ritz Property the restoration
of which is estimated by the Ritz Borrower to cost more than 5% of the Ritz
Loan amount (the "Ritz Threshold Amount"). In addition, the Ritz Borrower is
obligated to include with the notice of any casualty, damage, injury or
condemnation, the restoration of which is estimated by the Ritz Borrower to
cost more than the Ritz Threshold Amount, (or to forward as soon thereafter
as possible) an estimate of the cost of repairing or restoring such casualty,
damage, injury or condemnation in reasonable detail.
Following a casualty or condemnation at the Ritz Property, any insurance
and condemnation proceeds will be applied (after payment of the beneficiary's
reasonable expenses of collection thereof) to amounts due under the Ritz Loan
and the prepayment of the principal amount outstanding thereon, if: (i) the
proceeds equal or exceed the outstanding principal balance of the Ritz Loan,
or (ii) any Event of Default has occurred or is continuing, or (iii) a Ritz
Total Loss (as defined herein) has occurred, or (iv) the work of restoration
cannot be completed before the earlier of (a) the date which is six months
before the Ritz Maturity Date or (b) the date on which the business
interruption insurance expires, or (v) the Ritz Property is not capable of
being restored substantially to its condition prior to the casualty or
condemnation, or (vi) the Ritz Borrower is unable to demonstrate to the
beneficiary's reasonable satisfaction its continuing ability to pay the Ritz
Loan. In the event that proceeds do not exceed the Ritz Threshold Amount,
such proceeds are to be paid directly to Ritz Borrower to be applied to
restoration of the Ritz Property. The Ritz Borrower may settle any insurance
claim with respect to proceeds which do not exceed the Threshold Amount. All
other insurance claims shall be settled by beneficiary.
S-189
<PAGE>
An "Ritz Total Loss" means (x) a casualty, damage or destruction of the
Ritz Property, the cost of restoration of which would exceed 50% of the
outstanding principal balance of the Ritz Loan, or (y) a permanent taking of
25% or more of the hotel guest rooms on the Ritz Property or so much of the
Ritz Property, in either case, such that it would be impracticable, in
beneficiary's reasonable discretion, even after restoration, to operate the
Ritz Property as an economically viable whole.
In the event of (i) a Ritz Total Loss resulting from casualty, damage or
destruction, if either (A) the cost to repair the Ritz Property would exceed
the Ritz Threshold Amount and the restoration of the Ritz Property cannot
reasonably be completed before the date which is the later to occur of the
date of expiration of any business interruption insurance or the date of
expiration of any letter of credit posted in lieu thereof or in addition
thereto and under such circumstances the Ritz Borrower is not required under
any tenant lease to make the proceeds available to restore the Ritz Property
or (B) the beneficiary elects not to make such proceeds available to the Ritz
Borrower for the restoration of the Ritz Property, or (ii) a Ritz Total Loss
resulting from a condemnation, then the Ritz Borrower must prepay the Ritz
Loan to the extent of the casualty or condemnation proceeds received, up to
an amount equal to the outstanding principal thereon (without prepayment
premium or penalty).
If any insurance or condemnation proceeds (other than business
interruption insurance proceeds) are in excess of the Ritz Threshold Amount,
then all such proceeds will be applied as follows: first, toward
reimbursement of the beneficiary's reasonable out-of-pocket costs and
expenses in connection with the recovery and disbursement of such proceeds,
and then, to the prepayment of the principal amount outstanding on the Ritz
Loan, without prepayment premium or penalty, only if: (A)(i) the amount of
such proceeds is equal to or greater than the outstanding principal amount of
the Ritz Note, or (ii) the casualty or condemnation occurs less than 180 days
before the Ritz Maturity Date, or (iii) more than 25% of the hotel guest
rooms on the Ritz Property have been damaged by a casualty or shall have been
taken, or (B) such proceeds are condemnation proceeds received in excess of
the amount needed to restore the Ritz Property after a partial taking by
condemnation, in which case prepayment will be made to the extent of such
unneeded proceeds.
Upon an Event of Default or in the event the proceeds are required to be
paid to beneficiary, any such proceeds paid to beneficiary shall be applied
first toward reimbursement of beneficiary's reasonable costs and expenses
actually incurred in connection with recovery of the proceeds and
disbursement of the proceeds.
In the event that the casualty and condemnation proceeds (other than
business interruption insurance proceeds) are in excess of the Ritz Threshold
Amount and are not required to be applied to the payment or prepayment of the
Ritz Loan as described above, then the beneficiary is obligated to make all
casualty and condemnation proceeds (other than business interruption
insurance proceeds) available to the Ritz Borrower or the applicable tenant
for payment or reimbursement of the costs and expenses of the repair,
restoration and rebuilding of the Ritz Property if, (i) at the time of the
loss or damage or at any time thereafter while the Ritz Borrower is holding
any portion of the proceeds, there is no continuing Event of Default, (ii) in
the case that the cost of the work exceeds the proceeds, the Ritz Borrower,
at its option, either deposits with or delivers to the beneficiary (and
promptly following any such deposit or delivery, provides written notice of
same to the Rating Agencies) (A) cash and cash equivalents, (B) a letter or
letters of credit in an amount equal to the estimated cost of the work less
the proceeds available or (C) such other evidence of the Ritz Borrower's
ability to meet such excess costs as is reasonably satisfactory to the
beneficiary and the Rating Agencies, and (iii) beneficiary shall be furnished
with an estimate of the cost of the work accompanied by an independent
architect's certification as to the costs and appropriate plans and
specifications of the work.
Approval Rights. Under the Ritz Loan, for each calendar year commencing
after the Ritz Effective Maturity Date the Ritz Borrower is required to
submit to the beneficiary, for the beneficiary's written approval, an annual
budget not later than 60 days prior to the commencement of such calendar
year. In the event that the Ritz Borrower must incur an extraordinary
operating expense or a capital expense not set forth in the approved annual
budget, it is required promptly to deliver to the beneficiary, for the
beneficiary's approval, a reasonably detailed explanation of such proposed
expense.
S-190
<PAGE>
Financial Reporting. The Ritz Borrower is required to furnish to the
beneficiary: (a) annually within 100 days after the end of each calendar
year, a copy of its year-end financial statement audited by an independent
accountant reasonably acceptable to the beneficiary in accordance with the
Uniform System of Account for Hotels (Eighth, or most recent Edition); (b)
quarterly within 45 days after each calendar quarter (except the fourth
quarter of any calendar year), quarterly unaudited financial statements
prepared in accordance with the Uniform System of Account for Hotels (Eighth,
or most recent, Edition); (c) annually within 45 days after each calendar
year, a summary of all capital expenditures made at the Ritz Property during
the prior 12-month period; and (d) as soon as practicable, such further
information regarding the Ritz Property as the beneficiary or the Rating
Agencies may reasonably request in writing. Concurrently with delivery of the
financial statements to the beneficiary, the Ritz Borrower is required to
provide a copy of the foregoing items to the Rating Agencies. The Ritz
Borrower is also required to provide the beneficiary with updated information
concerning the tax and insurance costs for the next succeeding calendar year
prior to the termination of each calendar year.
S-191
<PAGE>
FOUR SEASONS HOTEL, AUSTIN, TX
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$45,150,000 $45,150,000
ORIGINATION DATE: NOVEMBER 24, 1997
ANTICIPATED REPAYMENT
DATE ("ARD"): DECEMBER 1, 2007
MATURITY DATE: DECEMBER 1, 2022
INTEREST RATE: 7.188%
AMORTIZATION: 25 YEARS
HYPERAMORTIZATION: N/A
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: THE LOAN IS NOT PREPAYABLE PRIOR TO THE DATE
THREE MONTHS PRIOR TO THE ARD. SUBSEQUENT TO
THIS DATE, PREPAYMENT IN FULL, BUT NOT IN
PART, IS PERMITTED WITHOUT PENALTY. SUBSEQUENT
TO THE THIRD ANNIVERSARY OF THE ORIGINATION
DATE OR THE SECOND ANNIVERSARY OF
SECURITIZATION OF THE LOAN, DEFEASANCE WILL BE
PERMITTED UPON THE DELIVERY OF APPROPRIATE
DEFEASANCE COLLATERAL.
THE BORROWER: THE BORROWING ENTITY, HEF 1 -- AUS NO.2, LLC,
AS WELL AS ITS GENERAL PARTNER, IS ORGANIZED
AS A SPECIAL-PURPOSE, BANKRUPTCY-REMOTE
ENTITY.
LIEN POSITION: FIRST MORTGAGE LIEN ON THE FOUR SEASONS HOTEL
IN AUSTIN, TX.
CROSS-COLLATERALIZATION/
DEFAULT: NO
PROPERTY INFORMATION
PROPERTY TYPE: HOTEL
OCCUPANCY: 1995 1996 TTM
---- ---- ---
79.4% 76.5% 80.6%
ADR: $145.92 $158.16 $166.05
RevPAR: $115.86 $120.99 $133.83
Rooms: 291
Year Built: 1986
The Collateral: The Four Seasons Hotel, a full-service hotel
in Austin, TX.
Property
Management: Four Seasons Hotels Limited
1996 Net
Operating Income: $4,670,912
Underwritten
Cashflow: $6,165,711
Appraised Value: $60,200,000
Appraised By: PKF Consulting
Appraisal Date: October 1, 1997
LTV as of 12/1/97: 75.0%
Annual Debt
Service: 3,930,910
DSC: 1.57x
Loan/Room as of 12/1/97: $155,155
S-192
<PAGE>
FOUR SEASONS HOTEL, AUSTIN LOAN: THE BORROWER; THE PROPERTY
The Loan. The loan (the "Austin Loan") was originated by Midland Loan
Services, L.P. on November 24, 1997 (the "Closing Date") and acquired
simultaneously therewith by Merrill Lynch Mortgage Capital Inc. The Austin
Loan had a principal balance at origination of $45,150,000. It is evidenced
by a deed of trust note (the "Austin Note") and secured by, among other
things, a deed of trust (the "Austin Deed of Trust") encumbering a hotel in
Austin, Texas commonly known as the Four Seasons Hotel Austin (the "Austin
Property").
The Borrower. The borrower under the Austin Loan is HEF I-AUS No. 2, L.P.,
a special-purpose Texas limited partnership (the "Austin Borrower"). The
limited partnership agreement of the Austin Borrower provides that its
purpose and business is limited to owning, managing, developing, operating,
maintaining, financing and otherwise using, and as necessary improving, the
Austin Property. The Austin Borrower owns no material asset other than the
Austin Property and related interests. The general partner of Austin Borrower
is AUS GP, L.L.C., a special-purpose Texas limited liability corporation. The
sole managing member of AUS GP, L.L.C. is AUS SPE Corp., a special-purpose
Delaware corporation.
The Property. The Austin Property is comprised of all of the Austin
Borrower's right, title and interest in and to the fee simple estate in one
parcel and non-exclusive easement estate in a parcel adjacent thereto
pursuant to a certain Amended and Restated Unified Development Declaration
dated as of September 23, 1991 made by Town Lake Center Corp., a Delaware
corporation. The Four Seasons Hotel, Austin is a multi-story, 292-room luxury
hotel comprised of approximately three acres of land in Austin, Texas. It has
been rated "Triple A, Four Diamond" by the American Automobile Association
and has also received Mobil Travel Guide's prestigious 4 Star Award. It
features 18,021 square feet of meeting and banquet spaces, one restaurant,
one cafe, a fully staffed health club, a heated, outdoor pool and a sauna.
The Four Seasons Hotel, Austin was built in 1986, and has undergone
renovations in 1996 and 1997. The individual rooms are each independently
heated and cooled by a thermostat controlled, three speed air handler.
For the twelve month period ended September 30, 1997, the average
occupancy rate for the Four Seasons Hotel, Austin was approximately 81.9% and
the average daily room rate (the "ADR") was approximately $167.10. As of
October 1, 1997, the appraised value of the Four Seasons Hotel, Austin was
approximately $60,200,000.
The San Jacinto Center is a mixed-use development containing the subject
hotel, 380,000 square feet of Class A office space, 40,000 square feet of
specialty retail shops and restaurants, and common underground parking for
779 cars. A parcel of land adjacent to the north and east of the subject
hotel improvements was originally planned as the site of an office building
that would be a mirror image of the Class A building located to the north and
west of the hotel. The owners of the Four Seasons have since purchased the
land, and are holding it for future development. It is currently utilized for
above ground parking. Future plans could include additional hotel rooms,
condominium and/or retail uses.
The tract originally improved with the hotel contains approximately three
acres and is rectangular in shape. It has frontage along the Austin
Greenbelt, which is part of Town Lake and the Colorado River. The parking lot
parcel (0.922 acres) is adjacent to the north and east. The site is at grade
level, slightly sloping toward the lake on the south side.
Location/Access. The hotel is located at 98 San Jacinto Boulevard in
downtown Austin, across Cesar Chavez Boulevard from the new Austin Convention
Center and within a short walk of all major downtown office and government
buildings and tourist attractions. It is also approximately three blocks from
the Congress Street Bridge, which houses the largest concentration of bats in
North America. The nightly exodus of the bats to consume billions of
mosquitoes is a popular tourist attraction. The hotel's views of Town Lake
and its location on the hike and bike trail, make the Four Seasons, Austin a
gathering point for many locals as well as hotel guests. The Four Seasons,
Austin is well-located with respect to attracting convention group,
individual commercial, and tourist demand, given its location and proximity
to local businesses, views of Town Lake, the Convention Center and area
attractions. It is within walking distance of most demand generators and area
amenities. Restaurants and retail are easily available nearby.
S-193
<PAGE>
Access to the Four Seasons, Austin is considered to be very good, and is
available via Cesar Chavez Boulevard, the southernmost street of the Austin
central business district, and via San Jacinto Boulevard, a major downtown
artery running north-south. The hotel is three blocks west of Interstate 35,
which allows easy access from all points in the city.
The subject site is visible from across Town Lake and from an approximate
two block radius. Because it is located at the southernmost part of the
central business district, visibility is obscured due to the number of
high-rise buildings, and it is not easily visible from Interstate 35.
However, the Four Season, Austin's market orientation is such that visibility
is not a key factor; rather the hotel is designed to be secluded and
protected to some degree from heavy traffic, in order to allow some privacy
and shelter to its guests.
Market Overview. According to an appraisal by PKF Consulting, the Austin
metropolitan area contains approximately 151 hotels and motels of varying
quality, with approximately 17,870 available rooms. At year-end 1996, the
market had an occupancy of 73.5% with an ADR of approximately $73.50. The
area experienced explosive growth in the number of available hotel rooms
between 1994 and 1996, the majority of which were in the limited service
sector. Because of this, occupancies have been negatively affected as the
market continues to absorb the new supply. Capacity constraints still exist
during peak periods, however, and this has put upward pressure on average
daily rates. In the central business district, the location of the subject,
there was little or no growth in the hotel rooms supply, in part because
downtown occupancies did not justify new development. The central business
district market is expected to continue to strengthen, especially if the
proposed expansion to the Convention Center is approved. The Stephen F.
Austin hotel, an Austin landmark which has been closed for several years, is
expected to be renovated and re-open within the next two years.
The Austin hotel market experiences greater demand in odd years, when the
State Legislature is in session. This explains the drop in market occupancy
in 1996, and the subsequent recovery being experienced year-to-date in 1997.
Average daily rate growth is strongest in the central business district
market, at 6.4% year-to-date. More impressive, however, is the 10.3% growth
in RevPAR that the central business district market is currently enjoying.
Competition. Four properties which have been identified as in the area of
the Four Seasons Hotel, Austin and which may be competitive therewith are: a
365 room Marriott at the Capitol which opened in 1986, a 446 room Hyatt
Regency Austin which opened in 1982 and is the oldest hotel in the
competitive supply, a 304 room Omni Austin Center which opened in 1986, and
the Omni Southpark, a 313 room hotel that opened in 1985.
Environmental Report. A Phase I environmental site assessment was
performed dated October 16, 1997 on the Four Seasons, Austin Hotel. The Phase
I environmental site assessment did not reveal any environmental liability
that the Depositor believes would have a material adverse effect on the
borrower's business, assets or results of operations taken as a whole.
Nevertheless, there can be no assurance that all environmental conditions and
risks were identified in such environmental assessment.
Engineering Report. A Hotel Condition Report was completed on the Four
Seasons, Austin Hotel on October 7, 1997 by a third party due diligence firm.
The Hotel Condition Report concluded that the Four Seasons, Austin Hotel was
in good condition and identified no deferred maintenance requirements.
Property Management. The Four Seasons Hotel Austin is operated by Four
Seasons Hotels Limited (the "Manager"), an Ontario corporation, pursuant to a
certain hotel management agreement dated as of November 17, 1994, by and
between Austin Borrower and Manager (the "Austin Management Agreement"). The
Manager's initial term expires on December 31, 2004, but the Manager has a
right to extend the term of the Austin Management Agreement for an additional
ten fiscal years so long as the hotel achieves an average net operating
income for the fiscal years ending December 31, 2002 through 2004, inclusive,
in a specified target amount which is below the amount of net operating
income over the past two full fiscal years in which the present Austin
Management Agreement has been in effect and provided that the Manager has not
been required to make certain payments to Austin Borrower in certain
S-194
<PAGE>
preceding years because of a failure of the hotel to meet specified
performance standards. Austin Borrower expects that the Manager will meet
such tests and have the right to extend the term of the Austin Management
Agreement beyond December 31, 2004 and investors should assume that the
Manager will have such right to extend.
Under the Austin Management Agreement, the Manager is entitled to a base
management fee equal to the sum of 3% of gross room revenue plus 1% of other
hotel revenue. The base management fee is subject to deferral in the event
the hotel does not meet stipulated levels of net operating income.
Pursuant to the Austin Management Agreement, bank accounts have been
established and maintained by the Manager in connection with the operation of
the Austin Property, and all funds derived from the operation of the Austin
Property have been and shall be deposited therein. The Austin Borrower and
the Manager have agreed to establish a segregated account for the replacement
and renewal of furniture, fixtures and equipment (the "Austin FF&E Reserve
Account") into which Manager shall fund, on a monthly basis, an amount equal
to 4% of monthly operating income. The Austin Borrower and the Manager have
agreed to establish a segregated account for the payment of interest and
principal due on the Austin Note (the "Austin Interest Escrow Account") into
which Manager shall deposit, on a monthly basis, the principal and interest
due on the Austin Note on the next Payment Date. The Austin Borrower and the
Manager have agreed to establish a segregated account for the payment of tax
and insurance premiums (the "Austin Deed of Trust Escrow Account") into which
the Manager shall deposit, on a monthly basis, one twelfth of the annual
insurance premiums for insurance being maintained by Austin Borrower and one
twelfth of the annual taxes and assessments which shall become due and
payable. The Austin FF&E Reserve Account, the Austin Interest Escrow Account
and the Austin Deed of Trust Escrow Account are herein collectively referred
to as the "Austin Accounts".
Pursuant to a subordination, nondisturbance and attornment agreement (the
"Austin Subordination Agreement") executed with respect to the Austin
Management Agreement by the Manager and Austin Borrower in favor of the
holder of the Austin Loan (the "beneficiary"), the Manager has agreed (i) to
subordinate its rights under the Austin Management Agreement to the lien of
the Austin Deed of Trust; (ii) to make all payments to the Agent Bank (as
hereinafter defined) which otherwise would have been payable to Austin
Borrower as more particularly set forth in the Cash Collateral Agreement (as
defined under "Lockbox and Reserves"); (iii) to make all deposits of funds
into escrow for the payment of taxes and insurance and reserve deposits for
replacements or improvements to the Property provided sufficient funds shall
be available for Manager to operate the Austin Property as set forth in the
Austin Management Agreement and to assign all accounts and funds in such
accounts to beneficiary or its designee to secure payment of the obligations
of Austin Borrower under the Austin Deed of Trust; (iv) upon foreclosure or
other enforcement proceedings, to attorn to and be bound to a transferee of
Austin Borrower with the same force and effect as if the transferee was the
"owner" under the Austin Management Agreement; (v) to limit the obligations
of any transferee succeeding to the interest of the Austin Borrower under the
Austin Management Agreement such that transferee shall (a) be subject only to
the obligations arising during such period during which such transferee was
the actual "owner" under the Austin Management Agreement, (b) not be subject
to any offset or counterclaim which Manager might otherwise be entitled to
assert against the transferee on account of any obligation of the Austin
Borrower, (c) if beneficiary is the transferee, beneficiary shall not have
any obligation to provide funds except in accordance with the last annual
plan approved by Austin Borrower prior to the transfer, (d) if beneficiary is
the transferee, beneficiary shall not have any obligation to provide funds to
repair or rebuild any improvements at the Austin Property after damage or
destruction or termination fees payable in conjunction therewith, (e) if
beneficiary is the transferee, beneficiary shall not be obligated to repair
or rebuild any of the improvements at the Austin Property upon any damage or
destruction thereof unless the insurance proceeds payable with respect to
such loss are sufficient to fully pay the cost of such repair or rebuilding,
(f) not be bound by any previous modification of the Austin Management
Agreement made without beneficiary's prior written consent; and (vi) to give
prompt written notice to beneficiary of any default by Austin Borrower under
the Austin Management Agreement, and termination thereof shall not be
effective unless beneficiary has received notice thereof and failed to cure
such default within the requisite cure period. The Austin Subordination
Agreement provides that, if a nonmonetary default is of
S-195
<PAGE>
such a nature that it cannot be cured by beneficiary, then beneficiary may,
at its option, immediately succeed to the interest of Austin Borrower under
the Austin Management Agreement. If the Austin Management Agreement is
otherwise terminated by reason of Austin Borrower default, Austin Manager and
beneficiary shall each be entitled to cause the other to enter into a new
management agreement upon the same terms set forth in the Austin Management
Agreement.
UNDERWRITTEN CASHFLOW -- FOUR SEASONS HOTEL, AUSTIN
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------- --------------
INCOME:
Room Department ................. $12,893,700 $14,528,200
Food & Beverage Department ..... 7,522,100 $ 8,694,100
Other Department ................ 1,721,400 $ 1,944,200
------------- --------------
GROSS INCOME: .................... $22,137,200 $25,166,500
============= ==============
ALLOCATED EXPENSES
Room Department ................. 3,342,200 3,637,600
Food & Beverage Department ..... 5,867,900 6,402,000
Other Department ................ 1,045,300 1,096,100
------------- --------------
TOTAL ALLOCATED EXPENSES.......... 10,255,400 11,135,700
============= ==============
DEPARTMENT PROFITS:............... $11,881,800 $14,030,800
============= ==============
UNALLOCATED EXPENSES
Operating Expenses ...............
Administration .................. 1,886,800 1,970,600
Maintenance & Repairs ........... 959,100 1,058,600
Energy .......................... 626,500 667,600
Management Fee .................. 685,400 841,600
Marketing & Corp. Service Charge 1,007,600 1,056,929
Other Expenses .................. -- --
Fixed Expenses
Taxes and Insurance ............. 923,000 1,029,100
Rent & Miscellaneous ............ 237,000 234,000
Reserve FF&E .................... 885,488 1,006,660
------------- --------------
TOTAL UNALLOCATED EXPENSES........ $ 7,210,888 $ 7,865,089
============= ==============
NET OPERATING INCOME.............. $ 4,670,912 $ 6,165,711
============= ==============
NET CASH FLOW..................... $ 4,670,912 $ 6,165,711
============= ==============
Average Occupancy................. 76.5% 80.6%
Average Room Rate................. $ 158.16 $ 166.05
Debt Service Coverage Ratio ...... 1.57x
Loan to Value..................... 75.0%
S-196
<PAGE>
FOUR SEASONS HOTEL, AUSTIN: THE LOAN
Security. The Austin Loan is a nonrecourse loan, secured by a mortgage
lien on the Austin Borrower's fee simple interest one parcel of land and a
non-exclusive easement estate interest in a parcel adjacent thereto which
together comprise the Austin Property, and certain other collateral relating
thereto (including an assignment of leases, rents and security deposits, an
assignment of certain agreements and the funds in certain accounts)
(collectively with all other security documents referenced herein, the "Loan
Documents"). The beneficiary is a named insured under the title insurance
policy which insures, among other things, that the Austin Deed of Trust
constitutes a valid and enforceable first lien on the Austin Property,
subject to certain exceptions and exclusions from coverage set forth therein.
Such insurance policy, the Austin Note, the Austin Deed of Trust and all
other agreements and documents evidencing and securing the Austin Loan will
be assigned to the Trust Fund.
Payment Terms. The Austin Loan matures on December 1, 2022 ("the Austin
Maturity Date") and bears interest (a) at a fixed rate per annum equal to
7.188% (the "Austin Initial Interest Rate") through but not including
December 1, 2007 (the "Austin Effective Maturity Date") and (b) from and
including the Austin Effective Maturity Date through and including the Austin
Maturity Date, at a fixed rate per annum equal to the greater of (i) the
Austin Initial Interest Rate plus 2% or (ii) the Austin Treasury Rate plus
2%. The "Austin Treasury Rate" means the yield, as of the Austin Effective
Maturity Date, calculated by the linear interpolation of the yields of
noncallable United States Treasury obligations with terms of ten (10) years,
as determined by Austin Borrower on the basis of Federal Reserve Statistical
Release H.15 Selected Insurance rates or such other recognized source of
financial market information selected by Four Seasons Hotel Austin, following
consultation with beneficiary, for one week prior to the Austin Effective
Maturity date. Any interest accrued after the Austin Effective Maturity Date
at the excess of the Austin Revised Interest Rate over the Austin Initial
Interest Rate shall be accrued and added to the outstanding indebtedness
under the Austin Loan and shall, to the extent permitted by applicable law,
earn interest at the Austin Revised Interest Rate (such accrued interest and
interest thereon, the "Austin Accrued Interest"). Interest on the Austin Loan
is calculated on the basis of a 360-day year and the actual number of days
elapsed in the applicable period.
The payment date for the Austin Loan is the first business day of each
month (each, a "Payment Date"), with no grace period for a default in the
payment of scheduled principal or interest. Commencing on January 1, 1998,
the Austin Loan requires 300 equal monthly payments of principal and interest
of $327,575.81 (each, a "Austin Debt Service Payment"). Each Austin Debt
Service Payment, due and payable on each Payment Date, shall be applied first
to the interest at the Austin Initial Interest Rate and the remainder thereof
to the reduction of principal. In the event of a default in payments,
interest will accumulate thereon at the applicable interest rate plus five
percent (5%) per annum (the "Default Rate"). On the Austin Loan Maturity
Date, payment of the remaining unpaid balance of principal, if any, together
with all interest accrued thereon and all other sums payable under the Note
or under the Loan Documents is required.
Commencing with the first Payment Date after the Austin Effective Maturity
Date, and continuing on each Payment Date thereafter, the Austin Borrower is
required to apply 100% of rents and other revenues from the Austin Property
to the following items in the following order of priority: (a) to payment of
interest accruing at the Default Rate and late payment charges, if any; (b)
to payment of required monthly escrows of taxes and insurance premiums; (c)
to payment of the Austin Monthly Debt Service Payments; (d) to payment of
monthly cash expenses pursuant to the annual budget approved by the
beneficiary, (e) to payment of extraordinary, unbudgeted operating or capital
expenses approved by the beneficiary, if any; (f) to payments to be applied
against the outstanding principal of the loan until such principal amount is
paid in full; (g) to payments of Austin Accrued Interest; and (h) to payments
of any other amounts due under the Loan Documents. Any excess amounts shall
be paid to the Austin Borrower.
Event of Default. The occurrence of any of the following constitutes an
"Event of Default" under the Austin Deed of Trust: (a) failure to make any
payment of interest or principal on the Austin Note when due, or failure to
pay the principal balance of the Austin Note when due; (b) failure to pay any
other amount payable pursuant to the Austin Deed of Trust or Note when due
and payable, with such failure
S-197
<PAGE>
continuing for 10 business days after beneficiary delivers written notice
thereof to the Austin Borrower; (c) failure to keep in force the insurance
required under the Austin Deed of Trust to be maintained or failure to comply
with any other covenant related to insurance requirements, with such failure
continuing for 5 business days after beneficiary delivers written notice
thereof to the Austin Borrower; (d) failure to comply with certain Austin
Deed of Trust covenants which require the Austin Borrower to keep the Austin
Property free of liens and encumbrances (with such default continuing for 5
business days after beneficiary delivers written notice thereof to the Austin
Borrower), and those which, with limited exceptions, prohibit the sale of the
Austin Property and transfers of interests in the Austin Borrower; (e) any
attempt by the Austin Borrower to assign its rights under the Austin Deed of
Trust; (f) any other default in the performance or payment, or breach, of any
material covenant, warranty, representation or agreement set forth in the
documents which evidence the Austin Loan, with such default continuing for 30
business days, and any applicable extension period, after beneficiary
delivers written notice thereof to the Austin Borrower; and (g) the
occurrence of certain bankruptcy events.
If the Austin Borrower defaults in the payment of any Austin Debt Service
Payment on the Payment Date then the Austin Borrower shall pay to beneficiary
a late payment charge in an amount equal to five percent (5%) of the amount
of the installment not paid. If the Austin Borrower defaults in the payment
of any Austin Debt Service Payment on the Payment Date due, or defaults in
any other manner so as to constitute an Event of Default, then beneficiary at
its option and without further notice to the Austin Borrower may declare the
entire unpaid amount of principal with interest at the Default Rate together
with all other sums due, if any, due and payable immediately.
Prepayment. Voluntary prepayment of the principal of the Austin Note is
prohibited at any time prior to the 90-day period prior to the Austin
Effective Maturity Date, at which time the Austin Borrower may prepay the
Note in whole or in part on any Payment Date without payment of any
prepayment premium.
Payments made following an Event of Default under the Austin Deed of Trust
or an acceleration by the beneficiary shall be deemed to be voluntary and
shall be subject to a prepayment premium (the "Austin Yield Maintenance
Premium") equal to the product of (i) a fraction whose numerator is an amount
equal to the portion of the principal balance being prepaid and whose
denominator is the entire outstanding principal balance on the date of such
prepayment, multiplied by (ii) an amount equal to the remainder obtained by
subtracting (x) an amount equal to the entire outstanding principle balance
as of the date of such prepayment from (y) the present value as of the date
of such prepayment of the remaining scheduled payments of principle and
interest (including any final installment of principle payment on the Austin
Effective Maturity Date) determined by discounting such payments at a
discount rate equal to the Austin Discount Rate. The "Austin Discount Rate"
means the rate which, when compounded monthly, equals the yield, as of the
date of prepayment, calculated by linear interpolation of the yields of
noncallable U.S. Treasury obligations with terms (one longer and one shorter)
most nearly approximating the period from the date of the prepayment to the
Austin Effective Maturity Date.
No Austin Yield Maintenance Premium or other premium or penalty is
required to be paid in connection with any prepayment resulting from the
application of insurance or condemnation proceeds to repayment of the Austin
Loan in accordance with the requirements of the Austin Deed of Trust.
Defeasance. For the purposes of this section, "Defeasance Collateral"
shall mean obligations or securities not subject to prepayment, call or early
redemption which are direct obligations of, or obligations fully guaranteed
as to timely payment by, the United States of America or any agency or
instrumentality of the United States of America, or the obligations of which
are backed by the full faith and credit of the United States of America, the
ownership of which will not cause the beneficiary to be an investment company
under the Investment Company Act of 1940, included as collateral under the
Austin Loan. For the purposes of this section, the "Defeasance Collateral
Requirement" shall mean an amount sufficient to pay 100% of the loan amount,
and sufficient to pay scheduled interest and principal payments on the Austin
Note through and including the Austin Effective Maturity Date together with
the outstanding principal balance of the Austin Note as of such date.
S-198
<PAGE>
The Austin Borrower shall be entitled to defease the Austin Property on
any Payment Date from and after the earlier of (x) the third anniversary of
the Closing Date and (y) the second anniversary of the Delivery Date, in
connection with the delivery of Defeasance Collateral, provided that: (i) the
Austin Borrower shall have delivered Defeasance Collateral in such amount as
shall satisfy the Defeasance Collateral Requirement with respect to the
Austin Property; (ii) the Austin Borrower shall have granted a first priority
security interest in the Defeasance Collateral and all proceeds; (iii) the
Austin Borrower shall have delivered a certificate of an officer of the
Austin Borrower (an "Officer's Certificate") dated the day of delivery of the
Defeasance Collateral (a) setting forth the aggregate face amount or the
unpaid principal amount, interest rate and maturity date of all the
Defeasance Collateral, accompanied with a copy of the transaction journal, if
any, and (b) stating in effect that the Austin Borrower owns the Defeasance
Collateral free and clear of any encumbrances, that it consists solely of
eligible investments as defined in the Deed of Trust, that it satisfies the
Defeasance Collateral Requirement, and that such defeasance shall not give
rise to an Event of Default; (iv) the Austin Borrower shall have delivered to
beneficiary the opinions of counsel with respect to beneficiary's interest in
the Defeasance Collateral, as well as a tax opinion and a nondisqualification
opinion required under the Austin Deed of Trust upon a defeasance of the
lien; (v) beneficiary shall have received from the Rating Agencies written
affirmation that the credit ratings of the securities secured in part by a
pledge of the Austin Note as of the date of such defeasance will not be
qualified, downgraded or withdrawn as a result of such defeasance.
Lockbox and Reserves. Pursuant to the terms of a cash collateral account
security, pledge and assignment agreement (the "Austin Cash Collateral
Agreement"), the Austin Borrower has established in the name of LaSalle
National Bank (the "Austin Agent"), as agent for the beneficiary, as secured
party, a cash collateral account (the "Austin Operating Account") with such
bank. The Austin Borrower has delivered irrevocable written instructions to
the Manager directing the Manager to deposit by wire transfer to the
Operating Account, all amounts due and payable to Austin Borrower, pursuant
to the Austin Management Agreement or otherwise, deriving from the Austin
Property.
Provided that (i) no Event of Default shall have occurred and be
continuing under the Loan Documents, (ii) Austin Borrower shall have
delivered to Austin Agent and beneficiary a certificate of an officer of
Borrower's managing member certifying that (A) no Event of Default has
occurred and is then continuing and (B) there are no trade payables more than
60 days past due, unless the same are being contested by Austin Borrower in
good faith, and (C) Austin Borrower shall have delivered to Austin Agent to
transfer from the Operating Account to the Deed of Trust Escrow Account, an
amount equal to 125% of any amounts being contested in connection with any
payables exceeding $250,000 in the aggregate, and (iii) all amounts required
to have been reserved by Manager have been so reserved, then Borrower may, at
any time, instruct Agent Bank to transfer amounts from the Operating Account
to such account or accounts of Austin Borrower as Austin Borrower may direct.
In accordance with the Austin Deed of Trust and pursuant to that certain
letter agreement dated as of November 24, 1997, between Austin Borrower and
the Manager, Austin Borrower and the Manager have established three (3)
segregated accounts with Boatman's National Bank of Austin, specifically, the
Austin Deed of Trust Escrow Account, the Austin FF&E Reserve Account and the
Austin Interest Reserve Account. (See "--Property Management").
Pursuant to the terms of the Austin Deed of Trust, Austin Borrower has
pledged to beneficiary a security interest in the Accounts. Pursuant to the
Austin Cash Collateral Agreement, Austin Borrower has pledged to beneficiary
a security interest in the Operating Account.
Transfer of Properties and Interest in Borrower; Encumbrances; Other
Debt. The Austin Borrower is generally prohibited from transferring or
encumbering the Austin Property. The Austin Borrower has the right to sell
the whole of its interest in the Austin Property provided that (a) the Austin
Borrower shall have caused to be delivered to the beneficiary a written
affirmation from applicable rating agencies that the securities secured by a
pledge of the Austin Note shall not be qualified, downgraded or withdrawn as
a result of such sale, (b) the purchaser is a single purpose entity
controlled by a Permitted Owner (as defined below), and (c) the Austin
Property shall be managed by a Qualifying Manager (as defined below). A
"Qualifying Manager" means a manager which is (1) an approved hotel operating
company
S-199
<PAGE>
which manages at least five First Class hotels with a minimum of 2500 rooms
in the aggregate, (2) the Manager or its affiliate, or (3) Four Seasons Hotel
Limited or its affiliate. A "Permitted Owner" means (1) any entity as to
which a rating agency confirmation would be issued, (2) Maritz, Wolff & Co.,
Hotel Equity Fund 1, L.P., Hotel Capital Partners, L.P. or any of their
affiliates, (3) any person with hotel assets of at least $100,000,000
exclusive of the Austin Property, and (4) any pension fund or separate
account or investment vehicle established by such entity or any publicly
traded real estate investment trust or corporation which owns hotel assets of
at lease $100,000,000 exclusive of the Austin Property.
Austin Borrower is permitted to transfer or dispose of building equipment
which is being replaced or which is no longer necessary in connection with
the operation of the Austin Property provided that such transfer or disposal
will not materially adversely affect the value of the Austin Property taken
as a whole. The Austin Borrower may, (provided that no such transfer shall
materially impair the utility or operation of the Austin Property taken as a
whole) without the beneficiary's consent: (i) make immaterial transfers of
portions of the Austin Property to governmental authorities for dedication or
public use or portions of thereof to third parties for the purpose of
erecting and operating additional structures whose use is integrated with the
use of the Austin Property and (ii) grant easements, restrictions, covenants,
reservations and rights of way in the ordinary course of business for
utilities.
With limited exceptions, the Austin Deed of Trust prohibits the transfer
of any interest in the Austin Borrower without the prior written consent of
the beneficiary. The beneficiary's consent is not required for a transfer or
direct or indirect beneficial interests in the Austin Borrower provided that:
(i) after giving effect to such transfer, (A) in the case of a transfer which
results in a 49% or greater change in beneficial ownership of the Austin
Borrower to a single beneficial owner, or any transfer of the interest of the
general partner, a written confirmation from each of the Rating Agencies
shall be delivered to beneficiary that such Rating Agencies will not
downgrade, qualify or withdraw the then current ratings of the securities
secured by a pledge of the Austin Note, and (B) (1) the Austin Borrower
remains a single purpose entity, (2) the Austin Borrower is controlled by a
Permitted Owner, (3) any transferee of such (x) direct interest in the Austin
Borrower or (y) indirect interest in the Austin Borrower if such transferee
is to own any general partnership interest in the entity which owns any
general partnership interest in the Austin Borrower, shall be a single
purpose entity and (4) a Qualifying Manager manages the Austin Property, and
(ii) no Event of Default has occurred and is continuing. If 10% or more of
direct beneficial interests in the Austin Borrower are transferred, or if any
transfer shall result in any one person or group of affiliates acquiring more
than a 49% interest or shall result in any transfer of the General Partner's
interest, the Austin Borrower shall deliver to the rating Agencies and
beneficiary (a) a non-consolidation opinion of counsel and (b) an Officer's
Certificate certifying that such transfer is not an event of default.
The Austin Borrower is not permitted to incur any additional indebtedness
other than: (i) the Austin Note and the other obligations, indebtedness and
liabilities provided for in any Loan Document evidencing or securing the
Austin Loan; (ii) unsecured indebtedness for trade payables, provided that
such amounts are paid within 60 days of the date incurred unless the Austin
Borrower is in good faith contesting its obligation to pay such indebtedness
in a manner satisfactory to the beneficiary; (iii) unsecured indebtedness not
to exceed 3% of the aggregate amount of the Austin Loan, provided that such
indebtedness is subordinated in all respects to the Austin Loan and the
provisions relating thereto be satisfactory to beneficiary, and (iv) amounts
loaned by the Manager to the Austin Borrower as "operator loans," but only to
the extent provided for in the Austin Management Agreement.
Insurance. The Austin Borrower is required to maintain for the Austin
Property (a) insurance against all perils included within the classification
"All Risks of Physical Loss" with extended coverage in an amount at all times
sufficient to prevent the Austin Borrower from becoming a co-insurer, but in
any event equal to the full insurable value of the improvements and
equipment, (b) comprehensive general liability insurance in such amounts as
are generally required by institutional lenders for comparable properties but
in no event less than $5,000,000 per occurrence and with an aggregate limit
of not less than $50,000,000, (c) statutory workers' compensation insurance,
(d) business interruption and/or "loss of rental value" insurance to cover
the loss of at least 24 months income, (e) during any period of repair or
restoration, builder's "all risk" insurance in an amount not less than the
full insurable value of the Austin Property, (f) broad-form boiler and
machinery insurance and insurance against loss of occupancy or use
S-200
<PAGE>
arising from any related breakdown in such amounts as are generally available
at a commercially reasonable premium and are generally required by
institutional lenders for properties comparable to the Austin Property, (g)
flood insurance, if any improvement on the Austin Property is located within
an area designated as "flood prone" or a "special flood hazard area," and (g)
at the beneficiary's reasonable request, such other insurance against loss or
damage of the kind customarily insured against and in such amounts as are
generally required by institutional lenders for comparable properties.
Any such insurance may be effected under a blanket policy so long as any
such blanket policy shall specify, except in the case of public liability
insurance, the portion of the total coverage of such policy that is allocated
to the Austin Property and any sublimate in such blanket policy applicable to
the Austin Property, which amounts may not be less than the amounts required
pursuant to, and which must in any case comply in all other respects with the
requirements of, the Austin Loan. All insurance policies, with the exception
of workers' compensation, are required to name the beneficiary as an
additional named insured, to provide that all proceeds (except with respect
to proceeds of general liability and workers' compensation insurance) be
payable to the beneficiary except as described below under "--Condemnation
and Casualty" and to contain: (i) a standard "noncontributory mortgagee"
endorsement or its equivalent relating, inter alia to recovery by the
mortgagee notwithstanding the negligent or willful acts or omissions of the
Austin Borrower; (ii) a waiver of subrogation endorsement in favor of
beneficiary; (iii) an endorsement providing that no policy shall be impaired
or invalidated by virtue of any act, failure to act, negligence of, or
violation of declarations, warranties or conditions contained in such policy
by Austin Borrower, beneficiary or any of other named insured, additional
insured or loss payee, except for willful misconduct of the beneficiary
knowingly in violation of the conditions of such policy; (iv) an endorsement
providing for a deductible per loss of an amount not more than that which is
customarily maintained by prudent owners of first class properties comparable
to and in the general vicinity of the Austin Property but in no event in
excess of $50,000 except in the case of earthquake coverage; and (v) a
provision that such policies shall not be cancelled, terminated or expired
without at least 30 days prior written notice to the beneficiary, in each
instance. The Austin Deed of Trust requires the Austin Borrower to obtain the
insurance describes above from insurance carriers having claims paying
abilities rated (i) not less than "AA" by S&P and its equivalent by any other
Rating Agencies and (ii) not less than "A" by Alfred M. Best Company, Inc.
with a financial size category of not less than X.
Condemnation and Casualty. The Austin Borrower is required to notify the
beneficiary in writing promptly upon obtaining knowledge of (1) the
institution of any condemnation proceedings, or (2) the occurrence of any
damage or destruction to all or any part of the Austin Property the
restoration of which is estimated by the Austin Borrower to cost more than 5%
of the Austin Loan amount (the "Austin Threshold Amount"). In addition, the
Austin Borrower is obligated to include with the notice of any casualty,
damage, injury or condemnation, the restoration of which is estimated by the
Austin Borrower to cost more than the Austin Threshold Amount, (or to forward
as soon thereafter as possible) an estimate of the cost of repairing or
restoring such casualty, damage, injury or condemnation in reasonable detail.
Following a casualty or condemnation at the Austin Property, any insurance
and condemnation proceeds will be applied (after payment of the beneficiary's
reasonable expenses of collection thereof) to amounts due under the Austin
Loan and the prepayment of the principal amount outstanding thereon, if: (i)
the proceeds equal or exceed the outstanding principal balance of the Austin
Loan, or (ii) any Event of Default has occurred or is continuing, or (iii) a
Austin Total Loss (as defined herein) has occurred, or (iv) the work of
restoration cannot be completed before the earlier of (a) the date which is
six months before the Austin Maturity Date or (b) the date on which the
business interruption insurance expires, or (v) the Austin Property is not
capable of being restored substantially to its condition prior to the
casualty or condemnation, or (vi) the Austin Borrower is unable to
demonstrate to the beneficiary's reasonable satisfaction its continuing
ability to pay the Austin Loan. In the event that proceeds do not exceed the
Austin Threshold Amount, such proceeds are to be paid directly to Austin
Borrower to be applied to restoration of the Austin Property. The Austin
Borrower may settle any insurance claim with respect to proceeds which do not
exceed the Threshold Amount. All other insurance claims shall be settled by
beneficiary.
S-201
<PAGE>
An "Austin Total Loss" means (x) a casualty, damage or destruction of the
Austin Property, the cost of restoration of which would exceed 50% of the
outstanding principal balance of the Austin Loan, or (y) a permanent taking
of 25% or more of the hotel guest rooms on the Austin Property or so much of
the Austin Property, in either case, such that it would be impracticable, in
beneficiary's reasonable discretion, even after restoration, to operate the
Austin Property as an economically viable whole.
In the event of (i) a Austin Total Loss resulting from casualty, damage or
destruction, if either (A) the cost to repair the Austin Property would
exceed the Austin Threshold Amount and the restoration of the Austin Property
cannot reasonably be completed before the date which is the later to occur of
the date of expiration of any business interruption insurance or the date of
expiration of any letter of credit posted in lieu thereof or in addition
thereto and under such circumstances the Austin Borrower is not required
under any tenant lease to make the proceeds available to restore the Austin
Property or (B) the beneficiary elects not to make such proceeds available to
the Austin Borrower for the restoration of the Austin Property, or (ii) a
Austin Total Loss resulting from a condemnation, then the Austin Borrower
must prepay the Austin Loan to the extent of the casualty or condemnation
proceeds received, up to an amount equal to the outstanding principal thereon
(without prepayment premium or penalty).
If any insurance or condemnation proceeds (other than business
interruption insurance proceeds) are in excess of the Austin Threshold
Amount, then all such proceeds will be applied as follows: first, toward
reimbursement of the beneficiary's reasonable out-of-pocket costs and
expenses in connection with the recovery and disbursement of such proceeds,
and then, to the prepayment of the principal amount outstanding on the Austin
Loan, without prepayment premium or penalty, only if: (A)(i) the amount of
such proceeds is equal to or greater than the outstanding principal amount of
the Austin Note, or (ii) the casualty or condemnation occurs less than 180
days before the Austin Maturity Date, or (iii) more than 25% of the hotel
guest rooms on the Austin Property have been damaged by a casualty or shall
have been taken, or (B) such proceeds are condemnation proceeds received in
excess of the amount needed to restore the Austin Property after a partial
taking by condemnation, in which case prepayment will be made to the extent
of such unneeded proceeds.
Upon an Event of Default or in the event the proceeds are required to be
paid to beneficiary, any such proceeds paid to beneficiary shall be applied
first toward reimbursement of beneficiary's reasonable costs and expenses
actually incurred in connection with recovery of the proceeds and
disbursement of the proceeds.
In the event that the casualty and condemnation proceeds (other than
business interruption insurance proceeds) are in excess of the Austin
Threshold Amount and are not required to be applied to the payment or
prepayment of the Austin Loan as described above, then the beneficiary is
obligated to make all casualty and condemnation proceeds (other than business
interruption insurance proceeds) available to the Austin Borrower or the
applicable tenant for payment or reimbursement of the costs and expenses of
the repair, restoration and rebuilding of the Austin Property if, (i) at the
time of the loss or damage or at any time thereafter while the Austin
Borrower is holding any portion of the proceeds, there is no continuing Event
of Default, (ii) in the case that the cost of the work exceeds the proceeds,
the Austin Borrower, at its option, either deposits with or delivers to the
beneficiary (and promptly following any such deposit or delivery, provides
written notice of same to the Rating Agencies) (A) cash and cash equivalents,
(B) a letter or letters of credit in an amount equal to the estimated cost of
the work less the proceeds available or (C) such other evidence of the Austin
Borrower's ability to meet such excess costs as is reasonably satisfactory to
the beneficiary and the Rating Agencies, and (iii) beneficiary shall be
furnished with an estimate of the cost of the work accompanied by an
independent architect's certification as to the costs and appropriate plans
and specifications of the work.
Approval Rights. Under the Austin Loan, for each calendar year commencing
after the Austin Effective Maturity Date the Austin Borrower is required to
submit to the beneficiary, for the beneficiary's written approval, an annual
budget not later than 60 days prior to the commencement of such calendar
year. In the event that the Austin Borrower must incur an extraordinary
operating expense or a capital expense not set forth in the approved annual
budget, it is required promptly to deliver to the beneficiary, for the
beneficiary's approval, a reasonably detailed explanation of such proposed
expense.
S-202
<PAGE>
Financial Reporting. The Austin Borrower is required to furnish to the
beneficiary: (a) annually within 100 days after the end of each calendar
year, a copy of its year-end financial statement audited by an independent
accountant reasonably acceptable to the beneficiary in accordance with the
Uniform System of Account for Hotels (Eighth, or most recent Edition); (b)
quarterly within 45 days after each calendar quarter (except the fourth
quarter of any calendar year), quarterly unaudited financial statements
prepared in accordance with the Uniform System of Account for Hotels (Eighth,
or most recent, Edition); (c) annually within 45 days after each calendar
year, a summary of all capital expenditures made at the Austin Property
during the prior 12-month period; and (d) as soon as practicable, such
further information regarding the Austin Property as the beneficiary or the
Rating Agencies may reasonably request in writing. Concurrently with delivery
of the financial statements to the beneficiary, the Austin Borrower is
required to provide a copy of the foregoing items to the Rating Agencies. The
Austin Borrower is also required to provide the beneficiary with updated
information concerning the tax and insurance costs for the next succeeding
calendar year prior to the termination of each calendar year.
S-203
<PAGE>
SHILO INNS HOTEL PORTFOLIO
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
Initial Funding: $65,977,276 $65,765,282
Additional Funding: $20,000,000 $19,967,537
ORIGINATION DATE: INITIAL FUNDING: ORIGINALLY CLOSED AS AN
ADJUSTABLE- RATE MORTGAGE ON MARCH 18, 1997.
LOCKED AT A FIXED RATE OF 8.47% ON SEPTEMBER
29, 1997.
ADDITIONAL FUNDING: OCTOBER 28, 1997
MATURITY DATE: INITIAL FUNDING: OCTOBER 1, 2017
ADDITIONAL FUNDING: NOVEMBER 1, 2017
INTEREST RATE: INITIAL FUNDING: 8.47%
ADDITIONAL FUNDING: 8.36%
AMORTIZATION: 20 YEARS
HYPERAMORTIZATION: N/A
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS:
INITIAL FUNDING: PREPAYMENT IS LOCKED OUT THROUGH AND INCLUDING
SEPTEMBER 30, 2007. SUBSEQUENT TO AND
INCLUDING OCTOBER 1, 2007, THE NOTE MAY BE
PREPAID IN WHOLE, ON REGULARLY SCHEDULED
PAYMENT DATES, PROVIDED THAT THE BORROWER PAY
A PREPAYMENT PREMIUM OF THE GREATER OF 1% OF
THE OUTSTANDING PRINCIPAL BALANCE OR YIELD
MAINTENANCE DISCOUNTED AT THE INTERPOLATED
UNITED STATES TREASURY RATE ADJUSTED TO THE
MONTHLY EQUIVALENT YIELD. ADDITIONAL
FUNDING: PREPAYMENT IS LOCKED OUT THROUGH AND INCLUDING
OCTOBER 30, 2007. SUBSEQUENT TO AND INCLUDING
NOVEMBER 1, 2007, THE NOTE MAY BE PREPAID IN
WHOLE, ON REGULARLY SCHEDULED PAYMENT DATES,
PROVIDED THAT THE BORROWER PAY A PREPAYMENT
PREMIUM OF THE GREATER OF 1% OF THE
OUTSTANDING PRINCIPAL BALANCE OR YIELD
MAINTENANCE DISCOUNTED AT THE INTERPOLATED
UNITED STATES TREASURY RATE ADJUSTED TO THE
MONTHLY EQUIVALENT YIELD.
THE BORROWER: EACH OF THE SEVENTEEN (17) SEPARATE BORROWING
ENTITIES, AS WELL AS THE GENERAL PARTNER OF
EACH BORROWER, IS A SPECIAL-PURPOSE,
BANKRUPTCY-REMOTE ENTITY.
LIEN POSITION: FIRST MORTGAGE LIENS ON THE FEE SIMPLE ESTATES
AND CORRESPONDING IMPROVEMENTS IN THE
SEVENTEEN (17) PROPERTIES REFERENCED IN THE
PROPERTY DESCRIPTION TABLE.
CROSS-COLLATERALIZATION/
DEFAULT: Yes
PROPERTY INFORMATION
PROPERTY TYPE: HOTEL
WEIGHTED-AVERAGE OCCUPANCY: 58%
ADR: $71.31
REVPAR: $41.45
YEAR BUILT: SEE PROPERTY SUMMARY TABLE
UNITS: 2,000
THE COLLATERAL: SEVENTEEN (17) HOTEL PROPERTIES LOCATED IN SIX
(6) STATES. PROPERTY
MANAGEMENT: SHILO INNS
UNDERWRITTEN
CASHFLOW: 13,541,963
APPRAISED VALUE: $131,125,000
APPRAISED BY: JAMES RATKOVICH & ASSOCIATES
<PAGE>
APPRAISAL DATE: DECEMBER 1, 1997
LTV AS OF 12/1/97: 65.4%
Annual Debt Service: 8,917,327
DSC: 1.52x
Loan/Room as of 12/1/97: $42,866
S-204
<PAGE>
SHILO INN LOAN: THE BORROWER; THE PROPERTY:
The Loans. The Shilo Inn Loans comprise 17 loans, in the aggregate
original principal amount of $86,622,000. Sixteen of the Shilo Inn Loans were
originated by Keycorp Real Estate Capital Markets, Inc., ("KeyCorp") on March
18, 1997 and acquired by Merrill Lynch Mortgage Capital, Inc. ("MLMC") on
September 26, 1997, and thereafter modified on September 29, 1997 (each a
"Shilo Inn I Loan" and collectively, the "Shilo Inn I Loans"). One of the
Shilo Inn Loans was originated on October 28, 1997 by Merrill Lynch Credit
Corp. (the "Shilo Inn II Loan" and, together with the Shilo Inn I Loans,
collectively, the "Shilo Inn Loans"). The original principal amount of each
of the Shilo Inn I Loans is shown below with the outstanding principal as of
the Cut-Off Date indicated in parenthesis: the Newport Loan--$13,230,000
($13,142,294); the Portland/Beaverton Loan--$6,980,000 ($6,896,705); the
Idaho Falls Loan--$6,780,000 ($6,706,110); the Yuma Loan--$5,770,000
($5,709,026); the Richland Loan--$4,330,000 ($4,276,772); the Boise Riverside
Loan--$4,000,000 ($3,914,361); the Dalles Loan--$3,720,000 ($3,670,209); the
Warrenton Loan--$3,710,000 ($3,657,094); the Washington Square
Loan--$3,640,000 ($3,600,125); the Spokane Loan--$2,890,000 ($2,810,384); the
Oakhurst Loan--$2,765,000 ($2,728,718); the Pomona Loan--$2,720,000
($2,668,994); the Casper Loan--$2,450,000 ($2,407,635); the Nampa Blvd
Loan--$1,950,000 ($1,918,618); the Grants Pass Loan--$1,230,000 ($1,208,490);
the Delano Loan--$457,000 ($449,746). The original principal loan amount of
the Shilo Inn II Loan is $20,000,000 and the outstanding principal as of the
Cut-Off Date is $19,967,537.
Each Shilo Inn I Loan is evidenced by: (i) a Promissory Note, as modified
by a Note Modification Agreement (each, a "Shilo Inn I Note" and collectively
the "Shilo Inn I Notes"); (ii) as the case may be, (A) a Deed of Trust,
Security Agreement, Assignment of Rents and Fixture Filing, as amended by a
Deed of Trust Modification Agreement, or (B) a Leasehold Deed of Trust,
Security Agreement, Assignment of Rents and Fixture Filing, as amended by a
Leasehold Deed of Trust Modification Agreement (each, a "Shilo Inn I
Mortgage" and collectively the "Shilo Inn I Mortgages"); and (iii) an
Assignment of Leases, Rents and Security Deposits (each, a "Shilo Inn I
Assignment of Leases" and collectively the "Shilo Inn I Assignments of
Leases"). The Shilo Inn II Loan is evidenced and secured by (i) a Promissory
Note (the "Shilo Inn II Note" and together with the Shilo Inn I Notes,
collectively, the "Shilo Inn Notes"); (ii) a Deed of Trust, Security
Agreement, Assignment of Rents and Fixture Filing (the "Shilo Inn II
Mortgage" and together with the Shilo Inn I Mortgages, collectively, the
"Shilo Inn Mortgages"); and (iii) an Assignment of Leases, Rents and Security
Deposits (the "Shilo Inn II Assignment of Leases" and together with the Shilo
Inn I Assignments of Leases, collectively, the "Shilo Inn Assignments of
Leases"). With respect to any individual Shilo Inn Loan, the term "Shilo Inn
Loan Documents" when used in relation to such Shilo Inn Loan means the Shilo
Inn Note, the Shilo Inn Mortgage, the Shilo Inn Assignment of Leases and all
other agreements and instruments executed and delivered in connection
therewith evidencing and securing such Shilo Inn Loan, as the same may from
time to time be amended, restated or otherwise modified, and when used
without reference to any individual Shilo Inn Loan the term "Shilo Inn Loan
Documents" means all of such agreements and instruments, collectively, as the
context may require. Each Shilo Inn Mortgage encumbers a hotel property
(each, a "Shilo Property" and collectively, the "Shilo Properties"). The
Shilo Inn Loans are cross-collateralized and cross-defaulted as more
particularly described hereinbelow.
The Borrower. Each of the following limited liability companies is
organized under the laws of the State of Oregon and is the borrower under
(except as specified with respect to the Shilo Inn II Loan) the similarly
named Shilo Inn Loan specified above under "--The Loan" (each, a "Shilo
Borrower" and collectively, the "Shilo Borrowers"): Shilo Inn, Grants Pass,
LLC; Shilo Inn, Delano, LLC; Shilo Inn, Oakhurt LLC; Shilo Inn, Diamond Bar,
LLC; Shilo Inn, Yuma LLC; Shilo Inn, Newport, LLC; Shilo Inn Beaverton, LLC;
Shilo Inn, The Dalles, LLC; Shilo Inn, Richland, LLC; Shilo Inn, Spokane,
LLC; Shilo Inn, Warrenton, LLC; Shilo Inn, Washington Square, LLC; Shilo Inn,
Boise Riverside, LLC; Shilo Inn, Casper, LLC; Shilo Inn, Idaho Falls, LLC;
Shilo Inn, Nampa Blvd, LLC; and, being the borrower under the Shilo Inn II
Loan, Shilo Inn, Lincoln City, LLC. Each of the Shilo Borrowers is organized
with a single managing member (each, a "Shilo Managing Member" and
collectively the "Shilo Managing Members"), in each case a corporation
organized under the laws of the State of Oregon. The Shilo Borrowers and each
S-205
<PAGE>
Shilo Managing Members are special-purpose, bankruptcy-remote entities whose
respective sole purposes are limited to owning, operating, and managing their
respective Shilo Inns hotel or managing member interest in the applicable
Shilo Borrower, as applicable and to engage in related activities.
SHILO INNS HOTEL POOL: PROPERTY DESCRIPTION
The Properties. The Shilo Inns Hotel Portfolio securing the Shilo Inns
Loan is comprised of 17 hotels located in Idaho, Wyoming, Oregon, California,
Washington, and Arizona. The Shilo Inns Hotels range in size from 48 rooms to
245 rooms totaling 2,000 rooms. As of October 31, 1997 the weighted average
occupancy for the Shilo Inns Hotel Portfolio was 58%, the weighted average
daily rate was $71.31 and the weighted average revenue per available room was
$41.45. The aggregate appraised value of the Shilo Inns Hotel Portfolio,
based on the appraisals performed by James Ratkovich & Associates is
$131,125,000. The Shilo Inns Hotels range in age from 29 to approximately 6
years.
The Shilo Inns are considered the largest independent and privately-owned
lodging chain in the Western United States. Shilo Inn is known for its focus
on providing "Affordable Excellence" and has been honored by Arthur Andersen
and Oregon Business Magazine, among others, as one of Oregon's top private
companies. The company was recently recognized as one of the top 100 lodging
chains in the world.
INDIVIDUAL PROPERTY DESCRIPTIONS
Lincoln City. Shilo Inn--Lincoln City is a 246-room, 7-building full
service hotel constructed in phases in 1968, 1972 and 1995. The latest
addition, completed in March, 1995, is a 61 room wing. The facility is
situated on a 9-acre site overlooking the Pacific Ocean in the city of
Lincoln City (Lincoln County) in the central portion of Oregon's coastline.
Amenities include a restaurant and lounge, meeting space, pool, sauna and
spa, and guest laundry. The applicable Shilo Borrower recently completed a
remodeling exceeding $2 million in June 1997 ($8,139/room) which included
guest rooms, FF&E, common areas, restaurant and pool. The subject property is
located within close proximity to the 185,000 SF Chinook Winds Casino,
factory outlet stores, and other tourist attractions. As of May 31, 1997, the
hotel's occupancy was 60% and the Average Daily Rate was $105.00.
Newport. Shilo Inn--Newport is a 179-room 5-building full service hotel
constructed in phases from 1966 to 1987 on a 3.88-acre site on a bluff
overlooking the Pacific Ocean in the city of Newport along the central
portion of Oregon's coastline. All of the rooms have ocean views. The
facilities include the Shilo Restaurant and Lounge, the Shilo Cafe and Sports
Bar, a 600-person conference center, a 70-person meeting room, 2 indoor
pools, a guest laundry and a card room. The hotel provides valet service and
airport shuttle service. The applicable Shilo borrower recently completed a
$2,500,000 rehabilitation (approximately $14,000/room) of the guest rooms,
hotel FF&E, the restaurants and pools. As of May 31, 1997 the hotel's
occupancy was 56% with an Average Daily Rate of $102.26.
Portland/Beaverton. Shilo Inn--Portland/Beaverton is a full service hotel
located in the greater Portland, Oregon metropolitan area. This urban area,
in the northwest portion of the state, is home to major international
corporations such as Nike, Intel, and General Motors. The property is located
within easy access of Highway 217, Highway 26 and is approximately 10 miles
southwest of the downtown Central Business District. The hotel is situated on
a busy commercial road, near to the Washington Square Mall and Beaverton Town
Square which are both major regional shopping areas. The property is situated
on a 4.08 acre (leasehold) site and includes 142 hotel rooms, a restaurant
with lounge, meeting space, fitness center with spa, sauna, steam room,
outdoor pool, and manager's apartment. The restaurant is leased by a
wholly-owned subsidiary of the applicable Shilo Borrower, monthly rent totals
the greater of $4,000 or 5% of gross sales. In addition the lessee is
responsible for taxes and insurance on the demised premises and a pro rata
portion CAM. Lease payments are $3,402 per month, adjusted every five years
by the increase in the Consumer Price Index. This lease expires on July 1,
2033. The hotel was constructed in phases from 1935, 1969-1970, 72, and 1979.
Shilo Inns acquired the leasehold interest and improvements in 1993 and the
company has subsequently completed a major remodeling during the year. As of
May 31, 1997, the hotel's occupancy was 62% with an Average Daily Rate
$77.43.
S-206
<PAGE>
Idaho Falls. Shilo Inn--Idaho Falls is a 161-unit full service hotel
constructed in 1988 on a 7.49-acre site in Idaho Falls, ID. Idaho Falls is
located in the southeastern area of the state along the Snake River. The
facility includes a restaurant and conference center (800-seat capacity) and
both are leased to an unaffiliated operator through November 30, 2002.
Additional hotel amenities include a swimming pool, spa, steam room, sauna,
coin-operated laundry and 3 hospitality rooms which can accommodate 20 people
each. The property is located with 600 feet of frontage along a major artery
with easy access to two nearby freeways. As of May 31, 1997 the hotel's
occupancy was 61% and its Average Daily Rate was $63.81.
Yuma. Shilo Inn--Yuma is a full service, all suites hotel located in Yuma,
Arizona. The property is located in the main portion of the City of Yuma, on
the east side of Interstate 8 at the 16th Street interchange. The property
contains 54 king sized rooms, 50 double queen rooms, 11 deluxe king rooms, 4
deluxe queen rooms, 15 single queen rooms, and one manager's apartment. Guest
rooms typically have a remote control color television, microwave, three
telephones, and mini-refrigerator. This four story property sits on a 5.93
acre site and includes 134 hotel suites (plus an apartment for the property
manager), restaurant, meeting space for 450 people, fitness center, guest
laundry, outdoor pool, steam and sauna. The hotel was constructed by the
Shilo Inns in 1987. A $1,500,000 remodeling was completed at the end of 1996.
As of May 31, 1997, the hotel's occupancy was 55% with an Average Daily Rate
of $76.02.
Richland. Shilo Inn--Richland is a full service hotel located on a site
overlooking the Columbia River in Richland, Benton County, Washington. It is
situated between the main roadways serving downtown Richland and is visible
from the adjacent freeway. The hotel site has river frontage and is located
in an area that is undergoing redevelopment into a recreational and hotel
center for the city. Built in 1968, hotel improvements include a five-story
hotel guest room building and a one-story structure containing the hotel
lobby, lounge area, meeting space and restaurant. Additional on-site
amenities include a fitness center with steam, sauna and jetted hot spa, an
outdoor pool also with a jetted hot spa. The restaurant and meeting area is
leased to an independent restaurant operator. Shilo Inns purchased the
leasehold improvements in 1987 and has subsequently completed over $4,000,000
in renovations during 1995 and 1996. As of May 31, 1997, the hotel's
occupancy was 54% with an Average Daily Rate of $59.31.
Boise/Riverside. Shilo Inn--Boise/Riverside is a 112-unit, three-story
limited service hotel constructed in 1974 and 1987 on a 1.87-acre site
located on the south side of Main Street at the Boise River in Boise, Idaho.
The facilities include a hospitality room (850 SF), an indoor heated pool,
whirlpool, steamroom, sauna and exercise room. In addition, the first floor
has an 800 square foot conference room (seating 55 to 62) with a wet bar,
microwave, refrigerator and bathroom. A Black Angus restaurant with a bar,
lounge and dance area is located adjacent to the hotel. The property
represents 17% of its directly competitive market. The primary competition in
the subject's price and category are the AmeriTel Inn and Owyhee Plaza.
Occupancy declined during a recent major remodeling, but is now climbing back
to its historical occupancy in the high 60% range. As of May 31, 1997,
occupancy was 63% with an Average Daily Rate of $54.89.
The Dalles. Shilo Inn--The Dalles is a full service hotel built on the
Columbia River in The Dalles, Oregon. The property is located on Bret
Clodfelter Way, a major commercial road running along the river, near the
intersection of US Highway 197 and Interstate 84. The facility contains
meeting/banquet rooms accommodating 250 people, a 137-seat restaurant with
adjacent lounge, heated outdoor swimming pool, fitness center, sauna, steam
bath and continental breakfast room. The site is easily accessible and has a
view of the Columbia River and the Dalles Dam. The property is situated on
five contiguous tax lots totaling 10.12 acres. Due to topography, flood zones
and highway right-of-ways, however, only 6.18 acres are available for
development. The facility has five interconnected two-story buildings with
112 hotel rooms. The hotel was constructed in 1971 and purchased by Shilo in
1989 who completed a rehabilitation and added a wing during 1990 and 1991.
This Shilo Inn site includes the remains of two historical sites, the Lone
Pine Indian Village and a Shaker Church. Both are over 100 years old and are
on the National Registry of Historic Places. As of May 31, 1997, the hotel's
occupancy was 58% with an Average Daily Rate of $58.64.
Warrenton. Shilo Inn--Warrenton, built in 1990, contains 62 mini-suites
(plus manager's apartment) housed in one four-story building and a free
standing restaurant building. Featured amenities include
S-207
<PAGE>
meeting space, an indoor pool, spa and steam room. On 1.15 acres, this
all-suite hotel is located in Warrenton, Oregon which is 3 miles south of the
city of Astoria. The property is located near the intersection of Highway
101, the major transportation artery running north/south along the Pacific
Ocean and Harbor Drive. Harbor Drive is the main east/west thoroughfare
through Warrenton. The area is a popular resort and recreational area. Nearby
are various small shopping centers, restaurants and Young's Bay Harbor is
visible from the upper floors of the hotel. The hotel is in excellent
condition, has an on-site restaurant, and good access and visibility to
Highway 101. As of May 31, 1997, the hotel's occupancy was 64% with an
Average Daily Rate of $74.78.
Washington Square. Shilo Inn--Washington Square is a limited service hotel
located in Tigard, Oregon. Tigard is part of the greater Portland
metropolitan area and home to major international corporations including
Nike, Intel, and General Motors. The property is located with easy access to
the Interstate-5 and Highway 217 interchange and on a busy commercial road.
The site is near the Washington Square Mall, a major regional shopping area.
The property is on a 1.21 acre (leasehold) site and includes 77 hotel rooms,
small meeting space, fitness center, spa, breakfast area/guest lounge, and
manager's apartment. The hotel was constructed by the borrower in 1984. Room
mix includes 16 king sized rooms (6 with a kitchen), 13 double queen rooms,
46 single queen, and 2 triple queens. As a limited service hotel, Shilo Inn
has few nearby competitors. As of May 31, 1997, the hotel's occupancy was 70%
with an Average Daily Rate of $63.07.
Spokane. Shilo Inn--Spokane is a full service hotel in Spokane, Spokane
County, Washington. The property is located on East Third Avenue on an
interior block which is approximately 1 mile east of the downtown central
business district. The property is in a stable commercial neighborhood and is
easily accessible to the Interstate 90 interchange. It sits on an irregularly
shaped assemblage of 10 city lots totaling 1.77 acres. The site is improved
with a five-story building containing 105 hotel rooms, restaurant,
conference/meeting space, indoor pool, fitness center with spa, steam and
sauna room, and guest laundry. The hotel was constructed in 1973 and Shilo
Inns has subsequently completed a $3,500,000 Million rehabilitation
($33,333/room) during 1995 and 1996. As of May 31, 1997, the hotel's
occupancy was 66% with an Average Daily Rate of $62.17.
Oakhurst. The Shilo Inn--Oakhurst/Yosemite is an 80-room, four-story
limited service hotel constructed in 1988 on a 1.99-acre site in the
unincorporated community of Oakhurst. This community is in central California
approximately 12 miles south of Yosemite National Park and 45 miles north of
Fresno. The facilities include a swimming pool, spa, steam room, sauna,
weight room, coin-operated guest laundry and a lounge. An Ol' Kettle
restaurant is immediately adjacent and a number of other restaurants are
within walking distance. This area's proximity to Yosemite National Park,
national forests, numerous lakes and scenic areas provides a strong tourist
economic base. The property is well-located with frontage along the major
route through the area. As of May 31, 1997 the hotel's occupancy was 56% with
an Average Daily Rate of $74.09.
Pomona. The Shilo Inn--Pomona is a 160-room full service hotel constructed
in 1985 on a 5.38-acre site in Pomona, CA. The guest rooms consist of 64
queen rooms, 62 double queen rooms and 34 king rooms. The hotel is located
approximately 31 miles east of downtown Los Angeles in the Inland Empire
area. It occupies a strategic location at a major intersection on the Orange
Freeway near four other major freeways to include I-10 and I-210. The
facilities include a swimming pool, spa, sauna, steam room, exercise room, a
coin-operated guest laundry, 3 meeting rooms and a restaurant-lounge.
Immediately across the street is another Shilo property known as the Shilo
Inn Hilltop Suites which is a 130-room all-suite hotel that complements the
hotel and shares general and administrative systems. Nearby is Cal State Poly
University and San Antonio College campuses. The Shilo Inn's restaurant is
leased to an outside third-party operator until 8/31/2007. As of May 31, 1997
the hotel's occupancy was 45% with an Average Daily Rate of $62.34.
Casper/Evansville. Shilo Inn--Casper/Evansville is a 101-unit 2-story full
service hotel constructed in 1980 on a 2.01-acre site located on the north
side of I-25 at Curtis Street in Evansville, WY. Evansville is a
bedroom-community suburb of Casper, WY. It is located on a primary route to
Yellowstone National Park. Its amenities include a banquet room (60-seat), a
meeting room (25-seat) on the second floor, a
S-208
<PAGE>
swimming pool, hot tub, sauna, steam room, a coin-operated laundry and an
attached single-story restaurant (132-seat) with a lounge/bar that seats 53
and a bandstand stage with dance floor. Room mix includes 4 handicapped
single-queen rooms, 29 single-queen rooms, 45 double-queen rooms and 29 king
rooms. The facility underwent a $500,000 remodeling program in 1995 with new
carpet, beds, wall coverings, ceramic tile and flooring. As of May 31, 1997,
the hotel's occupancy was 63% with an Average Daily Rate of $43.79.
Nampa. Shilo Inn--Nampa Boulevard is a 61-unit limited service hotel
constructed in 1979 on a 0.98-acre site in Nampa, ID which is in southwestern
Idaho approximately 15 miles west of Boise. Hotel amenities include a pool,
spa, steam room, sauna, coin-operated guest laundry and in-room microwaves
and refrigerators. The property is well-located on Nampa Blvd., a major
north/south artery. The hotel is immediately adjacent to the I-84
intersection with Nampa Boulevard which enhances visibility and access and
promotes further development and investment activity in the immediate
vicinity. A remodeling is planned for 1997, which will include new carpet,
draperies, wallpaper, bedspreads, headboards, bathroom sinks, counters and
tile, a 6-foot expansion of the lobby area and the enclosure of the pool for
year around use. As of May 31, 1997, the hotel's occupancy was 66% with an
Average Daily Rate of $47.66.
Grants Pass. Shilo Inn--Grants Pass is a 70-unit limited service hotel
constructed in 1974 on a 1.41-acre site in Grants Pass. Grants Pass is
located in the southwestern corner of Oregon. The facilities include a
manager's apartment, a meeting room, a heated outdoor pool and spa, steam
rooms and a guest laundry. The property does not include a restaurant, but a
Bee Gees restaurant is immediately adjacent and numerous other restaurants
are nearby. The property is located with frontage on Highway 99 and near an
I-5 interchange. The property was recently remodeled to place it above its
competition. Tourism constitutes 65% of the market demand and commercial
demand makes up the 35% balance. As of May 31, 1997, the hotel's occupancy
was 43% and its Average Daily Rate was $54.61.
Delano. Shilo Inn--Delano is a 48-unit, three-story limited service hotel
constructed in 1987 on a 0.86-acre site located at the intersection of
Highway 99 and County Line Road in Delano, CA. Delano is 140 miles north of
Los Angeles and 30 miles north of Bakersfield in the southern region of the
San Joaquin Valley. The area is primarily agricultural. The community,
however, is promoting diversification and has achieved some success in
attracting other industry such as a 1 million square foot Sears distribution
center. The facilities include a lobby sitting area with a sofa and chairs, a
small complimentary continental breakfast room, a pool and a spa. The
property is located along Highway 99. As of May 31, 1997, the hotel's
occupancy was 51% and the average daily rate was $47.74.
Environmental Report. Phase I site assessments have been performed on the
Shilo Properties between August 27, 1997 and September 5, 1997. The Phase I
assessments did not reveal any environmental liabilities that the Depositor
believes would have a material adverse effect on the borrower's business,
assets or results of operations taken as a whole. Nevertheless, there can be
no assurance that all environmental conditions and risks were identified in
such environmental assessments.
Engineering Report. Property Condition Reports were completed on the Shilo
Properties between July 29, 1997 and August 7, 1997 by a third party due
diligence firm. The Property Condition Reports concluded that the Shilo Inns
Hotels Pool Properties were in above average condition and identified
approximately $236,006 in deferred maintenance requirements. At the
origination of the Shilo Inns Hotels Loan, the Shilo Inns Hotels Borrower
established a deferred maintenance reserve account equal to $295,008 to fund
the cost of addressing the identified items.
Seismic Reports. A Seismic Report was completed on November 23, 1996 for
Shilo Inn--Delano by Surveys Inc. The Seismic Report found that the
theoretical probable maximum loss ("PML") for the Shilo Inn--Delano is
estimated to be 3.37% (approximately $35,811) of the replacement cost of the
building structure. The 100 Year Bounded Maximum earthquake scenario for the
building is estimated to be 1.29% (approximately $13,660) of the replacement
cost of the building over a 100 year return period. Based upon the October 1,
1996 site inspection, the third party due diligence firm would expect the
building would suffer little damage, and does not expect that the building
would need to be closed for inspection by a structural engineer.
S-209
<PAGE>
A Seismic Report was completed on November 23, 1996 for Shilo
Inn--Oakhurst by Surveys Inc. The Seismic Report found that the theoretical
PML for the Shilo Inn--Oakhurst is estimated to be 0% of the replacement cost
of the buildings. The 100 Year Bounded Maximum earthquake scenario for the
building is estimated to be 0% of the replacement cost of the building over a
100 year return period. The maximum PML of 0% based upon the October 1, 1996
site inspection indicates that there is no seismic risk potential at this
site.
A Seismic Report was completed on November 23, 1996 for Shilo Inn--Pomona
by Surveys Inc. The Seismic Report found that the theoretical PML for the
Shilo Inn--Pomona is estimated to be 25.22% (approximately $1,028,384) of the
replacement cost of the buildings. The 100 Year Bounded Maximum earthquake
scenario for the building is estimated to be 8.87% (approximately $362,416)
of the replacement cost of the buildings over a 100 year return period. Based
upon the October 3, 1996 site inspection, the third party due diligence firm
would expect the building would suffer structural damage, and would expect
that the building would be closed for inspection by a structural engineer and
subsequent repairs, in the event of the worst likely earthquake scenario.
A Seismic Report was completed on November 23, 1996 for Shilo Inn--Yuma by
Surveys Inc. The Seismic Report found that the theoretical PML for the Shilo
Inn--Yuma is estimated to be 44.36% (approximately $1,579,111) of the
replacement cost of the buildings. The 100 Year Bounded Maximum earthquake
scenario for the building is estimated to be 15% (approximately $531,420) of
the replacement cost of the buildings over a 100 year return period. Based
upon the October 4, 1996 site inspection, the building would need to be
closed for a fairly significant period (up to 6 months) so that proper
structural evaluations and repairs could be made, in the event of the worst
likely earthquake scenario.
Ground Leases. Each Shilo Property which is collateral for the Beaverton
Loan, the Washington Square Loan and the Richland Loan consists primarily of
a ground lease and the respective Shilo Borrower's ground leasehold estate in
such Shilo Property created thereby.
The Shilo Property which is collateral for the Beaverton Loan is leased by
the Shilo Borrower thereunder pursuant to an Amended and Restated Ground
Lease dated June 1, 1993 (the "Beaverton Ground Lease"), executed by such
Shilo Borrower's predecessor-in-interest, as lessee. As a predecessor lessee,
and pursuant to a Landlord's Consent & Estoppel Agreement Consent to
Assignment of Lessee's Interest dated December 11, 1996, Mark S. Hemstreet
("Hemstreet"), an affiliate of the Shilo Borrowers, remains personally liable
for the payment obligations under such ground lease and the lessee's
performance of all terms and obligations thereunder. The current term of the
Beaverton Ground Lease expires on June 30, 2033, and the lessee thereunder
has no remaining options to renew the term thereof. The base rent under the
Beaverton Ground Lease is $50,212 per year, subject to increases based on
increases in the consumer price index.
The Shilo Property which is collateral for the Washington Square Loan is
leased by the Shilo Borrower thereunder pursuant to a Ground Lease dated
January 31, 1984 (the "Washington Square Ground Lease"), executed by such
Shilo Borrower's predecessor-in-interest, as lessee. As a predecessor lessee,
and pursuant to a Landlord's Consent & Estoppel Agreement Consent to
Assignment of Lessee's Interest dated December 11, 1996, Hemstreet remains
personally liable for the payment obligations under such ground lease and the
lessee's performance of all terms and obligations thereunder. The current
term of the Washington Square Ground Lease expires on June 30, 2024, and the
lessee thereunder has one remaining option to renew the term thereof for a
renewal term of 10 years. The base rent under the Washington Square Ground
Lease is $53,876 per year, subject to annual increases such that the base
rent for each applicable year is 105% of the base rent for the immediately
preceding year.
The Shilo Property which is collateral for the Richland Loan is leased by
the Shilo Borrower thereunder pursuant to a Ground Lease dated June 16, 1961
(the "Richland Ground Lease" and, together with the Beaverton Ground Lease
and the Washington Square Ground Lease, collectively, the "Shilo Ground
Leases"), executed by such Shilo Borrower's predecessor-in-interest, as
lessee. As a predecessor lessee, and pursuant to a Landlord's Consent &
Estoppel Agreement Consent to Assignment of Lessee's Interest dated December
9, 1996, Hemstreet remains personally liable for the payment obligations
under such ground lease and the lessee's performance of all terms and
obligations thereunder. The term of the
S-210
<PAGE>
Richland Ground Lease expires on December 31, 2015, and the lessee thereunder
has no remaining options to renew the term thereof. The base rent under the
Richland Ground Lease is $33,238 and is based on gross receipts from the
subject Shilo Property.
Pursuant to the terms of a landlord estoppel given in connection with the
Shilo Inn Loans with respect to each of the Shilo Ground Leases, the
mortgagee under the related Shilo Inn Loan (i) is entitled to notice of any
tenant defaults thereunder (and no such notice delivered to such tenant is
effective unless also delivered to such mortgagee), (ii) has the right to
cure tenant defaults thereunder within specified time periods and (iii) any
default which is not susceptible of cure by the mortgage shall be deemed
waived upon completion of foreclosure proceedings with respect to the
applicable Shilo Property. Each Shilo Borrower which is a tenant under a
Shilo Ground Lease has, in its respective Shilo Mortgage, represented and
covenanted to the mortgagee thereunder that, among other things, (a) its
ground lease is in full force and effect, (b) there are no defaults and no
notices of default have been delivered thereunder, (c) such Shilo Borrower
will promptly pay all rent and other charges due thereunder and perform its
obligations thereunder, (d) such Shilo Borrower will not do or suffer to be
done any event or omission which could result in a default thereunder, and
(e) such Shilo Borrower will not cancel, terminate, surrender, modify or
amend any portion of the subject Shilo Property or any provision of such
ground lease.
Property Management. Each Shilo Property is managed by Shilo Management
Corporation, an Oregon corporation (the "Shilo Manager") pursuant to a
management agreement entered into between the Shilo Manager and the
applicable Shilo Borrower (each, a "Shilo Management Agreement" and
collectively, the "Shilo Management Agreements"). Each Shilo Management
Agreement provides for a management fee equal to 5% of hotel revenues at the
applicable Shilo Property and is payable monthly.
Pursuant to each of 17 assignments of management agreement, consent and
agreement of manager (each, a "Shilo Manager's Consent" and collectively, the
"Shilo Manager's Consents"), executed with respect to the Shilo Management
Agreements by the Shilo Manager and the applicable Shilo Borrower, the Shilo
Manager has agreed: (i) that mortgagee shall have the right at any time after
the occurrence of an Event of Default under the applicable Shilo Loan
Documents, either (a) to require the Shilo Manager to continue performance on
behalf of mortgagee or (b) to terminate the applicable Shilo Management
Agreement upon thirty (30) days' written notice to the Shilo Manager; (ii) if
mortgagee shall exercise its right to require the Shilo Manager to perform
under the applicable Shilo Management Agreement, mortgagee shall have the
right at any time upon not less than thirty (30) days' prior written notice
to the Shilo Manager to terminate the applicable Shilo Management Agreement
without cause; (iii) subject to notice and a 30-day cure period, in the event
that mortgagee reasonably determines that the applicable Shilo Property is
not being managed in accordance with commercially reasonable management
practices for property similarly situated to such Shilo Property, mortgagee
may require the applicable Shilo Borrower to replace the Shilo Manager with a
manager acceptable to mortgagee.
S-211
<PAGE>
PROPERTY SUMMARY The following table presents certain information regarding
the Shilo Inn properties:
SHILO INN PROPERTY SUMMARY
<TABLE>
<CAPTION>
YEAR BUILT/ NUMBER
PROPERTY ADDRESS (RENOVATED) OF ROOMS OCCUPANCY(1) ADR(1) REVPAR(1)
- -------------------------------- --------------- ---------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Shilo Inn--Lincoln City, OR 1968/(1995) 245 60% $105.00 $63.00
1501 N.W. 40th Street
Lincoln City, OR 97367
Shilo Inn--Newport, OR 1966-72; 1987 179 56% $102.26 $57.27
536 SW Elizabeth
Newport, OR 97365
Shilo Inn--Portland/Beaverton, 1935-79/ 142 62% $ 77.43 $48.01
OR (1996-97)
9900 SW Canyon Road
Portland, OR 97225-2996
Shilo Inn--Idaho Falls, ID 1988 162 61% $ 63.81 $38.92
780 Lindsay Boulevard
Idaho Falls, ID
Shilo Inn--Yuma, AZ 1986 134 55% $ 76.02 $41.81
1550 Castle Dome Avenue
Yuma, AZ 85365
Shilo Inn--Richland, WA 1968 150 54% $ 59.31 $32.03
50 Comstock Street (1995-96)
Richland, WA 99352
Shilo Inn--Boise, ID 1974; 1987/ 112 63% $ 54.89 $34.58
3031 Main Street (1996-97)
Boise, ID 83702
Shilo Inn--The Dalles, OR 1972; 1991 112 58% $ 58.64 $34.01
3223 Bret Clodfelter Way
The Dalles, OR 97058-9718
Shilo Inn--Warrenton, OR 1990 62 64% $ 74.78 $47.86
1609 East Harbor Drive
Warrenton, OR 97146
Shilo Inn--Washington Square, OR 1984 77 70% $ 63.07 $44.15
10830 SW Greenburg Road
Tigard/Washington Square, OR
97223-1409
Shilo Inn--Spokane, WA 1973 105 66% $ 62.17 $41.03
East 923 Third Avenue (1995-96)
Spokane, WA 99202
Shilo Inn--Oakhurst, CA 1988 80 56% $ 74.09 $41.49
40644 Highway 41
Oakhurst, CA 93644
Shilo Inn--Pomona, CA 1984 160 45% $ 62.34 $28.05
3200 Temple Avenue
Pomona, CA 91768
Shilo Inn--Casper, WY 1979; 1985 101 63% $ 43.79 $27.59
739 Luker Lane
Casper/Evansville, WY 82636
Shilo Inn--Nampa Boulevard, ID 1973 61 66% $ 47.66 $31.46
617 Nampa Boulevard
Nampa, ID 83687-3065
Shilo Inn--Grants Pass, OR 1974 70 43% $ 54.61 $23.48
1880 NW Sixth Street
Grants Pass, OR 97526-1038
Shilo Inn--Delano, CA 1986 48 51% $ 47.74 $24.35
2231 Girard Street
Delano, CA 93215
---------- ------------ --------- ---------
TOTAL/WEIGHTED AVERAGE 2,000 58% $ 71.31 $41.45
========== ============ ========= =========
</TABLE>
- --------------
(1) Occupancy, ADR, and RevPAR based on borrower-provided historical figures
for the 17-month period ended May 31, 1997.
S-212
<PAGE>
UNDERWRITTEN CASHFLOW -- SHILO INN
<TABLE>
<CAPTION>
LINCOLN PORTLAND/ IDAHO THE
CITY NEWPORT BEAVERTON FALLS YUMA RICHLAND BOISE DALLES WARRENTON
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rooms................... $5,318,246 $3,734,929 $2,487,872 $2,294,149 $2,040,012 $1,729,826 $1,403,577 $1,397,634 $1,081,449
Food & Beverage......... 171,294 156,458 60,925 153,653 45,558 54,564 -- 57,291 54,092
Telephone............... 53,225 39,145 58,332 71,861 73,024 40,153 27,251 28,510 19,064
Other Departments....... 13,311 9,354 8,938 9,189 8,321 8,872 15,578 4,728 4,429
Other................... 21,930 15,717 3,225 4,537 4,736 23,092 6,145 5,178 4,117
TOTAL REVENUE............ $5,578,006 $3,955,603 $2,619,292 $2,533,389 $2,171,651 $1,856,507 $1,452,551 $1,493,341 $1,163,151
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES
Departmental Expenses .
Rooms.................. $ 845,398 $ 533,837 $ 548,573 $ 508,145 $ 352,903 $ 388,013 $ 290,908 $ 326,394 $ 223,112
Food & Beverage........ 9,423 15,689 4,021 9,428 3,600 6,901 22,830 20,686 2,213
Telephone.............. 31,666 16,831 40,594 34,048 37,797 38,098 17,165 17,462 11,831
Supplies............... 33,312 1,998 4,543 6,822 3,011 2,096 2,734 3,650 2,393
Payroll & Related Exp . -- 76 684 4,505 509 1,208 1,587 644 424
Undistributed Expenses .
General &
Administrative........ $ 150,642 $ 104,645 $ 134,682 $ 122,035 $ 115,273 $ 115,963 $ 48,378 $ 54,335 $ 37,737
Franchise Fee.......... 230,027 100,938 -- 88,451 64,131 45,258 127,821 63,263 68,790
Sales and Marketing ... 195,433 215,510 237,638 114,220 109,601 103,263 46,485 56,204 24,262
Property Maintenance .. 159,741 124,863 100,161 87,288 70,706 66,920 50,875 59,002 32,451
Energy................. 149,596 121,847 86,424 114,629 144,210 80,408 54,283 121,164 45,209
Fixed Charges...........
--
FF&E................... $ 223,120 $ 158,224 $ 104,772 $ 101,336 $ 86,866 $ 74,260 $ 58,102 $ 59,734 $ 46,526
Mangement Fee.......... 278,900 197,780 130,965 126,669 108,583 92,825 72,628 74,667 58,158
Real Estate Taxes...... 199,496 150,809 54,901 215,750 187,922 63,156 61,050 73,048 23,918
Insurance.............. 40,618 17,814 10,940 11,615 10,383 10,712 9,023 12,071 5,817
Other.................. 4,194 -- 50,213 -- -- 23,170 -- -- --
TOTAL EXPENSES........... $2,551,567 $1,760,861 $1,509,110 $1,544,941 $1,295,494 $1,112,252 $ 863,869 $ 942,325 $ 582,841
---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Percent of EGI........... 45.7% 44.5% 57.6% 61.0% 59.7% 59.9% 59.5% 63.1% 50.1%
NET OPERATING INCOME .... $3,026,439 $2,194,741 $1,110,182 $ 988,448 $ 876,156 $ 744,255 $ 588,682 $ 551,016 $ 580,310
========== ========== ========== ========== ========== ========== ========== ========== ==========
Average Room Rate........ $ 102.14 $ 102.26 $ 77.43 $ 63.81 $ 76.02 $ 59.31 $ 54.89 $ 58.97 $ 74.78
Average Occupancy........ 58.0% 56.0% 62.0% 61.0% 55.0% 54.0% 63.0% 58.0% 64.0%
December 1, 1997 ........
Principal Balance....... -- -- -- -- -- -- -- -- --
Debt Service............. -- -- -- -- -- -- -- -- --
DSCR..................... -- -- -- -- -- -- -- -- --
LTV...................... -- -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
WASHINGTON NAMPA GRANTS AGGREGATE
SQUARE SPOKANE OAKHURST POMONA CASPER BOULEVARD PASS DELANO POOL
---------- ---------- ---------- ---------- ---------- --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUE
Rooms................... $1,237,790 $1,568,509 $1,210,879 $1,638,137 $1,017,991 $696,752 $597,292 $426,580 $29,881,624
Food & Beverage......... -- 11,784 -- 98,513 14,550 -- -- -- 878,680
Telephone............... 31,824 31,685 22,631 55,642 28,796 17,124 11,496 6,515 616,278
Other Departments....... 7,285 18,603 4,993 76,248 1,975 4,459 2,344 1,630 200,257
Other................... 3,669 2,817 23,059 28,422 5,435 1,685 823 679 155,266
TOTAL REVENUE............ $1,280,568 $1,633,398 $1,261,562 $1,896,962 $1,068,747 $720,020 $611,955 $435,404 $31,732,105
---------- ---------- ---------- ---------- ---------- --------- -------- -------- -----------
OPERATING EXPENSES
Departmental Expenses .
Rooms.................. $ 251,747 $ 336,945 $ 278,873 $ 567,885 $ 245,352 $175,577 $158,705 $165,085 $ 6,197,452
Food & Beverage........ 22,374 10,635 30,247 13,989 9,242 10,063 8,460 8,980 208,781
Telephone.............. 21,917 19,105 15,881 33,186 16,650 14,826 8,381 5,314 380,752
Supplies............... 2,124 2,110 2,116 9,843 1,043 2,930 315 706 81,746
Payroll & Related Exp . 944 668 563 552 804 392 560 -- 14,120
Undistributed Expenses . $ --
General &
Administrative........ $ 43,813 $ 99,358 $ 61,465 $ 163,630 $ 62,760 $ 28,115 $ 27,209 $ 20,632 $ 1,390,672
Franchise Fee.......... 123,399 -- 117,477 51,847 42,523 77,191 44,241 18,100 1,263,457
Sales and Marketing ... 30,269 147,073 33,910 99,910 42,977 9,211 29,194 34,148 1,529,308
Property Maintenance .. 26,930 71,213 50,603 107,547 47,724 26,874 28,737 13,316 1,124,951
Energy................. 44,455 121,426 100,396 119,997 59,890 26,613 40,195 42,010 1,472,752
Fixed Charges...........
FF&E................... $ 51,223 $ 65,336 $ 50,462 $ 75,878 $ 42,750 $ 28,801 $ 24,478 $ 17,416 $ 1,269,284
Mangement Fee.......... 64,028 81,670 63,078 94,848 53,437 36,001 30,598 21,770 1,586,605
Real Estate Taxes...... 35,613 46,244 38,665 114,679 10,833 21,292 26,338 13,228 1,336,943
Insurance.............. 7,787 8,409 11,057 21,297 8,669 6,393 6,900 5,012 204,517
Other.................. 51,223 -- -- -- -- -- -- -- 128,800
TOTAL EXPENSES........... $ 777,845 $1,010,192 $ 854,794 $1,475,089 $ 644,654 $464,279 $434,311 $365,717 $18,190,142
---------- ---------- ---------- ---------- ---------- -------- -------- -------- -----------
Percent of EGI........... 60.7% 61.8% 67.8% 77.8% 60.3% 64.5% 71.0% 84.0% 57.3%
NET OPERATING INCOME .... $ 502,723 $ 623,206 $ 406,768 $ 421,873 $ 424,092 $255,741 $177,644 $ 69,687 $13,541,963
========== ========== ========== ========== ========== ========= ======== ======== ===========
<PAGE>
Average Room Rate........ $ 63.07 $ 62.17 $ 74.09 $ 62.34 $ 43.79 $ 47.66 $ 54.61 $ 47.74 $ 79.18
Average Occupancy........ 70.0% 66.0% 56.0% 45.0% 63.0% 66.0% 43.0% 51.0% 58.7%
December 1, 1997 ........
Principal Balance....... -- -- -- -- -- -- -- -- $85,732,818
Debt Service............. -- -- -- -- -- -- -- -- 8,917,327
DSCR..................... -- -- -- -- -- -- -- -- 1.52x
LTV...................... -- -- -- -- -- -- -- -- 65.4%
</TABLE>
S-213
<PAGE>
SHILO INN: THE LOAN.
Security. Each Shilo Inn Loan is a non-recourse loan, secured only by the
applicable Shilo Mortgage encumbering, as applicable, the fee estate or the
ground leasehold estate of the applicable Shilo Borrower in its Shilo
Property and certain other collateral relating thereto (including the related
Shilo Assignment of Leases). Mortgagee is the insured under the title
insurance policies which insure, among other things, that each of the Shilo
Mortgages constitutes a valid and enforceable first lien on the applicable
Shilo Property, subject to certain exceptions and exclusions from coverage
set forth therein. Such title insurance policies, together with the Shilo
Notes, the Shilo Mortgages and the other Shilo Loan Documents will be
assigned to the Trust Fund.
Pursuant to seventeen subordinate deeds of trust, security agreement,
assignment of rents, fixture filing and guaranty (each, a "Subordinate Shilo
Mortgage" and collectively, the "Subordinate Shilo Mortgages"), executed by
the respective Shilo Borrowers, the Shilo Inn Loans are, subject to the terms
thereof, cross-collateralized. Under its Subordinate Shilo Mortgage, each
Shilo Borrower has (i) guaranteed the obligations of the other Shilo
Borrowers under their respective Shilo Inn Loans to the extent of the greater
of (A) a stated floor which varies among the Shilo Loans but is typically in
the range of $1,000,000 and (B) 95% of the excess of the fair saleable value
of the assets of the guarantor Shilo Borrower over its present or contingent
liabilities (excluding its Subordinate Shilo Mortgage) up to a maximum of the
original principal amount of the other Shilo Inn Loans guaranteed thereby,
and (ii) granted to the mortgagee under such other Shilo Inn Loans, as
security for such guaranty, a second lien on its Shilo Property.
Payment Terms. Each of the Shilo Inn I Loans matures on the Payment Date
(as defined below) in October, 2017 (the "Shilo Loan I Maturity Date"). The
Shilo Inn II Loan matures on the Payment Date in November, 2017 (the "Shilo
Loan II Maturity Date"). The Shilo Inn I Loans bear interest at a fixed rate
per annum equal to 8.47% (the "Shilo Inn I Interest Rate"). The Shilo Inn II
Loan bears interest at a fixed rate per annum equal to 8.36% (the "Shilo Inn
II Interest Rate"). Interest on each Shilo Inn Loan is calculated on the
basis of a 360-day year, on twelve (12) 30-day months for each full calendar
month and the actual number of days elapsed in the applicable period for
which the interest is being calculated for any partial calendar month. The
payment date (each, a "Payment Date") for each Shilo Inn Loan is the first
business day of each month.
The Shilo Inn Loans require monthly payment of principal and interest on
each Payment Date in the amount, with respect to the Shilo Inn I Loans, in
the aggregate, of $6,855,768 and, with respect to the Shilo Inn II Loan, of
$2,061,559. On the Shilo Loan I Maturity Date and Shilo Loan II Maturity
Date, as applicable, payment of the then outstanding balance of the
principal, if any, together with all accrued and unpaid interest and all
other sums payable under the documents evidencing, respectively, the Shilo
Inn I Loans and the Shilo Inn II Loan, is required. For so long as no Event
of Default (as hereinafter defined) under a Shilo Inn Loan has occurred, all
payments received by the mortgagee with respect thereto shall be applied in
the following order of priority: (i) to the repayments of sums advanced by
the mortgagee pursuant to the terms of the documents evidencing the
applicable Shilo Inn Loan for any reason (other than the initial advance of
principal), including, without limitation, the payment of taxes, assessments,
insurance premiums or other charges against the applicable Shilo Property
(together with interest thereon from the date of advance until the date
repaid at the Shilo Default Rate (as hereinafter defined); (ii) to the
payment of any outstanding late charges; (iii) to the payment of accrued but
unpaid interest which is due and payable; and (iv) to reduction of the then
outstanding principal balance of the applicable Shilo Inn Loan, as such
amount may be adjusted from time to time. Notwithstanding the foregoing, from
and after an Event of Default, all payments received by the mortgagee with
respect to each of the Shilo Notes shall be applied to principal, interest
and/or other charges due under the Shilo Notes, as applicable, or under the
other documents evidencing the related Shilo Inn Loan in such order as the
mortgagee shall determine in its sole subjective discretion.
If a Shilo Borrower defaults in the payment of any monthly installment of
principal and interest on a Payment Date or if a Shilo Borrower fails to pay
the principal balance of its Shilo Inn Loan on the Shilo Loan I Maturity Date
or Shilo Loan II Maturity Date, as applicable, the interest rate under the
related
S-214
<PAGE>
Shilo Note will be increased to a default rate equal to the lesser of (i) the
highest rate permitted by applicable law to be charged on commercial mortgage
loans, and (ii) the Shilo Inn I Interest Rate or the Shilo Inn II Interest
Rate, as applicable, plus four percent (4%) per annum (the "Shilo Default
Rate"). In addition to any interest which may be charged, each Shilo Borrower
shall pay to mortgagee a late charge for the collection of late payments
under its Shilo Inn Loan in an amount equal to five percent (5.0%) of any
payment required under the Note which is not paid within five (5) business
days after the date such payment is due.
Events of Default. Under each Shilo Inn Loan, pursuant to the terms of the
related Shilo Mortgage, the occurrence of any of the following constitutes an
"Event of Default": (a) failure to make any monthly payment of interest or
principal in full within five (5) business days after the date the same is
due, or failure to pay the principal balance when due; (b) failure to pay any
other amount payable pursuant to the related Shilo Note, the Shilo Mortgage
or any other Shilo Loan Documents within five (5) business days after the
date the same is due and payable; (c) if a default occurs under the related
Shilo Note or any of the other Shilo Loan Documents and such default is not
cured before the expiration of any applicable grace or cure periods; (d)
failure to keep in force the insurance required under the Shilo Mortgage to
be maintained or failure to assign and deliver the insurance policies and
proceeds to the mortgagee; (e) if the applicable Shilo Borrower attempts to
assign its rights under the Shilo Mortgage or any Shilo Loan Document, or if
any Transfer (as hereinafter defined) of the applicable Shilo Property or
interests in the applicable Shilo Borrower occurs other than in accordance
with the provisions of the Shilo Mortgage; (f) if any representation,
warranty or covenant of the Shilo Borrower made under the Shilo Mortgage or
any other Shilo Loan Document or in any certificate, report, financial
statement or other instrument or agreement furnished to the mortgagee shall
prove false or misleading in any material respect; (g) if the Shilo Borrower
or any general partner or managing member of the Shilo Borrower makes an
assignment for the benefit of creditors or admits in writing its inability to
pay its debts generally as they become due; (h) the occurrence of certain
bankruptcy and insolvency events; (i) if the Shilo Borrower shall be in
default beyond any grace or notice period, if any, under any other deed of
trust, mortgage or security agreement (including the applicable Subordinate
Shilo Mortgage) covering any part of the applicable Shilo Property; (j)
failure to comply with certain covenants requiring the Shilo Borrower to keep
the applicable Shilo Property free from liens and encumbrances; (k) if the
Shilo Borrower discontinues the operation of the applicable Shilo Property or
any part thereof for reasons other than repair or restoration arising from a
casualty or condemnation, or if the Shilo Borrower is enjoined by any court
or governmental authority from continuing the operation of its business,
including, without limitation, entering into leases or performing its
obligations thereunder, which injunction is not released or stayed, for
forty-five (45) days; (l) except as otherwise permitted by the Shilo
Mortgage, if the Shilo Borrower or its general partner or managing member
institutes or causes to be instituted any proceeding for the termination or
dissolution of the Shilo Borrower or its general partner or managing member;
(m) if the applicable Shilo Property, or any part thereof, is subjected to
waste or to removal, demolition or material alteration so that the value of
such Shilo Property is materially diminished thereby; and the mortgagee
determines (in its subjective determination) that it is not adequately
protected from any loss, damage or risk associate therewith; (n) if any
judgment, writ, warrant of attachment or execution or similar process is
issued or levied against the applicable Shilo Property or any part thereof
and is not released, vacated or fully bonded within sixty (60) days after its
issue or levy; (o) if the Shilo Borrower shall be in default under any of the
other terms, covenants or conditions of the related Shilo Note, the Shilo
Mortgage or any other Shilo Loan Document, other than as set forth in (a)
through (n) above, for thirty (30) days after notice from the mortgagee,
provided that if such default is susceptible of cure but cannot reasonably be
cured within such thirty (30) day period and such Shilo Borrower shall have
commenced to cure such default within such thirty (30) day period and
thereafter diligently and expeditiously proceeds to cure the same, such
thirty (30) day period shall be extended for so long as it shall require such
Shilo Borrower in the exercise of due diligence to cure such default up to
but not exceeding a maximum period of ninety (90) days; (q) if the Shilo
Borrower ceases to operate a hotel on the applicable Shilo Property or
terminates such business for any reason whatsoever; or (r) if the Shilo
Borrower operates the applicable Shilo Property under the name of any hotel
chain or system other than Shilo Inn, without mortgagee's prior written
consent.
S-215
<PAGE>
Pursuant to the terms of the Shilo Mortgages and the Subordinate Shilo
Mortgages, the Shilo Inn Loans are cross-defaulted.
Prepayment. Prepayment of the principal under any Shilo Inn Loan is
allowed on any regularly scheduled Payment Date after the applicable Lockout
Date (as defined below); provided that (a) no Event of Default then exists,
(b) the applicable Shilo Borrower gives mortgagee thirty (30) days' prior
written note of its intention to prepay, and (c) such Shilo Borrower pays to
mortgagee, in addition to the principal amount and all outstanding interest,
fees, penalties, and other sums due under the related Shilo Loan Documents,
as a prepayment charge (any such payment, a "Shilo Prepayment Charge"), an
amount equal to the sum of (i) all amounts incurred by Lender in connection
with the enforcement of its rights under the Note, the Mortgage or any of the
other Loan Documents, (ii) any amounts incurred by Lender to protect the
Property or the lien or security created by the Loan Documents, or for taxes,
assessments or insurance premiums as provided in the Loan Documents, and
(iii) the greater of (A) 1% of the principal amount being prepaid and (B) the
positive difference, if any, between (x) the present value on the date of
such prepayment of all future installments which such Shilo Borrower would
otherwise be required to pay under its Shilo Note during the original term
absent such prepayment, including the unpaid principal amount which would
otherwise be due on the scheduled Shilo Loan I Maturity Date or Shilo Loan II
Maturity Date, as applicable, absent such prepayment, with such present value
being determined by the use of a discount rate equal to the yield to maturity
(adjusted to a "Mortgage Equivalent Basis" pursuant to the standards and
practices of the Securities Industry Association), on the date of such
prepayment, of the United States Treasury Security having the term to
maturity closest to what otherwise would have been the remaining term thereof
absent such prepayment (the "Comparison Treasury Security"), and (y) the
principal amount being prepaid on the date of such prepayment. If there is
more than one United States Treasury Security with a maturity equally close
to what otherwise would have been the remaining term of the Shilo Note being
prepaid, the selection of the Comparison Treasury Security shall be at the
sole discretion of mortgagee. Notwithstanding the foregoing, (i) any Shilo
Note may be prepaid at any time within ninety (90) days prior to the Shilo
Loan I Maturity Date or Shilo Loan II Maturity Date, as applicable, without
any Shilo Prepayment Charge, and (ii) no Shilo Prepayment Charge shall be
payable with respect to a prepayment of a Shilo Note resulting from
mortgagee's election to apply any proceeds paid in connection with a casualty
to or condemnation of the applicable Shilo Property to reduce the
indebtedness evidenced thereby.
"Lockout Date" as used herein means the day immediately prior to the first
Payment Date occurring after the tenth anniversary of the date of the
applicable Shilo Note (such anniversary being September 29, 2007 in the case
of the Shilo Inn I Loans, and October 28, 2007 in the case of the Shilo Inn
II Loan).
Defeasance. Each Shilo Borrower may obtain the release of its Shilo
Property from the lien of the related Shilo Mortgage and Subordinate Shilo
Mortgage only in connection with a permitted prepayment or payment in full at
maturity of the related Shilo Note. In the case of the Shilo I Loans, in the
event that a Shilo Borrower makes a permitted prepayment of its Shilo Note,
such Shilo Borrower shall have the right to obtain a release of its Shilo
Property from the lien of the related Subordinate Shilo Mortgage upon the
satisfaction of the following conditions: (a) receipt by mortgagee of a wire
transfer of immediately available federal funds in an amount equal to the sum
required to be paid in accordance with such Shilo Note; (b) receipt by
mortgagee of evidence satisfactory to mortgagee that there are no subordinate
liens encumbering the Shilo Properties that are to continue to be encumbered
by the liens of the remaining Shilo Mortgages after the proposed release
(such Shilo Properties, the "Remaining Shilo Properties" and such Shilo
Mortgages the "Remaining Shilo Mortgages"); (c) receipt by mortgagee of
payment of all mortgagee's costs and expenses, including reasonable counsel
fees and disbursements; (d) the aggregate Release Debt Service Coverage Ratio
(as defined below) with respect to the Remaining Shilo Properties is equal to
or greater than 1.45 to 1.00 as determined by mortgagee in its sole and
absolute discretion; and (e) receipt by mortgagee of evidence reasonably
satisfactory to mortgagee that such Shilo Borrower is solvent and shall not
be rendered insolvent by the release of the property. The term "Release Debt
Service Coverage Ratio" means the ratio of (a) the net operating income
produced by the operation of the Remaining Shilo Properties for the twelve
(12) calendar month period ending immediately prior to the date of
determination to (b) the constant monthly payment that would be due
S-216
<PAGE>
under the Remaining Shilo Mortgages and related Shilo Notes secured thereby
with respect to the aggregate outstanding debt applicable to such Remaining
Shilo Properties for the twelve (12) calendar month period immediately
following the date of determination. The release of the Shilo Property which
secures the Shilo Inn II Loan from the lien of the Shilo Inn II Mortgage is
not contingent upon satisfaction of a Release Debt Service Coverage Ratio
Covenant.
Lockbox and Reserves. Under each Shilo Mortgage, the mortgagee may require
that the applicable Shilo Borrower establish one or more accounts (the
"Accounts") for the purpose of payment of taxes and assessments, insurance
premiums, utility and other service charges to the applicable Shilo Property,
or payment of costs of prevention of, or clean-up or remediation of,
environmental, health or safety conditions of such Shilo Property. Such
Accounts shall be established promptly upon the mortgagee's notice to such
Shilo Borrower that the same shall be required and the deposit of any monies
into any such Account shall be made or commence, if deposits are to be made
in installments, on the Payment Date identified in the mortgagee's notice,
but in no event shall such Payment Date be less than thirty (30) days from
the date of such notice.
All such Accounts constitute additional security under the applicable
Shilo Inn Loan and shall be maintained in Eligible Accounts. "Eligible
Account" means an interest bearing account selected by the mortgagee that is
either (a) maintained with a depository institution or trust company the
long-term unsecured debt obligations of which have been rated by two or more
of Standard & Poor's Rating Services, Duff & Phelps Credit Rating Co.,
Moody's Investors Service, Inc., Fitch Investors Service, Inc., or any
successors thereto, in one of their two highest rating categories or the
short-term commercial paper of which is rated by two or more of such agencies
in their highest rating category at the time of deposit therein, (b)
maintained with a federal or state chartered depository institution or trust
company with trust powers acting in its fiduciary capacity provided that any
such state chartered institution or trust company shall be subject to
regulations regarding fiduciary funds on deposit substantially similar to
federal regulation 12 CFR Section 910(b), or (c) maintained at a bank which
has (i) a minimum net worth of $500,000,000 and/or total assets of
$5,000,000,000 and (ii) a minimum unsecured, unguaranteed and unsubordinated
long-term debt rating by two or more of such agencies in one of their two
highest rating categories.
On the date of the closing of the Shilo Inn Loans, an Account was
established for reserves to pay the cost of fixtures, furnishings and
equipment ("FF&E Work") with respect to each Shilo Property. On each Payment
Date each Shilo Borrower is obligated to deposit in the Account (or
sub-account) the monthly sum required under its Shilo Mortgage as a reserve
for on-going FF&E Work. The mortgagee shall disburse to the applicable Shilo
Borrower from the applicable accounts, no more than once monthly, the amount
necessary to reimburse such Shilo Borrower for the cost of FF&E Work,
provided such Shilo Borrower has satisfied certain conditions including the
submission, together with its requisition for reimbursement, itemized
invoices and other reasonably requested documentation establishing the cost
of such FF&E Work and related matters.
If the total funds in any such Account shall exceed the amount of payments
actually applied by the mortgagee for the purposes of such Account, such
excess may be credited by the mortgagee on subsequent payments to be made
under the applicable Shilo Inn Loan or, at the mortgagee's option, refunded
to the applicable Shilo Borrower. If, however, any Account shall not contain
sufficient funds to pay the sums required when the same shall become due and
payable, the applicable Shilo Borrower shall, within ten (10) days after the
receipt of written notice thereof, deposit with the mortgagee the full amount
of such deficiency. If such Shilo Borrower shall fail to deposit the full
amount of any such deficiency, the mortgagee shall have the right to make
such deposit and all amounts so deposited by the mortgagee, and any interest
thereon at the Shilo Default Rate from the date incurred by the mortgagee
until actually paid by such Shilo Borrower, shall be immediately paid by such
Shilo Borrower on demand and shall be secured by the applicable Shilo
Mortgage and by all other related Shilo Loan Documents. If there is an Event
of Default under a Shilo Mortgage, the mortgagee may apply at any time the
balance then remaining in any related Account against the debt secured by
such Shilo Mortgage in whatever order the mortgagee shall determine in its
sole discretion. Upon full payment of the debt secured by any of the Shilo
Mortgages, or at such earlier time as the mortgagee may elect, the balance of
the related Accounts then in the mortgagee's possession shall be paid over to
the applicable Shilo Borrower.
S-217
<PAGE>
Transfer of Properties and Interest in Borrower; Encumbrance; Other
Debt. As used herein, a "Transfer" means the conveyance, assignment, sale,
mortgaging, encumbrance, pledging, hypothecation, granting of a security
interest in, granting of options with respect to, or otherwise disposing of
(directly or indirectly, voluntarily or involuntarily, by operation of law or
otherwise and whether or not for consideration of record), all or any portion
of any legal or beneficial interest in all or any portion of a Shilo Property
or a Shilo Borrower or its managing or non-managing members (but excluding
any legal or beneficial interest in any constituent non-managing member), and
when used as a verb, "Transfer" means to effect any of the foregoing.
The Shilo Mortgages generally prohibit Transfers of the Shilo Properties
or any rents derived therefrom and of the applicable Shilo Borrower or any
direct or indirect interest therein. Notwithstanding the foregoing, the
Subordinate Shilo Mortgages and the indebtedness secured thereby are
permitted under the respective Shilo Mortgages and, subject to certain notice
conditions and the requirement that the applicable Shilo Borrower pay certain
costs and fees in connection therewith, (A) in the event that any member of
such Shilo Borrower (or any partner or shareholder thereof) is a limited
partnership, the limited partnership interests in such partner or shareholder
may be encumbered or pledged; provided that, in the event of a proposed
Transfer in connection with such encumbrance or pledge of 50% or more of the
limited partnership interests in such partner, member or shareholder in any
one or more transactions to any one person, prior to such transfer, such
Shilo Borrower shall provide mortgagee with an opinion of counsel reasonably
satisfactory to mortgagee stating that, if effected, the proposed Transfer
would not result in the substantive consolidation by a bankruptcy court of
the assets and liabilities of such person with the assets and liabilities of
such Shilo Borrower and such other entities as the mortgagee may specify (a
"Nonconsolidation Opinion"); and (B) the following Transfers will be
permitted: (i) in the event that any member of such Shilo Borrower or any
entity holding an interest in such Shilo Borrower is a corporation, Transfers
of stock of such corporation shall be permitted, subject to mortgagee's
reasonable consent, provided that (1) (a) following such Transfer (in a
series of one or more transactions) less than 50% in the aggregate of stock
in such corporation shall be held by any one entity or, if more, mortgagee
may require such Shilo Borrower to deliver a Nonconsolidation Opinion of
counsel reasonably satisfactory to mortgagee or (b) such Shilo Borrower shall
have previously provided the mortgagee with such an opinion with respect to
such person; (2) in no event shall such Shilo Borrower or corporate member
thereof cease to be special purpose entity; (3) in no event shall 50% or more
of such stock in the aggregate be the subject of one or more transfers during
the term of the related Shilo Inn Loan; and (4) in the case of Shilo Inn I
Loans, Mark S. Hemstreet shall continue to hold not less than fifty-one
percent (51%) in the aggregate of the shares of such corporation; (ii) in the
event that any member of such Shilo Borrower, or if applicable, any general
partner of any member of such Shilo Borrower is a limited partnership,
Transfers of limited partnership interests shall be permitted, subject to
mortgagee's reasonable consent, upon satisfaction of the conditions set forth
above in this paragraph enumerated as (B) (i)(1), (2) and (4), substituting
the term "partnership interests" for the terms "stock" and "shares" and in no
event shall any such Transfer result in the dissolution or termination of
such Shilo Borrower or any corporate member of such Shilo Borrower; (iii)
with respect to such Shilo Borrower and in the event that any member of such
Shilo Borrower or any entity holding an interest therein is a limited
liability company, Transfers of membership interests of such limited
liability company shall be permitted, subject to mortgagee's reasonable
consent upon satisfaction of the conditions set forth above in this paragraph
enumerated as (B) (i)(1)-(4), substituting the term "membership interests"
for the terms "stock" and "shares".
Notwithstanding the general restriction against Transfers, Transfers of
partnership interests, membership interests or corporate stock in any Shilo
Borrower or any entity holding an interest in any Shilo Borrower between or
among partners, members or shareholders, or Transfers of such interests to
immediate family members of existing partners, members or shareholders or to
trusts for estate planning purposes for the benefit of existing partners,
members or shareholders or members of the transferor's immediate family shall
be permitted without mortgagee's consent, provided that 1) in no event shall
the applicable Shilo Borrower and any entity holding an interest in such
Shilo Borrower who is special purpose entity cease to be a special purpose
entity; and, in the case of Shilo Inn I Loans only: 2) in no event shall less
than fifty-one percent (51%) in the aggregate of the partnership interests,
membership
S-218
<PAGE>
interests or corporate shares of or in such Shilo Borrower be held by Mark S.
Hemstreet after any such Transfer; and 3) in no event shall Mark S. Hemstreet
cease to directly or indirectly own the controlling interest in the managing
general partner or managing member of such Shilo Borrower (as the case may
be) after any such Transfer.
In no event shall any Transfer otherwise permitted under any Shilo
Mortgage occur if such Transfer is required to be registered under the
Securities Act of 1933, as amended (the "1933 Act"), or any state securities
or Blue Sky laws, or offered pursuant to Rule 144A under the 1933 Act.
Insurance. Each Shilo Borrower is required to maintain the following types
of insurance with respect to its Shilo Property: (a) insurance against loss
or damage by fire, casualty and other hazards as now are or subsequently may
be covered by an "all risk" policy or a policy covering "special" causes of
loss, with such endorsements as mortgagee or the trustee may from time to
time reasonably require, covering the Property in an amount equal to 100% of
the full insurable replacement value of the Property (exclusive of footings
and foundation below the lowest basement floor) without deduction for
depreciation; (b) comprehensive general liability insurance under a policy
containing "Comprehensive General Liability Form" of coverage and the "Broad
Form CGL" endorsement (or a policy which otherwise incorporates the language
of such endorsement), providing coverage in such amounts as mortgagee may
from time to time reasonably require, but not less than One Million Dollars
($1,000,000) per occurrence with a Two Million Dollar ($2,000,000) general
aggregate limit, and if such policy shall cover more than one property, such
limits shall apply on a "per location" basis. If any elevators are located on
the Property, the foregoing amounts shall be increased to Three Million
Dollars ($3,000,000) and Six Million Dollars ($6,000,000), respectively; (c)
Rental Insurance in an amount equal to the greater of (x) not less than 100%
of the actual rent for the preceding twelve (12) month period or (y) the
annualized income based upon the most recent quarterly income statement
including, in either case, the total amount of all other charges which are
the legal obligations of the tenants, lessees and sublessees of the premises
under the leases and all room revenues; (d) during the period of any new
construction on the Premises, "Builder's All-Risk Completed Value" or "Course
of Construction" insurance policy in an amount equal to the minimum required
by law; (e) insurance covering the major components of the central heating,
air conditioning and ventilating systems, boilers, other pressure vessels,
high pressure piping and machinery, elevators and escalators, if any, and
other similar equipment installed in the improvements, in an amount equal to
one hundred percent (100%) of the full replacement cost of the Property; (f)
flood insurance, with a deductible not to exceed Three Thousand Dollars
($3,000), or such greater amount as may be satisfactory to mortgagee in its
sole discretion, and in an amount equal to the full insurable value of the
Property or the maximum amount available, whichever is less, if the property
is located in a federally designated flood hazard zone; (g) worker's
compensation insurance or other similar insurance which may be required by
governmental authorities or legal requirements in an amount at least equal to
the minium required by law; (h) such other insurance coverage, in such
amounts and such other forms and endorsements, as may from time to time be
required by mortgagee and which are customarily required by institutional
mortgagees to similar properties, similarly situated; (i) in the case of the
Shilo Inn I Loans, a blanket fidelity bond and errors and omissions insurance
coverage insuring against losses resulting from dishonest or fraudulent acts
committed by (A) Borrower's personnel or (B) temporary contract employees or
student interns; (j) such other insurance as may be required by the
Management Agreement or as may be required by mortgagee from time to time in
its reasonable discretion. Any such insurance coverage may be effected under
a blanket policy or policies so long as such blanket policy shall comply with
the terms of the applicable Shilo Mortgage and allocate to the applicable
Shilo Property the coverage specified in such Shilo Mortgage, without the
possibility of reduction or coinsurance by reason of, or damage to, any other
property (real or personal) named therein. All insurance required under the
Shilo Mortgages must be obtained by insurers licensed authorized to issue
insurance in the state where the Shilo Property insured is located or
obtained through a duly authorized surplus line insurance agent or otherwise
in conformity with the laws of such state, with a rating no less than AA or
its equivalent by any one of S&P, Duff & Phelps Credit Rating Co., Moody's,
Fitch Investors Service, Inc., or any successors thereto, or with an A.M.
Best Company, Inc. rating of A or higher and a financial size category of not
less than X.
Condemnation and Casualty. Each Shilo Borrower is required to notify the
mortgagee immediately in the event of any commencement or threat of any
taking or voluntary conveyance of all or any part of
S-219
<PAGE>
its Shilo Property, or any interest therein or right accruing thereto or the
use thereof, or any other injury to, or decrease in the value of such Shilo
Property, as a result of, or in the settlement of any condemnation or other
eminent domain proceeding affecting such Shilo Property whether or not the
same shall actually have been commenced (a "Taking"). Each Shilo Borrower has
granted to the mortgagee the exclusive power to collect, receive and retain
the proceeds of any such Taking and to make any compromise or settlement in
connection with such proceedings, but subject to the applicable Shilo
Borrower's right to participate in condemnation proceedings; provided,
however, that so long as no Event of Default has occurred and is then
continuing, the applicable Shilo Borrower may participate in any such
proceedings and shall be authorized and entitled to compromise or settle any
such proceeding with respect to condemnation proceeds in an amount less than
$100,000. If such proceeds are in an amount in excess of $100,000, in no
event shall the Shilo Borrower adjust, compromise, settle or enter into any
agreement with respect to such proceedings without the mortgagee's prior
written consent, which may be withheld in the mortgagee's sole and absolute
discretion. All proceeds of any Taking, and any purchase in lieu thereof,
have been assigned and are to be paid to the mortgagee free and clear of all
liens and encumbrances. In connection with any Taking, the mortgagee, to the
extent it has not been reimbursed by the Shilo Borrower, shall be entitled,
as first priority out of any award, to reimbursement for all its costs, fees,
reimbursements and expenses reasonably incurred in the determination and
collection of any award.
The mortgagee shall have the option to apply such condemnation proceeds
toward the payment of the debt evidenced by the applicable Shilo Note or to
allow such proceeds to be used to pay the cost of work for the sole purpose
of restoring the applicable Shilo Property. In the event the mortgagee elects
to make condemnation proceeds available to used toward the restoration or
rebuilding of the applicable Shilo Property, such proceeds shall be disbursed
in the manner and subject to the conditions applicable as if the same were
insurance proceeds in connection with damage or destruction to such Shilo
Property, as more particularly described below. Any excess proceeds remaining
after completion of such restoration or rebuilding shall be applied to the
repayment of the debt evidenced by the applicable Shilo Note.
In the event of any casualty to any of the Shilo Properties, the
applicable Shilo Borrower is obligated to give prompt notice to the mortgagee
thereof and of its good faith estimate of the cost of repairing or restoring
affected Shilo Property, and, provided that the mortgagee shall elect to
apply the net insurance proceeds to pay for the cost of the repair,
restoration or rebuilding of the affected Shilo Property, the applicable
Shilo Borrower will be required promptly to commence and diligently prosecute
to completion such repair, restoration and rebuilding of such Shilo Property
free and clear of any liens and claims. The applicable Shilo Borrower may not
adjust, compromise or settle any claim for insurance proceeds without the
prior written consent of the mortgagee, not to be unreasonably withheld or
delayed, provided that no Event of Default has occurred and is then
continuing; and provided further, that, except after the occurrence of an
Event of Default, the mortgagee's consent shall not be required with respect
to the adjustment, compromising or settlement of any claim for insurance
proceeds in an amount less than $100,000.
Proceeds to be used for restoration are to be held by the mortgagee and
paid from time to time to the applicable Shilo Borrower as the restoration
work progresses, subject to each of the following conditions: (i) delivery of
an architect's certificate estimating the cost of completing such work, and,
if such amount is greater than the applicable insurance proceeds, the
applicable Shilo Borrower shall have delivered to the mortgagee (x) cash
collateral in amount equal to such excess, or (y) an unconditional,
irrevocable, clean sight direct draw draft letter of credit, in form,
substance and issued by a bank acceptable to the mortgagee in its sole
discretion, in the amount of such excess or (z) a completion bond in form,
substance and issued by a survey company acceptable to the mortgagee in its
sole discretion; (ii) if the cost of such work is reasonably estimated to
equal or exceed $50,000, such work shall be performed under the supervision
of a reputable architect and the mortgagee shall have approved of the plans
and specifications of such work, which approval shall not be unreasonably
withheld; (iii) each request for payment shall be made on not less than ten
(10) business days' prior notice and shall be accompanied by an architect's
certificate or, if an architect's supervision is not required, by a
certificate of an officer of the applicable Shilo Borrower or its managing
member stating that (w) all of the work completed has been done in compliance
with approved plans and specifications, (x) that the sum is justly due, and
when added
S-220
<PAGE>
to all sums previously paid out by the mortgagee does not exceed the value of
the work done to the date of such certificate, (y) that title to the personal
property items covered by the request for payment is vested in such Shilo
Borrower, and (z) the remaining cost to complete such work; (iv) each request
for payment shall be accompanied by waivers of lien satisfactory to the
mortgagee covering that part of the work for which payment or reimbursement
is being requested and, if the mortgagee so requires, a search prepared by a
title company or licensed abstractor, or by other evidence satisfactory to
the mortgagee that there has not been filed with respect to the applicable
Shilo Property any mechanic's or other lien relating to any part of the work;
(v) the mortgagee has the right to inspect the work; (vi) proceeds shall not
be disbursed more frequently than thirty (30) days; and (vii) until such time
as the work has been completed and the mortgagee has received copies of any
and all final certificates of occupancy or other certificate, licenses and
permits required for the ownership, occupancy and operation of the applicable
Shilo Property, the mortgagee may retain up to ten percent (10%) of the cost
of the work.
Except as described in the sentence immediately following, mortgagee shall
have the option, in its discretion, to apply all or any part of the proceeds
in connection with a casualty in such manner as mortgagee may elect to any
one or more of the following: (i) the payment of the debt, in its discretion,
whether or not due, in any proportion or priority as mortgagee, in its sole
discretion, may elect; (ii) the repair or restoration of the affected Shilo
Property; (iii) the cure of any Default or Event of Default under the
applicable Shilo Loan Documents; (iv) the reimbursement of the costs and
expenses of the mortgagee in connection with the recovery of the proceeds.
Following the occurrence of an insured casualty, mortgagee shall apply the
net proceeds to pay the cost of the work provided that each of the following
conditions is fully satisfied: (i) no Event of Default under the applicable
Shilo Mortgage shall have occurred and be continuing; (ii) the applicable
Shilo Borrower shall have agreed in writing with mortgagee to proceed
promptly with the restoration; (iii) the net proceeds in connection with such
casualty shall not exceed the outstanding amount of the debt under the
related Shilo Note; (iv) a reputable architect shall have delivered to
mortgagee a certificate estimating the cost of fully completing the
restoration and a schedule of the time required; (v) the applicable Shilo
Borrower shall have provided evidence reasonably satisfactory to mortgagee
that the proceeds of the rent insurance will be available to offset fully any
loss of rents throughout the completion of the restoration; (vi) the
applicable Shilo Borrower shall have provided evidence satisfactory to
mortgagee that upon completion of the restoration, the ratio of net cash flow
from the affected Shilo Property to the debt service on the related Shilo
Note shall be at least equal to 1.35:1 as determined by mortgagee at its
discretion; (vii) the ratio of the principal amount of the applicable Shilo
Note then outstanding to the value of the affected Shilo Property after
completion of the restoration shall not exceed .70; (viii) following the
restoration, the use, occupancy, and operation of such Shilo Property as a
hotel shall be permitted under all applicable zoning laws; (ix) mortgagee
shall have received from the applicable Shilo Borrower certain statements and
certificates as set forth in the applicable Shilo Mortgage; and (x) the
applicable Shilo Borrower shall have agreed in writing with mortgagee that
all costs and expenses incurred by mortgagee in connection with making the
net proceeds available for the restoration of such Shilo Property shall paid
by such Shilo Borrower as a cost of the restoration.
Approval Rights. The management of the Shilo Properties shall be by
either: (a) the applicable Shilo Borrower or an affiliate of such Shilo
Borrower approved by the mortgagee for so long as such Shilo Borrower or said
affiliated entity is managing the applicable Shilo Property in a first class
manner satisfactory to the mortgagee; or (b) a professional property
management company approved by the mortgagee, which approval shall not be
unreasonably withheld. Such management by an affiliated entity or a
professional property management company shall be pursuant to a written
agreement approved and collaterally assigned to the mortgagee. In no event
shall any manager be removed or replaced or the terms of the applicable
management agreements be modified or amended without the mortgagee's prior
written consent.
No Shilo Borrower may, without the mortgagee's consent, undertake to
restore or alter, nor consent to any restoration, alteration, construction,
demolition, addition or removal of, its respective Shilo Property or any
portion thereof (any such restoration, alteration, construction, demolition,
addition or removal, a "Shilo Alteration"), which consent may be withheld in
the mortgagee's sole discretion, unless
S-221
<PAGE>
(i) the Shilo Alteration is non-structural and interior and will cost less
than $250,000 to complete; or (ii) the Shilo Alteration involves the removal
and disposing of equipment which may have become obsolete or unfit or is no
longer useful in the management, operation or maintenance of the Shilo
Properties.
Financial Reporting. Each Shilo Borrower is required to provide the
mortgagee the following: (a) copies of all tax returns filed by such Shilo
Borrower, within thirty (30) days after the date of filing; (b) annual
operating statements for its Shilo Property within forty-five (45) days after
the end of each fiscal year; (c) annual financial statements for such Shilo
Borrower within ninety (90) days after the end of each calendar year; and,
upon mortgagee's request, financial statements from each indemnitor and
guarantor under the applicable Shilo Inn Loan; (d) annually, on January 15,
an occupancy summary for the applicable Shilo Property setting forth the
occupancy rates, average daily room rates, and room revenues for each month
of the preceding calendar year, as well as annual averages of the same, and
such other information as may customarily be reflected thereon or reasonably
requested by mortgagee; and (e) such other information with respect to such
Shilo Property, Shilo Borrower, the principals and members of such Shilo
Borrower, as applicable, and each indemnitor and guarantor under any
indemnity or guaranty executed in connection with the related Shilo Note
which may be requested from time to time by mortgagee, within a reasonable
time after the applicable request (it being acknowledged and agreed by each
Shilo Borrower that, during the first twelve (12) months of the term of the
applicable Shilo Inn Loan, mortgagee may require monthly operating statements
for the related Shilo Property).
Other Loan Documentation. Pursuant to seventeen Indemnity and Guaranty
Agreements, each executed by Mark S. Hemstreet (the "Guarantor") in
connection with each of the Shilo Inn Loans, the Guarantor has guaranteed
payment to the mortgagee of, and to pay, protect, defend and save the
mortgagee harmless and to indemnify the mortgagee from and against any and
all liabilities, obligations, losses, damages, costs and expenses, demands
and judgments (collectively, the "Costs") which may at any time be imposed
upon, incurred by or awarded against the mortgagee in connection with (a)
misappropriation by the applicable Shilo Borrower or any affiliate thereof of
any insurance or condemnation proceeds; (b) any tenant security deposits or
other refundable deposits; (c) any rents from tenants under leases of all or
any portion of the applicable Shilo Properties received by the respective
Shilo Borrower more than one (1) month in advance and not applied in
accordance with the documents evidencing the applicable Shilo Inn Loan; (d)
any rents received following an Event of Default which are not either applied
to the ordinary and necessary expenses of owning and operating the applicable
Shilo Property or delivered to the mortgagee upon demand therefor; (e) waste
committed on the applicable Shilo Property while the respective Shilo
Borrower or an affiliate thereof are in possession thereof; (f) failure of
the applicable Shilo Borrower to pay all valid taxes, assessments, mechanics'
liens, materialmen's liens or other claims which could create liens on all or
any portion of the applicable Shilo Property; (g) fraud or material
misrepresentation by the applicable Shilo Borrower or any of its affiliates,
any guarantor, indemnitor or agent, employee or other person authorized or
apparently authorized to make statements or representations on behalf of such
Shilo Borrower, any affiliate of such Shilo Borrower or any guarantor or
indemnitor; (h) following an Event of Default, failure to deliver to the
mortgagee on demand all security deposits, books and records relating to the
Shilo Properties and in the possession or control of the applicable Shilo
Borrower or any affiliate, agent or employee thereof; (i) a Transfer without
the obtaining of the mortgagee's prior written consent which gives the
mortgagee the right to declare all sums secured by the applicable Shilo
Mortgage immediately due and payable; (j) encumbrance of the applicable Shilo
Property without first obtaining the mortgagee written consent, in violation
of the terms of the documents evidencing the applicable Shilo Inn Loan; or
(k) violation of the covenant that each Shilo Borrower shall maintain its
status as a single-purpose entity, without first obtaining the mortgagee's
written consent.
Pursuant to seventeen Environmental Health and Safety Indemnity
Agreements, executed in each case by the applicable Shilo Borrower and Mark
S. Hemstreet (the "Environmental Guarantors") in connection with each of the
Shilo Inn Loans, the Environmental Guarantors, with respect to the applicable
Shilo Property, have assumed liability for, agreed to pay and indemnify and
save mortgagee, its officers, directors, shareholders, principals, partners,
representatives, employees, agents, successors and assigns harmless from
costs and liabilities arising out of violations of environmental laws, the
presence or release of hazardous substances on the applicable Shilo Property
and surrounding areas, and related matters.
S-222
<PAGE>
Each Shilo Borrower in connection with its Shilo Inn Loan has also
executed and delivered a Security Agreement pursuant to which it has granted
to mortgagee a security interest in the buildings, improvements, personalty
and general intangibles located at or pertaining to its Shilo Property, and
an Omnibus Assignment of Contracts and Permits pursuant to which it has
collaterally assigned to the mortgagee all contract rights and benefits,
documents, insurance policies, contracts and other instruments relating to
its Shilo Property and all building permits, surveys, architectural plans and
specifications, certificates of occupancy licenses, authorizations and
agreements with utility companies owned by such Shilo Borrower with respect
to or in connection with its Shilo Property.
S-223
<PAGE>
FARB INVESTMENTS APARTMENT PORTFOLIO
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$64,880,000 $64,781,452
NON PROPERTY RELATED
MEZZANINE DEBT: 1,940,000
ORIGINATION DATE: SEPTEMBER 19, 1997
MATURITY DATE: OCTOBER 1, 2007
INTEREST RATE: 7.40%
AMORTIZATION: 30 YEARS
HYPERAMORTIZATION: N/A
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: THE LOAN MAY NOT BE PREPAID UNDER ANY TERMS
UNTIL THE PERIOD 90 DAYS PRIOR TO THE MATURITY
DATE, AT WHICH TIME THE BALANCE MAY BE PREPAID
WITHOUT PENALTY. SUBSEQUENT TO THE FIFTH
ANNIVERSARY OF THE ORIGINATION DATE OR THE
SECOND ANNIVERSARY OF SECURITIZATION OF THE
LOAN, DEFEASANCE WILL BE PERMITTED UPON THE
DELIVERY OF APPROPRIATE DEFEASANCE COLLATERAL.
THE BORROWER: THE BORROWING ENTITIES, FARB INVESTMENTS NOB
HILL, LTD., AND FARB INVESTMENTS WEST POINT,
LTD., AS WELL AS THEIR GENERAL PARTNERS, ARE
ORGANIZED AS SPECIAL-PURPOSE,
BANKRUPTCY-REMOTE ENTITIES.
LIEN POSITION: FIRST MORTGAGE LIEN ON THE NOB HILL APARTMENTS
AND WEST POINT APARTMENTS.
CROSS-COLLATERALIZATION/
DEFAULT: YES
PROPERTY INFORMATION
PROPERTY TYPE: MULTI-FAMILY
LOCATION: NOB HILL APARTMENTS
5410 N. BRAESWOOD BOULEVARD
HOUSTON, TX
WEST POINT APARTMENTS
8600 WESTHEIMER
HOUSTON, TX
OCCUPANCY: NOB HILL APARTMENTS 98.7%
WEST POINT APARTMENTS 96.3%
TOTAL 97.5%
UNITS: NOB HILL APARTMENTS 1,326
WEST POINT APARTMENTS 1,280
TOTAL 2,606
YEAR BUILT: NOB HILL APARTMENTS 1967-1970
WEST POINT APARTMENTS 1969-1972
THE COLLATERAL: 2 MULTI-FAMILY PROPERTIES, CONTAINING A TOTAL
OF 2,606 UNITS
PROPERTY
MANAGEMENT: HAROLD FARB APARTMENT HOMES
1996 NET
OPERATING INCOME: NOB HILL APARTMENTS $3,320,289
WEST POINT APARTMENTS $2,497,397
TOTAL $5,817,686
UNDERWRITTEN
CASHFLOW: NOB HILL APARTMENTS $3,921,962
WEST POINT APARTMENTS $3,369,272
TOTAL $7,291,234
APPRAISED VALUE: $81,100,000
APPRAISED BY: O'CONNOR & ASSOCIATES
APPRAISAL DATE: AUGUST 7, 1997 (NOB HILL APARTMENTS)
JULY 29, 1997 (WEST POINT APARTMENTS)
<PAGE>
LTV AS OF 12/1/97: 79.9%
ANNUAL DEBT
SERVICE: 5,390,592
DSC: 1.35X
LOAN / UNIT AS OF 12/1/97: $24,859
S-224
<PAGE>
Farb Investments Loans: The Borrowers; The Property
The Loan. The Farb Loans were made to the respective Farb Borrowers (as
defined below under "--The Borrowers") in the original principal amounts,
respectively, of $28,640,000 ("Farb Loan 1") and $36,240,000 ("Farb Loan 2"),
as originated by L.J. Melody and Company ("L.J. Melody") on September 19,
1997 and acquired simultaneously therewith by Merrill Lynch Mortgage Capital
Inc. ("Lender"). The Farb Loans have a principal balance as of the Cut-Off
Date, respectively, of approximately $36,184,954 and approximately
$28,596,498, and each Farb Investments Loan is evidenced by a promissory note
(each, a "Farb Note" and collectively, the "Farb Notes") and secured by,
among other things, a Multifamily Deed of Trust, Assignment of Rents and
Security Agreement (each, a "Farb Deed of Trust" and collectively, the "Farb
Deeds of Trust") each encumbering an apartment complex located in Harris
County, Texas (each, a "Farb Property" and collectively, the "Farb
Properties").
The Borrowers. The borrower under the Farb Loan 1 is Farb Investments Nob
Hill, Ltd. and the borrower under the Farb Loan 2 is Farb Investments West
Point, Ltd. (each, a "Farb Borrower" and, collectively, the "Farb Borrowers")
is a special-purpose limited partnerships organized under the laws of the
State of Texas. The sole general partner of the Farb Borrower under Farb Loan
1 is Farb Nob Hill, Inc. and the sole general partner of the Farb Borrower
under Farb Loan 2 is Farb West Point, Inc. (each, a "Farb Borrower GP" and
collectively, the "Farb Borrower GPs"), a Texas corporation. The limited
partnership agreement of each Farb Borrower provides that it is organized for
the sole purpose of owning its respective Farb Property, leasing, managing,
operating and mortgaging the same, and carrying on all incidental or related
activities. The articles of incorporation of each of the Farb Borrower GPs
provide that the sole and exclusive purpose of such Farb Borrower GP is to
acquire and hold the general partnership interest in the applicable Farb
Borrower and to engage in related activities.
The Properties. Each of the Farb Properties is comprised of the
respective Farb Borrower's fee interest in an apartment complex located in
Texas. The Farb Apartments Properties securing the Farb Loan consists of 2
multi-family properties containing a total of 2,606 units. As of October 31,
1997 the weighted average occupancy for the Farb Apartments Properties was
97.2%. The aggregate appraised value of the Farb Properties, based on the
appraisals performed by O'Connor & Associates, is $81,100,00.
Market Overview. The Farb Apartments are located within the Houston
Consolidated Metropolitan Statistical Area (CMSA) which is composed of a
seven-county area. Houston is the fourth largest city with a metropolitan
population of over three million people. During the 1960's and 1970's more
than 200 corporations moved their headquarters to Houston. Thirty-four of the
thirty-five major energy and petroleum corporations are headquartered in the
city which has created the "energy capital" of the world. The population of
the seven-county CMSA is projected to increase by an additional 1.48 million
people by the year 2010.
Houston's job growth has been strong, producing approximately 40,100 new
jobs in 1996. According to the June 1997 report by the Texas Employment
Commission (TEC), the Houston PMSA non-agricultural employment for June 1997
numbered 1,852,600, up from 1,820,500 in February 1997 and up from 1,809,700
in August 1996. According to the TEC, the Houston unemployment rate for June
1997 was 5.9% which was down from 6.1% in June 1996. The Texas unemployment
rate was for the same periods was 6.1% and 6.4% respectively. Houston has
several major universities including the University of Houston and Rice
University. As the largest employer in Houston, the world famous Texas
Medical Center employs approximately 52,000 persons and has an operating
budget of $4.25 billion. The Johnson Space Center which is located south of
downtown Houston employs approximately 16,000 people. The Johnson Space
Center has been selected to develop the majority of the $8 billion Space
Station project. The Port of Houston is a 25-mile long complex of facilities
with access to the Gulf of Mexico. More than 2,000 import/export companies
operate in the city and over 50 governments maintain consulates in Houston.
The Port of Houston Magazine reported tankers loaded and discharged
approximately 53.57 million tons of petroleum, petroleum products, industrial
chemicals, and other cargo at the Port of Houston in 1996. The Houston real
estate is continuing to recover from an imbalance of supply and demand which
resulted from the 1982 oil glut and downturn in the petrochemical industry.
Construction during the 1970's and early 1980's, within all segments of the
real estate market, continued on the
S-225
<PAGE>
assumption that the local economy was immune to recession, based on the
favorable experience of the proceeding ten years, including the 1974 oil
embargo. As a result, the supply of virtually all types of real estate in the
Houston area exceeded the demand until recently. However, as absorption of
this overbuilding has been occurring for ten plus years, the level of excess
supply has decreased substantially. Since 1994, significant levels of new
construction and absorption have occurred in many area market segments. All
segments of the market continue to improve with decreasing vacancies and
increasing rents.
The Houston apartment market is comprised of 2,342 apartment projects
which contain 384,940 units. The overall apartment market is experiencing an
overall occupancy rate of approximately 91.63%. Rental rates have been
increasing gradually for the past three years and renal concessions have
virtually disappeared. Rental rates for resident-paid units are at the
highest level since Spring 1983, averaging $0.594 per square foot.
Houston ranked as the third highest city in the country for projected job
growth through 1996. The city continues to diversify away from the oil
business. Houston now has a fundamentally healthy, viable economic base, with
only normal, typically expected unemployment, following the downturn of the
energy industry. In the past the city has suffered from over-building in the
1980's rather than from a weak economic base. In 1994 significant levels of
new construction began occurring in several market segments. The local real
estate economy bottomed out in 1987 and has experienced a gradual recovery
during the 1990's. Additionally, area economists are predicting a continued
gradual recovery for the economy as well as the real estate market in the
foreseeable future. The retail, multifamily and industrial segments have
improved drastically over the last decade while the office sector is still
the weakest which is the result of the greatest overbuilding in the 1980's.
Numerous sectors of the market in some submarkets indicate strength
sufficient to warrant additional construction immediately. For the first time
in recent history, the Houston economy has become diversified and exhibits
trends which are favorable for long-term economic stability. Houston's
population and economy are expected to continue to grow over the next decade,
but at a much slower rate than the years of the late 1970's and early 1980's.
West Point. The West Point Apartments are located at 8700 Woodway in
Houston, Texas. The site contains approximately 38 acres of land and is
improved with 1,280 apartment units located at the intersection of Woodway
Drive and Lazy Hollow Drive. The apartments were constructed by the current
owner in phases from 1969 through 1972 and contains 950 master-metered units
and 330 units which are separately-metered. The total net rentable area is
981,507 square feet and the gross building area including office/clubhouse,
storage, and laundry rooms is 993,307 square feet. Occupancy for the 31-month
period ended July 31, 1997 has averaged 95%.
The West Point Apartments are contained in two-story, garden-style
apartment buildings constructed from 1969 to 1972. The perimeter is fenced
with brick and iron rail fencing with limited access gates controlling
pedestrian and auto traffic through the property. The West Point Apartments
include nine fenced swimming pools and nineteen laundry rooms with
coin-operated washers and dryers. A new leasing office/clubhouse was
constructed in 1995 and features a modern computer room, mini-theater,
exercise room, and aerobics room. Unit amenities include ceiling fans, full
kitchen packages, private patios/balconies, walk-in closets, built-in
shelving and cable television hookups. Landscaping is mature and above
average. The property has been well-maintained by the owners with many
updates over the years.
The subject property consists of West Point Apartments and the adjacent
Creekside Apartments, which are operated as one property. It is located near
Westheimer which is one of the busiest streets in Houston. The properties use
one leasing office and one clubhouse located between the two properties. The
entire property is gated with access by an entrance keypad. In addition,
access to each section is restricted by gates and fences. Prospective tenants
are shown various units via a large van. In addition, the property contains a
4 row theater with a big screen TV.
The West Point Apartments are well-located in the Woodlake/Westheimer
Market Area which is adjacent to the Galleria Market Area. The Galleria has
the highest recorded retail and office rents in Houston. The property is
located at the intersection of Woodway Drive and Lazy Hollow Drive with
frontage on Westheimer. The property is accessible from downtown Houston by
traveling west on
S-226
<PAGE>
Westheimer Road which is an 8-lane, 2-way, primary area thoroughfare which
handles heavy daily traffic flows. Lazy Hollow is a two-lane, two-way
concrete paved roadway which dead-ends at Westheimer. Woodway Drive is a
two-lane, two-way concrete-paved roadway which handles minimal daily traffic.
Accessibility and visibility are considered to be good. Public transportation
is available within 1 block of the property.
Nob Hill. The Nob Hill Apartments are located at 5410 N. Braeswood
Boulevard in Houston, Texas on a 38-acre site comprised of a 1,326-unit
apartment complex. The Nob Hill Apartments are actually four contiguous
complexes which contain a total of 177 buildings. One complex was purchased
by the current owner in 1969 and the remaining complexes were built in phases
from 1969 to 1970. The property includes numerous amenities and all bills are
paid. The Nob Hill Apartments are well-maintained and have received many
updates over the years. Gross building area to include office/clubhouse,
storage, and laundry rooms, with a total of 1,196,324 square feet with a net
rentable area of 1,188,324 square feet. Occupancy for the 31-month period
ended July 31, 1997 has averaged in excess of 95%.
Nob Hill Apartments is comprised of garden-style apartment buildings
constructed during the period 1967 to 1970. Automobile access is controlled
via controlled-access gates. Numerous property amenities include nine
swimming pools, sixteen laundry rooms, and a large clubhouse. The clubhouse
features "movie night" with videos played on a large screen TV. It also
contains 2 kitchens, a big screen TV and three sitting areas. Unit amenities
include ceiling fans, full kitchen packages, private patios/balconies,
walk-in closets, built-in shelving and cable television hookups. Landscaping
is above average with courtyards and mature trees and shrubs providing a
park-like setting. The complex is well-located near many retail, office and
other employment centers as well as near two exclusive residential areas of
Houston known as Memorial Village and Riverside.
The property is known as a quiet and conservative complex. The tenant base
is comprised of 35% senior citizens, 15% medical or law students, and the
remaining 50% white collar professionals.
Environmental Reports. Phase I environmental site assessments have been
performed on the Farb Apartments Pool Properties between August 27, 1997 and
September 5, 1997. The Phase I environmental site assessments did not reveal
any environmental liabilities that the Depositor believes would have a
material adverse effect on the borrower's business, assets or results of
operations taken as a whole. Nevertheless, there can be no assurance that all
environmental conditions and risks were identified in such environmental
assessments.
Engineering Reports. Property Condition Reports were completed on the Farb
Apartments Pool Properties between July 29, 1997 and August 7, 1997 by a
third party due diligence firm. The Property Condition Reports concluded that
the Farb Apartments Pool Properties were in good condition and identified
approximately $221,708 in deferred maintenance requirements. At the
origination of the Farb Apartments Loan, the Farb Apartments Borrower
established a deferred maintenance reserve account equal to $277,135 (125% of
estimated costs) to fund the cost of addressing the identified items.
Property Management. The Farb Properties are managed by Farb Realty
Company (the "Farb Manager"), a Texas corporation, pursuant to 7 separate
management agreements between, in each case, the Farb Manager and the Farb
Borrower which owns the applicable Farb Property (each, a "Farb Management
Agreement" and collectively, the "Farb Management Agreements"). The Farb
Management Agreements provide for a management fee equal to 5% of the monthly
gross revenues for each Farb Property. Each Farb Management Agreement is for
a term of one (1) year and is automatically renewed for successive one (1)
year terms unless sooner terminated by either party thereto.
Pursuant to each of two assignments of management agreement, consent and
agreement of manager (each, a "Farb Manager's Consent" and collectively, the
"Farb Manager's Consents", dated as of September 19, 1997 and executed with
respect to the Farb Management Agreements, by the Farb Manager and the
applicable Farb Borrower, the Farb Manager has agreed (i) if an Event of
Default (as hereinafter defined) occurs, the applicable mortgagee may
terminate the Farb Management Agreements which are the subject of such Farb
Manager's Consent upon 30 days' written notice or require the applicable Farb
Manager to continue performance; (ii) the applicable beneficiary is not bound
by any
S-227
<PAGE>
amendment or modification of the Farb Management Agreements made without its
consent; (iii) any and all monies, rents, deposits, penalties and the like
held by the Farb Manager pursuant to the applicable Farb Management
Agreements shall be payable to the beneficiary on demand; (iv) if the
beneficiary succeeds to the interests of the applicable Farb Borrower, or in
the event the beneficiary exercises its option to terminate the applicable
Farb Management Agreements, no termination fee, commission, construction
management fee, administrative fee, charge, penalty or other compensation
shall be due and payable by the beneficiary to the applicable Farb Manager as
a result thereof; (v) the lien of the applicable Farb Deed of Trust and the
other documents evidencing the applicable Farb Loan, shall be superior to and
have priority over the Farb Management Agreements as well as any claim,
security interest or right to payment of the Farb Manager arising out of or
in any way connected with its services performed under such Farb Management
Agreements; (vi) subject to notice and a 30-day cure period, in the event
that the beneficiary reasonably determines that the applicable Farb
Properties are not being managed in accordance with generally accepted
management practices for properties similar to such Farb Properties, the
mortgagee may require the applicable Farb Borrower to replace the Farb
Manager with a manager acceptable to the beneficiary; and (vii) the Farb
Manager will not terminate the applicable Farb Management Agreements and will
not cease to perform its services thereunder for any reason without giving
the beneficiary 30 days' prior written notice in order to afford the
beneficiary an opportunity to cure any breach or default of the applicable
Farb Borrower and/or to exercise its rights as described in the documents
evidencing the applicable Farb Loan.
S-228
<PAGE>
FARB INVESTMENTS
UNDERWRITTEN CASHFLOW
COMBINED
<TABLE>
<CAPTION>
1994 1995 1996 UNDERWRITTEN
INCOME SUMMARIES: ACTUAL ACTUAL ACTUAL CASHFLOW
------------- ------------- ------------- --------------
GROSS INCOME
<S> <C> <C> <C> <C>
Rental Income........... $ $ $ -- $19,215,936
Less: Vacancy........... -- (1,152,956)
Net Rental Collections .. 16,369,680 $18,062,980
-- --
-- --
Other Income............ 380,941 430,887
------------- ------------- ------------- --------------
EFFECTIVE GROSS INCOME . $14,926,072 $16,141,643 $16,750,621 $18,493,867
============= ============= ============= ==============
OPERATING EXPENSES
Fixed Expenses
Real Estate Taxes....... $ $ $ 1,400,313 $ 1,449,324
Insurance............... 625,277 496,307
------------- ------------- ------------- --------------
Total Fixed Expenses ... $ 2,055,814 $ 2,151,265 $ 2,025,590 $ 1,945,631
============= ============= ============= ==============
Variable Expenses
Utilities............... $ $ $ 3,127,278 $ 3,349,010
Maintenance & Repairs .. 2,442,834 2,616,437
General &
Administrative......... 739,264 747,737
Payroll................. 930,484 1,071,866
Other................... -- --
Ground Rent............. -- --
Management Fee.......... 670,021 924,693
Reserves for
Replacement............ 997,464 547,260
------------- ------------- ------------- --------------
Total Variable
Expenses............... $ 8,616,367 $ 8,860,487 $ 8,907,345 $ 9,257,002
============= ============= ============= ==============
TOTAL EXPENSES........... $10,672,181 $11,011,752 $10,932,935 $11,202,633
============= ============= ============= ==============
Percent of EGI........... 71.5% 68.2% 65.3% 60.6%
NET OPERATING INCOME ... $ 4,253,891 $ 5,129,891 $ 5,817,686 $ 7,291,234
============= ============= ============= ==============
</TABLE>
EXPENSE ASSUMPTIONS
- -------------------------------
Management Fee 5.00%
Reserves (Unit) 210.00
Inflation Growth Rate 3.50%
S-229
<PAGE>
NOB HILL APARTMENTS
1994 1995 1996 UNDERWRITTEN
INCOME SUMMARIES: ACTUAL ACTUAL ACTUAL CASHFLOW
------------ ------------ ------------ --------------
GROSS INCOME
Rental Income........... $ $ $ -- $10,519,500
Less: Vacancy........... -- (631,170)
Net Rental Collections .. 9,255,866 $ 9,888,330
-- --
-- --
Other Income............ 190,998 199,845
------------ ------------ ------------ --------------
EFFECTIVE GROSS INCOME . $8,845,065 $9,327,425 $9,446,864 $10,088,175
============ ============ ============ ==============
OPERATING EXPENSES
Fixed Expenses
Real Estate Taxes....... $ $ $ 881,882 $ 914,000
Insurance............... 345,988 314,730
------------ ------------ ------------ --------------
Total Fixed Expenses ... $1,234,709 $1,294,963 $1,227,870 $ 1,228,730
============ ============ ============ ==============
Variable Expenses
Utilities............... $ $ $1,742,012 $ 1,861,036
Maintenance & Repairs .. 1,339,938 1,358,968
General &
Administrative......... 348,825 363,971
Payroll................. 497,974 570,640
Other................... -- --
Ground Rent............. -- --
Management Fee.......... 377,869 504,409
Reserves for
Replacement............ 592,087 278,460
------------ ------------ ------------ --------------
Total Variable
Expenses............... $4,706,688 $4,647,049 $4,898,705 $ 4,937,483
============ ============ ============ ==============
TOTAL EXPENSES........... $5,941,397 $5,942,012 $6,126,575 $ 6,166,214
============ ============ ============ ==============
Percent of EGI........... 67.2% 63.7% 64.9% 61.1%
NET OPERATING INCOME ... $2,903,668 $3,385,413 $3,320,289 $ 3,921,962
============ ============ ============ ==============
EXPENSE ASSUMPTIONS
- -------------------------------
Management Fee 5.00%
Reserves (Unit) 210.00
Inflation Growth Rate 3.50%
S-230
<PAGE>
WEST POINT APARTMENTS
1994 1995 1996 UNDERWRITTEN
INCOME SUMMARIES: ACTUAL ACTUAL ACTUAL CASHFLOW
------------ ------------ ------------ --------------
GROSS INCOME
Rental Income........... $ $ $ -- $8,696,436
Less: Vacancy........... -- (521,786)
Net Rental Collections .. 7,113,814 $8,174,650
-- --
-- --
Other Income............ 189,943 231,042
------------ ------------ ------------ --------------
EFFECTIVE GROSS INCOME . $6,081,007 $6,814,218 $7,303,757 $8,405,622
============ ============ ============ ==============
OPERATING EXPENSES
Fixed Expenses
Real Estate Taxes....... $ $ $ 518,431 $ 535,324
Insurance............... 279,289 181,577
------------ ------------ ------------ --------------
Total Fixed Expenses ... $ 821,105 $ 856,302 $ 797,720 $ 716,901
============ ============ ============ ==============
Variable Expenses
Utilities............... $ $ $1,385,266 $1,487,974
Maintenance & Repairs .. 1,102,896 1,257,469
General &
Administrative......... 390,439 383,766
Payroll................. 432,510 501,226
Other................... -- --
Ground Rent............. -- --
Management Fee.......... 292,152 420,285
Reserves for
Replacement............ 405,377 268,800
------------ ------------ ------------ --------------
Total Variable
Expenses............... $3,909,679 $4,213,438 $4,008,640 $4,319,519
============ ============ ============ ==============
TOTAL EXPENSES........... $4,730,784 $5,069,740 $4,806,360 $5,036,420
============ ============ ============ ==============
Percent of EGI........... 77.8% 74.4% 65.8% 59.9%
NET OPERATING INCOME ... $1,350,223 $1,744,478 $2,497,397 $3,369,272
============ ============ ============ ==============
EXPENSE ASSUMPTIONS
- -------------------------------
Management Fee 5.00%
Reserves (Unit) 210.00
Inflation Growth Rate 3.50%
S-231
<PAGE>
Farb Investments: The Loans
Security. Each Farb Loan is a nonrecourse loan, secured only by the
applicable Farb Deed of Trust encumbering the fee estate of the applicable
Farb Borrower in its Farb Property and certain other collateral relating
thereto (including the related absolute assignment of leases and rents and
security deposits, by the applicable Farb Borrower, as assignor, and the
beneficiary, as assignee). The mortgagee is the insured under the title
insurance policies which insure, among other things, that each of the Farb
Deeds of Trust constitutes a valid and enforceable first lien on the
applicable Farb Property, subject to certain exceptions and exclusions from
coverage set forth therein. Such title insurance policies, together with the
Farb Notes, the Farb Deeds of Trust and the other documents and agreements
evidencing and securing the Farb Loans, will be assigned to the Trust Fund.
Pursuant to two subordinate deeds of trust and guaranty (each, a
"Subordinate Farb Deed of Trust" and collectively, the "Subordinate Farb
Deeds of Trust"), the Farb Loans are, subject to the terms thereof,
cross-collateralized. Under its Subordinate Farb Deed of Trust, each Farb
Borrower has (i) guaranteed the obligations of the other Farb Borrower under
its Farb Loan to the extent of the greater of (A) $1,500,000 and (B) 95% of
the excess of the fair saleable value of the assets of the guarantor Farb
Borrower over its present or contingent liabilities (excluding its
Subordinate Farb Deed of Trust) up to a maximum of the original principal
amount of the other Farb Loan guaranteed thereby, and (ii) granted to the
beneficiary under such other Farb Loan, as security for such guaranty, a
second lien on its Farb Property.
Payment Terms. Each Farb Loan matures on October 1, 2007 (the "Farb
Maturity Date") and bears interest at a fixed rate per annum equal to 7.40%
(the "Farb Interest Rate") through and including the Farb Maturity Date.
Interest on each Farb Loan is calculated on the basis of a 360-day year, on
twelve (12) 30-day months for each full calendar month and the actual number
of days elapsed in the applicable period for which the interest is being
calculated for any partial calendar month.
The payment date (each, a "Payment Date") for each Farb Investments Loan
is the first day of each month. Commencing with the Payment Date in November
1997, each Farb Investments Loan requires a monthly payment of principal and
interest on each Payment Date in the amount, with respect to Farb Loan 1, of
$198,297.57 and, with respect to Farb Loan 2, of $250,918.44. On the Farb
Maturity Date, payment of the then outstanding balance of the principal, if
any, together with all accrued and unpaid interest and all other sums payable
under the documents evidencing each Farb Loan, is required. For so long as no
Event of Default (as hereinafter defined) under a Farb Loan has occurred, all
payments received by the mortgagee with respect thereto shall be applied in
the following order of priority: (i) to the repayments of sums advanced by
the beneficiary pursuant to the terms of the documents evidencing the
applicable Farb Investments Loan for any reason (other than the initial
advance of principal), including, without limitation, the payment of taxes,
assessments, insurance premiums or other charges against the applicable Farb
Property (together with interest thereon from the date of advance until the
date repaid at the Farb Default Rate (as hereinafter defined); (ii) to the
payment of any outstanding late charges; (iii) to the payment of accrued but
unpaid interest which is due and payable; and (iv) to reduction of the then
outstanding principal balance of the applicable Farb Investments Loan, as
such amount may be adjusted from time to time. Notwithstanding the foregoing,
from and after an Event of Default, all payments received by the beneficiary
with respect to each of the Farb Notes shall be applied to principal,
interest and/or other charges due under the Farb Notes, as applicable, or
under the other documents evidencing the related Farb Investments Loan in
such order as the beneficiary shall determine in its sole subjective
discretion.
Event of Default. With respect to each Farb Investments Loan, the
occurrence of any of the following constitutes and "Event of Default" under
the applicable Farb Deed of Trust: (a) failure to make any monthly payment of
interest or principal in full within five (5) business days after the date
the same is due, or failure to pay the principal balance when due; (b)
failure to pay any other amount payable pursuant to the related Farb Note,
the Farb Deed of Trust or any other documents evidencing such Farb
Investments Loan within five (5) business days after the date the same is due
and payable; (c) if a default occurs under the Farb Notes or any of the other
documents evidencing such Farb Loan and such default
S-232
<PAGE>
is not cured before the expiration of any applicable grace or cure periods;
(d) failure to keep in force the insurance required under each of the Farb
Deeds of Trust to be maintained or failure to assign and deliver the
insurance policies and proceeds to the beneficiary; (e) if the applicable
Farb Borrower attempts to assign its rights under the Farb Deed of Trust or
any other document evidencing such Farb Investments Loan or any interest
therein, or if any transfer of the applicable Farb Property or interests in
the applicable Farb Borrower occurs other than in accordance with the
provisions of the Farb Deed of Trust; (f) if any representation, warranty or
covenant of the Farb Borrower made under the Farb Deed of Trust or any other
document evidencing such Farb Investments Loan or in any certificate, report,
financial statement or other instrument or agreement furnished to the
beneficiary shall prove false or misleading in any material respect; (g) if
either of the Farb Borrowers or any general partner of either of the Farb
Borrowers makes an assignment for the benefit of creditors or admits in
writing its inability to pay its debts generally as they become due; (h) the
occurrence of certain bankruptcy and insolvency events; (i) if the Farb
Borrowers shall be in default beyond any grace or notice period, if any,
under any other deed of trust, mortgage or security agreement (including the
applicable Subordinate Farb Deed of Trust) covering any part of the
applicable Farb Property; (j) if the applicable Farb Property becomes subject
(i) to any superior lien other than a lien for real estate taxes and
assessments not yet due and payable, or (ii) to any mechanic's, materialman's
or other lien which is asserted to be superior to the lien of the Farb Deed
of Trust, and such lien shall not be discharged (by payment, bonding or
otherwise) within thirty (30) days unless contested in accordance with the
terms of the Farb Deed of Trust; (k) if either of the Farb Borrowers
discontinues the operation of the applicable Farb Property or any part
thereof for reasons other than repair or restoration arising from a casualty
or condemnation, or if the Farb Borrower is enjoined by any court or
governmental authority from continuing the operation of its business,
including, without limitation, entering into leases or performing its
obligations thereunder, which injunction is not released or stayed, for
forty-five (45) days; (l) except as otherwise permitted by the Farb Deed of
Trust, if the Farb Borrower or its general partner institutes or causes to be
instituted any proceeding for the termination or dissolution of the Farb
Borrower or its general partner; (m) if the applicable Farb Property, or any
part thereof, is subjected to waste or to removal, demolition or material
alteration so that the value of such Farb Property is materially diminished
thereby; and the beneficiary determines (in its subjective determination)
that it is not adequately protected from any loss, damage or risk associate
therewith; (n) if any judgment, writ, warrant of attachment or execution or
similar process is issued or levied against the applicable Farb Property or
any part thereof and is not released, vacated or fully bonded within sixty
(60) days after its issue or levy; or (o) if the Farb Borrower shall be in
default under any of the other terms, covenants or conditions of the related
Farb Note, the Farb Deed of Trust or any other document evidencing the
applicable Farb Investments Loan, other than as set forth in (a) through (n)
above, for thirty (30) days after notice from the mortgagee, provided that if
such default is susceptible of cure but cannot reasonably be cured within
such thirty (30) day period and such Farb Borrower shall have commenced to
cure such default within such thirty (30) day period and thereafter
diligently and expeditiously proceeds to cure the same, such thirty (30) day
period shall be extended for so long as it shall require such Farb Borrower
in the exercise of due diligence to cure such default up to but not exceeding
a maximum period of ninety (90) days.
Pursuant to the terms of the Farb Deeds of Trust and the Subordinate Farb
Deeds of Trust, the Farb Investments Loans are cross-defaulted.
If either of the Farb Borrowers defaults in the payment of any monthly
installment of principal and interest of principal and interest on a Payment
Date or if either of the Farb Borrowers fails to pay the principal balance of
its Farb Investments Loan on the Maturity Date, the Farb Interest Rate under
the related Farb Note will be increased to a default rate equal to the lesser
of (i) the highest rate permitted by applicable law to be charged on
commercial mortgage loans, and (ii) the interest rate on such Farb
Investments Loan plus 4% per annum (the "Farb Default Rate"). In the event
that a Farb Borrower fails to make a required payment under its Farb Note
(including the payment of the full amount of outstanding principal on the
Farb Maturity Date), such Farb Borrower shall be obligated to pay, in
addition to any interest due thereunder, a late payment charge equal to 5% of
the amount of such required payment.
Prepayment. Subject to limited exceptions, voluntary prepayment of the
Farb Investments Loans is prohibited. Notwithstanding the foregoing, (i)
either of the Farb Notes may be prepaid during the
S-233
<PAGE>
ninety (90) day period prior to the Farb Maturity Date, without any
prepayment charge or premium, provided that no Event of Default then exists
and (ii) no prepayment charge or premium shall be payable with respect to a
prepayment resulting from the beneficiary's election to apply any proceeds
paid in connection with a casualty to or condemnation of the Farb Properties
to reduce the indebtedness evidenced by the Farb Notes, as applicable.
Defeasance Collateral. For the purposes of this section and with respect
to each Farb Investments Loan, (i) "Defeasance Collateral" shall mean direct
non-callable obligations of the United States of America, acceptable to the
beneficiary, in its sole discretion, that provide for payments on or prior
to, but as close as possible to, all successive scheduled payments due under
the applicable Farb Note on each Payment Date after the Defeasance Date (as
hereinafter defined), including the amounts due on the Farb Maturity Date
("Scheduled Defeasance Payments") and (ii) "Defeasance Deposit" shall mean an
amount equal to the remaining principal amount of the applicable Farb Note,
the amount, if any, which, when added to the remaining principal amount of
the applicable Farb Note, will be sufficient to purchase Defeasance
Collateral (the "Defeasance Differential"), any costs and expenses incurred
or to be incurred in the purchase of Defeasance Collateral and any revenue,
documentary stamp or intangible taxes or any other tax or charge due in
connection with the transfer of the applicable Farb Note or otherwise
required to accomplish the defeasance of such Farb Loan.
At any time after the date which is (i) two (2) years after the Delivery
Date or (ii) September 19, 2002, whichever first shall occur, and provided no
Event of Default has occurred, each Farb Borrower will be entitled to have
its Farb Property released from the lien of the applicable Farb Deed of Trust
by delivering to the mortgagee Defeasance Collateral, the proceeds of which
replicate the Scheduled Defeasance Payments (a "Defeasance Event").
Upon the release of the applicable Farb Property in accordance with a
Defeasance Event, the applicable Farb Borrower shall assign all its
obligations and rights under the applicable Farb Note, together with the
pledged Defeasance Collateral, to a successor entity (the "Successor Maker")
which shall be a single-purpose, bankruptcy-remote entity, designated by such
Farb Borrower and approved by the beneficiary in its sole discretion. Such
Successor Maker shall execute an assumption agreement in form and substance
satisfactory to the mortgagee pursuant to which it shall assume such Farb
Borrower's obligations under the applicable Farb Note and the related
Defeasance Security Agreement. As conditions to such assignment and
assumption, such Farb Borrower shall (x) deliver to the beneficiary an
opinion of counsel in form and substance delivered by counsel satisfactory to
the beneficiary in its sole discretion stating, among other things, that such
assumption agreement is enforceable against such Farb Borrower and such
Successor Maker in accordance with its terms, and (y) pay all costs and
expenses incurred by the beneficiary or its agents in connection with such
assignment and assumption. Upon the release of the applicable Farb Property
in accordance with a Defeasance Event, such Farb Borrower shall have no
further right to prepay its Farb Note.
Lockbox and Reserves. Under each Farb Deed of Trust, the beneficiary may
require that the applicable Farb Borrower establish one or more accounts
(each, an "Account" and, collectively, the "Accounts") for the purpose of
payment of taxes and assessments, insurance premiums, utility and other
service charges, maintenance, repairs or capital improvements to the
applicable Farb Property, or payment of costs of prevention of, or clean-up
or remediation of, environmental, health or safety conditions of such Farb
Property. Such Accounts shall be established promptly upon the beneficiary's
notice to such Farb Borrower that the same shall be required and the deposit
of any monies into any such Account shall be made or commence, if deposits
are to be made in installments, on the Payment Date identified in the
beneficiary's notice, but in no event shall such Payment Date be less than
thirty (30) days from the date of such notice.
On the date of the closing of the Farb Investments Loans, an Account was
established for capital improvement reserves with respect to each Farb
Property. In connection with Farb Loan 1, on such closing date the Farb
Borrower thereunder deposited into an Account the sum of $214,761 to
establish a reserve for certain deferred maintenance items specified in the
related Farb Deed of Trust. On each Payment Date such Farb Borrower is
obligated to deposit in an Account (or sub-account) the monthly sum of
S-234
<PAGE>
$23,205 as a reserve for on-going capital expenditures other than such
specified deferred maintenance items. In connection with Farb Loan 2, on such
closing date the Farb Borrower thereunder deposited into an Account the sum
of $62,374 to establish a reserve for certain deferred maintenance items
specified in the related Farb Deed of Trust. On each Payment Date such Farb
Borrower is obligated to deposit in an Account (or sub-account) the monthly
sum of $22,400 as a reserve for on-going capital expenditures other than such
specified deferred maintenance items. The beneficiary shall disburse to the
applicable Farb Borrower from the applicable accounts, no more than once
monthly, the amount necessary to reimburse such Farb Borrower for the cost of
deferred maintenance items or capital expenditures, as applicable.
If the total funds in any such Account shall exceed the amount of payments
actually applied by the mortgagee for the purposes of such Account, such
excess may be credited by the beneficiary on subsequent payments to be made
under the applicable Farb Investments Loan or, at the mortgagee's option,
refunded to the applicable Farb Borrower. If, however, any Account shall not
contain sufficient funds to pay the sums required when the same shall become
due and payable, the applicable Farb Borrower shall, within ten (10) days
after the receipt of written notice thereof, deposit with the beneficiary the
full amount of such deficiency. If such Farb Borrower shall fail to deposit
the full amount of any such deficiency, the beneficiary shall have the right
to make such deposit and all amounts so deposited by the mortgagee, and any
interest thereon at the Farb Default Rate from the date incurred by the
beneficiary until actually paid by such Farb Borrower, shall be immediately
paid by such Farb Borrower on demand and shall be secured by the applicable
Farb Deed of Trust and by all other documents evidencing the applicable Farb
Investments Loan securing all or any part of the debt evidenced by the
applicable Farb Note. If there is an Event of Default under either of the
Farb Deeds of Trust, the beneficiary may apply at any time the balance then
remaining in any related Account against the debt secured by such Farb Deed
of Trust in whatever order the beneficiary shall determine in its sole
discretion. Upon full payment of the debt secured by either of the Farb Deeds
of Trust, or at such earlier time as the beneficiary may elect, the balance
of the related Accounts then in the beneficiary's possession shall be paid
over to the applicable Farb Borrower.
With respect to the Accounts or any monthly payments due under the
documents evidencing the Farb Investments Loans, in the event that any of
said monthly payments are not made in a timely fashion, in the sole
discretion of the beneficiary, the beneficiary reserves the right to
establish a lock box to hold such payments for the benefit of the
beneficiary.
Transfer of Properties and Interest in Borrower; Encumbrance; Other
Debt. As used herein, a "Transfer" means the conveyance, assignment, sale,
mortgaging, encumbrance, pledging, hypothecation, granting of a security
interest in, granting of options with respect to, or otherwise disposing of
(directly or indirectly, voluntarily or involuntarily, by operation of law or
otherwise and whether or not for consideration of record), all or any portion
of any legal or beneficial interest in all or any portion of a Farb Property
or a Farb Borrower or its general or limited partners (but excluding any
legal or beneficial interest in any constituent limited partner), and when
used as a verb, "Transfer" means to effect any of the foregoing.
The Farb Deeds of Trust generally prohibit Transfers of the Farb
Properties or any rents derived therefrom and of the applicable Farb Borrower
or any direct or indirect interest therein. Notwithstanding the foregoing,
Transfers in connection with the delivery of Defeasance Collateral are
permitted as described above and, subject to certain notice conditions and
the requirement that the applicable Farb Borrower pay certain costs and fees
in connection therewith, the following Transfers are permitted: (1) Transfers
of stock in the corporate general partner of each of the Farb Borrowers;
provided that (a) following such Transfer (in a series of one or more
transactions), less than 50% in the aggregate of such stock shall be held by
any one person unless (i) that applicable Farb Borrower shall provide an
opinion of counsel reasonably satisfactory to the mortgagee stating that, if
effected, the proposed Transfer would not result in the substantive
consolidation by a bankruptcy court of the assets and liabilities of such
person with the assets and liabilities of such Farb Borrower and such other
entities as the beneficiary may specify or (ii) such Farb Borrower shall have
previously provided the beneficiary with such an opinion with respect to such
person, (b) in no event shall such general partner cease to be a
single-purpose entity and (c) in no event shall 50% or more of such stock in
the aggregate be the subject of one or more Transfers
S-235
<PAGE>
during the term of the Farb Loan; and (2) Transfers of the limited
partnership interests in either of the Farb Borrowers; provided that (a)
following such Transfer (in a series of one or more transactions), less than
50% in the aggregate of such limited partnership interests shall be held by
any one person unless (i) that applicable Farb Borrower shall provide an
opinion of counsel reasonably satisfactory to the beneficiary stating that,
if effected, the proposed Transfer would not result in the substantive
consolidation by a bankruptcy court of the assets and liabilities of such
person with the assets and liabilities of such Farb Borrower and such other
entities as the beneficiary may specify or (ii) such Farb Borrower shall have
previously provided the mortgagee with such an opinion with respect to such
person, (b) in no event shall such Farb Borrower cease to be a single-purpose
entity and (c) in no event shall any such Transfer result in the dissolution
or termination of the Farb Borrower or any general partner of the Farb
Borrower. No such transfer is permitted within the first twelve (12) months
of the term of the Farb Loans.
Notwithstanding the general prohibition on Transfers, subordinate
mezzanine financing in the principal amount of $1,000,000 (with respect to
Farb Loan 1) and $940,000 (with respect to Farb Loan 2) is permitted under
the Farb Deeds of Trust, as applicable. See "--Mezzanine Debt" below.
Insurance. Each Farb Borrower is required under its Farb Deed of Trust to
maintain for its Farb Property: (a) insurance against all perils included
within the classification "all risks" or a policy covering "special" causes
of loss with extended coverage in an amount equal to the full replacement
cost of such Farb Property; (b) commercial general liability insurance under
a policy containing "Comprehensive General Liability Form" of coverage and
the "Broad Form CGL" endorsement, in such amounts as the mortgagee shall
reasonably require but in no event less than $1,000,000 per occurrence and
with an aggregate limit of not less than $2,000,000 with respect to each Farb
Property, provided that, if any elevators are located on any Farb Property,
the foregoing amounts shall be increased to $3,000,000 and $6,000,000,
respectively as to such Farb Property; (c) statutory worker's compensation
insurance; (d) rental insurance (i) with loss payable to the beneficiary,
(ii) covering all risks to be covered for under the "all risk" insurance
requirement, and (iii) in an amount equal to the greater of (x) not less than
100% of the actual rent for the preceding twelve (12) month period or (y) the
annualized rent based upon the most recent rent roll including, in either
case, the total amount of other charges which are the legal obligations of
the tenants of the Farb Properties; (e) during any period of new
construction, "builder's all risk completed value" or "course of
construction" insurance in an amount not less than the full insurable value
of the applicable Farb Property, including "softcost" coverage and worker's
compensation insurance covering all persons engaged in such construction, in
an amount at least equal to the minimum amount required by law; (f) broad
form boiler and machinery insurance covering the major components of the
central heating, air conditioning and ventilating systems, boilers, other
pressure vessels, high pressure piping and machinery, elevators and
escalators and other similar equipment, in an mount equal to the full
replacement value of the applicable Farb Property; (g) flood insurance, if
available, with respect to any of the Farb Properties located within a
federally designated flood hazard zone with a deductible not to exceed
$50,000; and (h) at the beneficiary's reasonable request, such other
insurance, including but not limited to earthquake, sinkhole and mine
subsidence insurance, against loss or damage of the kinds from commonly
insured against and generally available. Any such insurance coverage may be
effected under a blanket policy or policies so long as such blanket policy
shall comply with the terms of the applicable Farb Deed of Trust and allocate
to the applicable Farb Property the coverage specified in such Farb Deed of
Trust, without the possibility of reduction or coinsurance by reason of, or
damage to, any other property (real or personal) named therein. All insurance
required under the Farb Deeds of Trust must be obtained by insurers licensed
authorized to issue insurance in the state where the Farb Property insured is
located or obtained through a duly authorized surplus line insurance agent or
otherwise in conformity with the laws of such state, with a rating no less
than the third highest category by any one of S&P, Duff & Phelps Credit
Rating Co., Moody's, Fitch Investors Service, Inc., or any successors
thereto, or with an A.M. Best Company, Inc. rating of A or higher and a
financial size category of not less than X or a rating of at least BBBq in
the Insurer Solvency Review published by S&P.
Condemnation and Casualty. Each Farb Borrower is required to notify the
mortgagee immediately in the event of any commencement or threat of any
taking or voluntary conveyance of all or any part of its Farb Property, or
any interest therein or right accruing thereto or the use thereof, or any
other injury
S-236
<PAGE>
to, or decrease in the value of such Farb Property, as a result of, or in the
settlement of any condemnation or other eminent domain proceeding affecting
such Farb Property whether or not the same shall actually have been commenced
(a "Taking"). Each Farb Borrower has granted to the beneficiary the exclusive
power to collect, receive and retain the proceeds of any such Taking and to
make any compromise or settlement in connection with such proceedings, but
subject to the applicable Farb Borrower's right to participate in
condemnation proceedings; provided, however, that so long as no Event of
Default has occurred and is then continuing, the applicable Farb Borrower may
participate in any such proceedings and shall be authorized and entitled to
compromise or settle any such proceeding with respect to condemnation
proceeds in an amount less than $250,000. If such proceeds are in an amount
in excess of $250,000, in no event shall the Farb Borrower adjust,
compromise, settle or enter into any agreement with respect to such
proceedings without the beneficiary's prior written consent, which may be
withheld in the mortgagee's sole and absolute discretion. All proceeds of any
Taking, and any purchase in lieu thereof, have been assigned and are to be
paid to the beneficiary free and clear of all liens and encumbrances. In
connection with any Taking, the beneficiary, to the extent it has not been
reimbursed by the Farb Borrower, shall be entitled, as first priority out of
any award, to reimbursement for all its costs, fees, reimbursements and
expenses reasonably incurred in the determination and collection of any
award.
The beneficiary shall have the option to apply such condemnation proceeds
toward the payment of the debt evidenced by the applicable Farb Note or to
allow such proceeds to be used to pay the cost of work for the sole purpose
of restoring the applicable Farb Property. In the event the beneficiary
elects to make condemnation proceeds available to used toward the restoration
or rebuilding of the applicable Farb Property, such proceeds shall be
disbursed in the manner and subject to the conditions applicable as if the
same were insurance proceeds in connection with damage or destruction to such
Farb Property, as more particularly described below. Any excess proceeds
remaining after completion of such restoration or rebuilding shall be applied
to the repayment of the debt evidenced by the applicable Farb Note.
In the event of any casualty to any of the Farb Properties, the applicable
Farb Borrower shall give prompt notice to the beneficiary thereof and of its
good faith estimate of the cost of repairing or restoring the Farb Properties
, and, provided that the beneficiary shall elect to apply the net insurance
proceeds to pay for the cost of the repair, restoration or rebuilding of the
affected Farb Property, the applicable Farb Borrower will be required
promptly to commence and diligently prosecute to completion such repair,
restoration and rebuilding of such Farb Property free and clear of any liens
and claims. The applicable Farb Borrower may not adjust, compromise or settle
any claim for insurance proceeds without the prior written consent of the
beneficiary, not to be unreasonably withheld or delayed, provided that no
Event of Default has occurred and is then continuing; and provided further,
that, except after the occurrence of an Event of Default, the beneficiary's
consent shall not be required with respect to the adjustment, compromising or
settlement of any claim for insurance proceeds in an amount less than
$100,000.
Proceeds to be used for restoration are to be held by the beneficiary and
paid from time to time to the applicable Farb Borrower as the restoration
work progresses, subject to each of the following conditions: (i) delivery of
an architect's certificate estimating the cost of completing such work, and,
if such amount is greater than the applicable insurance proceeds, the
applicable Farb Borrower shall have delivered to the beneficiary (x) cash
collateral in amount equal to such excess, or (y) an unconditional,
irrevocable, clean sight direct draw draft letter of credit, in form,
substance and issued by a bank acceptable to the beneficiary in its sole
discretion, in the amount of such excess or (z) a completion bond in form,
substance and issued by a survey company acceptable to the mortgagee in its
sole discretion; (ii) if the cost of such work is reasonably estimated to
equal or exceed $50,000, such work shall be performed under the supervision
of a reputable architect and the beneficiary shall have approved of the plans
and specifications of such work, which approval shall not be unreasonably
withheld; (iii) each request for payment shall be made on not less than ten
(10) business days' prior notice and shall be accompanied by an architect's
certificate or, if an architect's supervision is not required, by a
certificate of an officer of the applicable Farb Borrower or its general
partner stating that (w) all of the work completed has been done in
compliance with approved plans and specifications, (x) that the sum is justly
due, and when added to all sums previously paid out by the beneficiary does
not exceed the value of the work done to the date of such certificate, (y)
that title to the personal property items covered by the request for payment
is
S-237
<PAGE>
vested in such Farb Borrower, and (z) the remaining cost to complete such
work; (iv) each request for payment shall be accompanied by waivers of lien
satisfactory to the mortgagee covering that part of the work for which
payment or reimbursement is being requested and, if the beneficiary so
requires, a search prepared by a title company or licensed abstractor, or by
other evidence satisfactory to the mortgagee that there has not been filed
with respect to the applicable Farb Property any mechanic's or other lien
relating to any part of the work; (v) the beneficiary has the right to
inspect the work; (vi) proceeds shall not be disbursed more frequently than
thirty days; and (vii) until such time as the work has been completed and the
mortgagee has received copies of any and all final certificates of occupancy
or other certificate, licenses and permits required for the ownership,
occupancy and operation of the applicable Farb Property, the mortgagee may
retain up to ten percent of the cost of the work.
Following the occurrence of an insured casualty, the mortgagee shall apply
the net insurance proceeds to pay the cost of the restoration work, provided
each of the following conditions is fully satisfied: (i) no Event of Default
under the applicable Farb Deed of Trust has occurred and is continuing; (ii)
the applicable Farb Borrower shall have agreed in writing with the
beneficiary to proceed promptly with the restoration, replacement, rebuilding
or repair of the applicable Farb Property to a standard at least equal to the
replacement value and general utility of such Farb Property immediately prior
to such casualty; (iii) the net proceeds in connection with such casualty
shall not exceed the outstanding amount of the debt of the applicable Farb
Investments Loan; (iv) delivery of a certificate of a reputable architect
estimating the cost of fully completing the restoration and a schedule of the
time required therefor, which must be earlier than the Farb Maturity Date and
the date occurring twelve (12) months after such casualty; (v) the applicable
Farb Borrower shall have provided evidence reasonably satisfactory to the
mortgagee that the proceeds of the rent insurance will be available to fully
offset the loss of any rents throughout the completion of the restoration and
a reasonable period thereafter for leasing the applicable Farb Property; (vi)
the applicable Farb Borrower shall have provided evidence satisfactory to the
beneficiary that upon completion of the restoration, the ratio of net cash
flow from the applicable Farb Property to the debt service on the applicable
Farb Note (both determined in accordance with generally accepted accounting
principles) shall be at least equal to 1.20:1; (vii) the ratio of the
principal amount of the applicable Farb Note then outstanding to the value of
the Farb Property after completion of the restoration shall not exceed .80;
(viii) following the restoration, the use, occupancy and operation of the
applicable Farb Property as an apartment complex shall be permitted under all
applicable zoning laws; (ix) the mortgagee shall have received from the
applicable Farb Borrower with respect to the matters referred to in clauses
(vi) and (vii) above: (A) an appraisal of the applicable Farb Property if the
architect's estimate of the cost of the restoration referred to in clause
(iv) above shall be equal to or exceed five percent (5%) of the outstanding
amount on the applicable Farb Note; (B) statements of the cash flow and debt
service prepared by the applicable Farb Borrower in form and substance
acceptable to the mortgagee; (C) calculations prepared by the Farb Borrower
of the ratios described in clauses (vi) and (vii); and (D) a certificate of
an officer of the applicable Farb Borrower stating that such statements and
calculations are true, correct and complete in all material respects and
certifying that all applicable conditions have been met; and (x) the
applicable Farb Borrower shall have agreed in writing with the beneficiary
that all costs and expenses incurred by the beneficiary in connection with
making the net proceeds available for the restoration of the applicable Farb
Property shall be paid by such Farb Borrower as a cost of the restoration.
Approval Rights. The management of the Farb Properties shall be by either:
(a) the applicable Farb Borrower or an affiliate of such Farb Borrower
approved by the mortgagee for so long as such Farb Borrower or said
affiliated entity is managing the applicable Farb Property in a first class
manner satisfactory to the beneficiary; or (b) a professional property
management company approved by the mortgagee, which approval shall not be
unreasonably withheld. Such management by an affiliated entity or a
professional property management company shall be pursuant to a written
agreement approved and collaterally assigned to the beneficiary. In no event
shall any manager be removed or replaced or the terms of the applicable
management agreements be modified or amended without the beneficiary's prior
written consent.
Neither of the Farb Borrowers may, without the beneficiary's consent,
undertake to restore or alter, nor consent to any restoration, alteration,
construction, demolition, addition or removal of, its respective
S-238
<PAGE>
Farb Property or any portion thereof (any such restoration, alteration,
construction, demolition, addition or removal, a "Farb Alteration"), which
consent may be withheld in the beneficiary's sole and absolute discretion,
unless (i) the Farb Alteration is non-structural and interior and will cost
less than $500,000 to complete; or (ii) the Farb Alteration involves the
removal and disposing of equipment which may have become obsolete or unfit or
is no longer useful in the management, operation or maintenance of the Farb
Properties.
The beneficiary has approved the standard form of lease used at the Farb
Properties. No material changes to the beneficiary-approved standard lease
form may be made without the prior written consent of the beneficiary (except
as required by law).
Financial Reporting. Each Farb Borrower is required under its Farb Deed of
Trust to furnish to the beneficiary thereunder: (a) during the first twelve
(12) months of the Farb Investments Loan, a monthly rent roll for its Farb
Property and an operating statement for such Farb Property for each
immediately preceding twelve (12) month period, within fifteen (15) days
after the calendar month to which such rent roll or operating statement shall
pertain; (b) copies of all tax returns filed by such Farb Borrower, within
thirty (30) days after the date of such filing; (c) annual operating
statements for the applicable Farb Property within forty-five (45) days after
the end of each fiscal year; (d) annual financial statements for such Farb
Borrower within ninety (90) days after the end of each calendar year; and,
upon the beneficiary's request, financial statements from each indemnitor and
guarantor under the applicable Farb Investments Loan; (e) annually, on
January 15, a rent for from the applicable Farb Property containing the name
of each tenant, the space occupied by such tenant, the lease commencement
date and expiration date, security deposit, rent, additional rent, arrearages
and such other information as may customarily be reflected thereon or
reasonably requested by the beneficiary; and (f) such other information with
respect to such Farb Property, such Farb Borrower, the principals, members or
general partners of such Farb Borrower, as applicable, and each indemnitor
and guarantor under any indemnity and guaranty executed in connection with
the applicable Farb Note which may be reasonably requested from time to time
by the mortgagee, within a reasonable time after the applicable request.
Other Loan Documentation. Pursuant to two Indemnity and Guaranty
Agreements, dated as of September 19, 1997, each executed by Harold Farb (the
"Guarantor") in connection with each of the Farb Investments Loans, the
Guarantor has guaranteed payment to the beneficiary of, and to pay, protect,
defend and save the mortgagee harmless and to indemnify the mortgagee from
and against any and all liabilities, obligations, losses, damages, costs and
expenses, demands and judgments (collectively, the "Costs") which may at any
time be imposed upon, incurred by or awarded against the mortgagee in
connection with (a) misappropriation by the applicable Farb Borrower or any
affiliate thereof of any insurance or condemnation proceeds; (b) any tenant
security deposits or other refundable deposits; (c) any rents from tenants
under leases of all or any portion of the applicable Farb Properties received
by the respective Farb Borrower more than one (1) month in advance and not
applied in accordance with the documents evidencing the applicable Farb
Investments Loan; (d) any rents received following an Event of Default which
are not either applied to the ordinary and necessary expenses of owning and
operating the applicable Farb Property or delivered to the beneficiary upon
demand therefor; (e) waste committed on the applicable Farb Property while
the respective Farb Borrower or an affiliate thereof are in possession
thereof; (f) failure of the applicable Farb Borrower to pay all valid taxes,
assessments, mechanics' liens, materialmen's liens or other claims which
could create liens on all or any portion of the applicable Farb Property; (g)
fraud or material misrepresentation by the applicable Farb Borrower or any of
its affiliates, any guarantor, indemnitor or agent, employee or other person
authorized or apparently authorized to make statements or representations on
behalf of such Farb Borrower, any affiliate of such Farb Borrower or any
guarantor or indemnitor; (h) following an Event of Default, failure to
deliver to Mortgagee on demand all security deposits, books and records
relating to the Farb Properties and in the possession or control of the
applicable Farb Borrower or any affiliate, agent or employee thereof; (i) a
Transfer without the obtaining of the beneficiary's prior written consent
which gives the beneficiary the right to declare all sums secured by the
applicable Farb Deed of Trust immediately due and payable; (j) encumbrance of
the applicable Farb Property without first obtaining the beneficiary written
consent, in violation of the terms of the documents evidencing the applicable
Farb Investments Loan; or (k) violation of the covenant that each Farb
Borrower shall maintain its status as a single-purpose entity, without first
obtaining the beneficiary's written consent.
S-239
<PAGE>
Pursuant to two Environmental Health and Safety Indemnity Agreements,
dated as of September 19, 1997, executed in each case by the applicable Farb
Borrower and Harold Farb (the "Environmental Guarantors") in connection with
each of the Farb Investments Loans, the Environmental Guarantors, with
respect to the applicable Farb Property, have assumed liability for, agreed
to pay and indemnify and save the beneficiary, its officers, directors,
shareholders, principals, partners, representatives, employees, agents,
successors and assigns harmless from costs and liabilities arising out of
violations of environmental laws, the presence or release of hazardous
substances on the applicable Farb Property and surrounding areas, and related
matters.
Each Farb Borrower in connection with its Farb Loan has executed and
delivered a Security Agreement, each dated as of September 19, 1997, pursuant
to which it has granted to the beneficiary a security interest in the
buildings, improvements, personalty and general intangibles located at or
pertaining to its Farb Property, and an Omnibus Assignment of Contracts and
Permits, each dated as of September 19, 1997, pursuant to which it has
collaterally assigned to the beneficiary all contract rights and benefits,
documents, insurance policies, contracts and other instruments relating to
its Farb Property and all building permits, surveys, architectural plans and
specifications, certificates of occupancy licenses, authorizations and
agreements with utility companies owned by such Farb Borrower with respect to
or in connection with its Farb Property.
Mezzanine Debt. The "Farb Mezzanine Loans" were made in the original
principal amount, as to the Farb Borrower under Farb Loan 1, $1,000,000, and,
as to the Farb Borrower under Farb Loan 2, $940,000, which loans were
originated on September 19, 1997 by L.J. Melody (the "Farb Mezzanine Lender")
and acquired simultaneously therewith by the Lender. Each of the Farb
Mezzanine Loans is evidenced by a promissory note made by the applicable Farb
Borrower, as obligor, and is secured by a guaranty and pledge, recognition
and consent agreement, executed by the general partner of the applicable Farb
Borrower and Harold Farb (collectively, the "Mezzanine Pledgors") and the
applicable Farb Borrower, pursuant to which the Mezzanine Pledgors have
jointly and severally unconditionally guaranteed the payment of the
applicable Farb Borrower's obligations under its Farb Mezzanine Loan and
pledged as security for such guaranty all of their right title and interest
in the applicable Farb Borrower (the "Farb Pledged Interests").
The Farb Mezzanine Loans mature on October 1, 2004 (the "Farb Mezzanine
Maturity Date") and bear interest at a rate based upon a reference rate
applicable in the London interbank market for one-month deposits in U.S.
dollars plus 4.25%.
The Mezzanine Notes are freely transferable by the Farb Mezzanine Lender.
Pursuant to two Subordination and Standstill Agreements by and between the
Farb Mezzanine Lender and the Lender (each, a "Farb Standstill Agreement"),
the Farb Mezzanine Loans are fully subordinated to the respective Farb Loans.
Under each Farb Standstill Agreement the Farb Mezzanine Lender has agreed,
with respect to the applicable Farb Loan, among other things, that (i) the
subject Farb Mezzanine Loan is subject and subordinated to the related Farb
Loan, including modifications, refinancings, renewals and extensions thereof,
provided the same do not increase the obligations of the Farb Borrower
thereunder, (ii) the Farb Mezzanine Lender will not, without the Lender's
consent, accept a scheduled payment of principal and/or interest under a
Subordinate Loan in an amount exceeding the positive difference between the
gross revenue from the applicable Farb Property and property expenses
(including debt service under the related Farb Loan), and otherwise will not
accept payment by or on behalf of the applicable Farb Borrower with respect
to its Farb Mezzanine Loan until the related Farb Loan has been paid in full,
(iii) the Farb Mezzanine Lender will give the Lender notice of any default
under a Farb Mezzanine Loan and the Lender will have the right, but not the
obligations, to cure such default, (iv) the Farb Mezzanine Lender waives any
right it may have to be subrogated to the rights of the Lender under any loan
documents evidencing or securing either Farb Loan, (v) the Farb Mezzanine
Lender will not institute or acquiesce in the commencement against either
Farb Borrower of any bankruptcy insolvency or similar proceeding and (vi)
reinstatement of each Farb Standstill Agreement will occur in the event that
the Lender is obligated under any bankruptcy or similar law to return to the
applicable Farb Borrower any payment received with respect to the related
Farb Loan. Pursuant to each Farb Standstill Agreement, the Lender has
consented to the transfer of the Applicable Farb Property to the Farb
Mezzanine Lender.
S-240
<PAGE>
AMERICAN APARTMENT COMMUNITIES I
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$45,000,000 $44,440,152
ORIGINATION DATE: DECEMBER 31, 1996
ANTICIPATED REPAYMENT
DATE ("ARD"): JANUARY 1, 2004
MATURITY DATE: JANUARY 1, 2022
INTEREST RATE: 7.75%
AMORTIZATION: 25 YEARS
HYPERAMORTIZATION: SUBSEQUENT TO JANUARY 1, 2004, THE INTEREST
RATE WILL INCREASE TO THE GREATER OF 12.75% OR
500 BASIS POINTS PLUS THE INTERPOLATED UST
RATE WITH A TERM APPROXIMATING THE PERIOD FROM
THE ARD TO THE MATURITY DATE (THE "REVISED
INTEREST RATE"). ADDITIONALLY, ALL EXCESS CASH
FLOW WILL BE CAPTURED UNDER THE TERMS OF THE
CASH COLLATERAL AGREEMENT AND APPLIED TO THE
OUTSTANDING PRINCIPAL BALANCE OF THE NOTE.
INTEREST DUE UNDER THE REVISED INTEREST RATE
ABOVE THAT WHICH IS DUE UNDER THE INITIAL
INTEREST RATE WILL BE PAYABLE SUBSEQUENT TO
THE PAYMENT OF PRINCIPAL. ANY INTEREST DUE
UNDER THE NOTE BUT NOT PAID WILL BE ACCRUED.
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: PREPAYMENT IS NOT PERMITTED THROUGH AND
INCLUDING DECEMBER 31, 2001. THEREAFTER,
PREPAYMENT IS PERMITTED IN FULL OR IN PART
WITHOUT PENALTY. SUBSEQUENT TO THE SECOND
ANNIVERSARY OF DEPOSIT INTO A REMIC,
DEFEASANCE IN FULL WILL BE PERMITTED UPON THE
DELIVERY OF APPROPRIATE DEFEASANCE COLLATERAL.
PARTIAL DEFEASANCE IS PERMITTED SUBJECT TO
DELIVERY OF 125% OF THE ALLOCATED LOAN AMOUNT
AND TO THE DSCR'S NOT FALLING BELOW EITHER THE
CURRENT DSCR OR 1.60X.
THE BORROWER: THE BORROWING ENTITY, CMP -1, LLC, AS WELL AS
ITS GENERAL PARTNER, IS ORGANIZED AS A
SPECIAL-PURPOSE, BANKRUPTCY-REMOTE ENTITY.
LIEN POSITION: FIRST MORTGAGE LIEN ON THE PORTFOLIO.
CROSS-COLLATERALIZATION/
DEFAULT YES, SUBJECT TO THE RELEASE PROVISIONS AS
DESCRIBED HEREIN.
PROPERTY INFORMATION
PROPERTY TYPE: MULTI-FAMILY
LOCATION: MONTEREY COUNTY, CA
WEIGHTED-AVERAGE OCCUPANCY: 96.4%
UNITS: 1,598
YEAR BUILT: SEE PROPERTY SUMMARY TABLE
THE COLLATERAL: 10 MULTI-FAMILY PROPERTIES
PROPERTY
MANAGEMENT: JH REAL ESTATE PARTNERS, INC.
1996 NET
OPERATING INCOME: $7,230,239
UNDERWRITTEN
CASHFLOW: $7,059,029
APPRAISED VALUE: $69,700,000
APPRAISED BY: ARTHUR ANDERSEN LLP:
(BORONDA MANOR APARTMENTS)
ROBERT SAIA & ASSOCIATES:
(NINE REMAINING PROPERTIES)
APPRAISAL DATE: ARTHUR ANDERSEN LLP: 11/19/97
ROBERT SAIA & ASSOCIATES: 9/28/96
LTV AS OF 12/1/97: 63.8%
<PAGE>
ANNUAL DEBT
SERVICE: 4,078,775
DSC: 1.73X
LOAN / UNIT AS OF 12/1/97: $27,810
S-241
<PAGE>
AMERICAN APARTMENT COMMUNITIES I: THE BORROWER; THE PROPERTY
The Loan. The loan to CMP-1, LLC ("CMP-1 Loan") was originated by Midland
Loan Services, L.P. on December 31, 1996 and acquired simultaneously
therewith by Merrill Lynch Mortgage Capital Inc. ("MLMC"). The CMP-1 Loan had
a principal balance at origination of $45,000,000 and has a principal balance
as of the Cut-Off Date of approximately $44,440,152. It is evidenced by a
mortgage note (the "CMP-1 Note") and secured by a single mortgage (the "CMP-1
Mortgage") encumbering ten (10) residential properties located in Monterey
County, California (the "CMP-1 Properties").
The Borrower. The borrower under the CMP-1 Loan is CMP-1, LLC ("CMP-1
Borrower"), a single-purpose Delaware limited liability company. The
operating agreement of CMP-1 Borrower provides that it is organized for the
limited purposes of acquiring, owning, improving, leasing, operating,
financing, refinancing, holding, mortgaging or managing the CMP-1 Properties,
and carrying on all activities incidental or related thereto. The managing
member of CMP-1 Borrower is FMP Member, Inc., a single-purpose Delaware
corporation ("FMP GP"). The certificate of incorporation of FMP GP provides
that its sole and exclusive purpose is to provide for the operation of CMP-1
Borrower.
American Apartment Communities Individual Property Descriptions
The Circles Apartments, Salinas, California. The Circles Apartments is a
319-unit residential complex consisting of 20 one-and two-story buildings.
The property, constructed between 1979 and 1983 and renovated between 1996
and 1997, is situated on a 17.23-acre site and contains 274,885 Net Rentable
Square Feet. The Circles Apartments shares the following amenities with North
Plaza Apartments (see below): lawn-greenbelt areas, two swimming pools, one
jacuzzi, one exercise room, one racquetball court, two tennis courts, four
laundry rooms, and two playground areas. Each unit is given one carport-style
parking space; in addition., there are 176 uncovered parking spaces. An
appraisal prepared by Robert Saia & Associates, effective as of September 28,
1996, determined a value for The Circles Apartments and North Plaza
Apartments (see below) of $21,000,000.
Boronda Manor Apartments, Salinas, California. Boronda Manor Apartments is
a 207-unit residential complex consisting of 22 two-story garden apartment
buildings. The property, constructed between 1978 and 1979, is situated on a
7.54-acre site and contains 125,787 Net Rentable Square Feet. Common
amenities include one swimming pool, five laundry facilities, and 322
carport-style and uncovered parking spaces. An appraisal prepared by Arthur
Andersen LLP, effective as of November 19, 1997, determined a value for
Boronda Manor Apartments of $8,700,000.
The Elms Apartments, Salinas, California. The Elms Apartments is a
188-unit residential complex. The property, constructed in 1979, is situated
on a 10.57 acre site and contains 148,260 Net Rentable Square Feet. Property
amenities include lawn-greenbelt areas, two swimming pools, and two laundry
rooms. There are 188 carport-style parking spaces and 40 uncovered parking
spaces. An appraisal prepared by Robert Saia & Associates, effective as of
September 28, 1996, determined a value for The Elms Apartments of $8,000,000.
Heather Plaza Apartments, Salinas, California. Heather Plaza Apartments is
a 218-unit residential complex consisting of 33 two-story buildings. The
property, constructed in 1974, is situated on a 12.6-acre site and contains
147,384 Net Rentable Square Feet. Property amenities include lawn-greenbelt
areas, two swimming pools, seven laundry rooms, and one children's play area.
There are 215 carport-style parking spaces and 124 uncovered parking spaces.
An appraisal prepared by Robert Saia & Associates, effective as of September
28, 1996, determined a value for Heather Plaza Apartments of $8,300,000.
North Plaza Apartments, Salinas, California. North Plaza Apartments is a
120-unit residential complex consisting of 24 one-and two-story buildings.
The property, constructed in 1986, is situated on a 6.09-acre site and
contains 123,400 Net Rentable Square Feet. North Plaza Apartments shares the
following amenities with The Circles Apartments (see above): lawn-greenbelt
areas, two swimming pools, one jacuzzi, one exercise room, one racquetball
court, two tennis courts, four laundry rooms, and two playground areas. Each
unit is given one carport-style parking space; in addition, there are 125
uncovered parking spaces. An appraisal prepared by Robert Saia & Associates,
effective as of September 28, 1996, determined an aggregate value for The
Circles Apartments and North Plaza Apartments (see above) of $21,000,000.
S-242
<PAGE>
Pine Grove Apartments, Pacific Grove, California. Pine Grove Apartments
is a 100-unit residential complex consisting of one three-story building. The
property, constructed in 1963, is situated on a 2.37 acre site and contains
69,232 Net Rentable Square Feet. The building is constructed as a
three-story, rectangular-like building surrounding a central courtyard.
Property amenities include a swimming pool, a jacuzzi, two exercise rooms,
one recreation room, three laundry rooms, and two saunas. Some units afford a
limited view of Monterey Bay and the Pacific Ocean. An appraisal prepared by
Robert Saia & Associates, effective as of September 30, 1996, determined a
value for Pine Grove Apartments of $5,800,000.
Laurel Tree Apartments, Salinas, California. Laurel Tree Apartments is a
157-unit residential complex consisting of 10 two-story buildings. The
property, constructed in 1977, is situated on a 7.8-acre site and contains
80,862 Net Rentable Square Feet. Laurel Tree Apartments shares the following
amenities with Harding Park Townhomes (see below): lawn-greenbelt areas, one
swimming pool, one jacuzzi, one exercise room, one tennis court, one laundry
room, and one playground areas. Each unit is given one carport-style parking
space; in addition., there are 176 uncovered parking spaces. There are 155
carport-style parking spaces and 99 uncovered parking spaces. An appraisal
prepared by Robert Saia & Associates, effective as of September 28, 1996,
determined an aggregate value for Laurel Tree Apartments and Harding Park
Townhomes (see below) of $8,500,000.
Westlake Apartments, Salinas, California. Westlake Apartments is a
139-unit residential complex consisting of seven two-and three-story
buildings. The property, constructed between 1972 and 1976, is situated on a
3.68-acre site and contains 88,372 Net Rentable Square Feet. Property
amenities include lawn-greenbelt areas, one swimming pool, and 14 laundry
rooms. There are 134 covered parking spaces and 63 uncovered parking spaces.
An appraisal prepared by Robert Saia & Associates, effective as of September
28, 1996, determined a value for Westlake Apartments of $5,400,000.
The Capri Apartments, Salinas, California. The Capri Apartments is a
114-unit residential complex consisting of 12 two-story buildings. The
property, constructed 1965 and 1973, is situated on a 5.08-acre site and
contains 72,720 Net Rentable Square Feet. Sixty-four studio and 1BR / 1BA
units were completed in 1965. The remaining 50 units, comprised of 1BR / 1BA
and 2BR / 2BA units, were completed in 1973. Property amenities include
lawn-greenbelt areas, one swimming pool, two saunas, and two laundry rooms.
An appraisal prepared by Robert Saia & Associates, effective as of September
28, 1996, determined a value for The Capri Apartments of $4,000,000.
Harding Park Townhomes, Salinas, California. Harding Park Townhomes is a
36-unit residential complex. The property, constructed in 1984, is situated
on 36 PUD lots and contains 41,292 Net Rentable Square Feet. Harding Park
Townhomes shares the following amenities with Laurel Tree Apartments (see
above): lawn-greenbelt areas, one swimming pool, one jacuzzi, one exercise
room, one tennis court, one laundry room, and one playground areas. Each unit
is given one carport-style parking space; in addition., there are 176
uncovered parking spaces. There are 36 attached one-car garage enclosures and
45 uncovered parking spaces. An appraisal prepared by Robert Saia &
Associates, effective as of September 28, 1996, determined an aggregate value
for Laurel Tree Apartments and Harding Park Townhomes (see above) of
$8,500,000.
Market Overview. Monterey County, California, is located along
California's Pacific Coastline, approximately 125 miles south of San
Francisco and 350 miles north of Los Angeles. According to Robert Saia &
Associates' appraisal, the estimated 1995 population of Monterey County was
382,547. Monterey County grew at a 24% rate from 1980 through 1990 and is
projected to continue its double-digit growth into the next century.
Agriculture is still the county's leading industry and mainstay employer.
Monterey County ranks second in the state of California (behind Fresno
County) with 86 farming operations and ranks third in the state of California
(behind Fresno and Tulare Counties), and in the top ten nationally, in gross
dollar agricultural production. In addition to agriculture, the county also
relies on tourism, which generates over $1 billion in revenue per annually,
and small retail business.
The city of Salinas, the county seat of Monterey County, is also its
largest city. Salinas grew at a 35% pace between 1980 and 1990. Incorporated
in 1874 and traditionally agriculturally dependent, Salinas now boasts 100
manufacturing firms.
S-243
<PAGE>
Environmental Reports. Phase I environmental site assessments were
performed on the American Apartment Communities I Pool Properties on
September 27, 1996. The Phase I environmental site assessments did not reveal
any environmental liabilities that the Depositor believes would have a
material adverse effect on the borrower's business, assets or results of
operations taken as a whole. Nevertheless, there can be no assurance that all
environmental conditions and risks were identified in such environmental
assessments.
Engineering Reports. Property Condition Reports were completed on the
American Apartment Communities I Pool Properties between September 25, 1996
and October 1, 1996 by a third party due diligence firm. The Property
Condition Reports concluded that the American Apartment Communities I Pool
Properties were in fair to good condition and identified approximately
$308,675 in deferred maintenance requirements. At the origination of the
American Apartment Communicites I Pool Loan, the CMP-1 Borrower established a
deferred maintenance reserve account equal to $385,844 (125% of estimated
costs) to fund the cost of addressing the identified items.
Seismic Report. A Seismic Report was completed in October, 1997 for each
of the American Apartment Communities I properties by Nabih Youssef &
Associates. The Seismic Report estimated that the aggregate PML due to a 475
year return period earthquake for the ten apartment complexes, to be
approximately 13.5% of the replacement cost of the buildings.
Property Management. CMP-1 Properties are managed by JH Management
Company, LLC, a California limited liability company ("CMP-1 Manager"),
pursuant to the terms of a Property Management Agreement (the "CMP-1
Management Agreement"). The CMP-1 Management Agreement provides for a
management fee of 3% of gross receipts for each CMP-1 Property. The term of
the CMP-1 Management Agreement expires on December 31, 2003, unless sooner
terminated by either party thereto.
Pursuant to the terms of a manager's consent and subordination of
management agreement given by CMP-1 Manager and CMP-1 Borrower in favor of
the holder of the CMP-1 Loan (the "mortgagee"), the CMP-1 Manager has agreed
(i) not to terminate the CMP-1 Management Agreement without the consent of
the mortgagee, except for nonpayment of management fees (in which case the
mortgagee has a 60-day cure period), (ii) that all liens, rights and
interests owned, claimed or held by the Manager in and to the CMP-1 Property
are and will be in all respects subordinate to the lien and security interest
securing the CMP-1 Loan, including the lien of the CMP-1 Mortgage, (iii) that
during the continuance of an Event of Default (as defined below) under the
CMP-1 Loan, the Manager will continue to perform under the CMP-1 Management
Agreement provided that the mortgagee performs or causes to be performed the
obligations of the CMP-1 Borrower thereunder, (iv) that, notwithstanding
anything in the CMP-1 Management Agreement to the contrary, the mortgagee, or
the CMP-1 Borrower at the mortgagee's direction, shall have the right to
terminate the CMP-1 Management Agreement on 30 days' prior written notice (a)
upon the occurrence of an Event of Default (as hereinafter defined) or
default by CMP-1 Manager under the CMP-1 Management Agreement; (b) upon a 50%
or more change in control of ownership of CMP-1 Manager; (c) at any time for
cause (including, but not limited to, CMP-1 Manager's gross negligence,
willful misconduct or fraud); and (d) if the CMP-1 DSCR (as hereinafter
defined) falls below 1.40:1; (v) not to amend or modify the CMP-1 Management
Agreement without the prior written consent of the mortgagee, and (vi) prior
to an Event of Default (or in the event of an occurrence of default, within
10 days after a request from the mortgagee therefor) CMP-1 Manager will
deliver to mortgagee, not later than 45 days after the end of each fiscal
quarter of the CMP-1 Borrower's operations, a true and complete rent roll for
the CMP-1 Property and a schedule of all contracts and other agreements
relating to the CMP-1 Property. The CMP-1 Management Agreement shall
automatically terminate on December 31, 2006.
The "CMP-1 DSCR" means, as of the last day of any calendar quarter with
respect to the immediately preceding four calendar quarters, the ratio of net
operating income to debt service on the CMP-1 Note (based on a debt service
constant on the CMP-1 Note) for such period.
S-244
<PAGE>
Property Summary. The following table presents certain information regarding
American Apartment Communities I properties:
<TABLE>
<CAPTION>
PROPERTY NAME YEAR BUILT/ TYPE NUMBER AVERAGE
ADDRESS OCCUPANCY (RENOVATED) OF UNIT OF UNITS SQUARE FEET
------- --------- ----------- ------- -------- -----------
<S> <C> <C> <C> <C> <C>
The Circles Apartments 97.5% 1979-83 / (1996-97) 1BR/1BA 40 715
2260-98 N. Main Street 1BR/1BA 79 755
Salinas, CA 93906 1BR/1BA 40 777
2BR/2BA 40 915
2BR/2BA 80 983
2BR/2BA 40 1,008
----- -----
TOTAL / WEIGHTED
AVERAGE................. 319 862
Boronda Manor Apartments 94.2% 1978-79 Studio 22 408
2073 Santa Rita Street 1BR/1BA 58 571
Salinas, CA 93906 2BR/1BA 127 659
----- -----
TOTAL / WEIGHTED
AVERAGE................. 207 608
The Elms Apartments 96.8% 1979 1BR/1BA 80 672
424 Noice Drive 2BR/1BA 108 875
----- -----
Salinas, CA 93906
TOTAL / WEIGHTED
AVERAGE................. 188 789
Heather Plaza Apartments 92.7% 1974 1BR/1BA 162 616
939-78 Heather Circle 2BR/1BA 52 846
Salinas, CA 93906 3BR/1BA 4 900
----- -----
TOTAL / WEIGHTED
AVERAGE................. 218 676
North Plaza Apartments 97.5% 1986 1BR/1BA 52 660
2310-48 N. Main Street 3BR/2BA 68 1,310
----- -----
Salinas, CA 93906
TOTAL / WEIGHTED
AVERAGE................. 120 1,028
Pine Grove Apartments 100.0% 1963 1BR/1BA 24 640
230 Grove Acre Avenue 1BR/1BA 26 640
Pacific Grove, CA 93950 1BR/1BA 26 640
2BR/1BA 8 858
2BR/1BA 8 858
2BR/1BA 8 858
----- -----
TOTAL / WEIGHTED
AVERAGE................. 100 692
Laurel Tree Apartments 98.1% 1977 Studio 26 399
1185 Monroe Street Studio 22 399
Salinas, CA 93906 Loft 60 520
1BR/1BA 24 542
2BR/1BA 24 700
3BR/2BA 1 702
----- -----
TOTAL / WEIGHTED
AVERAGE................. 157 515
Westlake Apartments 99.3% 1972-76 Studio 27 480
25-82 Stephanie Drive Jr. (1BR/1BA) 26 520
Salinas, CA 93901 1BR/1BA 3 624
1BR/1BA 56 650
2BR/1BA 5 720
2BR/2BA 22 910
----- -----
TOTAL / WEIGHTED
AVERAGE................. 139 636
The Capri Apartments 93.9% 1965,1973 Studio 12 425
349 Iris Drive 1BR/1BA 72 600
Salinas, CA 93906 2BR/1BA 30 814
----- -----
TOTAL / WEIGHTED
AVERAGE................. 114 638
Harding Park Townhomes 97.2% 1984 2BR/1BA 20 975
1019 Polk Street 3BR/2.5BA 16 1,362
----- -----
Salinas, CA 93906
TOTAL / WEIGHTED
AVERAGE................. 36 1,147
===== =====
PORTFOLIO TOTALS......... 96.4% 1,598 734
===== =====
</TABLE>
<TABLE>
<CAPTION>
PROPERTY NAME TOTAL MONTHLY POTENTIAL COMPETITIVE
ADDRESS SQUARE FEET RENT RENT MARKET RENT
------- ----------- ---- ---- -----------
<S> <C> <C> <C> <C>
The Circles Apartments 28,600 $620 $ 24,800 $568-$750
2260-98 N. Main Street 59,645 650 51,350 $568-$750
Salinas, CA 93906 31,080 690 27,600 $568-$750
36,600 730 29,200 $750-$950
78,640 760 60,800 $750-$950
40,320 795 31,800 $750-$950
--------- ---- ---------- ---------
TOTAL / WEIGHTED
AVERAGE................. 274,885 $707 $ 225,550
Boronda Manor Apartments 8,976 $460 $ 10,120 $475
2073 Santa Rita Street 33,118 570 33,060 $555-$750
Salinas, CA 93906 83,693 680 86,360 $660-$743
--------- ---- ---------- ---------
TOTAL / WEIGHTED
AVERAGE................. 125,787 $626 $ 129,540
The Elms Apartments 53,760 $575 $ 46,000 $530-$750
424 Noice Drive 94,500 695 75,060 $620-$725
--------- ---- ---------- ---------
Salinas, CA 93906
TOTAL / WEIGHTED
AVERAGE................. 148,260 $644 $ 121,060
Heather Plaza Apartments 99,792 $550 $ 89,100 $530-$750
939-78 Heather Circle 43,992 725 37,700 $620-$725
Salinas, CA 93906 3,600 775 3,100 N/A
--------- ---- ---------- ---------
TOTAL / WEIGHTED
AVERAGE................. 147,384 $596 $ 129,900
North Plaza Apartments 34,320 $620 $ 32,240 $568-$750
2310-48 N. Main Street 89,080 925 62,900 N/A
--------- ---- ---------- ---------
Salinas, CA 93906
TOTAL / WEIGHTED
AVERAGE................. 123,400 $793 $ 95,140
Pine Grove Apartments 15,360 $695 $ 16,680 $550-$650
230 Grove Acre Avenue 16,640 715 18,590 $550-$650
Pacific Grove, CA 93950 16,640 725 18,850 $550-$650
6,864 795 6,360 N/A
6,864 825 6,600 N/A
6,864 850 6,800 N/A
--------- ---- ---------- ---------
TOTAL / WEIGHTED
AVERAGE................. 69,232 $739 $ 73,880
Laurel Tree Apartments 10,374 $450 $ 11,700 N/A
1185 Monroe Street 8,778 495 10,890 N/A
Salinas, CA 93906 31,200 540 32,400 N/A
13,008 560 13,440 $530-$750
16,800 675 16,200 $620-$725
702 800 800 N/A
--------- ---- ---------- ---------
TOTAL / WEIGHTED
AVERAGE................. 80,862 $544 $ 85,430
Westlake Apartments 12,960 $520 $ 14,040 $475
25-82 Stephanie Drive 13,520 540 14,040 N/A
Salinas, CA 93901 1,872 625 1,875 $525-$605
36,400 580 32,480 $525-$605
3,600 750 3,750 $620-$725
20,020 750 16,500 N/A
--------- ---- ---------- ---------
TOTAL / WEIGHTED
AVERAGE................. 88,372 $595 $ 82,685
The Capri Apartments 5,100 $490 $ 5,880 $450
349 Iris Drive 43,200 540 38,880 $530-$750
Salinas, CA 93906 24,420 665 19,950 $620-$725
--------- ---- ---------- ---------
TOTAL / WEIGHTED
AVERAGE................. 72,720 $568 $ 64,710
Harding Park Townhomes 19,500 $775 $ 15,500 $620-$725
1019 Polk Street 21,792 895 14,320 N/A
--------- ---- ---------- ---------
Salinas, CA 93906
TOTAL / WEIGHTED
AVERAGE................. 41,292 $828 $ 29,820
========= ==== ==========
PORTFOLIO TOTALS......... 1,172,194 $649 $1,037,715
========= ==== ==========
</TABLE>
- ------------
Occupancy based on borrower provided rent roll as of October 1997.
Competitive Market Rent based on appraisal by Robert Saia & Associates as of
September 1996 and Arthur Andersen LLP as of November 19, 1997.
Operating History. The table below presents information regarding the
operating performance of the American Apartment Communities properties:
S-245
<PAGE>
AMERICAN APARTMENT COMMUNITIES I
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------ ------------- ------------- --------------
Revenues............. $9,462,609 $10,232,952 $11,294,698 $12,297,835
Expenses............. 4,156,002 4,652,613 4,064,459 4,869,056
------------ ------------- ------------- --------------
Net Operating
Income.............. $5,306,607 $ 5,580,339 $ 7,230,239 $ 7,428,779
Occupancy............ 96.4%
12/1/97 Loan
Balance............. $44,440,152
Appraised Value...... $69,700,000
12/1/97 LTV.......... 63.8%
Annual Debt Service . $ 4,078,775
DSCR................. 1.73x
THE CIRCLES APARTMENTS AND NORTH PLAZA APARTMENTS (COMBINED)
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------ ------------ ------------ --------------
Revenues............. $2,718,264 $3,024,558 $3,370,768 $ 3,874,907
Expenses............. 1,370,923 1,415,814 953,106 1,426,496
------------ ------------ ------------ --------------
Net Operating
Income.............. $1,347,341 $1,608,744 $2,417,662 $ 2,448,410
Occupancy............ 97.5%
Appraised Value...... $21,000,000
BORONDA MANOR APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------ ------------ ------------ --------------
Revenues............. $1,283,899 $1,277,479 $1,384,490 $1,481,978
Expenses............. 472,863 512,007 526,737 597,498
------------ ------------ ------------ --------------
Net Operating
Income.............. $ 811,036 $ 765,472 $ 857,753 $ 884,480
Occupancy............ 94.2%
Appraised Value...... $8,700,000
THE ELMS APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------ ------------ ------------ --------------
Revenues............. $1,025,844 $1,172,422 $1,269,963 $1,461,113
Expenses............. 477,118 531,077 545,367 604,355
------------ ------------ ------------ --------------
Net Operating
Income.............. $ 548,726 $ 641,345 $ 724,596 $ 856,758
Occupancy............ 96.8%
Appraised Value...... $8,000,000
S-246
<PAGE>
HEATHER PLAZA APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASHFLOW
------------ ------------ ------------ --------------
Revenues............. $1,246,219 $1,281,310 $1,429,052 $1,506,613
Expenses............. 555,615 640,580 559,460 631,280
------------ ------------ ------------ --------------
Net Operating
Income.............. $ 690,604 $ 640,730 $ 869,592 $ 875,333
Occupancy............ 92.7%
Appraised Value...... $8,300,000
PINE GROVE APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASHFLOW
---------- ---------- ---------- --------------
Revenues............. $756,428 $807,157 $852,336 $ 888,407
Expenses............. 228,469 266,386 295,346 337,244
---------- ---------- ---------- --------------
Net Operating
Income.............. $527,959 $540,771 $556,990 $ 551,163
Occupancy............ 100.0%
Appraised Value...... $5,800,000
LAUREL TREE APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASHFLOW
---------- ---------- ---------- --------------
Revenues............. $799,785 $887,891 $994,583 $1,019,840
Expenses............. 344,724 432,777 336,384 430,455
---------- ---------- ---------- --------------
Net Operating
Income.............. $455,061 $455,114 $658,199 $ 589,385
Occupancy............ 98.1%
Appraised Value (1) . $8,500,000
WESTLAKE APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASHFLOW
---------- ---------- ---------- --------------
Revenues............. $682,915 $799,306 $901,425 $ 950,594
Expenses............. 323,044 386,587 379,835 $ 389,446
---------- ---------- ---------- --------------
Net Operating
Income.............. $359,871 $412,719 $521,590 $ 561,148
Occupancy............ 99.3%
Appraised Value...... $5,400,000
S-247
<PAGE>
THE CAPRI APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASHFLOW
---------- ---------- ---------- --------------
Revenues............. $640,832 $656,368 $751,212 $ 766,539
Expenses............. 279,912 356,125 359,654 $ 343,241
---------- ---------- ---------- --------------
Net Operating
Income.............. $360,920 $300,243 $391,558 $ 423,298
Occupancy............ 93.9%
Appraised Value...... $4,000,000
HARDING PARK TOWNHOMES
UNDERWRITTEN
1994 1995 1996 CASHFLOW
---------- ---------- ---------- --------------
Revenues............. $308,423 $326,461 $340,869 $ 347,844
Expenses............. 103,334 111,260 108,570 $ 109,039
---------- ---------- ---------- --------------
Net Operating
Income.............. $205,089 $215,201 $232,299 $ 238,805
Occupancy............ 97.2%
Appraised Value(1) . $8,500,000
- ------------
(1) Appraised value for Laurel Tree Apartments also includes the
appraised value of Harding Park Townhomes.
S-248
<PAGE>
UNDERWRITTEN CASH FLOW--AMERICAN APARTMENT COMMUNITIES I COMBINED
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------- --------------
Gross Income
Rental Income (1).......... 10,478,780 12,685,224
Other Income............... 815,917 322,086
------------- --------------
Total Gross Income......... 11,294,697 13,007,310
Less: Vacancy.............. -- 709,476
------------- --------------
Effective Gross Income ..... $11,294,697 $12,297,835
============= ==============
Operating Expenses
Fixed Expenses
Real Estate Tax............ 454,289 827,942
Insurance.................. (3,137) 136,634
------------- --------------
Total Fixed Expense........ $ 451,152 $ 964,576
============= ==============
Variable Expenses
Payroll.................... 1,145,336 1,197,764
Administrative............. 435,779 274,449
Utilities.................. 968,681 1,284,638
Maintenance ............... 1,026,170 655,711
Other...................... 37,341 --
Ground Rent................ -- --
Management Fee............. -- 491,915
------------- --------------
Total Variable Expense .... $ 3,613,305 $ 3,904,480
============= ==============
Total Expenses.............. $ 4,064,457 $ 4,869,056
------------- --------------
Percent of EGI.............. 36% 42%
Net Operating Income........ $ 7,230,240 $ 7,428,779
============= ==============
Reserve for Replacement .... -- 369,750
------------- --------------
Net Cash Flow............... $ 7,230,240 $ 7,059,029
============= ==============
Debt Service Coverage
Ratio...................... 1.73x
Occupancy .................. 96.4%
S-249
<PAGE>
THE CIRCLES APARTMENTS AND NORTH PLAZA APARTMENTS COMBINED
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------ --------------
GROSS INCOME
Rental Income (1) .... 3,184,205 3,993,900
Other Income........... 186,564 84,949
------------ --------------
Total Gross Income .... 3,370,788 4,078,849
Less: Vacancy (2) .... -- 203,942
------------ --------------
Effective Gross Income . $3,370,768 $3,874,907
============ ==============
OPERATING EXPENSES
Fixed Expenses
Real Estate Tax ....... 155,955 276,173
Insurance.............. (132) 37,818
------------ --------------
Total Fixed Expense ... $ 155,823 $ 313,991
============ ==============
Variable Expenses
Payroll................ 372,731 392,896
Administrative......... 48,927 75,613
Utilities.............. 62,052 323,206
Maintenance ........... 276,233 165,793
Other.................. 37,341 --
Ground Rent............ -- --
Management Fee (3) ... -- 154,996
------------ --------------
Total Variable Expense $ 797,283 $1,112,505
============ ==============
Total Expenses.......... $ 953,106 $1,426,496
Percent of EGI.......... 28% 37%
------------ --------------
Net Operating Income ... $2,417,662 $2,448,410
============ ==============
Reserve for
Replacement............ -- 80,000
Net Cash Flow........... $2,417,662 $2,368,410
============ ==============
Occupancy............... 97.5%
- ------------
1. Revenue was extracted from October Rent Roll annalized.
2. Vacancy at 5% of Gross Income or actual, whichever was greater.
3. Management computed on the basis of 4% of EGI.
S-250
<PAGE>
BORONDA MANOR APARTMENTS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------ --------------
Gross Income
Rental Income (1) .......... 1,266,848 1,519,320
Other Income ............... 117,642 52,838
------------ --------------
Total Gross Income ......... 1,384,490 1,572,158
Less: Vacancy (2) .......... -- 90,180
------------ --------------
Effective Gross Income ..... $1,384,490 $1,481,978
============ ==============
Operating Expenses
Fixed Expenses
Real Estate Tax ............ 57,630 101,501
Insurance .................. (536) 17,644
Total Fixed Expense ........ $ 57,095 $ 119,145
Variable Expenses............
Payroll .................... 109,350 136,004
Administrative ............. 68,082 47,558
Utilities .................. 156,687 166,062
Maintenance ................ 155,524 69,450
Other ...................... -- --
Ground Rent ................ -- --
Management Fee (3) ......... -- 59,279
------------ --------------
Total Variable Expense .... $ 469,643 $ 478,353
============ ==============
Total Expenses .............. $ 526,737 $ 597,498
------------ --------------
Percent of EGI .............. 38% 44%
Net Operating Income ........ $ 857,753 $ 884,480
============ ==============
Reserve for Replacement (4) 51,750
Net Cash Flow ............... $ 857,753 $ 832,730
============ ==============
Occupancy ...................
- ------------
1. Revenue was extracted from October Rent Roll annualized.
2. Vacancy at 5% of Gross Income or actual whichever is greater.
3. Management computed on the basis of 4% of EGI.
4. Reserves as estimated from engineering report or $250 per unit.
S-251
<PAGE>
THE POINTE AT NORTHRIDGE (THE "ELMS")
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------- --------------
Gross Income
Rental Income (1) .......... 1,167,409.5 1,486,404
Other Income................ 102,493.5 51,609
------------- --------------
Total Gross Income.......... 1,269,963 1,538,013
Less: Vacancy (2) .......... 76,901
------------- --------------
Effective Gross Income....... $ 1,269,963 $1,461,113
============= ==============
Operating Expenses
Fixed Expenses
Real Estate Tax............. 64,281 95,125
Insurance................... 487.5 16,034
------------- --------------
Total Fixed Expense......... $ 63,794 $ 111,159
============= ==============
Variable Expenses
Payroll..................... 116,161.5 132,721
Administrative.............. 61,150.5 32,737
Utilities................... 168,997.5 173,019
Maintenance ................ 135,264 96,274
Other....................... -- --
Ground Rent................. -- --
Management Fee (3) ......... -- 58,445
------------- --------------
Total Variable Expense ..... $ 481,574 $ 493,196
============= ==============
Total Expenses............... $ 545,367 $ 604,355
------------- --------------
Percent of EGI............... 43% 41%
Net Operating Income......... 724,596 $ 856,758
============= ==============
Reserve for Replacement (4) 47,000
Net Cash Flow................ $ 724,596 $ 809,758
============= ==============
Occupancy.................... 96.8%
- ------------
1. Revenue was extracted from October Rent Roll annualized.
2. Vacancy at 5% of Gross Income or actual whichiever was greater.
3. Management computed on the basis of 4% of EGI.
4. Reserves as estimated from engineering report or $250 per unit.
S-252
<PAGE>
HEATHER PLAZA APARTMENTS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------ --------------
Gross Income
Rental Income (1) .......... 1,303,874 1,584,912
Other Income................ 125,178 41,761
------------ --------------
Total Gross Income.......... 1,429,052 1,626,673
Less: Vacancy (2) .......... -- 120,060
------------ --------------
Effective Gross Income....... $1,429,052 $1,506,613
============ ==============
Operating Expenses ..........
Fixed Expenses ..............
Real Estate Tax............. 37,701 97,593
Insurance................... (564) 18,582
------------ --------------
Total Fixed Expense......... $ 37,137 $ 116,175
============ ==============
Variable Expenses
Payroll..................... 156,057 151,638
Administrative.............. 69,798 36,778
Utilities................... 166,691 170,873
Maintenance ................ 129,777 95,501
Other....................... -- --
Ground Rent................. -- --
Management Fee (3) ......... -- 60,265
------------ --------------
Total Variable Expense ..... $ 522,323 $ 515,105
============ ==============
Total Expenses............... $ 559,460 $ 631,280
------------ --------------
Percent of EGI............... 39% 42%
Net Operating Income......... $ 869,592 $ 875,333
============ ==============
Reserve for Replacement (4) -- 54,500
Net Cash Flow................ $ 869,592 $ 820,833
============ ==============
Occupancy.................... 92.7%
- ------------
1. Revenue was extracted from October Rent Roll annualized.
2. Vacancy at 5% of Gross Income or actual whichever was greater.
3. Management computed on the basis of 4% of EGI.
4. Reserves as estimated from engineering report or $250 per unit.
S-253
<PAGE>
PINE GROVE APARTMENTS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
---------- --------------
Gross Income
Rental Income (1) .......... 812,522 926,028
Other Income................ 40,014 9,137
---------- --------------
Total Gross Income.......... 852,336 935,165
Less: Vacancy (2) .......... -- 46,758
---------- --------------
Effective Gross Income....... $852,336 $888,407
Operating Expenses
Fixed Expenses
Real Estate Tax............. 14,672 61,449
Insurance................... (260) 8,530
---------- --------------
Total Fixed Expense......... $ 14,412 $ 69,979
---------- --------------
Variable Expenses
Payroll..................... 71,223 74,537
Administrative.............. 48,254 23,707
Utilities................... 82,053 95,799
Maintenance ................ 79,484 37,686
Other....................... -- --
Ground Rent................. -- --
Management Fee (3) ......... -- 35,536
---------- --------------
Total Variable Expense ..... $280,934 $267,265
========== ==============
Total Expenses............... $295,346 $337,244
---------- --------------
Percent of EGI............... 33% 36%
Net Operating Income......... 556,991 $551,163
========== ==============
Reserve for Replacement (4) 25,000
Net Cash Flow................ $556,991 $526,163
========== ==============
Occupancy.................... 100.0%
- ------------
1. Revenue was extracted from October Rent roll annualized.
2. Vacancy at 5% of Gross Income or actual whichever was greater.
3. Management computed on the basis of 4% of EGI.
4. Reserves as estimated from engineering report or $250 per unit.
S-254
<PAGE>
LAUREL TREE APARTMENTS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
---------- --------------
Gross Income
Rental Income (1) ...... 902,151 1,049,520
Other Income ........... 92,432 23,996
---------- --------------
Total Gross Income...... 994,583 1,073,516
Less: Vacancy (2) ...... -- 53,676
---------- --------------
Effective Gross Income . $994,583 $1,019,840
========== ==============
Operating Expenses
Fixed Expenses
Real Estate Tax ........ 24,746 61,257
Insurance .............. (410) 13,385
---------- --------------
Total Fixed Expense ... $ 24,336 $ 74,642
========== ==============
Variable Expenses
Payroll ................ 108,825 105,682
Administrative ......... 45,176 16,828
Utilities .............. 89,798 117,995
Maintenance ............ 74,250 74,514
Other................... -- --
Ground Rent ............ -- --
Management Fee (3) .... -- 40,794
---------- --------------
Total Variable Expense $312,048 $ 355,813
========== ==============
Total Expenses .......... $336,384 $ 430,455
---------- --------------
Percent of EGI .......... 34% 42%
Net Operating Income ... $658,199 $ 589,385
========== ==============
Reserve for Replacement 39,250
Net Cash Flow ........... $658,199 $ 550,135
========== ==============
Occupancy ............... 98.1%
- ------------
1. Revenue was extracted from October rent Roll annualized.
2. Vacancy at 5% of Gross Income or actual whichever was greater.
3. Management computed on the basis of 4% of EGI.
4. Reserves as estimated from engineering report or $250 per unit.
S-255
<PAGE>
WESTLAKE APARTMENTS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
---------- --------------
Gross Income
Rental Income (1) ......... 832,397 982,620
Other Income............... 69,029 18,005
---------- --------------
Total Gross Income......... 901,425 1,000,625
Less: Vacancy (2) ......... -- 50,031
---------- --------------
Effective Gross Income .... $901,425 $ 950,594
========== ==============
Operating Expenses .........
Fixed Expenses ............
Real Estate Tax............ 45,915 60,345
Insurance.................. (360) 11,851
---------- --------------
Total Fixed Expense........ $ 45,555 $ 72,196
========== ==============
Variable Expenses
Payroll.................... 109,428 105,827
Administrative............. 49,371 22,956
Utilities.................. 90,276 97,116
Maintenance ............... 85,205 53,327
Other...................... -- --
Ground Rent (3) ........... -- --
Management Fee............. -- 38,024
---------- --------------
Total Variable Expense ... $334,280 $ 317,250
========== ==============
Total Expenses ............. $379,835 $ 389,446
---------- --------------
Percent of EGI ............. 42% 41%
Net Operating Income ....... $521,591 $ 561,148
========== ==============
Reserve for Replacement
(4)........................ 34,750
Net Cash Flow .............. $521,591 $ 526,398
========== ==============
Occupancy................... 99.3%
- ------------
1. Revenue was extracted from October Rent Roll annualized.
2. Vacancy at 5% of Gross Income or actual whichever was greater.
3. Management computed on the basis of 4% of EGI.
4. Reserves as estimated from engineering report or $250 per unit.
S-256
<PAGE>
THE CAPRI APARTMENTS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
---------- --------------
Gross Income
Rental Income (1) .......... 686,643 779,580
Other Income................ 64,569 36,579
---------- --------------
Total Gross Income.......... 751,212 816,159
Less: Vacancy (2) .......... -- 49,620
---------- --------------
Effective Gross Income....... $751,212 $766,539
========== ==============
Operating Expenses
Fixed Expenses
Real Estate Tax............. 39,315 46,938
Insurance................... (296) 9,722
---------- --------------
Total Fixed Expense......... $ 39,020 $ 56,660
========== ==============
Variable Expenses
Payroll..................... 77,349 73,879
Administrative.............. 37,556 15,785
Utilities................... 119,727 114,191
Maintenance ................ 86,003 52,064
Other....................... --
Ground Rent................. --
Management Fee (3) ......... -- 30,662
---------- --------------
Total Variable Expense ..... $320,634 $286,581
========== ==============
Total Expenses............... $359,654 $343,241
---------- --------------
Percent of EGI............... 48% 45%
Net Operating Income......... $391,559 $423,298
========== ==============
Reserve for Replacement (4) 28,500
Net Cash Flow................ 391,559 $394,798
========== ==============
Occupancy.................... 93.9%
- ------------
1. Revenue was extracted from October Rent Roll annualized.
2. Vacancy at 5% of Gross Income or actual whichever was greater.
3. Management computed on the basis of 4% of EGI.
4. Reserves as estimated from engineering report or $250 per unit.
S-257
<PAGE>
HARDING PARK TOWNHOMES
1996 UNDERWRITTEN
ACTUAL CASHFLOW
---------- --------------
Gross Income
Rental Income (1) ...... 322,872 362,940
Other Income ........... 17,997 3,212
---------- --------------
Total Gross Income .... 340,869 366,152
Less: Vacancy (2) ...... -- 18,308
---------- --------------
Effective Gross Income . $340,869 $347,844
========== ==============
Operating Expenses
Fixed Expenses
Real Estate Tax ........ 14,075 27,561
Insurance .............. (93) 3,068
---------- --------------
Total Fixed Expense ... $ 13,982 $ 30,629
========== ==============
Variable Expenses
Payroll ................ 24,212 24,530
Administrative ......... 7,466 2,487
Utilities .............. 38,400 26,377
Maintenance ............ 24,512 11,102
Other .................. -- --
Ground Rent ............ -- --
Management Fee (3) .... -- 13,914
---------- --------------
Total Variable Expense $ 94,589 $ 78,410
========== ==============
Total Expenses .......... $108,570 $109,039
---------- --------------
Percent of EGI .......... 32% 31%
Net Operating Income ... $232,299 $238,805
========== ==============
Reserve for Replacement -- 9,000
Net Cash Flow ........... $232,299 $229,805
========== ==============
Occupancy ............... 97.2%
- ------------
1. Revenue was extracted from October Rent Roll annualized.
2. Vacancy at 5% of Gross Income or actual whichever was greater.
3. Management computed on the basis of 4% of EGI.
S-258
<PAGE>
AMERICAN APARTMENT COMMUNITIES I: THE LOAN
Security. The CMP-1 Loan is a non-recourse loan, secured by a mortgage
lien on the fee estate of CMP-1 Borrower in the CMP-1 Properties and certain
other collateral relating thereto (including an assignment of leases, rents
and security deposits, an assignment of certain agreements and the funds in
certain accounts pursuant to a cash collateral account agreement)
(collectively, with all other security documents referenced herein, the "Loan
Documents"). The mortgagee is the insured under title insurance policies
which insure, among other things, that the CMP-1 Mortgage constitutes a valid
and enforceable first lien on the CMP-1 Properties, subject to certain
exceptions and exclusions from coverage set forth therein. Such insurance
policies, together with the CMP-1 Note, the CMP-1 Mortgage and all other
agreements and documents evidencing and securing the CMP-1 Loan shall be
assigned to the Trust Fund.
Payment Terms. The CMP-1 Loan matures on January 1, 2022 (the "CMP-1
Maturity Date") and bears interest at (a) a fixed rate per annum equal to
7.75% (the "CMP-1 Initial Interest Rate") through and including December 31,
2003 and (b) from and including January 1, 2004 (the "CMP-1 Effective
Maturity Date") through and including the CMP-1 Maturity Date, at an interest
rate per annum equal to the greater of (i) the CMP-1 Initial Interest Rate
plus 5% or (ii) the CMP-1 Treasury Rate (as defined below) plus 5% (the
"CMP-1 Revised Interest Rate"). The "CMP-1 Treasury Rate" means the yield,
calculated by linear interpolation of the yields of noncallable United States
Treasury obligations with terms (one longer and one shorter) most nearly
approximating the period from the CMP-1 Effective Maturity Date to the CMP-1
Maturity Date. Any interest accrued at the CMP-1 Revised Interest Rate and
not paid in accordance with the CMP-1 Note shall be deferred and added to the
principal indebtedness and shall earn interest at the CMP-1 Revised Interest
Rate to the extent permitted by applicable law (such deferred interest and
interest thereon, the "CMP-1 Accrued Interest"). Interest on the CMP-1 Loan
is calculated on the basis of a 360-day year of 30-day months.
The payment date for the CMP-1 Loan is the first business day of each
month (each, a "Payment Date"), with no grace period for a default in payment
of principal or interest. Commencing on February 1, 1997, the CMP-1 Loan
requires 300 equal monthly installments of principal and interest of
$339,897.94 (the "CMP-1 Debt Service Payment"). Each CMP-1 Debt Service
Payment, due and payable on each Payment Date, shall be applied first to the
interest at the CMP-1 Initial Interest Rate and the remainder thereof to the
reduction of principal. In the event of a default in payments, interest will
accumulate thereon at the applicable interest rate plus 5% per annum (the
"Default Rate"). On the CMP-1 Maturity Date, the entire remaining unpaid
balance of principal of the CMP-1 Note, all interest accrued thereon and all
other sums payable thereunder or under the other loan documents shall be due
and payable in full.
Commencing with the first Payment Date after the CMP-1 Effective Maturity
Date and continuing on each Payment Date thereafter through and including the
CMP-1 Maturity Date, CMP-1 Borrower is required to apply 100% of the rents
and other revenues from the CMP-1 Properties received on or before such day
to the following items in the following order of priority: (a) to the deposit
of required monthly escrow amounts of real estate taxes and insurance
premiums; (b) to payment of interest calculated on the basis of the CMP-1
Initial Interest Rate, including interest at the CMP-1 Default Rate (as
herein defined) and principal due on the next Payment Date (c) to payment of
monthly cash expenses pursuant to the annual budget approved (the "Annual
Budget") by the mortgagee and to payment of extraordinary, unbudgeted
operating or capital expenses ("Extraordinary Expenses") approved by the
mortgagee, if any; (d) to payments to be applied against the outstanding
principal of the loan until such principal amount is paid in full; (e) to
payments of CMP-1 Accrued Interest; and (f) to payments of any other amounts
due under the Loan Documents. Any excess amounts shall be paid to CMP-1
Borrower. The scheduled principal balance of the CMP-1 Loan as of the CMP-1
Effective Maturity Date is approximately $39,527,429.
Event of Default. The occurrence of any of the following constitutes and
"Event of Default" under the CMP-1 Mortgage: (a) failure to make any payment
of interest or principal due under the CMP-1 Note when due, or failure to pay
the principal balance when due; (b) failure to pay any other amount payable
pursuant to the CMP-1 Note or the CMP-1 Mortgage when due and payable, with
such failure continuing for ten (10) days after mortgagee delivers written
notice thereof to the CMP-1 Borrower; (c) failure to keep in force the
insurance required under the CMP-1 Mortgage to be maintained or failure to
comply with any other covenant relating to insurance requirements, which
failure continues for five (5) business
S-259
<PAGE>
days after the mortgagee delivers written notice thereof to the CMP-1
Borrower; (d) failure to comply with certain CMP-1 Mortgage covenants which
require the CMP-1 Borrower to keep the CMP-1 Property free from liens and
encumbrances (with such default continuing for five (5) business days after
mortgagee delivers written notice thereof to the CMP-1 Borrower), and which,
prohibit the sale of the CMP-1 Property and transfers of direct and indirect
beneficial interests in the CMP-1 Borrower; (e) any attempt by the CMP-1
Borrower to assign its rights under the CMP-1 Mortgage; (f) any other default
in the performance or payment, or breach, of any material covenant, warranty,
representation or agreement set forth in the documents which evidence and
secure the CMP-1 Loan, with such default continuing for thirty (30) business
days after mortgagee delivers written notice thereof to the CMP-1 Borrower;
(g) the occurrence of certain bankruptcy events; (h) the termination, or the
failure to continue to be valid and effective, of the CMP-1 Mortgage (or the
ceasing of any lien granted thereunder to be a perfected first priority lien)
or any of the Loan Documents evidencing the CMP-1 Loan; and (i) any event of
the default under any other of the Loan Documents which evidence the CMP-1
Loan.
If the CMP-1 Borrower defaults in the payment of any CMP-1 Debt Service
Payment on the Payment Date then the CMP-1 Borrower shall pay to mortgagee a
late payment charge in an amount equal to five percent (5%) of the amount of
the installment not paid. An additional late charge equal to five percent
(5%) of the monthly payment due will be charged for each successive month the
payment, or any part thereof, remains outstanding. If the CMP-1 Borrower
defaults in the payment of any CMP-1 Debt Service Payment on the Payment Date
due, or defaults in any other manner so as to constitute an Event of Default,
then mortgagee at its option and without further notice to the CMP-1 Borrower
may declare the entire unpaid amount of principal with interest at the
Default Rate together with all other sums due, if any, due and payable
immediately.
Prepayment. Voluntary prepayment of the principal of the CMP-1 Note is
prohibited at any time prior to December 31, 2001. Thereafter, the CMP-1 Loan
may be prepaid without a prepayment premium. A tender of payment of the
amount necessary to pay and satisfy the entire unpaid principal balance or
any portion thereof at any time after an Event of Default or an acceleration
by the mortgagee prior to December 31, 2001, whether such payment is tendered
voluntarily, during or after foreclosure of the CMP-1 Mortgage, or pursuant
to realization upon other security, shall be subject to a prepayment premium
(the "CMP-1 Yield Maintenance Premium") equal to the greater of (a) 1% of the
principal amount being prepaid and (b) the product of (i) a fraction whose
numerator is an amount equal to the portion of the principal balance being
prepaid and whose denominator is the entire outstanding principal balance on
the date of such prepayment, and (ii) an amount equal to the remainder
obtained by subtracting (x) an amount equal to the entire outstanding
principle balance as of the date of such prepayment from (y) the present
value as of the date of such prepayment of the remaining scheduled payments
of principle and interest (including any final installment of principle
payment on the CMP-1 Maturity Date) determined by discounting such payments
at a discount rate equal to the CMP-1 Discount Rate. The "CMP-1 Discount
Rate" means the rate which, when compounded monthly, is equivalent to the
CMP-1 Treasury Rate.
Defeasance. CMP-1 Borrower shall be entitled to have one (1) or more of
the CMP-1 Properties released from the lien of the CMP-1 Mortgage, from and
after the second anniversary of the Delivery Date in connection with a
delivery of defeasance collateral, provided the following release conditions
have been met: (i) the mortgagee has received at least thirty (30) days'
prior written notice of the date proposed for such release (the "Release
Date"); (ii) no Event of Default has occurred and is occurring; (iii) CMP-1
Borrower shall deliver the sufficient defeasance collateral, in accordance
with the provisions of the CMP-1 Mortgage, with respect to such CMP-1
Property, or, if applicable, cash in an amount equal to 125% of the loan
amount (the "Allocated Loan Amount") allocated to the applicable CMP-1
Property (the "Release Amount"); (iv) CMP-1 Borrower shall deliver a
certificate of an officer of the administrative member certifying compliance
with requirements (ii) and (iii) above; (v) CMP-1 Borrower shall deliver one
or more endorsements to the mortgagee's title insurance policies insuring
that the policy shall not be adversely affected by the release; (vi) the
CMP-1 DSCR shall not be less than the greater of such debt service coverage
without giving effect to such release and 1.60:1; (vii) the fair market value
of the CMP-1 Properties that will remain subject to the lien of the CMP-1
Mortgage shall not be less than the
S-260
<PAGE>
fair market value of such CMP-1 Properties as of the closing date of the
CMP-1 Loan; and (viii) the mortgagee and the Rating Agencies shall have
received from CMP-1 Borrower statements of the net operating income and
calculations of the CMP-1 DSCR both with or without the effect of the
proposed release.
Lockbox and Reserves. Pursuant to a cash collateral account, security,
pledge and assignment agreement (the "CMP-1 Cash Collateral Agreement"),
CMP-1 Borrower has established in the name of Bank One Trust Company, N.A.
("CMP-1 Agent Bank"), as agent for the mortgagee, as secured party an
interest bearing cash collateral account. CMP-1 Borrower has instructed CMP-1
Manager (hereinafter defined) to deposit all checks and other funds with
respect to rent due under the leases to the account established at Union Bank
of California (the "CMP-1 Property Account"). CMP-1 Borrower has delivered
irrevocable instructions to Union Bank of California to deposit, twice
weekly, by wire transfer all cleared funds from the CMP-1 Property Account to
the account established with (the CMP-1 Agent Bank) as agent for mortgagee,
as secured party (the "CMP-1 Lockbox Account"), provided that a minimum
balance of $2,000.00 shall remain at all times in the CMP-1 Property Account.
Pursuant to irrevocable instructions given by the CMP-1 Borrower, on a daily
basis the CMP-1 Agent Bank withdraws from the CMP-1 Lockbox all cleared funds
deposited therein and deposits the same by wire or other transfer into the
CMP-1 Operating Account (as hereinafter defined)
The CMP-1 Borrower has established with the CMP-1 Agent Bank (a) an
operating account (the "CMP-1 Operating Account") to receive twice weekly
deposits of amounts on deposit in the CMP-1 Lockbox Account, (b) an interest
bearing cash collateral account for the deposit of reserves (the "CMP-1 Tax
and Insurance Escrow Amounts") for the payment of real estate taxes and
insurance premiums (the "CMP-1 Tax and Insurance Escrow Account"), (c) an
interest bearing cash collateral account for the monthly deposit of reserves
(the "CMP-1 Debt Service Escrow Amounts") for interest and principal due on
the next Payment Date (the "CMP-1 Debt Service Escrow Account"), an interest
bearing cash collateral account for the deposit of reserves (the "CMP-1 Trade
Payables Amounts"), if required under the CMP-1 Cash Collateral Agreement,
for contested trade payables more than 60 days past due in excess of $250,000
(the "Trade Payables Escrow Account"), an interest bearing cash collateral
account for deferred maintenance items with a one-time deposit of $385,844
(the "Repair Escrow Account"), and an interest bearing cash collateral
account for the deposit of required monthly reserves (the "CMP-1 Capital
Improvement Escrow Amounts") for capital improvements in the amount of
$33,333.33 subject to adjustment, in the event of a release of a CMP-1
Property from the lien of the CMP-1 Mortgage, to 1/12 of the product of $250
and the number of units in the remaining CMP-1 Properties (the "Capital
Improvement Escrow Account") (collectively, the "Accounts"). The Collateral
held in the Accounts derives from a Lockbox Agreement between CMP-1 Borrower
and the Lockbox Bank, which shall be irrevocable until full payment of the
CMP-1 Note.
Until the CMP-1 Effective Maturity Date, the CMP-1 Agent will withdraw the
funds on deposit in the CMP-1 Lockbox Account on the first business day of
each month in the following amounts and in the following order of priority:
(i) funds in an amount equal to the monthly Tax and Insurance Escrow Amounts
and deposit the same into the Tax and Insurance Escrow Account, (ii) funds in
an amount equal to the CMP-1 Debt Service Escrow Amounts, for deposit into
CMP-1 Debt Service Escrow Account; (iii) funds in an amount equal to the
CMP-1 Trade Payables Amounts, if any, for deposit into the CMP-1 Trade
Payables--Escrow Account; and (iv) funds in an amount equal to the monthly
CMP-1 Capital Improvement Escrow Amounts, for deposit into the CMP-1 Capital
Improvement Escrow Account.
Prior to the CMP-1 Effective Maturity Date, provided that (a) no Event of
Default shall have occurred and be continuing; (b) the CMP-1 Borrower
certifies that there are no payables more than 60 days past due, unless the
same are being contested in good faith, and no other obligations of the CMP-1
Borrower are past due; and (c) the CMP-1 Borrower certifies that it has
delivered instructions to the CMP-1 Agent Bank to transfer from the CMP-1
Lockbox Account to the CMP-1 Trade Payables Escrow Account an amount equal to
any Trade Payables Reserve Amounts due, then the CMP-1 Borrower may at any
time during the remainder of such month, instruct the CMP-1 Agent Bank to
transfer amounts from the CMP-1 Lockbox Account to such account or accounts
of the CMP-1 Borrower as instructed to pay operating expenses of the CMP-1
Property, to make distribution to the shareholders of CMP-1 Borrower, or
otherwise.
S-261
<PAGE>
After the CMP-1 Effective Maturity Date, the CMP-1 Agent Bank will
withdraw from the CMP-1 Operating Account on the first business day of each
month or as soon thereafter as there shall be collected funds in the CMP-1
Operating Account, funds in the following amounts and in the following order
of priority: (i) funds in an amount equal to the monthly Tax and Insurance
Escrow Amounts and deposit the same into the Tax and Insurance Escrow
Account, (ii) funds in an amount equal to the amount of interest at the CMP-1
Initial Interest Rate, including, if applicable, interest at the Default Rate
applicable prior to the CMP-1 Effective Maturity Date and CMP-1 Debt Service
Escrow Amounts, for deposit into CMP-1 Debt Service Escrow Account; (iii)
funds in an amount equal to the monthly allocation of operating expenses in
the Annual Budget approved by mortgagee and approved Extraordinary Expenses,
if any; (iv) funds to be applied against the outstanding principal due under
the CMP-1 Note until the principal amount is paid in full; (v) funds in an
amount equal to Accrued Interest, including, if applicable, interest at the
Default Rate, (vi) funds in an amount equal to the CMP-1 Trade Payables
Amounts, if any, for deposit into the CMP-1 Trade Payables Escrow Account;
and (vii) funds in an amount equal to the monthly CMP-1 Capital Improvement
Escrow Amounts, for deposit into the CMP-1 Capital Improvement Escrow
Account.
Transfer of Properties and Interest in Borrower; Encumbrance; Other
Debt. Subject to limited exceptions described below, CMP-1 Borrower will not
(i) transfer all or any part of the CMP-1 Properties; (ii) incur indebtedness
for borrowed money; (iii) mortgage, hypothecate or otherwise encumber or
grant a security interest in all or any part of the CMP-1 Properties; (iv)
permit any transfer of any interest in CMP-1 Borrower; or (v) file a
declaration of condominium with respect to any of the CMP-1 Properties.
The CMP-1 Borrower is generally prohibited form transferring or
encumbering the the CMP-1 Properties except for a transfer of a CMP-1
Property that has been released as described under "--Defeasance Collateral".
The CMP-1 Borrower may, without the consent of the mortgagee (i) make
immaterial transfers of portions of a CMP-1 Property to governmental
authorities for dedication or public use; (ii) grant easements, restrictions,
covenants, reservations and rights of way in the ordinary course of business;
(iii) enter into laundry equipment leases, cable television service
contracts, service and license agreements, provided that none of the above
transfers materially impairs the utility and operation of the applicable
CMP-1 Property or materially adversely affect the value of the applicable
CMP-1 Property taken as a whole. In connection with any transfer or series of
transfers that affect (on a cumulative basis) more than 10% of the value of
the CMP-1 Properties, a tax opinion and a nondisqualification opinion shall
be furnished to mortgagee.
The mortgagee's consent shall not be required with respect to transfers of
direct or indirect beneficial interests in CMP-1 Borrower, provided that (i)
no Event of Default shall have occurred and be continuing; (ii) CMP-1
Borrower shall deliver to the mortgagee and the Rating Agencies written
notice at least fifteen (15) business days' prior to the effective date of
the transfer; (iii) CMP-1 Borrower remains a single purpose entity; (iv) no
transfer of limited partner, non-administrative member or shareholder
interests shall result in any one person (or any group of affiliates) owning,
directly or indirectly, 50% or more of the beneficial ownership interests of
CMP-1 Borrower; and (v) American Apartment Communities II, Inc. shall at all
times directly or indirectly own not less than 50% of the beneficial
interests in CMP-1 Borrower and all administrative members shall be
wholly-owned subsidiaries of American Apartment Communities II, Inc.
CMP-1 Borrower shall not incur, create or assume any indebtedness or incur
any liabilities without the consent of the mortgagee; provided, however, that
CMP-1 Borrower may, without the consent of the mortgagee, incur, create or
assume any or all of the following indebtedness: (i) the CMP-1 Note and the
other obligations, indebtedness and liabilities provided for in any loan
document evidencing or securing the CMP-1 Loan; (ii) amounts, not secured by
liens on the CMP-1 Properties not to exceed two percent (2%) of the
outstanding balance of the CMP-1 Loan at the time of determination, provided
that each such amount shall be paid within sixty (60) days following the date
on which each such amount was incurred; (iii) amounts, not secured by liens
on the CMP-1 Properties, payable or reimbursable to any tenant on account of
work performed at a CMP-1 Property by such tenant or for cost incurred by
such tenant in connection with its occupancy of space in the CMP-1 Property;
and (iv) amounts constituting encumbrances on the CMP-1 Properties as
described in mortgagee's title insurance policy insuring the lien of the
CMP-1 Mortgage or otherwise as expressly described in the CMP-1 Mortgage.
S-262
<PAGE>
Insurance. CMP-1 Borrower is required to maintain for the CMP-1
Properties (a) insurance with respect to the improvements and the building
equipment against any peril included within the classification of "All Risks
of Physical Loss" with extended coverage in amount at all times sufficient to
prevent CMP-1 Borrower from becoming a co-insurer, but in any event equal to
the full insurable value of improvements and the building equipment; (b)
comprehensive general liability insurance, including bodily injury,
contractual injury, death and property damage liability, and excess and/or
umbrella liability insurance with a per occurrence limit of not less than
$1,000,000 and with an aggregate limit of not less than $5,000,000 per CMP-1
Property; (c) statutory worker's compensation insurance with respect to any
work by or for CMP-1 Borrower performed on or about the CMP-1 Property; (d)
loss of rental value or business interruption insurance in an amount
sufficient to avoid any co-insurance penalty and to provide proceeds which
will cover the loss of rents sustained during the period of twelve (12)
months following the date of casualty; (e) during the period of performance
of any restoration or repair work, builder's all risk insurance in an amount
equal to not less than the full insurable value of the applicable CMP-1
Property; (f) broad form boiler and machinery insurance covering all boilers
or other pressure vessels, machinery and equipment located in, on or about
each CMP-1 Property; and (g) if any improvement or any CMP-1 Property is
located within an area designated as "flood prone" or a "special flood hazard
area", flood insurance, if available, in an amount equal to the lesser of the
Allocated Loan Amount for the applicable CMP-1 Property and the maximum limit
of coverage available with respect to the applicable CMP-1 Property. At the
mortgagee's request, CMP-1 Borrower shall obtain such other insurance,
excluding earthquake insurance, against any loss or damage of the kinds from
time to time customarily insured against.
The above insurance coverage shall be maintained with one or more domestic
primary insurers, having both (1) a claims-paying-ability rating by S&P of
not less than "AA" and its equivalent by any other nationally recognized
statistical rating agency and (2) an Alfred M. Best Company, Inc. rating of
"A" or better and a financial size category of not less than IX.
The insurance coverage required may be affected under a blanket policy or
policies covering the CMP-1 Properties, provided that any such blanket policy
shall specify, except in the case of public liability insurance, the portion
of the total coverage of such policy that is allocated to the CMP-1
Properties and any sublimits in such blanket policy applicable to the CMP-1
Properties, which amounts shall not be less than those required above,
provided further, that if the coverage of such policy or policies exceeds 20%
of policyholders' surplus, such policy or policies must include a
"cut-through" endorsement acceptable to mortgagee.
Casualty and Condemnation. CMP-1 Borrower will promptly notify mortgagee
in writing upon obtaining knowledge of (i) the institution of any
condemnation proceedings relating to any CMP-1 Property or (ii) the
occurrence of any casualty, damage or injury to, any CMP-1 Property or any
portion thereof the restoration of which is estimated by CMP-1 Borrower in
good faith to cost more than ten percent (10%) of the Allocated Loan Amount
for the particular CMP-1 Property (the "CMP-1 Individual Threshold Amount").
In addition, CMP-1 is obligated to include with the notice of any casualty,
damage, injury or condemnation, the restoration of which is estimated by
CMP-1 to cost more than the CMP-1 Individual Threshold Amount, (or to forward
as soon thereafter as possible) an estimate of the cost of repairing or
restoring such casualty, damage, injury or condemnation in reasonable detail.
Following a casualty or condemnation at a CMP-1 Property, any insurance
and condemnation proceeds will be applied (after payment of the mortgagee's
reasonable expenses of collection thereof) to amounts due under the CMP-1
Loan and the prepayment of the principal amount outstanding thereon, if: (i)
the proceeds shall equal or exceed the Allocated Loan Amount with respect to
the applicable CMP-1 Property; (ii) an Event of Default has occurred and is
continuing; (iii) a CMP-1 Total Loss (as defined below) shall have occurred;
(iv) work to be performed is not capable of being completed before the
earlier to occur of the date which is six (6) months prior to the CMP-1
Maturity Date or the date which the business interruption insurance expires;
(v) the applicable CMP-1 Property is incapable of substantial restoration to
its condition prior to the condemnation or casualty; or (vi) CMP-1 Borrower
is unable to demonstrate to the mortgagee its continuing ability to pay the
CMP-1 Loan. Notwithstanding the foregoing, to the extent such proceeds with
respect to such CMP-1 Property do not exceed $1,000,000 (the
S-263
<PAGE>
"Casualty Amount"), or, if less than the Casualty Amount but when aggregated
with all other then unapplied proceeds, do not exceed $2,500,000 in the
aggregate, such proceeds are to be paid directly to CMP-1 Borrower for
restoration of the CMP-1 Properties.
A "CMP-1 Total Loss" means (x) a casualty, damage or destruction of a
CMP-1 Property, the cost of restoration of which would exceed 50% of the
outstanding principal balance of the applicable Allocated Loan Amount, or (y)
a permanent taking by condemnation of 50% or more of the gross leasable area
of a CMP-1 Property, in either case, such that it would be impractical, in
the mortgagee's sole discretion, even after restoration, to operate the CMP-1
Property as an economically viable whole and with respect to which the
applicable tenant leases do not require restoration.
In the event of (i) a CMP-1 Total Loss resulting from casualty, damage or
destruction, if either (A) the cost to repair the CMP-1 Property would exceed
the CMP-1 Individual Threshold Amount and the restoration of the CMP-1
Property cannot reasonably be completed before the date which is the later to
occur of the date of expiration of any business interruption insurance or the
date of expiration of any letter of credit posted in lieu thereof or in
addition thereto and under such circumstances CMP-1 Borrower is not required
under any tenant lease to make the proceeds available to restore the CMP-1
Property or (B) the mortgagee elects not to make such proceeds available to
CMP-1 Borrower for the restoration of the CMP-1 Property, or (ii) a CMP-1
Total Loss resulting from a condemnation, then CMP-1 Borrower must prepay the
CMP-1 Loan to the extent of the casualty or condemnation proceeds received,
up to an amount equal to the outstanding principal thereon (without
prepayment premium or penalty).
If any insurance or condemnation proceeds (other than business
interruption insurance proceeds) are in excess of the CMP-1 Individual
Threshold Amount, then all such proceeds will be applied as follows: first,
toward reimbursement of the mortgagee's reasonable out-of-pocket costs and
expenses in connection with the recovery and disbursement of such proceeds,
and then, to the prepayment of the principal amount outstanding on the CMP-1
Loan, without prepayment premium or penalty, only if: (A)(i) the amount of
such proceeds is equal to or greater than the outstanding principal amount of
the CMP-1 Loan, or (ii) the casualty or condemnation occurs less than 180
days before the CMP-1 Maturity Date, or (iii) more than 25% of the rentable
area of the applicable CMP-1 Property has been the subject the casualty or
condemnation, or (B) such proceeds are condemnation proceeds received in
excess of the amount needed to restore the CMP-1 Property after a partial
taking by condemnation, in which case prepayment will be made to the extent
of such unneeded proceeds.
In the event that the casualty and condemnation proceeds (other than
business interruption insurance proceeds) are in excess of the CMP-1
Individual Threshold Amount and are not required to be applied to the payment
or prepayment of the CMP-1 Loan as described above, then the mortgagee is
obligated to make all casualty and condemnation proceeds (other than business
interruption insurance proceeds) available to CMP-1 for payment or
reimbursement of the costs and expenses of the repair, restoration and
rebuilding of the CMP-1 Property if, (i) at the time of the loss or damage or
at any time thereafter while CMP-1 Borrower is holding any portion of the
proceeds, there is no continuing Event of Default (ii) the estimated cost of
the work (as estimated by the independent architect referred to in clause
(iii) below) shall exceed the proceeds, CMP-1 Borrower shall at its option
(within a reasonable period of time after receipt of such estimate) either
deposit with or deliver to the mortgagee (A) cash and cash equivalents, (B) a
letter or letters of credit in an amount equal to the estimated cost the work
less the proceeds available, or (C) such other evidence of CMP-1 Borrower's
ability to meet such excess costs and which is satisfactory to the mortgagee
and the Rating Agencies; and (iii) the mortgagee shall, within a reasonable
period of time prior to request for initial disbursement, be furnished with
an estimate of the cost of the work accompanied by an independent architect's
certification as to such costs and appropriate plans and specifications for
the work.
Approval Rights. Under the CMP-1 Note, for each calendar year commencing
after the CMP-1 Effective Maturity Date, CMP-1 Borrower is required to submit
to the mortgagee, for the mortgagee's written approval, an annual budget not
later than 30 days prior to the commencement of such calendar
S-264
<PAGE>
year. In the event that CMP-1 Borrower must incur an extraordinary operating
expense or a capital expense not set forth in the approved annual budget, it
is required promptly to deliver to the mortgagee, for the mortgagee's
approval, a reasonably detailed explanation of such proposed expense.
CMP-1 Borrower shall notify the mortgagee and the Rating Agencies of any
entity proposed to be designated as manager of all or any of the CMP-1
Properties no less than 30 days before such proposed manager begins to manage
such CMP-1 Property(ies). Such proposed manager must be acceptable to the
mortgagee (a "qualifying manager") and with respect to any qualifying manager
CMP-1 Borrower must obtain a written confirmation from the Rating Agencies
that the retention of such qualifying manager will not result in a downgrade,
withdrawal or qualification of the then ratings of the Certificates. A
qualifying manager may be retained at the mortgagee's direction at any time
following the occurrence and during the continuance of any Event of Default
and at any time following the seventh (7th) anniversary of the CMP-1 Loan
unless the CMP-1 Loan has been paid in full. The mortgagee has the right to
approve any new management agreement with the qualifying manager.
Financial Reporting. CMP-1 Borrower is required to provide to the
mortgagee: (1) not later than forty-five (45) days following the end of each
calendar quarter (other than the fourth (4th) quarter of any calendar year),
unaudited financial statements, internally prepared, in accordance with
generally accepted accounting principals, including a balance sheet and a
statement of revenues; (2) not later than ninety (90) days after the end of
CMP-1 Borrower's fiscal year, audited financial statements certified by an
independent accountant (with a copy to the Rating Agencies), including a
balance sheet as of the end of such year, a statement of net operating income
for the year and for the fourth (4th) quarter thereof and a statement of
revenues and expenses of such year; (3) in no event later than the
twenty-fifth (25th) day of each calendar month, a cash flow statement for the
immediately preceding month, showing all items of income and expense, both on
a consolidated basis with respect to all the CMP-1 Properties, as well as a
property by property basis; (4) not later than ninety (90) days after the end
of each fiscal quarter, a true and complete rent roll for each CMP-1 Property
(and aggregating the occupancy rate with respect to all CMP-1 Properties);
(5) within forty-five (45) days after the end of each calendar year during
the term of the CMP-1 Note, an annual summary of any and all capital
expenditures made at each CMP-1 Property during the twelve (12) month period
(with a copy to the Rating Agency); and (6) promptly, after written request
from the mortgagee or the Rating Agency, such additional information as may
be reasonably requested by the mortgagee or the Rating Agency with respect to
the CMP-1 Properties.
S-265
<PAGE>
AAC APARTMENT COMMUNITIES II
LOAN INFORMATION
PRINCIPAL BALANCE: ORIGINAL DECEMBER 1, 1997
-------- ----------------
$21,000,000 $20,940,017
ORIGINATION DATE: JULY 2, 1997
ANTICIPATED REPAYMENT
DATE ("ARD"): JULY 1, 2007
MATURITY DATE: JULY 1, 2027
INTEREST RATE: 7.74%
AMORTIZATION: 30 YEARS
HYPERAMORTIZATION: SUBSEQUENT TO JULY 1, 2007, THE INTEREST RATE
WILL INCREASE TO THE GREATER OF 12.74% OR 200
BASIS POINTS PLUS THE INTERPOLATED UST RATE
WITH A TERM APPROXIMATING THE PERIOD FROM THE
ARD TO THE MATURITY DATE (THE "REVISED
INTEREST RATE"). ADDITIONALLY, ALL EXCESS CASH
FLOW WILL BE CAPTURED UNDER THE TERMS OF THE
CASH COLLATERAL AGREEMENT AND APPLIED TO THE
OUTSTANDING PRINCIPAL BALANCE OF THE NOTE.
INTEREST DUE UNDER THE REVISED INTEREST RATE
ABOVE THAT WHICH IS DUE UNDER THE INITIAL
INTEREST RATE WILL BE PAYABLE SUBSEQUENT TO
THE PAYMENT OF PRINCIPAL. ANY INTEREST DUE
UNDER THE NOTE BUT NOT PAID WILL BE ACCRUED.
PREPAYMENT TERMS/
DEFEASANCE/
RELEASE PROVISIONS: PRIOR TO FEBRUARY 1, 2007, THE BORROWER MUST
PAY A PREPAYMENT PREMIUM OF THE GREATER OF 1%
OF THE OUTSTANDING PRINCIPAL BALANCE OR A
YIELD MAINTENANCE. AFTER FEBRUARY 1, 2007, THE
BORROWER MAY PREPAY THE LOAN IN WHOLE WITHOUT
PENALTY. SUBSEQUENT TO THE SECOND ANNIVERSARY
OF SECURITIZATION OF THE LOAN, DEFEASANCE WILL
BE PERMITTED UPON THE DELIVERY OF APPROPRIATE
DEFEASANCE COLLATERAL. RELEASE OF THE
COLLATERAL WILL BE PERMITTED SUBJECT TO
POSTING OF DEFEASANCE COLLATERAL OR 125% OF
ALLOCATED LOAN AMOUNT.
THE BORROWER: THE BORROWING ENTITY, AAC FUNDING IV LLC, AS
WELL AS ITS GENERAL PARTNER, IS ORGANIZED AS A
SPECIAL-PURPOSE, BANKRUPTCY-REMOTE ENTITY.
CAPITAL REPLACEMENT RESERVE: INITIAL FUNDING OF $402,500 AT CLOSING FOR
DEFERRED MAINTENANCE. THROUGH JULY 2002, THE
MONTHLY CAPITAL RESERVE REQUIREMENT IS
$11,704.00 ($308 PER UNIT PER YEAR). COMMENCING
AUGUST 1, 2002, AND CONTINUING THROUGH THE
MATURITY DATE, THE MONTHLY CAPITAL RESERVE
REQUIREMENT IS $9,500.00 ($250 PER UNIT PER
YEAR).
GROUND RENT
RESERVE: $84,315 MONTHLY FOR PAYMENT OF BOTH GROUND
LEASES
LIEN POSITION: FIRST MORTGAGE LIENS ON THE GROUND LEASEHOLD
ESTATES AND ON BIRCH CREEK APARTMENTS AND
MARINA PLAYA APARTMENTS
CROSS-COLLATERALIZATION/
DEFAULT: YES
PROPERTY INFORMATION
PROPERTY TYPE: MULTI-FAMILY
LOCATION: BIRCH CREEK APARTMENTS
575 SOUTH RENGSTORFF AVENUE
MOUNTAIN VIEW, CA
MARINA PLAYA APARTMENTS
3500 GRANADA AVENUE
SANTA CLARA, CA
WEIGHTED-AVERAGE OCCUPANCY: BIRCH CREEK 97.3%
MARINA PLAYA 97.4%
------
WEIGHTED AVERAGE 97.4%
UNITS: BIRCH CREEK 184
MARINA PLAYA 272
------
TOTAL 456
YEAR BUILT: BIRCH CREEK 1968
MARINA PLAYA 1971
THE COLLATERAL: TWO MULTI-FAMILY PROPERTIES
PROPERTY
MANAGEMENT: AAC FUNDING IV LLC
1996 NET OPERATING INCOME: BIRCH CREEK $1,013,214
MARINA PLAYA $1,713,288
-----------
TOTAL $2,726,502
UNDERWRITTEN
CASHFLOW: BIRCH CREEK $1,288,008
MARINA PLAYA $2,049,791
-----------
TOTAL $3,337,799
APPRAISED VALUE: $32,430,000
APPRAISED BY: ARTHUR ANDERSEN LLP
APPRAISAL DATE: JUNE 1, 1997
LTV AS OF 12/1/97: 64.6%
ANNUAL DEBT
SERVICE: 1,803,618
DSC: 1.85X
LOAN / UNIT AS OF 12/1/97: $45,921
S-266
<PAGE>
AMERICAN APARTMENT COMMUNITIES II: THE BORROWER; THE PROPERTY
The Loan. The loan to AAC Funding IV LLC (the "AAC Loan") was originated
by Midland Loan Services, L.P. on July 2, 1997 and acquired simultaneously
therewith by Merrill Lynch Mortgage Capital, Inc. ("MLMC"). The AAC Loan had
a principal balance at origination of $21,000,000.00 and has a principal
balance as of the Cut-Off Date of approximately $20,940,016.85. The AAC Loan
is evidenced by a mortgage note (the "AAC Note") and secured by a single
mortgage (the "AAC Mortgage") encumbering the borrower's ground leasehold
interest in two (2) residential properties located in Santa Clara County,
California commonly known as Birch Creek (the "Birch Creek Property") and
Marina Playa (the "Marina Playa Property", collectively, the "AAC
Properties").
The Borrower. The borrower under the AAC Funding IV LLC is a
special-purpose California limited liability company ("AAC Borrower")
organized for the limited purposes of acquiring, owning, improving, leasing,
operating, financing, refinancing, holding, mortgaging, selling, exchanging
or otherwise managing the AAC Properties. AAC owns no other material asset
other than the AAC Properties and related interests. The managing member of
AAC is AAC Funding IV, Inc., a special-purpose Delaware corporation ("Funding
IV"), which was formed for the purposes of (i) acquiring the leasehold
interest in the AAC Properties and (ii) owning, holding, selling, assigning,
transferring, operating, leasing, financing, mortgaging, pledging and
otherwise dealing with the AAC Properties and to engage in activities related
thereto.
The Properties.
Birch Creek Apartments, Mountain View, California. Birch Creek Apartments
is a 184-unit residential complex consisting of 20 two-story buildings. The
property, constructed in 1968, is situated on a 6.4-acre site and contains
162,000 Net Rentable Square Feet. The buildings are configured around a
central courtyard which contains a pool, a recreation room / fitness center,
and a koi pond and canal system. The property also contains 200 carport-style
parking spaces and 187 uncovered parking spaces. An appraisal prepared by
Arthur Andersen LLP, effective as of June 1, 1997, determined a value for
Birch Creek Apartments of $11,050,000.
Marina Playa Apartments, Santa Clara, California. Marina Playa Apartments
is a 272-unit residential complex consisting of 14 two-story buildings. The
property, constructed in 1971, is situated on a 10.0-acre site and contains
230,084 Net Rentable Square Feet. The buildings are situated around a small
central lake and two swimming pools. Other amenities include a two-story
clubhouse, a billiard room, an exercise room, saunas, four hotel-style guest
rooms, a restaurant, a spa, two lighted tennis courts, and four on-site
laundry facilities. The property also contains 227 carport-style parking
spaces and 211 uncovered parking spaces. An appraisal prepared by Arthur
Andersen LLP, effective as of June 1, 1997, determined a value for Marina
Playa Apartments of $21,380,000.
Market Overview. Both Mountain View and Santa Clara are located in Santa
Clara County, California, within two miles of San Jose and approximately 50
miles south of San Francisco. According to Arthur Andersen's appraisal, the
estimated 1996 population of the San Jose metropolitan area was 1,593,746,
accounting for slightly less than five percent of the population of the state
of California.
The San Jose metropolitan area is located within the heart of the Silicon
Valley. The concentration of high-tech firms has attracted a large,
well-educated workforce to the San Jose area. In 1995, the San Jose
metropolitan area was California's top employer in terms of growth. Between
August 1995 and August 1996, the number of jobs in the San Jose metropolitan
area increased from approximately 845,000 to approximately 877,500. Based on
Arthur Andersen's appraisal, 1996 median household salary in the San Jose
metropolitan area was $58,246, 42.8% higher than the state of California's
median household salary and 59.0% higher than the national median.
Location/Access. Birch Creek Apartments. The Birch Creek Apartments are
located on the east side of South Rengstorff Avenue, north of the
intersection with El Camino Real in Mountain View, a community located in the
northwestern Santa Clara County. The property is located in a predominantly
residential neighborhood, within close proximity to major transportation
corridors such as U.S. 101 and the Stevens Creek Freeway (State Highway 85).
The property is located approximately 7 miles northwest of San Jose and 45
miles south of San Francisco.
S-267
<PAGE>
Marina Playa Apartments. The Marina Playa Apartments are located on the
east side of Lawrence Expressway, south of the intersection with El Camino
Real in the city of Santa Clara. The property is located in a predominantly
residential neighborhood, within close proximity to major transportation
corridors such as U.S. 101, I-280, and I-880. The property is located
approximately 2 miles northwest of the city of San Jose and 50 miles south of
San Francisco.
Environmental Reports. A Phase I site assessment was completed on June 17,
1997 on the AAC Properties by Aquifer Sciences, Inc. The Phase I assessment
did not reveal any environmental liability that the Depositor believes would
have a material adverse effect on the borrower's business, assets or results
of operations takes as a whole. Nevertheless, there can be no assurance that
all environmental conditions and risks were identified in such environmental
assessment.
Engineering Reports. A Property Condition Report was completed on June 17,
1997 on the AAC Properties by Law/Crandell. The Property Condition Reports
concluded that the AAC Properties were in fair to good condition and
identified approximately $322,000 in deferred maintenance requirements. At
the origination of the AAC Properties Loan, the AAC Properties Borrower
established a deferred maintenance reserve account equal to $402,500 (125% of
estimated costs) to fund the cost of addressing the identified items.
Seismic Report. A Seismic Report was completed in November, 1997 for each
of the American Apartment Communities II properties by Nabih Youssef &
Associates. The Seismic Report estimated that the aggregate PML due to a 475
year return period earthquake for the two apartment complexes, to be on the
order of 18.69% of the replacement cost of the buildings.
Birch Creek Ground Lease. The AAC Borrower leases the Birch Creek Property
pursuant to a ground lease dated as of May 31, 1968 by and between the
Manufacturers Life Insurance Company, as lessor, and Birch Creek Properties,
predecessor in interest to AAC Borrower, as lessee, which ground lease was
amended by Ground Lease Amendment Agreement, dated April 16, 1976, and by an
Amendment of Lease, dated July 1, 1997, and assigned to AAC Borrower by
Assignment of Lease, dated as of July 1, 1997 ("Birch Creek Ground Lease").
The Birch Creek Ground Lease extends for a term of 75 years, through May 31,
2043. The rent is $462,742 per year.
Marina Playa Ground Lease. The AAC Borrower leases the Marina Playa
Property pursuant to a ground lease dated as of December 23, 1969, by and
between The Manufacturers Life Insurance Company, as lessor, and Jim Joseph,
which lease was assigned by Jim Joseph to American Apartment Communities II,
L.P. by assignment dated as of . Said ground lease was amended by a
Reformation of Lease, dated January 23, 1970, a Lease Amendment, dated June
6, 1984, and by an Amendment of Lease, dated July 1, 1997 ("Marina Playa
Ground Lease") (the Birch Creek Ground Lease and Marina Playa Ground Lease,
collectively, the "Ground Leases"). The Marina Playa Ground Lease extends for
a term of 50 years, through December 31, 2019, with one option to extend the
term for one successive term of 25 years, through December 31, 2044. The rent
is $549,022 per year.
Property Management. Each of the AAC Properties is managed by American
Apartment Communities II, L.P., a Delaware limited partnership (the
"Manager"), pursuant to a management agreement dated as of June 1, 1997 (the
"AAC Management Agreement"). The AAC Management Agreement extends for a term
of five (5) years and is self-renewing on an annual basis thereafter unless
sooner terminated by either party thereto.
Pursuant to the terms of the manager's consent and subordination of
management agreement given by the Manager and AAC Borrower in favor of the
holder of the AAC Loan (the "mortgagee"), the Manager has agreed (i) not to
terminate the AAC Management Agreement without the consent of the mortgagee,
except for nonpayment of management fees (in which case the mortgagee has a
60-day cure period), (ii) that all liens, rights and interests owned, claimed
or held by the Manager in and to the AAC Property are and will be in all
respects subordinate to the lien and security interest securing the AAC Loan,
including the lien of the AAC Mortgage, (iii) that during the continuance of
an Event of Default (as defined below) under the AAC Loan, the Manager will
continue to perform under the AAC Management Agreement provided that the
mortgagee performs or causes to be performed the obligations of the AAC
Borrower thereunder, (iv) that, notwithstanding anything in the AAC
Management Agreement to the contrary, the mortgagee, or the AAC Borrower at
the mortgagee's direction, shall have
S-268
<PAGE>
the right to terminate the AAC Management Agreement (a) upon default by
Manager under the AAC Management Agreement or (b) at any time for cause
(including, but not limited to, Manager's gross negligence, willful
misconduct or fraud), (c) upon a 50% or more change in control of ownership
of Manager, and (d) if the AAC DSCR (as hereinafter defined) falls below
1.40:1, (v) not to amend or modify the AAC Management Agreement without the
prior written consent of the mortgagee, and (vi) prior to an Event of Default
(or in the event of an occurrence of default, within 10 days after a request
from the mortgagee therefor) AAC Manager will deliver to mortgagee, not later
than 45 days after the end of each fiscal quarter of the AAC Borrower's
operations, a true and complete rent roll for the AAC Property and a schedule
of all contracts and other agreements relating to the AAC Property. In
addition, the AAC Management Agreement shall automatically terminate on the
AAC Effective Maturity Date (as hereinafter defined).
"AAC DSCR" means, as of the last day of any calendar quarter with respect
to the immediately preceding four calendar quarters, the ratio of net
operating income ot debt service on the AAC Note (based on a debt service
constant on the AAC Note) for such period.
Unit Mix. The following table shows certain information regarding the unit
mix of the AAC Properties:
<TABLE>
<CAPTION>
AVERAGE TOTAL
PROPERTY NAME YEAR BUILT/ TYPE NUMBER SQUARE SQUARE MONTHLY POTENTIAL COMPETITIVE
ADDRESS OCCUPANCY (RENOVATED) OF UNIT OF UNITS FEET FEET RENT RENT MARKET RENT
- --------------------- --------- ----------- --------------- -------- ------- -------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Marina Playa
Apartments........... 97.4% 1971 Jr. (1BR / 1BA) 100 664 66,400 $1,075 $107,500 $ 930-$1,210
3500 Granada Avenue 1BR / 1BA 32 705 22,560 1,075 34,400 $ 930-$1,210
Santa Clara, CA
95051 1BR / 1BA 20 738 14,760 1,350 27,000 $ 930-$1,210
1BR / 1BA 20 805 16,100 1,350 27,000 $ 930-$1,210
2BR / 1BA 14 950 13,300 1,550 21,700 $1,190-$1,415
2BR / 2BA 64 1,070 68,480 1,600 102,400 $1,290-$1,535
2BR / 2BA / DEN 8 1,338 10,704 1,800 14,400 N/A
3BR / 2BA 14 1,270 17,780 1,685 23,590 N/A
--- ----- ------ ----- -------
TOTAL / WEIGHTED
AVERAGE.............. 272 846 230,084 $1,316 $357,990
--- ----- ------ ----- -------
Birch Creek
Apartments........... 97.3% 1968 Jr. (1BR / 1BA) 24 550 13,200 $ 975 $ 23,400 $ 950-$1,005
575 South Rengstorff
Avenue............... 1BR / 1BA 80 800 64,000 1,250 100,000 $ 845-$1,320
Mountain View, CA
94040 2BR / 2BA 80 1,060 84,800 1,525 122,000 $1,400-$1,660
--- ----- ------ ----- -------
TOTAL / WEIGHTED
AVERAGE.............. 184 880 162,000 $1,334 $245,400
--- ----- ------- ------ --------
PORTFOLIO TOTAL....... 97.4% 456 860 392,084 $1,323 $603,390
=== ===== ======= ====== ========
</TABLE>
- --------------
Occupancy based on borrower-provided rent roll as of October 31, 1997.
Competitive Market Rent based on appraisal by Arthur Andersen LLP as of
December 1, 1996.
S-269
<PAGE>
Operating History. The tables below present certain information regarding
the operating performance of the American Apartment Communities II Pool
Properties.
AMERICAN APARTMENT COMMUNITIES II
UNDERWRITTEN
1994 1995 1996 CASH FLOW
------------ ------------ ------------ --------------
Revenues............. $2,854,603 $3,029,703 $5,579,433 $ 6,675,183
Expenses............. 1,322,184 1,533,580 2,852,931 3,337,384
------------ ------------ ------------ --------------
Net Operating
Income.............. $1,532,419 $1,496,123 $2,726,502 $ 3,337,799
Adjustments to NOI .. - - - -
Net Cash Flow........ $1,532,419 $1,496,123 $2,726,502 $ 3,337,799
============ ============ ============ ==============
Occupancy............ 97.4%
12/1/97 Loan
Balance............. $20,940,017
Appraised Value...... $32,430,000
12/1/97 LTV.......... 64.6%
Annual Debt Service . $ 1,803,618
DSCR................. 1.85x
MARINA PLAYA APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASH FLOW
------------ ------------ ------------ --------------
Revenues............. $2,854,603 $3,029,703 $3,345,028 $ 3,939,300
Expenses............. 1,322,184 1,533,580 1,631,740 1,889,509
------------ ------------ ------------ --------------
Net Operating
Income.............. $1,532,419 $1,496,123 $1,713,288 $ 2,049,791
Occupancy............ 97.4%
Appraised Value...... $21,380,000
BIRCH CREEK APARTMENTS
UNDERWRITTEN
1994 1995 1996 CASH FLOW
------ ------ ------------ --------------
Revenues............. -- -- $2,234,405 $ 2,735,883
Expenses............. -- -- 1,221,191 1,447,875
------------ --------------
Net Operating
Income.............. -- -- $1,013,214 $ 1,288,008
Occupancy............ 97.3%
Appraised Value...... NA NA NA $11,050,000
S-270
<PAGE>
UNDERWRITTEN CASHFLOW -- AMERICAN APARTMENT COMMUNITIES II COMBINED
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------ --------------
Gross Income
Rental Income (1) ......... $5,703,588 $6,816,696
Other Income............... 170,814 209,813
Total Gross Income......... 5,874,402 7,026,509
Less: Vacancy.............. 294,969 351,326
------------ --------------
Effective Gross Income ..... 5,579,433 6,675,183
Operating Expenses
Fixed Expenses
Real Estate Tax............ 361,122 487,849
Insurance.................. 72,476 67,181
Total Fixed Expense........ 433,598 555,030
Variable Expenses ..........
Payroll.................... 481,619 499,031
Administrative............. 135,773 186,891
Utilities.................. 357,261 353,773
Maintenance ............... 279,882 290,411
Other...................... -- --
Ground Rent................ 992,212 1,071,241
Management Fee............. 172,586 267,007
Reserve for Replacement ... -- 114,000
Total Variable Expense .... 2,419,333 2,782,353
------------ --------------
Total Expenses.............. 2,852,931 3,337,383
Percent of EGI.............. 51.1% 50.0%
Net Operating Income........ $2,726,502 $3,337,800
============ ==============
Net Cash Flow...............
Debt Service Coverage
Ratio...................... 1.85x
Loan to Value .............. 64.6%
Occupancy................... 97.4%
- ------------
1. See Individual Properties for Notes.
S-271
<PAGE>
UNDERWRITTEN CASHFLOW -- MARINA PLAYA APARTMENTS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------ --------------
Gross Income
Rental Income (1).......... $3,346,913 $3,981,360
Other Income............... 136,042 165,272
Total Gross Income......... 3,482,955 4,146,632
Less: Vacancy (2).......... 137,927 207,332
------------ --------------
Effective Gross Income ..... 3,345,028 3,939,300
Operating Expenses
Fixed Expenses
Real Estate Tax (3)........ 247,326 279,000
Insurance (3).............. 54,192 38,267
Total Fixed Expense........ 301,518 317,267
Variable Expenses
Payroll (3)................ 278,740 312,462
Administrative (3)......... 76,799 101,136
Utilities (3).............. 179,228 181,018
Maintenance (3) ........... 146,020 151,864
Other...................... -- --
Ground Rent (3)............ 525,599 600,191
Management Fee (4)......... 123,836 157,572
Reserve for Replacement
(5)....................... -- 68,000
Total Variable Expense .... 1,330,222 1,572,243
------------ --------------
Total Expenses.............. 1,631,740 1,889,510
Percent of EGI.............. 48.8% 48.0%
Net Operating Income........ $1,713,288 $2,049,790
==============
Net Cash Flow............... $1,713,288 2,049,790
Occupancy................... 97.4%
- ------------
1. Revenue adjusted by annualizing October 27, 1997 Rent Roll monthly income.
2. Vacancy the greater of 5% of Gl or vacancy from October 27, 1997
annualized.
3. Extracted from AAC Trailing 12 months dated 10/31/97.
4. Management fee actual or 4%, whichever is greater.
5. Reserve for Replacement calculated at $250 per unit.
S-272
<PAGE>
UNDERWRITTEN CASHFLOW -- BIRCH CREEK APARTMENTS
1996 UNDERWRITTEN
ACTUAL CASHFLOW
------------ --------------
Gross Income
Rental Income (1) ......... $2,356,675 $2,835,336
Other Income............... 34,772 44,541
Total Gross Income......... 2,391,447 2,879,877
Less: Vacancy (2).......... 157,042 143,994
------------ --------------
Effective Gross Income ..... 2,234,405 2,735,883
Operating Expenses .........
Fixed Expenses ............
Real Estate Tax (3)........ 113,796 208,849
Insurance (3).............. 18,284 28,914
Total Fixed Expense........ 132,080 237,763
Variable Expenses
Payroll (3)................ 202,879 186,568
Administrative (3)......... 58,974 85,755
Utilities (3).............. 178,033 172,755
Maintenance (6) ........... 133,862 138,547
Other...................... -- --
Ground Rent (3)............ 466,613 471,050
Management Fee (4)......... 48,750 109,435
Reserve for Replacement
(5)....................... -- 46,000
Total Variable Expense .... 1,089,111 1,210,110
------------ --------------
Total Expenses.............. 1,221,191 1,447,873
Percent of EGI.............. 54.7% 52.9%
Net Operating Income........ $1,013,214 $1,288,010
============ ==============
Net Cash Flow............... $1,013,214 $1,288,010
Occupancy................... 97.3%
- ------------
1. Revenue adjusted by annualizing October 27, 1997 Rent Roll monthly income.
2. Vacancy the greater of 5% of Gl or vacancy from October 27, 1997
annualized.
3. Extracted from AAC Trailing 12 months dated 10/31/97.
4. Management fee actual or 4%, whichever is greater.
5. Reserve for Replacement calculated at $250 per unit.
6. Maintenance based on the expense for 1996 escalated by 1.035.
AMERICAN APARTMENT COMMUNITIES II: THE LOAN
Security. The AAC Loan is a non-recourse loan, secured by AAC Borrower's
ground leasehold interest in the AAC Properties and certain other collateral
relating thereto (including a mortgage, an assignment of leases and rents and
a cash collateral account security) (collectively, with all other security
documents referenced herein, the "Loan Documents"). The mortgagee is the
insured under the title insurance policies which insure, among other things,
that the AAC Mortgage constitutes a valid and enforceable first lien on the
AAC Properties, subject to certain exceptions and exclusions from coverage
set forth therein. Such title insurance policies, together with the AAC Note,
the AAC Mortgage and other documents and agreements evidencing the AAC Loan
(collectively, the "Loan Documents"), will be assigned to the Trust Fund.
Payment Terms. The AAC Loan matures on July 1, 2027 (the "Maturity Date")
and bears interest (a) at an interest rate of 7.74% per annum (the "Initial
Interest Rate") and (b) from and after July 1, 2007 (the "AAC Effective
Maturity Date") through and including the date the AAC Note is paid in full,
a rate per annum equal to the greater of (i) the Initial Interest Rate plus
five percent (2%) or (ii) the AAC
S-273
<PAGE>
Treasury Rate (as defined below) plus two percent (2%) (the "Revised Interest
Rate"). The "AAC Treasury Rate" means the yield, calculated by linear
interpolation (rounded to the nearest one-thousandth of one percent) of the
yields of noncallable United States Treasury obligations with terms (one
longer and one shorter) most nearly approximating the period from the AAC
Effective Maturity Date to the Maturity Date. Any interest accrued at the
excess of the AAC Revised Interest Rate over the AAC Initial Interest Rate is
deferred and added to the outstanding indebtedness under the AAC Loan and
earns interest at the AAC Revised Interest Rate (such deferred interest and
interest thereon, the "AAC Accrued Interest"). Interest on the AAC Loan is
calculated on the basis of a 360-day year of 30-day months.
The payment date for the AAC Loan is the first business day of each
calendar month (each, a "Payment Date"), with no grace period for a default
in payment of principal or interest. Commencing August 1, 1997, the AAC Loan
requires 359 equal monthly installments of principal and interest of
$150,301.48 (the "AAC Debt Service Payments"). Each AAC Debt Service Payment,
due and payable on each Payment Date, shall be applied first to the interest
at the AAC Initial Interest Rate and the remainder thereof to the reduction
of principal. In the event of a default in payments, interest will accumulate
thereon at the applicable interest rate plus five percent (5%) per annum (the
"Default Rate"). On the AAC Maturity Date, the entire remaining unpaid
balance of principal of the AAC Note, all interest accrued thereon and all
other sums payable thereunder or under the other Loan Documents shall be due
and payable in full.
Commencing with the first Payment Date after the AAC Effective Maturity
Date and on each Payment Date thereafter up to and including the Maturity
Date, AAC Borrower is required to apply 100% of the rents and other revenues
from the AAC Properties received on or before such day to the following items
in the following order of priority: (1) to payment of monthly amounts of
taxes and insurance premiums (the "AAC Mortgage Escrow Amounts"); (2) to
payment of the AAC Debt Service Payments; (3) to payment of monthly cash
expenses pursuant to the terms and conditions of the annual budget approved
by mortgagee (the "Cash Expenses"); (4) to payment of extraordinary expenses
approved by mortgagee (the "Extraordinary Expenses"); (5) to payments to
mortgagee to be applied against the outstanding principal due under the AAC
Note; (6) to payments to mortgagee for Accrued Interest; and (7) to payments
to mortgagee of any other amounts due under the loan documents. Any excess
amounts ahll be paid to AAC Borrower. The scheduled principal balance of the
AAC Loan as of the AAC Effective Maturity Date is approximately
$18,353,955.32.
Event of Default. The occurrence of any of the following constitutes and
"Event of Default" under the AAC Mortgage: (a) failure to make any payment of
interest or principal due under the AAC Note when due, or failure to pay the
principal balance when due; (b) failure to pay any other amount payable
pursuant to the AAC Note or the AAC Mortgage when due and payable, with such
failure continuing for ten (10) days after mortgagee delivers written notice
thereof to the AAC Borrower; (c) failure to keep in force the insurance
required under the AAC Mortgage to be maintained or failure to comply with
any other covenant relating to insurance requirements, which failure
continues for five (5) business days after the mortgagee delivers written
notice thereof to the AAC Borrower; (d) failure to comply with certain AAC
Mortgage covenants which require the AAC Borrower to keep the AAC Property
free from liens and encumbrances (with such default continuing for five (5)
business days after mortgagee delivers written notice thereof to the AAC
Borrower), and which, prohibit the sale of the AAC Property and transfers of
direct and indirect beneficial interests in the AAC Borrower; (e) any attempt
by the AAC Borrower to assign its rights under the AAC Mortgage; (f) any
other default in the performance or payment, or breach, of any material
covenant, warranty, representation or agreement set forth in the documents
which evidence and secure the AAC Loan, with such default continuing for
thirty (30) business days after mortgagee delivers written notice thereof to
the AAC Borrower; (g) the occurrence of certain bankruptcy events; (h) the
termination, or the failure to continue to be valid and effective, of the AAC
Mortgage (or the ceasing of any lien granted thereunder to be a perfected
first priority lien) or any of the Loan Documents evidencing the AAC Loan;
and (i) any event of the default under any other of the Loan Documents which
evidence the AAC Loan.
S-274
<PAGE>
If the AAC Borrower defaults in the payment of any AAC Debt Service
Payment on the Payment Date then the AAC Borrower shall pay to mortgagee a
late payment charge in an amount equal to five percent (5%) of the amount of
the installment not paid. An additional late charge equal to five percent
(5%) of the monthly payment due will be charged for each successive month the
payment, or any part thereof, remains outstanding. If the AAC Borrower
defaults in the payment of any AAC Debt Service Payment on the Payment Date
due, or defaults in any other manner so as to constitute an Event of Default,
then mortgagee at its option and without further notice to the AAC Borrower
may declare the entire unpaid amount of principal with interest at the
Default Rate together with all other sums due, if any, due and payable
immediately.
Prepayment. Voluntary prepayment of the principal of the AAC Note is
prohibited at any time prior to the AAC Effective Maturity Date, after which
time AAC Borrower may prepay the principal of the AAC Note in full or in part
without premium or penalty on any Payment Date. Upon acceleration of the AAC
Note in accordance with its terms and the terms in the loan documents, AAC
shall pay a prepayment premium (the "AAC Yield Maintenance Premium") equal to
the greater of (a) 1% of the principal amount being prepaid or (b) the
product of a fraction whose numerator is (i) an amount equal to the portion
of the principal balance of the AAC Note being prepaid and whose denominator
is the entire outstanding principal balance of the AAC Note on the date of
such prepayment, multiplied by (ii) an amount equal to the remainder obtained
by subtracting (x) an amount equal to the entire outstanding principal
balance of the AAC Note as of the date of such prepayments from (y) the
present value as of the date of such prepayment of the remaining scheduled
payments of principal and interest determined by discounting such payments at
a discournt rate equal to the AAC Discount Rate. The "AAC Discount Rate"
means the rate which, when compounded monthly, is equivalent to the AAC
Treasury Rate.
Tender of payment in the amount necessary to pay and satisfy the entire
unpaid balance or any portion thereof at any time after an event of default
or an acceleration by MLMC of the indebtedness, whether such payment is
tendered voluntarily, during or after foreclosure of the Leasehold Mortgage,
or pursuant to realization upon other security, shall constitute a purposeful
evasion of the prepayment terms of the AAC Note and shall be deemed a
voluntary prepayment of the AAC Note subject to the prepayment premium
described above.
No AAC Yield Maintenance Premium or other premium or penalty is required
to be paid in connection with any prepayment resulting from the application
of insurance or condemnation proceeds to repayment of the AAC Loan in
accordance with the requirements of the AAC Mortgage.
Defeasance Collateral. For the purposes of this section, "Defeasance
Collateral" shall mean obligations or securities not subject to prepayment,
call or early redemption which are direct obligations of, or obligations
fully guaranteed as to timely payment by, the United States of America or any
agency or instrumentality of the United States of America, or the obligations
of which are backed by the full faith and credit of the United States of
America, the ownership of which will not cause the mortgagee to be an
investment company under the Investment Company Act of 1940, included as
collateral under the AAC Loan. For the purposes of this section, the "Minimum
Defeasance Collateral Requirement" shall mean an amount sufficient to pay
125% of the amount of the AAC Loan allocated to each of the AAC Properties
(in any case, the "AAC Allocated Loan Amount"), and sufficient to pay
scheduled interest and principal payments on the loan amount through and
including the AAC Effective Maturity Date together with the outstanding
principal balance of the AAC Loan as of such date.
The AAC Borrower shall be entitled on any Payment Date to defease one or
both of the AAC Properties from and after the second anniversary of the
Delivery Date, in connection with the delivery of Defeasance Collateral,
provided that: (i) the mortgagee shall have received from the AAC Borrower at
least 30 days' prior written notice of the date proposed for such release
(the "AAC Release Date"); (ii) no Event of Default shall have occurred and be
continuing as of the date of such notice and the AAC Release Date; (iii) the
AAC Borrower shall deliver on the AAC Release Date, Defeasance Collateral in
such amount as shall satisfy the Minimum Defeasance Collateral Requirement
with respect to the AAC Property being defeased; (iv) the AAC Borrower shall
have delivered a certificate of an officer of the AAC Borrower (an "Officer's
Certificate") dated the AAC Release Date, confirming the matters referred
S-275
<PAGE>
to in clause (ii) above, certifying that the applicable provisions of clause
(iii) above have been complied with and certifying that all conditions
precedent for such release have been complied with; (v) with respect to a
defeasance of one of the AAC Properties (a "Partial Defeasance"), the AAC
Borrower, at its sole cost and expense, shall have delivered, one or more
endorsements to the policy of title insurance delivered to the mortgagee
insuring that after giving effect to such release, (x) the mortgagee's lien
on the remaining AAC Property is a first priority lien and (y) that such
policy is in full force and effect; (vi) with respect to a Partial
Defeasance, after giving effect to such proposed release, the AAC DSCR would
not be less than 1.60:1; (vii) with respect to a Partial Defeasance, the fair
market value of the remaining AAC Property shall not be less than the fair
market value of the AAC Property as of the date of the AAC Mortgage; and
(viii) the AAC Borrower shall have delivered to mortgagee the opinions
required by the AAC Mortgage upon a defeasance of the lien.
Lockbox and Reserves. Pursuant to the terms of a Cash Collateral Account,
Security, Pledge and Assignment Agreement (the "AAC Cash Collateral
Agreement"), AAC Borrower has established in the name of LaSalle National
Bank ("AAC Agent Bank"), as agent for the mortgagee, as secured party an
interest bearing cash collateral account for the deposit from the AAC
Property Account (as herein defined) of all revenues from the AAC Properties
(the "AAC Lockbox Account"), an interest bearing cash collateral account for
the deposit of reserves (the "AAC Mortgage Escrow Amounts") for the payment
of real estate taxes and insurance premiums(the "AAC Mortgage Escrow
Account"), an interest bearing cash collateral account for the monthly
deposit of reserves (the "AAC Debt Service Escrow Amounts") for interest and
principal due on the next Payment Date (the "AAC Debt Service Escrow
Account"), an interest bearing cash collateral account for the deposit of
reserves (the "AAC Trade Payables Amounts"), if required under the AAC Cash
Collateral Agreement, for contested trade payables more than 60 days past due
in excess of $250,000 (the "Trade Payables Escrow Account"), an interest
bearing cash collateral account for deferred maintenance items with a
one-time deposit of $402,500 (the "Repair Escrow Account"), an interest
bearing cash collateral account for the deposit of required monthly reserves
(the "AAC Capital Improvement Escrow Amounts") for capital improvements in
the amount of $11,704 subject to adjustment, in the event of a release of a
AAC Property from the lien of the AAC Mortgage, to 1/12 of the product of
$308 and the number of units in the remaining AAC Properties (the "Capital
Improvement Escrow Account") collectively, the "Accounts"), and an interest
bearing cash collateral account for the deposit of reserves (the "Ground Rent
Escrow Account"), required under the AAC Cash Collateral Agreement, for the
monthly ground rent payable under the Ground Leases, equal to an aggregate
sum of $84,315 for both Ground Leases (the "Monthly Ground Rent Deposit").
The Collateral held in the Accounts derives from a Lockbox Agreement between
AAC Borrower and the Lockbox Bank, which shall be irrevocable until full
payment of the AAC Note.
AAC Borrower has instructed the Manager to deposit, within one business
day of receipt, into the operating account(s) for the AAC Properties
(collectively, the "Property Account") established by Union Bank of
California ("Union"), all revenue from the AAC Properties. AAC Borrower has
given instructions to Union, irrevocable prior to the payment in full of all
obligations under the AAC Loan, to deposit on a twice-weekly basis, each
Tuesday or Friday (the next succeeding business day if such Tuesday or Friday
is not a business day), by wire or other transfer to the AAC Lockbox Account,
all cleared funds in the Property Account; provided that a minimum balance of
$2,000.00 shall remain at all times in the Property Account.
Until the AAC Effective Maturity Date, the AAC Agent Bank will withdraw
the funds on deposit in the AAC Lockbox Account on the first business day of
each month in the following amounts and in the following order of priority:
(i) funds in an amount equal to the monthly Mortgage Escrow Amounts and
deposit the same into the Mortgage Escrow Account; (ii) funds in an amount
equal to the Monthly Ground Rent Deposit and deposit the same into the Ground
Rent Escrow Account; (iiii) funds in an amount equal to the AAC Debt Service
Escrow Amounts, for deposit into AAC Debt Service Escrow Account; (iv) funds
in an amount equal to the AAC Trade Payables Amounts, if any, for deposit
into the AAC Trade Payables Escrow Account; and (v) funds in an amount equal
to the monthly AAC Capital Improvement Escrow Amounts, for deposit into the
AAC Capital Improvement Escrow Account. After all amounts required to be
deposited into the Accounts have been funded with respect to any month, the
S-276
<PAGE>
excess funds on deposit in the AAC Lockbox Account, if any, will, provided no
Event of Default is continuing and certain other conditions are satisfied, be
forwarded to AAC. In the event that AAC has not paid the principal of and
interest on the AAC Loan on or prior to the AAC Effective Maturity Date, then
commencing on the AAC Effective Maturity Date and continuing on each Payment
Date thereafter, 100% of the funds deposited in the AAC Lockbox Account will
be applied in the following amounts and in the following order of priority:
(i) funds in an amount equal to the monthly Mortgage Escrow Amounts and
deposit the same into the Mortgage Escrow Account, (ii) funds in an amount
equal to the Monthly Ground Rent Deposit and deposit the same into the Ground
Rent Escrow Account, (iii) funds in an amount equal to the amount of interest
at the AAC Initial Interest Rate, including, if applicable, interest at the
Default Rate applicable prior to the AAC Effective Maturity Date and AAC Debt
Service Escrow Amounts, for deposit into AAC Debt Service Escrow Account;
(iv) funds in an amount equal to the monthly allocation of operating expenses
in the Annual Budget approved by mortgagee and approved Extraordinary
Expenses, if any; (v) funds to be applied against the outstanding principal
due under the Note until the principal amount is paid in full; (vi) funds in
an amount equal to Accrued Interest, including, if applicable, interest at
the Default Rate; (vii) funds in an amount equal to the AAC Trade Payables
Amounts, if any, for deposit into the AAC Trade Payables Escrow Account; and
(viii) funds in an amount equal to the monthly AAC Capital Improvement Escrow
Amounts, for deposit into the AAC Capital Improvement Escrow Account.
Transfer of Properties and Interest in Borrower; Encumbrance; Other Debt.
Subject to limited exceptions described below, AAC Borrower will not (i)
transfer all or any part of the AAC Properties; (ii) incur indebtedness for
borrowed money; (iii) mortgage, hypothecate or otherwise encumber or grant a
security interest in all or any part of the AAC Properties; (iv) permit any
transfer of any interest in AAC Borrower; or (v) file a declaration of
condominium with respect to any of the AAC Properties. The mortgagee's
consent shall not be required with respect to transfers of direct or indirect
beneficial interests in AAC Borrower, provided that (i) no Event of Default
shall have occurred and be continuing; (ii) AAC Borrower shall deliver to the
mortgagee and the Rating Agencies written notice at least fifteen (15)
business days' prior to the effective date of the transfer; (iii) AAC
Borrower remains a single purpose entity; (iv) no transfer of limited
partner, non-administrative member or shareholder interests shall result in
any one person (or any group of affiliates) owning, directly or indirectly,
50% or more of the beneficial ownership interests of AAC Borrower; and (v)
American Apartment Communities II, Inc. shall at all times directly or
indirectly own not less than 50% of the beneficial interests in AAC Borrower
and all administrative members shall be wholly-owned subsidiaries of American
Apartment Communities II, Inc.
AAC Borrower shall not incur, create or assume any indebtedness or incur
any liabilities without the consent of the mortgagee; provided, however, that
AAC Borrower may, without the consent of the mortgagee, incur, create or
assume any or all of the following indebtedness: (i) the AAC Note and the
other obligations, indebtedness and liabilities provided for in any loan
document evidencing or securing the AAC Loan; (ii) amounts, not secured by
liens on the AAC Properties not to exceed two percent (2%) of the outstanding
balance of the AAC Loan at the time of determination, provided that each such
amount shall be paid within sixty (60) days following the date on which each
such amount was incurred; (iii) amounts, not secured by liens on the AAC
Properties, payable or reimbursable to any tenant on account of work
performed at a AAC Property by such tenant or for cost incurred by such
tenant in connection with its occupancy of space in the AAC Property; and
(iv) amounts constituting encumbrances on the AAC Properties as described in
mortgagee's title insurance policy insuring the lien of the AAC Mortgage or
otherwise as expressly described in the AAC Mortgage.
Notwithstanding the above-noted restrictions on transfers, AAC Borrower
may, without the consent of the mortgagee (i) make immaterial transfers of
portions of a AAC Property to governmental authorities for dedication or
public use; (ii) grant easements, restrictions, covenants, reservations and
rights of way in the ordinary course of business; (iii) enter into laundry
equipment leases, cable television service contracts, service and license
agreements, provided that none of the above transfers materially impairs the
utility and operation of the applicable AAC Property or materially adversely
affect the value of the applicable AAC Property taken as a whole.
S-277
<PAGE>
Insurance. AAC Borrower is required to maintain for the AAC Properties
(a) insurance with respect to the improvements and the building equipment
against any peril included within the classification of "All Risks of
Physical Loss" with extended coverage in amount at all times sufficient to
prevent AAC Borrower from becoming a co-insurer, but in any event equal to
the full insurable value of improvements and the building equipment; (b)
comprehensive general liability insurance, including bodily injury,
contractual injury, death and property damage liability, and excess and/or
umbrella liability insurance with a per occurrence limit of not less than
$1,000,000 and with an aggregate limit of not less than $5,000,000 per AAC
Property; (c) statutory worker's compensation insurance with respect to any
work by or for AAC Borrower performed on or about the AAC Property; (d) loss
of rental value or business interruption insurance in an amount sufficient to
avoid any co-insurance penalty and to provide proceeds which will cover the
loss of rents sustained during the period of twelve (12) months following the
date of casualty; (e) during the period of performance of any restoration or
repair work, builder's all risk insurance in an amount equal to not less than
the full insurable value of the applicable AAC Property; (f) broad form
boiler and machinery insurance covering all boilers or other pressure
vessels, machinery and equipment located in, on or about each AAC Property;
and (g) if any improvement or any AAC Property is located within an area
designated as "flood prone" or a "special flood hazard area", flood
insurance, if available, in an amount equal to the lesser of the AAC
Allocated Loan Amount for the applicable AAC Property and the maximum limit
of coverage available with respect to the applicable AAC Property. At the
mortgagee's request, AAC Borrower shall obtain such other insurance,
excluding earthquake insurance, against any loss or damage of the kinds from
time to time customarily insured against.
The above insurance coverage shall be maintained with one or more domestic
primary insurers, having both (1) a claims-paying-ability rating by S&P of
not less than "AA" and its equivalent by any other nationally recognized
statistical rating agency and (2) an Alfred M. Best Company, Inc. rating of
"A" or better and a financial size category of not less than IX.
The insurance coverage required may be affected under a blanket policy or
policies covering the AAC Properties, provided that any such blanket policy
shall specify, except in the case of public liability insurance, the portion
of the total coverage of such policy that is allocated to the AAC Properties
and any sublimits in such blanket policy applicable to the AAC Properties,
which amounts shall not be less than those required above, provided further,
that if the coverage of such policy or policies exceeds 20% of policyholders'
surplus, such policy or policies must include a "cut-through" endorsement
acceptable to the mortgagee.
Casualty and Condemnation. AAC Borrower will promptly notify the mortgagee
in writing upon obtaining knowledge of (i) the institution of any
condemnation proceedings relating to any AAC Property or (ii) the occurrence
of any casualty, damage or injury to, any AAC Property or any portion thereof
the restoration of which is estimated by AAC Borrower in good faith to cost
more than ten percent (10%) of the Allocated Loan Amount for the particular
AAC Property (the "AAC Individual Threshold Amount"). In addition, AAC is
obligated to include with the notice of any casualty, damage, injury or
condemnation, the restoration of which is estimated by AAC to cost more than
the AAC Individual Threshold Amount, (or to forward as soon thereafter as
possible) an estimate of the cost of repairing or restoring such casualty,
damage, injury or condemnation in reasonable detail.
Following a casualty or condemnation at a AAC Property, any insurance and
condemnation proceeds will be applied (after payment of the mortgagee's
reasonable expenses of collection thereof) to amounts due under the AAC Loan
and the prepayment of the principal amount outstanding thereon, if: (i) the
proceeds shall equal or exceed the Allocated Loan Amount with respect to the
applicable AAC Borrower Property; (ii) an Event of Default has occurred and
is continuing; (iii) a AAC Total Loss (as defined below) shall have occurred;
(iv) work to be performed is not capable of being completed before the
earlier to occur of the date which is six (6) months prior to the Maturity
Date or the date which the business interruption insurance expires; (v) the
applicable AAC Property is incapable of substantial restoration to its
condition prior to the condemnation or casualty; or (vi) AAC Borrower is
unable to demonstrate to the mortgagee its continuing ability to pay the AAC
Loan. Notwithstanding the foregoing, to the extent
S-278
<PAGE>
such proceeds with respect to such AAC Borrower Property do not exceed
$1,000,000 (the "Casualty Amount"), or, if less than the Casualty Amount but
when aggregated with all other then unapplied proceeds, do not exceed
$2,500,000 in the aggregate, such proceeds are to be paid directly to AAC
Borrower for restoration of the AAC Properties.
A "AAC Total Loss" means (x) a casualty, damage or destruction of a AAC
Property, the cost of restoration of which would exceed 50% of the
outstanding principal balance of the applicable Allocated Loan Amount, or (y)
a permanent taking by condemnation of 50% or more of the gross leasable area
of a AAC Property, in either case, such that it would be impractical, in the
mortgagee's sole discretion, even after restoration, to operate the AAC
Property as an economically viable whole and with respect to which the
applicable tenant leases do not require restoration.
In the event of (i) a AAC Total Loss resulting from casualty, damage or
destruction, if either (A) the cost to repair the AAC Property would exceed
the AAC Individual Threshold Amount and the restoration of the AAC Property
cannot reasonably be completed before the date which is the later to occur of
the date of expiration of any business interruption insurance or the date of
expiration of any letter of credit posted in lieu thereof or in addition
thereto and under such circumstances AAC Borrower is not required under any
tenant lease to make the proceeds available to restore the AAC Property or
(B) the mortgagee elects not to make such proceeds available to AAC Borrower
for the restoration of the AAC Property, or (ii) a AAC Total Loss resulting
from a condemnation, then AAC Borrower must prepay the AAC Loan to the extent
of the casualty or condemnation proceeds received, up to an amount equal to
the outstanding principal thereon (without prepayment premium or penalty).
If any insurance or condemnation proceeds (other than business
interruption insurance proceeds) are in excess of the AAC Individual
Threshold Amount, then all such proceeds will be applied as follows: first,
toward reimbursement of the mortgagee's reasonable out-of-pocket costs and
expenses in connection with the recovery and disbursement of such proceeds,
and then, to the prepayment of the principal amount outstanding on the AAC
Loan, without prepayment premium or penalty, only if: (A)(i) the amount of
such proceeds is equal to or greater than the outstanding principal amount of
the AAC Loan, (ii) the casualty or condemnation occurs less than 180 days
before the AAC Maturity Date, or (iii) more than 25% of the rentable area of
the applicable AAC Property has been the subject the casualty or
condemnation, or (B) such proceeds are condemnation proceeds received in
excess of the amount needed to restore the AAC Property after a partial
taking by condemnation, in which case prepayment will be made to the extent
of such unneeded proceeds.
In the event that the casualty and condemnation proceeds (other than
business interruption insurance proceeds) are in excess of the AAC Individual
Threshold Amount and are not required to be applied to the payment or
prepayment of the AAC Loan as described above, then the mortgagee is
obligated to make all casualty and condemnation proceeds (other than business
interruption insurance proceeds) available to AAC for payment or
reimbursement of the costs and expenses of the repair, restoration and
rebuilding of the AAC Property if, (i) at the time of the loss or damage or
at any time thereafter while AAC Borrower is holding any portion of the
proceeds, there is no continuing Event of Default (ii) the estimated cost of
the work (as estimated by the independent architect referred to in clause
(iii) below) shall exceed the proceeds, AAC Borrower shall at its option
(within a reasonable period of time after receipt of such estimate) either
deposit with or deliver to the mortgagee (A) cash and cash equivalents, (B) a
letter or letters of credit in an amount equal to the estimated cost the work
less the proceeds available, or (C) such other evidence of AAC Borrower's
ability to meet such excess costs and which is satisfactory to the mortgagee
and the Rating Agency; and (iii) the mortgagee shall, within a reasonable
period of time prior to request for initial disbursement, be furnished with
an estimate of the cost of the work accompanied by an independent architect's
certification as to such costs and appropriate plans and specifications for
the work.
Approval Rights. Under the AAC Note, for each calendar year commencing
after the AAC Effective Maturity Date, AAC Borrower is required to submit to
the mortgagee, for the mortgagee's written approval, an annual budget not
later than 30 days prior to the commencement of such calendar
S-279
<PAGE>
year. In the event that AAC Borrower must incur an extraordinary operating
expense or a capital expense not set forth in the approved annual budget, it
is required promptly to deliver to the mortgagee, for the mortgagee's
approval, a reasonably detailed explanation of such proposed expense.
AAC Borrower shall notify the mortgagee and the Rating Agencies of any
entity proposed to be designated as manager of all or any of the AAC
Properties no less than 30 days before such proposed manager begins to manage
such AAC Property(ies). Such proposed manager must be acceptable to the
mortgagee (a "qualifying manager") and with respect to any qualifying manager
AAC Borrower must obtain a written confirmation from the Rating Agencies that
the retention of such qualifying manager will not result in a downgrade,
withdrawal or qualification of the then ratings of the Offered Certificates.
A qualifying manager may be retained at the mortgagee's direction at any time
following the occurrence and during the continuance of any Event of Default
and at any time following the seventh anniversary of the AAC Loan unless the
AAC Loan has been paid in full. The mortgagee has the right to approve any
new management agreement with the qualifying manager.
Provided that no event of default shall have occurred and be continuing,
AAC Borrower shall have the right, without the mortgagee's consent, to
undertake any alteration, improvement, demolition or removal of any AAC
Property or any portion thereof (any such alteration, improvement, demolition
or removal, an "Alteration") so long as (i) AAC Borrower provides the
mortgagee with prior written notice of any Material Alteration (as defined
below); and (ii) any Alteration is undertaken in accordance with the
applicable provisions of the AAC Mortgage and the other documents evidencing
and securing the AAC Loan, is not prohibited by relevant operating agreements
and the leases and shall not upon completion (giving credit to rent and other
charges attributable to leases executed upon such completion) materially
adversely (A) affect the value, use or operation of such AAC Property taken
as a whole or (B) reduce the net operating income of such AAC Property from
the level available immediately prior to commencement of such Alteration. Any
Material Alteration shall be conducted under the supervision of an
independent architect and no such Material Alteration shall be undertaken
until five (5) business days after there shall have been filed with the
mortgagee detailed plans and specifications and cost estimates therefor,
prepared by such independent architect, as well as an Officer's Certificate
stating that the Alteration will involve an estimated cost of more than (x)
the greater of the individual Threshold Amount and $500,000 with respect to
Alterations being undertaken at a single AAC Property at such time or (y)
$2,100,000 for Alterations at all the AAC Properties (such an Alteration, a
"Material Alteration"). Notwithstanding anything to the contrary contained in
the foregoing, no Material Alteration nor any Alterations which when
aggregated with all other Alterations (other than Material Alterations) then
being undertaken by AAC Borrower exceeds $2,100,000, shall be performed by or
on behalf of AAC Borrower unless AAC Borrower has delivered to the mortgagee
cash and cash equivalents and/or a letter of credit as security in an amount
not less than the estimated cost of the Material Alteration or the
Alterations in excess of the such amount.
Financial Reporting. AAC Borrower is required to provide to the mortgagee:
(1) not later than forty-five (45) days following the end of each calendar
quarter (other than the fourth (4th) quarter of any calendar year), unaudited
financial statements, internally prepared, in accordance with generally
accepted accounting principals, including a balance sheet and a statement of
revenues; (2) not later than ninety (90) days after the end of AAC Borrower's
fiscal year, audited financial statements certified by an independent
accountant (with a copy to the Rating Agencies), including a balance sheet as
of the end of such year, a statement of net operating income for the year and
for the fourth (4th) quarter thereof and a statement of revenues and expenses
of such year; (3) in no event later than the twenty-fifth (25th) day of each
calendar month, a cash flow statement for the immediately preceding month,
showing all items of income and expense, both on a consolidated basis with
respect to all the AAC Properties, as well as a property by property basis;
(4) not later than ninety (90) days after the end of each fiscal quarter, a
true and complete rent roll for each AAC Property (and aggregating the
occupancy rate with respect to all AAC Properties); (5) within forty-five
(45) days after the end of each calendar year during the term of the AAC
Note, an annual summary of any and all capital expenditures made at each AAC
Property during the twelve (12) month period (with a copy to the Rating
Agencies); and (6) promptly, after written request from the mortgagee or the
Rating Agencies, such additional information as may be reasonably requested
by the mortgagee or the Rating Agencies with respect to the AAC Properties.
S-280
<PAGE>
THE MORTGAGE LOAN SELLER
Merrill Lynch Mortgage Capital Inc. (the "Mortgage Loan Seller") is an
indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. and an
affiliate of the Underwriter. The Mortgage Loan Seller is a Delaware
corporation formed on April 18, 1983 and is principally engaged in
purchasing, selling, and investing in and financing of whole loan mortgages
and related servicing. The Mortgage Loan Seller is licensed as an investing
mortgagee with the United States Department of Housing and Urban Development
("HUD") in order to buy, sell, and hold mortgage loans insured by the Federal
Housing Administration. The Mortgage Loan Seller is also an approved Federal
Home Loan Mortgage Corporation ("Freddie Mac") seller/servicer.
The Mortgage Loan Seller has been the immediate purchaser and assignee for
all of the Merrill Lynch Conduit programs. The Mortgage Loan Seller purchases
the loans at closing from the various originators that are part of the
correspondent network. The year end 1996 total amount of origination's
purchased for the commercial conduit programs is in excess of $1.5 billion.
Year end 1996 assets were approximately $2.9 billion.
The information concerning the Mortgage Loan Seller set forth above has
been provided by the Mortgage Loan Seller and none of the Trustee, the Fiscal
Agent, the Deposition or the Underwriter makes any representation or warranty
as to the accuracy thereof.
THE MASTER SERVICER AND SPECIAL SERVICER
Midland Loan Services, L.P. ("Midland") will act as the Servicer and
Special Servicer with respect to the Mortgage Loans. 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 October 31, 1997, Midland and its affiliates were responsible for
the servicing of approximately 12,725 commercial and multifamily loans with
an aggregate principal balance of approximately $19.2 billion, the collateral
for which is located in 50 states, Puerto Rico and the District of Columbia.
With respect to such loans, approximately 11,156 loans with an aggregate
principal balance of approximately $14.2 billion pertain to commercial and
multifamily mortgage-backed securities. Property type concentrations within
the portfolio include multifamily, office, retail, hotel/motel and other
types of income-producing properties. Midland and its affiliates also provide
commercial loan servicing for newly-originated loans and loans acquired in
the secondary market on behalf of issuers of commercial and multifamily
mortgage-backed securities, financial institutions and private investors.
There are no restrictions on the ability of the Servicer to purchase
Certificates or to exercise any of the rights of a Certificateholder.
Midland is the originator with respect to nine of the Mortgage Loans, but
neither Midland nor any of its affiliates underwrote or reunderwrote such
Mortgage Loans.
S-281
<PAGE>
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 SEPTEMBER 30,
--------------------------------------------------
1996 1997
------------------------ -------------------------
BY DOLLAR BY DOLLAR
BY NO. AMOUNT BY NO. AMOUNT
OF LOANS OF LOANS OF LOANS OF LOANS
---------- ------------ ---------- -------------
(DOLLAR AMOUNTS IN
THOUSANDS)
Total Portfolio ......... 1,756 $5,606,392 3,416 $10,726,230
---------- ------------ ---------- -------------
Period of delinquency(1)
30 to 59 days........... 13 $ 101,663 175 $ 79,231
60 to 89 days........... 2 4,913 27 17,438
90 days or more(2)...... 6 11,738 45 17,438
---------- ------------ ---------- -------------
Total delinquent loans . 21 $ 118,314 247 $ 114,107
========== ============ ========== =============
Percent of portfolio .... 1% 2% 7% 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.
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 Rating Services, a division of The McGraw-Hill Companies,
Inc. ("S&P"). Midland is ranked "Above Average" as a commercial mortgage
servicer and asset manager by S&P, and "Acceptable" as a master servicer and
"Above Average" as a
S-282
<PAGE>
special servicer by Fitch. S&P ranks commercial mortgage servicers and
special servicers in one of five rating categories: Strong, Above Average,
Average, Below Average and Weak. Fitch ranks special servicers in one of five
categories: Superior, Above Average, Average, Below Average and Unacceptable.
Fitch ranks master servicers as Acceptable or Unacceptable.
The information concerning Midland set forth above has been provided by
Midland and none of the Trustee, the Fiscal Agent 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 sixteen Classes to be designated as the Class
A-1 Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the
Class A-4 Certificates, the Class IO Certificates, the Class B Certificates,
the Class C Certificates, the Class D Certificates, the Class E Certificates,
the Class F Certificates, the Class G Certificates, the Class H Certificates,
the Class J Certificates, the Class R-I Certificates, the Class R-II
Certificates, and the Class R-III Certificates. ONLY THE CLASS A-1, CLASS
A-2, CLASS A-3, CLASS IO, CLASS B, CLASS C, CLASS D AND CLASS E CERTIFICATES
ARE OFFERED HEREBY. The Pooling and Servicing Agreement will be included as
part of the Form 8-K to be filed with the Commission within 15 days after the
Closing Date. See "THE POOLING AND SERVICING AGREEMENT" herein and
"DESCRIPTION OF THE CERTIFICATES" and "SERVICING OF THE MORTGAGE LOANS" in
the Prospectus for more important additional information regarding the terms
of the Pooling and Servicing Agreement and the Certificates.
The Certificates represent in the aggregate the entire beneficial
ownership interest in a Trust Fund consisting primarily of: (i) the Mortgage
Loans, all scheduled payments of interest and principal due after the Cut-off
Date (whether or not received) and all payments under and proceeds of the
Mortgage Loans received after the Cut-off Date (exclusive of payments of
principal and interest due on or before the Cut-off Date); (ii) any Mortgaged
Property acquired on behalf of the Trust Fund through foreclosure or
deed-in-lieu of foreclosure (upon acquisition, an "REO Property"); (iii) such
funds or assets as from time to time are deposited in the Collection Account,
the Distribution Account and any account established in connection with REO
Properties (an "REO Account"); (iv) the rights of the mortgagee under all
insurance policies with respect to the Mortgage Loans; (v) the Depositor's
rights and remedies under the Mortgage Loan Purchase Agreement; and (vi) all
of the mortgagee's right, title and interest in the Reserve Accounts.
DELIVERY, FORM AND DENOMINATION
Book-Entry Certificates. No Person acquiring a Class A-1, Class A-2, Class
A-3, Class A-4, Class IO, Class B, Class C, Class D, Class E, Class F, Class
G, Class H or Class J 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 $1,000 initial Certificate Balance or
Notional Balance and integral multiples of $1 in excess thereof. 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
S-283
<PAGE>
statements to Certificateholders or holders will, in the case of the
Book-Entry Certificates, refer to distributions, notices, reports and
statements to DTC or Cede & Co., as the case may be, for distribution to
Beneficial Owners in accordance with DTC procedures. DTC may discontinue
providing its services as securities depository with respect to the
Book-Entry Certificates at any time by giving reasonable notice to the
Trustee. Under such circumstances, in the event that a successor securities
depository is not obtained, certificates are required to be printed and
delivered. The Trustee, the Master Servicer, the Special Servicer, the Fiscal
Agent and the Certificate Registrar may for all purposes, including the
making of payments due on the Book-Entry Certificates, deal with DTC as the
authorized representative of the Beneficial Owners with respect to such
Certificates for the purposes of exercising the rights of Certificateholders
under the Pooling and Servicing Agreement.
The Depository Trust Company. DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the New York
Uniform Commercial Code and a "clearing agency" registered pursuant to
Section 17A of the Securities Exchange Act of 1934, as amended. DTC was
created to hold securities for its participating organizations
("Participants") and to facilitate the clearance and settlement of securities
transactions among Participants through electronic computerized book-entry
charges in Participants' accounts, thereby eliminating the need for physical
movement of certificates. Participants include securities brokers and dealers
(including the Underwriter), banks, trust companies and clearing corporations
and certain other organizations. The Rules applicable to DTC and its
participants are on file with the Commission. Indirect access to the DTC
system also is available to banks, brokers, dealers, trust companies and
other institutions that clear through or maintain a custodial relationship
with a Participant, either directly or indirectly ("Indirect Participants").
DTC is owned by a number of its Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through Direct Participants, which will receive a credit for the
Book-Entry Certificates on DTC's records. The ownership interest of each
Beneficial Owner is in turn to be recorded on the Participants' and Indirect
Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchase, but Beneficial Owners are expected
to receive written confirmations providing details of the transaction, as
well as periodic statements of their holdings, from the Participant or
Indirect Participant through which the Beneficial Owner entered into the
transaction. Transfers of ownership interests in the Book-Entry Certificates
are to be accomplished by entries made on the books of Participants acting on
behalf of Beneficial Owners. Beneficial Owners will not receive certificates
representing their ownership interests in the Certificates except in the
event that use of the book-entry system for the Book-Entry Certificates is
discontinued. Neither the Certificate Registrar nor the Trustee will have any
responsibility to monitor or restrict the transfer of ownership interests in
Book-Entry Certificates through the book-entry facilities of DTC.
To facilitate subsequent transfers, all Book-Entry Certificates deposited
by Participants with DTC are registered in the name of DTC's nominee, Cede &
Co. The deposit of Book-Entry Certificates with DTC and their registration in
the name of Cede & Co. effect no change in beneficial ownership. DTC has no
knowledge of the actual Beneficial Owners of the Book-Entry Certificates;
DTC's records reflect only the identity of the Participants and Indirect
Participants to whose accounts such Book-Entry Certificates are credited,
which may or may not be the Beneficial Owners. The Participants will remain
responsible for keeping account of their holdings on behalf of their
customers. Beneficial Owners will not be recognized as Certificateholders, as
such term is used in the Pooling and Servicing Agreement, by the Trustee or
any paying agent (each, a "Paying Agent") appointed by the Trustee.
Beneficial Owners will be permitted to exercise the rights of
Certificateholders only indirectly through DTC and its Participants.
Conveyance of notices and other communications by DTC to Participants, by
Participants to Indirect Participants, and by Participants and Indirect
Participants to Beneficial Owners will be governed by arrangements among
them, subject to any statutory or regulatory requirements as may be in effect
from time to time.
S-284
<PAGE>
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Beneficial Owner to pledge Book-Entry Certificates to persons or entities
that do not participate in the DTC system, or to otherwise act with respect
to such Book-Entry Certificates, may be limited due to lack of a definitive
Certificate for such Book-Entry Certificates. In addition, under a book-entry
format, Beneficial Owners may experience delays in their receipt of payments,
since distributions will be made by the Trustee or a Paying Agent on behalf
of the Trustee to Cede & Co., as nominee for DTC.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Book-Entry Certificates. Under its usual procedures, DTC mails an Omnibus
Proxy to the Trustee as soon as possible after the record date. The Omnibus
Proxy assigns Cede & Co.'s consenting or voting rights to those Participants
to whose accounts the Offered Certificates are credited on that record date
(identified in a listing attached to the Omnibus Proxy). DTC may take
conflicting actions with respect to Percentage Interests or Voting Rights to
the extent that Participants whose holdings of Book-Entry Certificates
evidence such Percentage Interests or Voting Rights authorize divergent
action.
Neither the Depositor, the Trustee, the Master Servicer, the Special
Servicer, the Fiscal Agent, nor any Paying Agent will have any responsibility
for any aspect of the records relating to, or payments made on account of,
beneficial ownership interests of the Book-Entry Certificates registered in
the name of Cede & Co., as nominee for DTC, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests. In
the event of the insolvency of DTC, a Participant or an Indirect Participant
in whose name Book-Entry Certificates are registered, the ability of the
Beneficial Owners of such Book-Entry Certificates to obtain timely payment
may be impaired. In addition, in such event, if the limits of applicable
insurance coverage by the Securities Investor Protection Corporation are
exceeded or if such coverage is otherwise unavailable, ultimate payment of
amounts distributable with respect to such Book-Entry Certificates may be
impaired.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that the Depositor believes to be reliable,
but the Depositor takes no responsibility for the accuracy thereof.
Physical Certificates. The Class R-I, Class R-II, Class R-III, and the
Class IO Certificates will be issued in fully registered certificated form
only. 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. The Class IO Certificates will consist
of two "regular interests" in REMIC III, and may be exchanged for separate
Certificates representing such regular interests upon request of the holder.
Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i)(A) the Depositor advises the Certificate Registrar in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to any Class of the Book-Entry
Certificates and (B) the Depositor is unable to locate a qualified successor
or (ii) the Depositor, at its option, advises the Trustee and Certificate
Registrar that it elects to terminate the book-entry system through DTC with
respect to any Class of the Book-Entry Certificates.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Certificate Registrar will be required to notify all affected
Beneficial Owners through DTC of the availability of Definitive Certificates.
Upon surrender by DTC of the physical certificates representing the affected
Book-Entry Certificates and receipt of instructions for re-registration, the
Certificate Registrar will reissue the Book-Entry Certificates as Definitive
Certificates to the Beneficial Owners. Upon the issuance of Definitive
Certificates for purposes of evidencing ownership of the Class A-1, Class
A-2, Class A-3, Class IO, Class B, Class C, Class D, Class E, Class F, Class
G, Class H or Class J 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.
S-285
<PAGE>
REGISTRATION AND TRANSFER
Subject to the restrictions on transfer and exchange set forth in the
Pooling and Servicing Agreement, the holder of any Definitive Certificate may
transfer or exchange the same in whole or part (in a principal amount equal
to the minimum authorized denomination or any integral multiple thereof) by
surrendering such Definitive Certificate at the corporate trust office of the
certificate registrar appointed pursuant to the Pooling and Servicing
Agreement (the "Certificate Registrar") or at the office of any transfer
agent, together with an executed instrument of assignment and transfer in the
case of transfer and a written request for exchange in the case of exchange.
In exchange for any Definitive Certificate properly presented for transfer or
exchange with all necessary accompanying documentation, the Certificate
Registrar will, within five Business Days of such request if made at the
corporate trust office of the Certificate Registrar, or within ten Business
Days if made at the office of a transfer agent (other than the Certificate
Registrar), execute and deliver at such corporate trust office or the office
of the transfer agent, as the case may be, to the transferee (in the case of
transfer) or holder (in the case of exchange) or send by first class mail at
the risk of the transferee (in the case of transfer) or holder (in the case
of exchange) to such address as the transferee or holder, as applicable, may
request, a Definitive Certificate or Definitive Certificates, as the case may
require, for a like aggregate Certificate Balance or Notional Balance, as
applicable, and in such authorized denomination or denominations as may be
requested. The presentation for transfer or exchange of any Definitive
Certificate will not be valid unless made at the corporate trust office of
the Certificate Registrar or at the office of a transfer agent by the
registered holder in person, or by a duly authorized attorney-in-fact. The
Certificate Registrar may decline to accept any request for an exchange or
registration of transfer of any Definitive Certificate during the period of
15 days preceding any Distribution Date.
The Class IO Certificates consist of the Class IO-1 Component and the
Class IO-2 Component. At any time at which Definitive Certificates are
available, holders of the Class IO Certificates may obtain separate
Definitive Certificates evidencing the Class IO-1 Component and Class IO-2
Component comprising their Class IO Certificates.
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.
CERTIFICATE BALANCES AND NOTIONAL AMOUNTS
Upon initial issuance, and in each case subject to a permitted variance of
plus or minus 5%, the Sequential Pay Certificates will have the Certificate
Balances representing the approximate percentage of the Initial Pool Balance
as set forth in the following table:
INITIAL PERCENT OF
CERTIFICATE INITIAL POOL
CLASS OF CERTIFICATES BALANCE BALANCE
- --------------------- ------- -------
Class A-1 Certificates ........................ $ %
Class A-2 Certificates ........................ $ %
Class A-3 Certificates......................... $ %
Class A-4 Certificates......................... $ %
Class B Certificates .......................... $ %
Class C Certificates .......................... $ %
Class D Certificates .......................... $ %
Class E Certificates .......................... $ %
Private Certificates
(other than the Residual Certificates) ........ $ %
S-286
<PAGE>
The "Certificate Balance" of any Class of Certificates (other than the
Class IO 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 Certificate Balance of each Class of Sequential Pay
Certificates will be reduced on each Distribution Date by any distributions
of principal actually made on such Class of Certificates on such Distribution
Date, and further by any Realized Losses and Additional Trust Fund Expenses
actually allocated to such Class of Certificates on such Distribution Date
pursuant to the terms of the Pooling and Servicing Agreement.
The Class IO Certificates will not have Certificate Balances, but will
represent the right to receive the sum of the interest accrued on the
notional amount of each of its Components, as described herein. As of any
Distribution Date, each component (each, a "Component") will have a notional
amount equal to the Certificate Balance of the related Class of Certificates
immediately prior to such Distribution Date. Each Component will accrue
interest at its applicable Strip Rate. The aggregate notional amount of the
Class IO Components will initially equal $751,582,423.
The REMIC Residual Certificates will not have Certificate Balances, but
will represent the right to receive on each Distribution Date any portion of
the Available Distribution Amount (as defined below) for the applicable REMIC
for such date that remains after the required distributions have been made on
all the other Classes of Certificates.
PASS-THROUGH RATES
The Pass-Through Rate applicable to each Class of Offered Certificates
(other than the Class IO Certificates) for each Distribution Date is equal to
(i) in the case of the Class A-1, Class A-2, Class A-3 and Class A-4
Certificates, the respective rate per annum set forth with respect to such
Class in the table set forth on page S-4 hereof and (ii) in the case of the
Class B, Class C, Class D and Class E Certificates, the Group 2 Weighted
Average Rate (as defined below) less the applicable Strip Rate set forth
below.
The Strip Rate applicable to the Class A-1, Class A-2, Class A-3, Class F,
Class G, Class H, and Class J Components (stated as a percentage of the
related notional amount) for each Distribution Date will equal the Group 2
Weighted Average Rate for such Distribution Date minus %, %, %,
%, %, %, and %, respectively (but not less than zero), and the
Strip Rate applicable to the Class B, Class C, Class D and Class E Components
(stated as a percentage of the related notional amount) for each Distribution
Date will equal %, %, %, and %, respectively.
The "Group 2 Weighted Average Rate" equals for any Distribution Date, the
weighted average of the REMIC I Net Mortgage Rates, weighted on the basis of
the Certificate Principal Amounts of the REMIC I Interests as of the close of
the preceding Distribution Date.
The "REMIC I Net Mortgage Rate" for each REMIC I Interest is equal to the
Mortgage Interest Rate for the related Mortgage Loan without taking into
account any modification of such rate occurring after the Cut-Off Date.
For purposes of calculating the REMIC I Weighted Average Rate applicable
to any Distribution Date, in the case of any REMIC I Interest for which
interest is not calculated on the basis of a year consisting of twelve 30-day
months, the REMIC I Net Mortgage Rate for each Due Period will be converted
to an effective rate equal to the amount of interest accrued on the related
REMIC I Interest for such Distribution Date, multiplied by twelve and
expressed as a percentage of the principal balance of the REMIC I interest as
of the preceding Distribution Date. The "Scheduled Principal Balance" of each
Mortgage Loan outstanding at any time generally will equal the Cut-off Date
Balance thereof, reduced on each Distribution Date (to not less than zero) by
(i) any payments or other collections (or advances in lieu thereof) of
principal of such Mortgage Loan that are due or received, as the case may be,
during the related Collection Period and (ii) any Realized Loss incurred in
respect of such Mortgage Loan during the related Collection Period for such
Distribution Date. Notwithstanding the foregoing, if any
S-287
<PAGE>
Mortgage Loan is paid in full, liquidated or otherwise removed from the Trust
Fund, commencing as of the first Distribution Date following the Interest
Accrual Period during which such event occurred, the Scheduled Principal
Balance of such Mortgage Loan will be zero.
The "Interest Accrual Period" for each Distribution Date will be the
calendar month preceding the month in which such Distribution Date occurs.
The "Determination Date" will be the fifth Business Day preceding each
Distribution Date.
DISTRIBUTIONS
Application of the Group 1 Available Distribution Amount. On each
Distribution Date the Trustee will (except as otherwise described under
"--Termination" below) apply amounts on deposit in the Certificate Account,
to the extent of the Group 1 Available Distribution Amount, in the following
order of priority:
(1) to distributions of interest to the holders of the Class A-4
Certificates an amount equal to the Distributable Certificate Interest in
respect of the Class A-4 Certificates on such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates and, in
the event that the Group 2 Available Distribution Amount is not sufficient
to pay Distributable Certificate Interest to the holders of the Class A-1,
Class A-2 and Class A-3 Certificates, to pay any shortfall in such amount;
(2) to distributions of principal to the holders of the Class A-4
Certificates in an amount equal to the lesser of the then outstanding
Certificate Balance of the Class A-4 Certificates and to the Group 1
Principal Distribution Amount for such Distribution Date;
(3) any remaining amounts shall be included in the Group 2 Available
Distribution Amount.
Application of the Group 2 Available Distribution Amount. On each
Distribution Date the Trustee will (except as required to make payments on
the Group 1 Certificates from amounts included in the Group 1 Available
Distribution Amount or as otherwise described under "--Termination" below)
apply amounts on deposit in the Certificate Account, to the extent of the
Group 2 Available Distribution Amount, in the following order of priority:
(1) to distributions of interest to the holders of the Class A-1, Class
A-2 and Class A-3 and Class IO Certificates (in each case, so long as any
such Class remains outstanding), pro rata, in accordance with the
respective amounts of Distributable Certificate Interest in respect of
such Classes of Certificates on such Distribution Date in an amount equal
to all Distributable Certificate Interest in respect of each such Class of
Certificates for such Distribution Date and, to the extent not previously
paid, for all prior Distribution Dates and, in the event that the Group 1
Available Distribution Amount is not sufficient to pay Distributable
Certificate Interest to the holders of the Class A-4 Certificates, to pay
any shortfall in such amount;
(2) to distributions of principal to the holders of the Class A-1
Certificates equal to the lesser of the then outstanding Certificate
Balance of the Class A-1 Certificates and to the Group 2 Principal
Distribution Amount for such Distribution Date;
(3) to distributions of principal to the holders of the Class A-2
Certificates equal to the lesser of the then outstanding Certficate
Balance of the Class A-2 Certificates and to the Group 2 Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in respect of the Class A-1 Certificates;
(4) to distributions of principal to the holders of the Class A-3
Certificates equal to the lesser of the then outstanding Certificate
Balance of the Class A-3 Certificates and to the Group 2 Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in respect of the Class A-1 and/or Class A-2 Certificates;
(5) to distributions to the holders of the Class A-1, Class A-2 and Class
A-3 Certificates, pro rata in accordance with the amount of Realized
Losses and Additional Trust Fund Expenses, if any, previously allocated to
such Classes of Certificates for which no reimbursement has previously
been received, to reimburse such holders for all Realized Losses and
Additional Trust Fund Expenses, if any;
S-288
<PAGE>
(6) if the Class A-4 Certificates remain outstanding (after application
of the Group 1 Available Funds as described above) to distributions of
principal equal to the lesser of the then outstanding Certificate Balance
of the Class A-4 Certificates and the Group 2 Principal Distribution
Amount for such Distribution Date, less any portion thereof distributed in
respect of the Class A-1, Class A-2 and Class A-3 Certificates;
(7) to distributions of interest to the holders of the Class B
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class B Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(8) after the principal balances of the Class A-1, Class A-2, Class A-3
and Class A-4 Certificates have been reduced to zero distributions of
principal to the holders of the Class B Certificates in an amount not to
exceed the then outstanding Certificate Balance of the Class B
Certificates equal to the Group 2 Principal Distribution Amount for such
Distribution Date, less any portion thereof distributed in respect of the
Class A-1, Class A-2 and/or Class A-3 Certificates on such Distribution
Date;
(9) to distributions to the holders of the Class B Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to the Class B Certificates and for
which no reimbursement has previously been received;
(10) to distributions of interest to the holders of the Class C
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class C Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(11) to distributions of principal to the holders of the Class C
Certificates equal to the lesser of the then outstanding Certificate
Balance of the Class C Certificates and the Group 2 Principal Distribution
Amount for such Distribution Date, less any portion thereof distributed in
respect of the Class A-1, Class A-2, Class A-3 and/or Class B Certificates
on such Distribution Date;
(12) to distributions to the holders of the Class C Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to the Class C Certificates and for
which no reimbursement has previously been received;
(13) to distributions of interest to the holders of the Class D
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class D Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(14) to distributions of principal to the holders of the Class D
Certificates equal to the lesser of the then outstanding Certificate
Balance of the Class D Certificates and the Group 2 Principal Distribution
Amount for such Distribution Date, less any portion thereof distributed in
respect of the Class A-1, Class A-2, Class A-3, Class B and/or Class C
Certificates on such Distribution Date;
(15) to distributions to the holders of the Class D Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to the Class D Certificates and for
which no reimbursement has previously been received;
(16) to distributions of interest to the holders of the Class E
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class E Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(17) to distributions of principal to the holders of the Class E
Certificates equal to the lesser of the then outstanding Certificate
Balance of such Class of Certificates and the Group 2 Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in respect of the Class A-1, Class A-2, Class A-3, Class B,
Class C and/or Class D Certificates;
(18) to distributions to the holders of the Class E Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to the Class E Certificates and for
which no reimbursement has previously been received;
S-289
<PAGE>
(19) to distributions of interest to the holders of the Class F
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class F Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(20) to distributions of principal to the holders of the Class F
Certificates equal to the lesser of the then outstanding Certificate
Balance of such Class of Certificates and to the Group 2 Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in respect of the Class A-1, Class A-2, Class A-3, Class B,
Class C, Class D and/or Class E Certificates;
(21) to distributions to the holders of the Class F Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to the Class F Certificates and for
which no reimbursement has previously been received;
(22) to distributions of interest to the holders of the Class G
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class G Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(23) to distributions of principal to the holders of the Class G
Certificates equal to the lesser of the then outstanding Certificate
Balance of such Class of Certificates and to the Group 2 Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in respect of the Class A-1, Class A-2, Class A-3, Class B,
Class C, Class D, Class E and/or Class F Certificates;
(24) to distributions to the holders of the Class G Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to the Class G Certificates and for
which no reimbursement has previously been received;
(25) to distributions of interest to the holders of the Class H
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class H Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(26) to distributions of principal to the holders of the Class H
Certificates equal to the lesser of the then outstanding Certificate
Balance of such Class of Certificates and to the Group 2 Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in respect of the Class A-1, Class A-2, Class A-3, Class B,
Class C, Class D, Class E, Class F and/or Class G Certificates;
(27) to distributions to the holders of the Class H Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to the Class H Certificates and for
which no reimbursement has previously been received;
(28) to distributions of interest to the holders of the Class J
Certificates in an amount equal to all Distributable Certificate Interest
in respect of the Class J Certificates for such Distribution Date and, to
the extent not previously paid, for all prior Distribution Dates;
(29) to distributions of principal to the holders of the Class J
Certificates equal to the lesser of the then outstanding Certificate
Balance of such Class of Certificates and to the Group 2 Principal
Distribution Amount for such Distribution Date, less any portion thereof
distributed in respect of the Class A-1, Class A-2, Class A-3, Class A-4,
Class B, Class C, Class D, Class E, Class F, Class G and/or Class H
Certificates;
(30) to distributions to the holders of the Class J Certificates to
reimburse such holders for all Realized Losses and Additional Trust Fund
Expenses, if any, previously allocated to the Class J Certificates and for
which no reimbursement has previously been received; and
(31) to distributions to the holders of the applicable REMIC Residual
Certificates in an amount equal to the balance, if any, of the Available
Distribution Amount remaining after the distributions to be made on such
Distribution Date as described in clauses (1) through (29) above.
Notwithstanding the foregoing, if, at any time when the Class A-1, Class
A-2 or Class A-3 Certificates are outstanding, the amount available to pay
the Group 2 Principal Distribution Amount is less than the
S-290
<PAGE>
Group 2 Principal Distribution Amount, such amount will be applied on a pro
rata basis among the outstanding Class A-1, Class A-2 and Class A-3
Certificates. In addition, if at any time the remaining principal balance of
the Mortgage Loans is less than the aggregate Certificate Balance of the
Class A-1, Class A-2, Class A-3 and Class A-4 Certificates, the Group 1 and
Group 2 Available Distribution Amounts will be combined. Thereafter, on each
Distribution Date, the Available Distribution Amount will be distributed
first, to pay Distributable Certificate Interest to the Class A-1, Class A-2,
Class A-3 and Class A-4 Certificates, pro rata in proportion to such
Distributable Certificate Interest, and thereafter, pro rata to each such
Class to pay the Certificate thereof.
Distributable Certificate Interest. The "Distributable Certificate
Interest" in respect of any Class of the Group 1 Certificates, other than
Class IO Components, for each Distribution Date will generally equal one
month's interest at the applicable Pass-Through Rate accrued on the
Certificate Balance of such Class of Certificates, outstanding immediately
prior to such Distribution Date. The "Distributable Certificate Interest" in
respect of the Class IO Certificates will equal the sum of the interest due
on the notional amount of each of the Components.
The Pass-Through Rates for the Class B, Class C, Class D, and Class E
Certificates will equal the Group 2 Weighted Average Rate minus %, %, %,
and %, respectively.
The "Group 2 Weighted Average Rate" equals for any Distribution Date, the
weighted average of the REMIC I Net Mortgage Rates, weighted on the basis of
the Certificate Principal Amounts of the REMIC I Interests as of the close of
the preceding Distribution Date.
The "REMIC I Net Mortgage Rate" for each REMIC I Interest is equal to the
Mortgage Interest Rate for the related Mortgage Loan without taking into
account any modification of such rate occurring after the Cut-Off Date.
For purposes of calculating the Group 2 Weighted Average Rate applicable
to any Distribution Date, in the case of any REMIC I Interest for which
interest is not calculated on the basis of a year consisting of twelve 30-day
months, the REMIC I Net Mortgage Rate for each Due Period will be converted
to an effective rate equal to the amount of interest accrued on the related
REMIC I Interest for such Distribution Date, multiplied by twelve and
expressed as a percentage of the principal balance of the REMIC I Interest as
of the preceding Distribution Date.
Interest payable on the Regular Certificates will be calculated on a
30/360 day basis.
Principal Distribution Amounts. The "Group 1 Principal Distribution
Amount" for each Distribution Date will generally equal the aggregate of the
following:
(a) the aggregate of the principal portions of all Scheduled Payments (as
defined below) (other than Balloon Payments) and the principal portion of
any Assumed Scheduled Payments (as defined herein) due or deemed due on or
in respect of the Group 1 Mortgage Loan for its Due Date during the
related Interest Accrual Period; (b) the aggregate of all principal
prepayments received on the Group 1 Mortgage Loan during the related
Interest Accrual Period; (c) if the stated maturity date of the Group 1
Mortgage Loan occurred during or prior to the related Collection Period,
any payment of principal made by or on behalf of the related borrower
during the related Collection Period (including any Balloon Payment), in
each case, net of any portion of such payment that represents a recovery
of the principal portion of any Scheduled Payment (other than a Balloon
Payment) due or the principal portion of any Assumed Scheduled Payment
deemed due, in respect of the Group 1 Mortgage Loan on a Due Date during
or prior to the related Interest Accrual Period to the extent previously
advanced and not previously recovered; (d) the aggregate of all
liquidation proceeds, insurance proceeds, condemnation proceeds and
awards, and proceeds of any Group 1 Mortgage Loan repurchase that were
received on or in respect of Mortgage Loans during the related Collection
Period and that were identified and applied by the Master Servicer as
recoveries of principal, in each case net of any portion of such amounts
that represents a recovery of the principal portion of any Scheduled
Payment (other than a Balloon Payment) due and of the principal portion of
any Assumed Scheduled Payment deemed due, in respect of the Group 1
Mortgage Loan or a Due Date during or prior to the related Collection
Period to the extent previously advanced and not previously
S-291
<PAGE>
recovered; and (e) for each Distribution Date after the initial
Distribution Date, the excess, if any, of the Group 1 Principal
Distribution Amount for the immediately preceding Distribution Date, over
the aggregate distributions of principal made on the Class A-4
Certificates on such immediately preceding Distribution Date.
The "Group 1 Scheduled Payment" due on the Group 1 Mortgage Loan on any
related Due Date is the amount of the Monthly Payment that is or would
have been, as the case may be, due thereon on such date, after giving
effect to any waiver, modification or amendment granted or agreed to by
the Master Servicer or the Special Servicer or in connection with a
bankruptcy or similar proceeding involving the related borrower and
assuming that each prior Scheduled Payment has been timely made. The
"Group 1 Assumed Scheduled Payment" is an amount deemed due in respect of
the Group 1 Mortgage Loan if it is delinquent in respect of its Balloon
Payment beyond the first Determination Date (as defined herein) after its
stated maturity date. The Assumed Scheduled Payment deemed due on the
Group 1 Mortgage Loan on its stated maturity date and on each successive
related Due Date that it remains or is deemed to remain outstanding (and
prior to such time, if any, as the amount of the Scheduled Payment is
modified) will equal the Scheduled Payment that would have been due
thereon on such date if the related Balloon Payment had not come due but
rather such Mortgage Loan had continued to amortize in accordance with the
Group 1 Mortgage Loan's amortization schedule, if any, in effect prior to
its stated maturity date.
The "Group 2 Principal Distribution Amount" for any Distribution Date
will generally equal the aggregate of the following: (a) the aggregate of
the principal portions of all Scheduled Payments (as defined below) (other
than Balloon Payments) and the principal portion of any Assumed Scheduled
Payments (as defined herein) due or deemed due on or in respect of the
Group 2 Mortgage Loans for its Due Dates during the related Collection
Period (and, if the Class A-4 Certificates have been paid in full, the
Group 1 Mortgage Loan); (b) the aggregate of all principal prepayments
received on the Group 2 Mortgage Loans during the related Collection
Period (including any Remaining Cash Flow); (c) with respect to any
Mortgage Loan as to which the related stated maturity date occurred during
or prior to the related Collection Period, any payment of principal made
by or on behalf of the related borrower during the related Collection
Period (including any Balloon Payment), in each case, net of any portion
of such payment that represents a recovery of the principal portion of any
Scheduled Payment (other than a Balloon Payment) due or the principal
portion of any Assumed Scheduled Payment deemed due, in respect of such
Mortgage Loan on a Due Date during or prior to the related Collection
Period to the extent previously advanced and not previously recovered; (d)
the aggregate of all liquidation proceeds, insurance proceeds,
condemnation proceeds and awards, and proceeds of Group 2 Mortgage Loan
repurchases that were received on or in respect of Group 2 Mortgage Loans
during the related Collection Period and that were identified and applied
by the Master Servicer as recoveries of principal, in each case net of any
portion of such amounts that represents a recovery of the principal
portion of any Scheduled Payment (other than a Balloon Payment) due and of
the principal portion of any Assumed Scheduled Payment deemed due, in
respect of the Group 2 Mortgage Loan on a Due Date during or prior to the
related Interest Accrual Period to the extent previously advanced and not
previously recovered; and (e) for each Distribution Date after the initial
Distribution Date, the excess, if any, of the Group 2 Principal
Distribution Amount for the immediately preceding Distribution Date, over
the aggregate distributions of principal made on the Group 2 Certificates
on such immediately preceding Distribution Date.
The "Group 2 Scheduled Payment" due on any Group 2 Mortgage Loan on any
related Due Date is the amount of the Monthly Payment that is or would
have been, as the case may be, due thereon on such date, after giving
effect to any waiver, modification or amendment granted or agreed to by
the Master Servicer or the Special Servicer or in connection with a
bankruptcy or similar proceeding involving the related borrower, and
assuming that each prior Scheduled Payment has been timely made. The
"Group 2 Assumed Scheduled Payment" is an amount deemed due in respect of
a Group 2 Balloon Loan that is delinquent in respect of its Balloon
Payment beyond the first Determination Date (as defined herein) after its
stated maturity date. The Assumed Scheduled Payment deemed due on any such
Balloon Loan on its stated maturity date and on each successive
S-292
<PAGE>
related Due Date that it remains or is deemed to remain outstanding (and
prior to such time, if any, as the amount of the Scheduled Payment is
modified) will equal the Scheduled Payment that would have been due
thereon on such date if the related Balloon Payment had not come due but
rather such Group 2 Mortgage Loan had continued to amortize in accordance
with such loan's amortization schedule, if any, in effect prior to its
stated maturity date. The "Determination Date" will be the 10th day of
each month (or, if not a business day, the next preceding business day).
Distributions of the applicable Principal Distribution Amount will
constitute the only distributions of principal on the Certificates.
Reimbursements of previously allocated Realized Losses and Additional Trust
Fund Expenses will not constitute distributions of principal for any purpose
and will not result in an additional reduction in the Certificate Balance of
the Class of Certificates in respect of which any such reimbursement is made.
Treatment of REO Properties. Notwithstanding that any Mortgaged Property
may be acquired as part of the Trust Fund through foreclosure, deed in lieu
of foreclosure or otherwise, the related Mortgage Loan will be treated, for
purposes of (i) determining distributions on the Certificates, (ii)
allocating the Realized Losses and Additional Trust Fund Expenses to the
Certificates, and (iii) determining the amount of Trustee Fees and Master
Servicing Fees payable under the Pooling and Servicing Agreement, as having
remained outstanding until such REO Property is liquidated. In connection
therewith, operating revenues and other proceeds derived from such REO
Property (net of related operating costs) will be "applied" by the Master
Servicer as principal, interest and other amounts that would have been "due"
on such Mortgage Loan, and the Master Servicer, the Trustee or the Fiscal
Agent will be required to make P&I Advances in respect of such Mortgage Loan,
in all cases as if such Mortgage Loan had remained outstanding. References to
"Mortgage Loan" or "Mortgage Loans" in the definitions of "Principal
Distribution Amount" and "Weighted Average Net Mortgage Rate" include any
Mortgage Loan as to which the related Mortgaged Property has become an REO
Property (an "REO Mortgage Loan").
Allocation of Prepayment Premiums. In the event a borrower is required to
pay any Prepayment Premium, the amount of such payments actually collected
will be distributed in respect of the Offered Certificates as set forth
below. A "Prepayment Premium" is any yield maintenance premium paid or
payable on a Mortgage Loan as a result of a prepayment of principal not
otherwise due thereon, which have been calculated (based on Scheduled
Payments on such Mortgage Loan) to compensate the holder of the Mortgage for
reinvestment losses based on the difference between the Mortgage Rate on such
Mortgage Loan and the applicable treasury rate in effect on the date of
repayment (the "Rate Differential") with the aggregate payment of interest
which would have accrued on such Mortgage Loan at the Rate Differential on
each subsequent due date through the maturity date of such Mortgage Loan
discounted at a rate at or near the time of prepayment and includes any
minimum charge.
For any Distribution Date, with respect to any Prepayment Premium actually
collected in respect of a Group 2 Mortgage Loan during the related Interest
Accrual Period, the holders of the Class A-1, Class A-2, Class A-3, Class B,
Class C, Class D, Class E, Class F, Class G, Class H and Class J Certificates
are entitled to distributions in the amount of the product of (a) a fraction
(not greater than one and not less than zero), the numerator of which is the
applicable Pass-Through Rate minus the discount rate used in calculating such
Prepayment Premium and the denominator of which is the Mortgage Rate of the
applicable Group 2 Mortgage Loan minus such discount rate, (b) the
appropriate Class Prepayment Percentage and (c) the amount of such Prepayment
Premium collected. On each Distribution Date, the holders of each Component
are entitled to receive any remaining portion of such Prepayment Premium
received with respect to the Group 2 Mortgage Loans in proportion to the
Distributable Certificate Interest then payable to each such Component. The
holders of the Class A-4 Certificates are entitled to receive all Prepayment
Premiums received on the Group 1 Mortgage Loan.
SCHEDULED FINAL DISTRIBUTION DATE
The "Scheduled Final Distribution Date" with respect to any Class of
Certificates is the Distribution Date on which the aggregate Certificate
Balance or aggregate Notional Balance, as the case may be, of such Class of
Certificates would be reduced to zero based on the assumptions set forth
below. Such Distribution Date shall in each case be as follows:
S-293
<PAGE>
CLASS DESIGNATION SCHEDULED FINAL DISTRIBUTION DATE
----------------- ---------------------------------
Class A-1.............
Class A-2.............
Class A-3.............
Class A-4.............
Class IO..............
Class B...............
Class C...............
Class D...............
Class E...............
The Scheduled Final Distribution Dates set forth above were calculated
without regard to any delays in the collection of Balloon Payments and
without regard to a reasonable liquidation time with respect to any Mortgage
Loans that may be delinquent. Accordingly, in the event of defaults on the
Mortgage Loans, the actual final Distribution Date for one or more Classes of
the Certificates may be later, and could be substantially later, than the
related Scheduled Final Distribution Date(s).
In addition, the Scheduled Final Distribution Dates set forth above were
calculated assuming no prepayments (involuntary or voluntary), no termination
(as described under "--Termination"), no defaults, no modifications and no
extensions. Since the rate of payment (including prepayments) of the Mortgage
Loans can be expected to exceed the scheduled rate of payments, and could
exceed such scheduled rate by a substantial amount, the actual final
Distribution Date for one or more Classes of the Certificates may be earlier,
and could be substantially earlier, than the related scheduled Final
Distribution Date(s). The rate of payments (including prepayments) on the
Mortgage Loans will depend on the characteristics of the Mortgage Loans, as
well as on the prevailing level of interest rates and other economic factors,
and no assurance can be given as to actual payment experience.
SUBORDINATION; ALLOCATION OF LOSSES AND CERTAIN EXPENSES
The rights of holders of the Class B, Class C, Class D and Class E
Certificates and each Class of the Private Certificates (collectively, the
"Subordinate Certificates") to receive distributions of amounts collected or
advanced on the Mortgage Loans will be subordinated, to the extent described
herein, to the rights of holders of the Class A-1, Class A-2, Class A-3,
Class A-4 and Class IO Certificates (collectively, the "Senior Certificates")
and each other such Class of Subordinate Certificates, if any, with an
earlier alphabetical Class designation. This subordination is intended to
enhance the likelihood of timely receipt by the holders of the Senior
Certificates of the full amount of Distributable Certificate Interest Payable
in respect of such Classes of Certificates on each Distribution Date, and the
ultimate receipt by the holders of the Class A-1, Class A-2, Class A-3 and
Class A-4 Certificates of principal in an amount equal to the entire
respective Certificate Balances of such Classes of Certificates. Similarly,
but to decreasing degrees, this subordination is also intended to enhance the
likelihood of timely receipt by the holders of the Class B, the Class C, the
Class D and the Class E Certificates of the full amount of Distributable
Certificate Interest payable in respect of each such Class of Certificates on
each Distribution Date, and the ultimate receipt by the holders of each such
Class of Certificates of, principal equal to the entire related Certificate
Balance. The protection afforded to the holders of the Class E Certificates
by means of the subordination of the Private Certificates, to the holders of
the Class D Certificates by means of the subordination of the Class E and the
Private Certificates, to the holders of the Class C Certificates by means of
the subordination of the Class D, the Class E and the Private Certificate, to
the holders of the Class B Certificates by means of the subordination of the
Class C, the Class D, the Class E and the Private Certificates, and to the
holders of the Senior Certificates by means of the subordination of the
Subordinate Certificates, will be accomplished by (i) the application of the
Available Distribution Amount on each Distribution Date in accordance with
the order of priority described under "--Distributions--Application of the
Available Distribution Amount" above and (ii) by the allocation of Realized
Losses and Additional Trust Fund Expenses as described below. The Class A-3
Certificates will receive principal payments only after the Certificate
Balances of the Class A-2 and Class A-1 Certificates have been reduced to
zero and the Class A-2 Certificates will receive principal payments only
after the
S-294
<PAGE>
Certificate Balance of the Class A-1 Certificates has been reduced to zero.
However, the Class A-1, Class A-2, Class A-3, Class A-4 and Class IO
Certificates will bear shortfalls in collections and losses incurred in
respect of the Mortgage Loans pro rata. No other form of credit support will
be available for the benefit of the holders of the Offered Certificates.
On each Distribution Date, following all distributions on the Certificates
to be made on such date, the aggregate of all Realized Losses and Additional
trust Fund Expenses that have been incurred since the Cut-off Date through
the end of the related Interest Accrual Period and that have not previously
been allocated as described below will be allocated among the respective
Classes of Sequential Pay Certificates (in each case in reduction of their
respective Certificate Balances) as follows, but in the aggregate only to the
extent that the aggregate Certificate Balance of all Classes of Sequential
Pay Certificates remaining outstanding after giving effect to the
distributions of such Distribution Date exceeds the aggregate Stated
Principal Balance of the Mortgage Pool that will be outstanding immediately
following such Distribution Date: first, to the Class J Certificates, until
the remaining Certificate Balance of such Class of Certificates is reduced to
zero; second, to the Class H Certificates, until the remaining Certificate
Balance of such Class of Certificates is reduced to zero; third, to the Class
G Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; fourth, to the Class F Certificates, until
the remaining Certificate Balance of such Class of Certificates is reduced to
zero; fifth, the Class E Certificates, until the remaining Certificate
Balance of such Class of Certificates is reduced to zero; sixth, to the Class
D Certificates, until the remaining Certificate Balance of such Class of
Certificates is reduced to zero; seventh, to the Class C Certificate, until
the Remaining Certificate Balance of such Class of Certificates is reduced to
zero and eighth, to the Class B Certificates until the remaining Certificate
Balance of such Class of Certificates is reduced to zero. Thereafter,
additional Realized Losses and Additional Trust Fund Expenses will be
allocated to the Class A-1 Certificates, the Class A-2 Certificates and the
Class A-3 Certificates, pro rata, in proportion to their outstanding
Certificate Balances, until the remaining Certificate Balances of such
Classes of Certificates are reduced to zero.
Any Realized Loss incurred in respect of any Mortgage Loan will result in
a corresponding reduction in the notional amount of the Class IO-1 Component,
and any Realized Los or Additional Trust Fund Expense allocated in reduction
of the Certificate Balance of the Class A-1 or Class A-2 Certificates will
also result in a corresponding reduction in the notional amount for the Class
IO-2 Component.
"Realized Losses" are losses arising from the inability to collect all
amounts due and owing under any defaulted Mortgage Loan, including by reason
of the fraud or bankruptcy of the borrower or a casualty of any nature at the
related Mortgaged Property, to the extent not covered by insurance. The
Realized Loss in respect of a liquidated Mortgage Loan (or related REO
Property) is an amount generally equal to the excess, if any, of (a) the
outstanding principal balance of such Mortgage Loan as of the date of
liquidation, together with (i) all accrued and unpaid interest thereon at the
related Mortgage Rate in effect from time to time to but not including the
Due Date in the Collection Period in which the liquidation occurred and (ii)
certain related unreimbursed servicing expenses, over (b) the aggregate
amount of Liquidation Proceeds, if any, recovered in connection with such
liquidation. If any portion of the debt due under a Mortgage Loan is
forgiven, whether in connection with a modification, waiver or amendment
granted or agreed to by the Special Servicer or in connection with the
bankruptcy or similar proceeding involving the related borrower, the amount
so forgiven also will be treated as a Realized Loss.
"Additional Trust Fund Expenses" include, among other things, (i) any
Special Servicing Fees or Principal Recovery Fees paid to the Special
Servicer, (ii) any interest paid to the Master Servicer, the Trustee and/or
the Fiscal Agent in respect of unreimbursed Advances, and (iii) any of
certain unanticipated, non-Mortgage Loan specific expenses of the Trust Fund,
including certain reimbursements to the Trustee of the type described under
"DESCRIPTION OF THE POOLING AGREEMENTS--Certain Matters Regarding the
Trustee" in the Prospectus, certain reimbursements to the Master Services,
any Special Servicer and the Depositor of the type described under "SERVICING
OF MORTGAGE LOANS -- Certain Matters with Respect to the Master Servicer and
the Depositor" in the Prospectus (the Special Servicer having the same rights
to indemnity and reimbursements as described thereunder with respect to the
Master Service), and certain federal, state and local taxes, and certain tax
related expenses, payable from the assets of the Trust Fund and described
under "MATERIAL FEDERAL INCOME
S-295
<PAGE>
TAX CONSEQUENCES" in the Prospectus. Additional Trust Fund Expenses will
reduce amounts payable to Certificateholders and, subject to the distribution
priorities described above, may result in a loss on one or more Classes of
Offered Certificates.
ADDITIONAL RIGHTS OF THE RESIDUAL CERTIFICATES
The Residual Certificates will remain outstanding for as long as the Trust
Fund exists. Holders of the Residual Certificates are not entitled to
distributions in respect of principal, interest or Prepayment Premiums.
Holders of the Residual Certificates are not expected to receive any
distributions until after the Certificate Balances of all other Classes of
Certificates have been reduced to zero and only to the extent of any
available funds remaining on any Distribution Date and remaining assets of
the REMICs, if any, on the final Distribution Date for the Certificates,
after distributions in respect of any accrued but unpaid interest on the
Certificates and after distributions in reduction of principal balance have
reduced the principal balances of the Certificates to zero.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate upon the final distribution to the Certificateholders, which shall
follow the earlier of (i) the final payment (or advance in respect thereof)
or other liquidation of the last Mortgage Loan or REO Property subject
thereto, and (ii) the purchase of all of the Mortgage Loans and all of the
REO Properties remaining in the Trust Fund, if any, by the Depositor or the
Master Servicer. Written notice of termination of the Pooling and Servicing
Agreement will be given to each Certificateholder, and the final distribution
will be made only upon surrender and cancellation of the Certificates at the
office of the Trustee or other registrar for the Certificates or at such
other location as may be specified in such notice of termination.
Any such purchase by the Master Servicer or the Depositor of all the
Mortgage Loans and all of the REO Properties, if any, remaining in the Trust
Fund is required to be made at a price equal to (i) the aggregate Purchase
Price of all the Mortgage Loans (other than REO Mortgage Loans) then included
in the Trust Fund, plus (ii) the fair market value of all REO Properties then
included in the Trust Fund, as determined by an appraiser mutually agreed
upon by the Master Servicer and the Trustee, minus (iii) if the purchaser is
the Master Servicer, the aggregate of amounts payable or reimbursable to the
Master Servicer under the Pooling and Servicing Agreement. Such purchase will
effect early retirement of the then outstanding Offered Certificates, but the
right of the Master Servicer or the Depositor to effect such termination is
subject to the requirement that the then aggregate Stated Principal Balance
of the Mortgage Pool be less than 1% of the Initial Pool Balance.
The purchase price paid in connection with the purchase of all Mortgage
Loans and REO Properties remaining in the Trust Fund, exclusive of any
portion thereof payable or reimbursable (as if such purchase price
constituted Liquidation Proceeds) to any person other than the
Certificateholders, will constitute part of the Available Distribution Amount
for the final Distribution Date. The Available Distribution Amount for the
final Distribution Date will be distributed by the Trustee generally as
described herein under "--Distributions--Application of the Group 1 Available
Distribution Amount" and "--Application of the Group 2 Available Distribution
Amount", except that the distributions of principal on any Class of
Sequential Pay Certificates described thereunder will be made, subject to
available funds and the distribution priorities described thereunder, in an
amount equal to the entire Certificate Balance of such Class remaining
outstanding.
S-296
<PAGE>
YIELD AND MATURITY CONSIDERATIONS
YIELD CONSIDERATIONS
General. The yield on any Offered Certificate will depend on the price at
which such Certificate is purchased by an investor and the rate, timing and
amount of distributions on such Certificate. The rate, timing and amount of
distributions on any Offered Certificate will in turn depend on, among other
things, (i) the Pass-Through Rate for such Certificate, (ii) the rate and
timing of principal payments (including principal prepayments) and other
principal collections on the Mortgage Loans and the extent to which such
amounts are to be applied in reduction of the Certificate Balance or Notional
Amount of the related Class, (iii) the rate, timing and severity of Realized
Losses and Additional Trust Fund Expenses and the extent to which such losses
and expenses are allocable in reduction of the Certificate Balance or
notional amount of the related Class, and (iv) the timing and severity of any
Net Aggregate Prepayment Interest Shortfalls and the extent to which such
shortfalls are allocable in reduction of the Distributable Certificate
Interest payable on the related Class.
Rate and Timing of Principal Payment. The yield to holders of the Class IO
Certificates will be extremely sensitive to, and the yield to holders of any
other Offered 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 Group
2 Principal Distribution Amount for each Distribution Date will be
distributable first in respect of the Class A-1 Certificates until the
Certificate Balance thereof is reduced to zero, and will thereafter be
distributable entirely in respect of the Class A-2 Certificates, the Class
A-3 Certificates, the Class A-4 Certificates, the Class B Certificates, the
Class C Certificates, the Class D Certificates and the Class E Certificates,
in that order, in each case until the Certificate Balance of such Class of
Certificates is reduced to zero. Payments made in reduction of the
Certificate Balance of any Class of Certificates will result in a
corresponding reduction in the notional amount of the related Component.
Consequently, the rate and timing of principal payments that are distributed
or otherwise result in reduction of the aggregate outstanding principal
balance of the Certificate Balance, as the case may be, of each Class of
Certificates will be directly related to the rate and timing of principal
payments on or in respect of the Group 2 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 Group 2 Mortgage Loans due to defaults,
casualties or condemnations affecting the Mortgaged Properties, or purchases
of Mortgage Loans out of the Trust Fund). 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 Offered
Certificates (other than the Class IO Certificates) of amounts that would
otherwise be 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 Offered Certificates that are
Sequential Pay Certificates) while work-outs are negotiated or foreclosures
are completed. See "SERVICING OF THE MORTGAGE LOANS--Modifications, Waivers
and Amendments" and "--Servicing of the Mortgage Loans--Rights Upon Event of
Default" and "CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS--Foreclosure" in the
Prospectus.
The extent to which the yield to maturity of any Class of Offered
Certificates may vary from the anticipated yield will depend upon the degree
to which such Certificates are purchased at a discount or premium and when,
and to what degree, payments of principal on the Mortgage Loans in turn are
distributed or otherwise result in reduction of the Certificate Balance or
notional amount of such Certificates. No representation is made as to the
rate of principal payments on the Mortgage Loans or as to the yield to
maturity of any class of Offered Certificates. In addition, although excess
cash flow is applied to reduce principal of certain of the Mortgage Loans
after their respective effective maturity Dates, there can be no assurance
that any of such Mortgage Loans will be prepaid on that date or any date
prior to maturity and increases in the Mortgage Rates on the Mortgage Loans
after such effective maturity dates will not be distributed to
Certificateholders. An investor should consider, in the case of any Offered
Certificate purchased at a discount, the risk that a slower than anticipated
rate of principal
S-297
<PAGE>
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 a Class
IO Certificate or any other Offered Certificate purchased at a premium, 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 or otherwise results in reduction of the principal balance (or
Notional Amount of a Component) of an Offered Certificate purchased at a
discount or premium, the greater will be the effect on an investor's yield to
maturity. As a result, the effect on an investor's yield of principal
payments on the Mortgage Loans occurring at a rate higher (or lower) than the
rate anticipated by the investor during any particular period would not be
fully offset by a subsequent like reduction (or increase) in the rate of such
principal payments. Investors in the Class IO Certificates should fully
consider the risk that a rapid rate of principal payments on the Mortgage
Loans could result in the failure of such investors to recoup their initial
investments. 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 mortgage loans
comparable to the Mortgage Loans.
Losses and Shortfalls. The yield to holders of the Offered 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. Losses and other
shortfalls on the Mortgage Loans will, with the exception of any Net
Aggregate Prepayment Interest Shortfalls, generally be borne by the holders
of the respective Classes of Sequential Pay Certificates, to the extent of
amounts otherwise distributable in respect of their Certificates, in reverse
alphabetical order of their Class designations. Realized Losses and
Additional Trust Fund Expenses will be allocated, as and to the extent
described herein, to the respective Classes of Sequential Pay Certificates
(in reduction of the Certificate Balance of each such Class), in reverse
alphabetical order of their Class designations. Any Realized Loss allocated
in reduction of the aggregate outstanding principal balance of any Class of
Certificates will result in a corresponding reduction in the notional amount
of the related Component. As more full described herein under "DESCRIPTION OF
THE CERTIFICATES--Distributions-Distributable Certificate Interest," Net
Aggregate Prepayment Interest Shortfalls will generally be borne by the
respective Classes of REMIC Regular Certificates on a pro rata basis.
Pass-Through Rates. The effective rate applicable to the Class IO
Certificates for each Distribution Date will be variable and will be equal to
the weighted average of the Strip Rates of the Components, some of which are
fixed and some of which are variable weighted by the Certificate Balances of
the corresponding Classes immediately prior to such Distribution Date.
Accordingly, the yield on the Class IO Certificates will be sensitive to
changes in the relative composition of the Mortgage Pool as a result of
scheduled amortization, voluntary prepayments and liquidations.
Certain Relevant Factors. 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, Lockout Periods,
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 and the
general supply and demand for rental units, hotel/motel guest rooms,
residential health care facility beds or comparable commercial space, as
applicable, in such areas, the quality of management of the Mortgaged
Properties, the servicing of the Mortgage Loans, possible changes in tax laws
and other opportunities for investment. See "YIELD CONSIDERATIONS" and
"DESCRIPTION OF THE MORTGAGE POOL" herein.
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 the prevailing market interest rate is below a
mortgage interest rate, the related borrower has an incentive to refinance
its mortgage loan. As of the Cut-off Date, all of the Mortgage Loans may
either be voluntarily prepaid or defeased at any time after the expiration of
the applicable Lockout Period, and/or any period when a borrower pledges
Defeasance Collateral in lieu of prepaying the related Mortgage Loan (a
"Required Defeasance
S-298
<PAGE>
Period"), subject, in most cases, to the payment of a Prepayment Premium. A
requirement that a prepayment be accompanied by a Prepayment Premium may not
provide a sufficient economic disincentive to deter a borrower from
refinancing at a more favorable interest rate.
Depending on prevailing market interest rates, the outlook for market
interest rates and economic conditions generally, some borrowers may sell or
refinance 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.
The Depositor makes no representation as to the particular factors that
will affect the rate and timing or prepayments and defaults of 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
whether a default will have occurred as of any date or as to the overall rate
of prepayment or default on the Mortgage Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until a date that is scheduled to be at least
15 days following the Due Dates for the Mortgage Loans during the related
Collection Period, the effective yield to the holders of the Offered
Certificates will be lower than the yield that would otherwise be produced by
the applicable Pass-Through Rates and purchase prices (assuming such prices
did not account for such delay).
Unpaid Distributable Certificate Interest. As described under "DESCRIPTION
OF THE CERTIFICATES--Distributions--Application of the Group 1 Available
Distribution Amount" and Application of the Group 2 Available Distribution
Amount herein, if the portion of the Available Distribution Amount
distributable in respect of interest on any Class of Offered Certificates on
any Distribution Date is less than the Distributable Certificate Interest
then payable for such Class, the shortfall will be distributable to holders
of such Class of Certificates on subsequent Distribution Dates, to the extent
of available funds. Any such shortfall will not bear interest, however, and
will therefor negatively affect the yield to maturity of such Class of
Certificates for so long as it is outstanding.
Yield Sensitivity of the Class IO Certificates. The yield to maturity on
the Class IO Certificates will be extremely sensitive to the rate and timing
of principal payments (including by reason of prepayments, defaults and
liquidations) on the Mortgage Loans. Accordingly, investors in the Class IO
Certificates should fully consider the associated risks, including the risk
that a rapid rate of prepayment of the Mortgage Loans could result in the
failure of such investors to fully recoup their initial investments. The
allocation of a portion of collected Prepayment Premiums to the Class IO
Certificates is intended to reduce those risks; however, such allocation may
be insufficient to offset fully the adverse effects on the yields on such
Classes of Certificates that the related prepayments may otherwise have.
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
annual rate of prepayment each month, expressed as a per annum percentage of
the then scheduled principal balance of one or more mortgage loans. As used
in the following table, the column headed "0%" assumes that none of the
Mortgage Loans is prepaid in whole or in part before maturity. The column
headed "100%" assumes that prepayments are made each month at that level of
CPR on each Mortgage Loan whether or not it is then in its Lockout Period, if
any.
S-299
<PAGE>
The following table indicates the approximate pre-tax yields to maturity
(on a corporate bond equivalent basis ("CBE")) on the Class IO Certificates
for the specified CPRs. Such calculations are based on the following
assumptions ("Table Assumptions"): (i) no prepayment restrictions apply; and
each Mortgage Loan is assumed to prepay at the indicated level of CPR, with
the CPR in each case being applied on the first day of each month to that
portion of the scheduled principal amount of the Mortgage Loan that is not
assumed to be in default as described below, (ii) the initial Certificate
Balances of the Sequential Pay Certificates and the Pass-Through Rates for
the REMIC Regular Certificates are described in the Summary thereof, (iii)
there are no delinquencies or Additional Trust Fund Expenses, (iv) scheduled
interest and principal payments on the Mortgage Loans are timely received,
except as described above, and prepayments are made on the Mortgage Loans on
their respective Due Dates (assumed in all cases to be the first day of each
month) at the indicated levels of CPR set forth in the tables, (v) partial
prepayments on the Mortgage Loans are permitted, but are assumed not to
affect the amortization schedules, (vi) no Prepayment Premiums are collected,
(vii) neither the Master Servicer nor the Depositor exercises its right of
optional termination of the Trust Fund described herein, (viii) no Mortgage
Loan is required to be purchased from the Trust Fund, (ix) there are no
Prepayment Interest Shortfalls or Appraisal Reductions, (x) distributions on
the Certificates are made on the fifteenth day (each assumed to be a business
day) of each month, commencing in January 1998, and (xi) the Certificates
will be issued on the Closing Date.
For purposes of preparing the tables, it was assumed that (i) each of the
Mortgage Loans has the following characteristics as of the Cut-Off Date:
<TABLE>
<CAPTION>
REMAINING
CUT-OFF TERM TO REMAINING SERVICING
DATE EFFECTIVE TERM TO AND
PRINCIPAL MATURITY DATE MATURITY INTEREST GROSS TRUSTEE UNDERWRITTEN
MORTGAGE LOAN BALANCE (MONTHS) (MONTHS) ACCRUAL COUPON FEE CASH FLOW
<C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Copley Place $ 96,908,666 116 116 30/360 6.75% .015% $21,882,091
2. Brookfield Properties $ 59,754,386 114 354 30/360 8.00% .05% $ 7,921,547
Corporation
3. Tower Realty Trust(1) $107,000,000 83 359 30/360 6.8174% .05% $14,048,919
4. Mills Corporation $109,538,921 114 354 30/360 7.882% .05% $16,735,288
5. Mills Corporation $ 19,954,654 114 354 30/360 7.44% .05% $ 1,809,957
6. Newton Oldacre McDonald $ 76,640,023 179 359 Actual/360 7.56% .05% $ 9,426,049
7. Newton Oldacre McDonald $ 12,791,840 179 359 Actual/360 7.325% .05% N/A(2)
8. Four Seasons Biltmore $ 63,000,000 120 300 Actual/360 7.138% .05% $ 8,616,344
Hotel, Santa Barbara, CA
9. Ritz-Carlton Hotel, St. $ 41,850,000 120 300 Actual/360 7.188% .05% $ 5,879,132
Louis, MO
10. Four Seasons Hotel, $ 45,150,000 120 300 Actual/360 7.188% .05% $ 6,165,711
Austin, TX
11. Shilo Inns $ 65,765,282 238 238 30/360 8.47% .065% $10,515,524
12. Shilo Inns $ 19,967,537 239 239 30/360 8.36% .065% $ 3,026,439
13. Farb Investments $ 64,781,452 118 118 30/360 7.40% .075% $ 7,291,234
14. American Apartment $ 44,440,152 73 289 30/360 7.75% .05% $ 7,059,029
Communities I
15. American Apartment $ 20,940,017 115 355 30/360 7.74% .05% $ 3,337,799
Communities II
</TABLE>
- ------------
(1) The Tower Realty Trust loan is interest-only for two years. Commencing
with the payment on December 1, 1999, and continuing thereafter, the loan
will follow a 28-year amortization schedule.
(2) Newton Oldacre McDonald Additional Funding Underwritten Cash Flow is
included in Newton Oldacre McDonald Initial Funding Underwritten Cash Flow.
S-300
<PAGE>
It was further assumed that the aggregate purchase price of such Classes
of Certificates are as specified below, including accrued interest.
PRE-TAX YIELD TO MATURITY (CBE) OF THE CLASS IO CERTIFICATES
BREAK-EVEN PRE-TAX YIELD
ASSUMED PURCHASE PRICE CPR% AT TO MATURITY AT
(INCLUDING ACCRUED INTEREST) 0% YIELD (A) 0% CPR
- ------------
(A) The Break-Even CPR% is the approximate CPR% for each assumed purchase
price where the pre-tax yield to maturity (CBE) is approximately 0%.
The pre-tax yields set forth in the preceding table were calculated by
determining the monthly discount rates that, when applied to the assumed
streams of cash flow to be paid on the Class IO Certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed aggregate purchase price of the Class IO Certificates, which includes
accrued interest, and by converting such monthly rates to corporate bond
equivalent rates. Such calculation does not take into account shortfalls in
collection of interest due to prepayments (or other liquidations) on the
Mortgage Loans or the interest rates at which investors may be able to
reinvest funds received by them as distributions on the Class IO Certificates
(and consequently does not purport to reflect the return on any investment in
the Class IO Certificates when such reinvestment rates are considered).
The characteristics of the Mortgage Loans differ in substantial respects
from those assumed in preparing the table above, and the table is presented
for illustrative purposes only. In particular, none of the Mortgage Loans
permit voluntary partial prepayments, and many of the Mortgage Loans are
subject to Lockout Periods and/or Required Defeasance Periods disregarded in
preparing the table. Thus neither the Mortgage Pool nor any Mortgage Loan
will prepay at any constant rate. In addition, there can be no assurance that
the Mortgage Loans will prepay at any particular rate, that the actual
pre-tax yields on the Class IO Certificates will correspond to any of the
pre-tax yields shown herein or that the aggregate purchase prices of the
Class IO Certificates will be those assumed. Accordingly, investors must make
their own decisions as to the appropriate assumptions (including prepayment
assumptions) to be used in deciding whether to purchase the Class IO
Certificates.
WEIGHTED AVERAGE LIFE
The weighted average life of any Class A-1, Class A-2, Class A-3, Class
A-4, Class B, Class C, Class D or Class E Certificate refers to the average
amount of time that will elapse from the date of its issuance until each
dollar allocable to principal of such Certificate is distributed to the
investor. The weighted average life of any such Offered Certificate will be
influenced by, among other things, the rate at which principal on the
Mortgage Loans is paid or otherwise collected or advanced and applied to pay
principal of such Offered Certificate. Any delay in collection of a Balloon
Payment due at the maturity of a Mortgage Loan or the repayment of the
principal balance of a Mortgage Loan on its respective Expected Repayment
Date will likely extend the weighted average life of the Class or Classes of
Offered Certificates entitled to distributions in respect of principal as of
the date such Balloon Payment was due or such Expected Repayment Date. As
described herein, the Principal Distribution Amount for each Distribution
Date will be distributable first in respect of Class A-1 Certificates until
the Certificate Balance thereof is reduced to zero, and will thereafter be
distributable entirely in respect of the Class A-2 Certificates, the Class
A-3 Certificates, the Class B Certificates, the Class C Certificates, the
Class D Certificates and the Class E Certificates, in that order, in each
case until the Certificate Balance of such Class of Certificates is reduced
to zero.
S-301
<PAGE>
The following tables indicate the percentage of the initial Certificate
Balance of each Class of Offered Certificates (other than the Class IO
Certificates) that would be outstanding after each of the dates shown under
each of the designated scenarios (each, a "Scenario") and the corresponding
weighted average life of each such Class of Offered Certificates. The tables
have been prepared on the basis of, among others, the assumptions described
below. To the extent that the Mortgage Loans or the Certificates have
characteristics that differ from those assumed in preparing the tables, the
Class A-1, Class A-2, Class A-3, Class B, Class C, Class D and/or Class E
Certificates may mature earlier or later than indicated by the tables.
Accordingly, the Mortgage Loans, will not prepay at any constant rate, and it
is highly unlikely that the Mortgage Loans will prepay in a manner consistent
with the assumptions underlying any of the Scenarios. In addition, variations
in the actual prepayment experience and the balance of the Mortgage Loans
that prepay may increase or decrease the percentages of initial Certificate
Balances (and shorten or extend the weighted average lives) shown in the
following tables. Investors are urged to conduct their own analyses of the
rates at which the Mortgage Loans may be expected to prepay.
The tables set forth below were prepared on the basis of the relevant
Table Assumptions, except that it was assumed that there are not prepayments
on the Mortgage Loans other than in accordance with the designated Scenario.
The Scenarios are as follows:
Scenario (1): No Mortgage Loan prepays; that is, the CPR for the Mortgage
Pool is 0%.
Scenario (2): No Mortgage Loan prepays during a month in which a Lockout
Period is in effect or in which prepayments on such Mortgage
Loan are required to be accompanied by a Yield Maintenance
Charge. Then all Mortgage Loans prepay at the rate of 100%
CPR. The Mortgage Loans are prepaid in full or the first Due
Dates on which prepayments in full can be made without
payment of any Prepayment Premium and without defeance.
Scenario (3): No Mortgage Loan prepays during a month in which a Lockout
Period is in effect or in which prepayments on such Mortgage
Loan are required to be accompanied by a Yield Maintenance
Charge. Each of the Mortgage Loans having an Effective
Maturity Date are extended for 5 years and hyperamortize; and
each of the Balloon Mortgage Loans extend 3 years. Then all
Mortgage Loans prepay at the rate of 100% CPR. The Mortgage
Loans are prepaid in full or the first Due Dates on which
prepayments in full can be made without payment of any
Prepayment Premium and without defeance.
Based on the above-referenced assumptions, the following two tables
indicate the resulting weighted average lives of each Class of Offered
Certificates (other than the Class IO Certificates) and sets forth the
percentages of the initial Certificate Balance of such Class of Offered
Certificates that would be outstanding after each of the dates shown under
each of the designated Scenarios. For purposes of the following tables, the
weighted average life of an Offered Certificate (other that the Class IO
Certificates) is determined by (i) multiplying the amount of each principal
distribution thereon by the number of years from the date of issuance of such
Certificate to the related Distribution Date, (ii) summing the results and
(iii) dividing the sum by the aggregate amount of the reductions in the
principal balance of such Certificate.
S-302
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
(OR NOTIONAL BALANCE)
OUTSTANDING FOR
EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
GROUP 2 LOANS GROUP 2 LOANS GROUP 2 LOANS GROUP 1 LOANS
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
SCENARIO SCENARIO SCENARIO SCENARIO
-------------------------------------- ------------------- -------------------
DISTRIBUTION DATE 1 2 3 1 2 3 1 2 3 1 2 3
- --------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance.......
January 1998..........
January 1999..........
January 2000..........
January 2001..........
January 2002..........
January 2003..........
January 2004..........
January 2005..........
January 2006..........
January 2007..........
January 2008..........
January 2009..........
January 2010..........
January 2011..........
Weighted Average
Life(1) .............
</TABLE>
- ------------
(1) The weighted average life of each Class is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Balance or
Notional Balance of such Class by the number of years from the date of
purchase to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the aggregate distributions in reduction of Certificate
Balance or Notional Balance referred to in clause (i).
S-303
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
(OR NOTIONAL BALANCE)
OUTSTANDING FOR
EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
GROUP 2 LOANS GROUP 2 LOANS GROUP 2 LOANS GROUP 2 LOANS
CLASS B CLASS C CLASS D CLASS E
SCENARIO SCENARIO SCENARIO SENARIO
-------------------------------------- ------------------- -------------------
DISTRIBUTION DATE 1 2 3 1 2 3 1 2 3 1 2 3
- --------------------- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Balance.......
January 1998..........
January 1999..........
January 2000..........
January 2001..........
January 2002..........
January 2003..........
January 2004..........
January 2005..........
January 2006..........
January 2007..........
January 2008..........
January 2009..........
January 2010..........
January 2011..........
Weighted Average
Life(1) .............
</TABLE>
- ------------
(1) The weighted average life of each Class is determined by (i) multiplying
the amount of each distribution in reduction of the Certificate Balance or
Notional Balance of such Class by the number of years from the date of
purchase to the related Distribution Date, (ii) adding the results and (iii)
dividing the sum by the aggregate distributions in reduction of Certificate
Balance or Notional Balance referred to in clause (i).
S-304
<PAGE>
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of December 1, 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: Clarence Krantz at telephone number (816)
435-5000.
ASSIGNMENT OF THE MORTGAGE LOANS
On or before the Closing Date, the Depositor will assign or cause the
assignment of the Mortgage Loans without recourse, to the Trustee for the
benefit of the holders of Certificates. On or prior to the Closing Date, the
Depositor will deliver to the Trustee, with a copy to the Master Servicer,
with respect to each Mortgage Loan the following set of documents (the
"Trustee Mortgage File"):
(i) the original of the related Note, endorsed by the applicable Mortgage
Loan Seller in blank in the following form: "Pay to the order of ,
without recourse" which the Trustee or its designee is authorized to
complete and which Note and all endorsements thereof shall show a complete
chain of endorsement from the Originator to the applicable Mortgage Loan
Seller;
(ii) the related original recorded Mortgage or a copy thereof certified
by the related title insurance company, public recording office or closing
agent to be in the form in which executed or submitted for recording, the
related original recorded Assignment of Mortgage to the applicable
Mortgage Loan Seller or a copy thereof certified by the related title
insurance company, public recording office or closing agent to be in the
form in which executed or submitted for recording and the related original
Assignment of Mortgage executed by the applicable Mortgage Loan Seller in
blank which the Trustee or its designee is authorized to complete (and but
for the insertion of the name of the assignee and any related recording
information which is not yet available to the applicable Mortgage Loan
Seller, is in suitable form for recordation in the jurisdiction in which
the related Mortgaged Property is located);
(iii) if the related security agreement is separate from the Mortgage,
the original security agreement or a counterpart thereof, and if the
security agreement is not assigned under the Assignments of Mortgage
described in clause (ii) above, the related original assignment of such
security agreement to the applicable Mortgage Loan Seller or a counterpart
thereof and the related original assignment of such security agreement
executed by the applicable Mortgage Loan Seller in blank which the Trustee
or its designee is authorized to complete;
(iv) a copy of each Form UCC-1 financing statement, if any, filed with
respect to personal property constituting a part of the related Mortgaged
Property, together with a copy of each Form UCC-2 or UCC-3 assignment, if
any, of such financing statement to the applicable Mortgage Loan Seller
and a copy of each Form UCC-2 or UCC-3 assignment, if any, of such
financing statement executed by the applicable Mortgage Loan Seller in
blank which the Trustee or its designee is authorized to complete (and but
for the insertion of the name of the assignee and any related filing
information which is not yet available to the applicable Mortgage Loan
Seller, is in suitable form for filing in the filing office in which such
financing statement was filed);
(v) the related original of the Loan Agreement, if any, relating to such
Mortgage Loan or a counterpart thereof;
(vi) the related original lender's title insurance policy (or the
original pro forma title insurance policy), together with any endorsements
thereto;
(vii) if any related Assignment of Leases, Rents and Profits is separate
from the Mortgage, the original recorded Assignment of Leases, Rents and
Profits or a copy thereof certified by the related
S-305
<PAGE>
title insurance company, public recording office, or closing agent to be
in the form in which executed or submitted for recording, the related
original recorded reassignment of such instrument, if any, to the
applicable Mortgage Loan Seller or a copy thereof certified by the related
title insurance company or closing agent to be in the form in which
executed or submitted for recording and the related original reassignment
of such instrument, if any, executed by the applicable Mortgage Loan
Seller in blank which the Trustee or its designee is authorized to
complete (and but for the insertion of the name of the assignee and any
related recording information which is not yet available to the applicable
Mortgage Loan Seller, is in suitable form for recordation in the
jurisdiction in which the related Mortgaged Property is located) (any of
which reassignments, however, may be included in a related Assignment of
Mortgage and need not be a separate instrument);
(viii) copies of the original Environmental Reports with respect to the
Mortgaged Property made in connection with the origination of such
Mortgage Loan;
(ix) if any related assignment of contracts is separate from the
Mortgage, the original assignment of contracts or a counterpart thereof,
and if the assignment of contracts is not assigned under the Assignments
of Mortgage described in clause (ii) above, the related original
reassignment of such instrument to the applicable Mortgage Loan Seller or
a counterpart thereof and the related original reassignment of such
instrument executed by the Mortgage Loan Seller in blank which the Trustee
or its designee is authorized to complete;
(x) with respect to the related Reserve Accounts, if any, a copy of the
original of any separate agreement with respect thereto between the
related borrower and the Originator;
(xi) the original of any other written agreement, instrument or document
securing such Mortgage Loan, including, without limitation, originals of
any guaranties with respect to such Mortgage Loan or the original letter
of credit, if any, with respect thereto, together with any and all
amendments thereto, including, without limitation, any amendment which
entitles the Master Servicer to draw upon such letter of credit on behalf
of the Trustee for the benefit of the Certificateholders, and the original
of each instrument or other item of personal property given as security
for a Mortgage Loan possession of which by a secured party is necessary to
a secured party's valid, perfected, first priority security interest
therein, together with all assignments or endorsements thereof necessary
to entitle the Master Servicer to enforce a valid, perfected, first
priority security interest therein on behalf of the Trustee for the
benefit of the Certificateholders;
(xii) with respect to the related Reserve Accounts, if any, a copy of the
UCC-1 financing statements, if any, submitted for filing with respect to
the applicable Originator's security interest in such Reserve Accounts and
all funds contained therein, together with a copy of each Form UCC-2 or
UCC-3 assignment, if any, of such financing statement to the applicable
Mortgage Loan Seller and a copy of each Form UCC-2 or UCC-3 assignment, if
any, of such financing statement executed by the applicable Mortgage Loan
Seller in blank which the Trustee or its designee is authorized to
complete (and but for the insertion of the name of the assignee and any
related filing information which is not yet available to the applicable
Mortgage Loan Seller, is in suitable form for filing in the filing office
in which such financing statement was filed);
(xiii) the original of each assumption or substitution agreement, if any,
with evidence of recording thereon, where appropriate (or a copy thereof
certified by the related title insurance company, public recording office
or closing agent to be in the form in which executed or submitted for
recording); and
(xiv) originals or copies of any and all amendments, modifications and
supplements to, and waivers related to, any of the foregoing.
If the Depositor cannot deliver any original or certified recorded
document described above on the Closing Date, the Depositor will use its best
efforts to deliver (or cause to be delivered) such original or certified
recorded documents within 45 days from the Closing Date (subject to delays
attributable to the failure of the appropriate recording office to return
such documents, in which case the Depositor will
S-306
<PAGE>
deliver such documents promptly upon receipt thereof). The Trustee is
obligated to review the Trustee Mortgage File for each Mortgage Loan within
45 days after the later of delivery or the Closing Date and report any
missing documents or certain types of defects therein to the Depositor.
The Master Servicer will hold all remaining Mortgage Loan Documents and
all other documents related to each Mortgage Loan, including copies of any
management agreements, ground leases, appraisals, surveys, environmental
reports and similar documents and any other written agreements relating to
each Mortgage Loan (collectively, the "Master Servicer Mortgage File" and
together with the Trustee Mortgage File, the "Mortgage File") in trust for
the benefit of the Trustee on behalf of Certificateholders. The legal
ownership of all records and documents with respect to each Mortgage Loan
prepared by or that come into the possession of the Master Servicer will
immediately vest in the Trustee, in trust for the benefit of
Certificateholders.
SERVICING OF THE MORTGAGE LOANS; COLLECTION OF PAYMENTS
The Pooling and Servicing Agreement will require 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 will be required to service and administer
the Mortgage Loans (x) in the same manner in which, and with the same care,
skill, prudence and diligence with which it services and administers similar
mortgage loans for other third-party portfolios, giving due consideration to
customary and usual standards of practice of prudent institutional commercial
mortgage loan servicers used with respect to loans comparable to the Mortgage
Loans or (y) in the same manner in which, and with the same care, skill,
prudence and diligence with which, it services and administers similar
mortgage loans which it owns, whichever standard of care is higher, and
taking into account its other obligations under the Pooling and Servicing
Agreement, but without regard to (i) any other relationship that the Master
Servicer, the Special Servicer, any sub-servicer or any affiliate of the
Master Servicer, the Special Servicer or any sub-servicer may have with the
borrowers or any affiliate of such borrowers; (ii) the ownership of any
Certificate by the Master Servicer, the Special Servicer or any affiliate of
either; (iii) the Master Servicer's, the Trustee's or the Fiscal Agent's
obligations, as applicable, to make Advances or to incur servicing expenses
with respect to the Mortgage Loans; (iv) the Master Servicer's, the Special
Servicer's or any sub-servicer's right to receive compensation for its
services under the Pooling and Servicing Agreement or with respect to any
particular transaction; or (v) the ownership, servicing or management for
others by the Master Servicer, the Special Servicer or any sub-servicer of
any other mortgage loans or property. Each of the Master Servicer and the
Special Servicer will be 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. Notwithstanding the foregoing, in
the case of the Copley Sub-Servicer in sub-servicing the Copley Loan, the
same procedures shall be employed as the Copley Sub-Servicer customarily
employs and exercises in servicing mortgage loans for the account of the
Copley Sub-Servicer, with a view to the maximization of the timely recovery
of principal and interest on the Copley Loan but without regard to (a) any
relationship the Copley Sub-Servicer or its affiliates may have with the
Copley Borrower or its affiliates, (b) the Copley Sub-Servicer's obligations
to make P&I Advances, (c) the Copley Sub-Servicer's rights to receive
sub-servicing compensation or (d) the Copley Sub-Servicer's interest in the
Class B Note. The Pooling and Servicing Agreement will provide, however, that
neither the Master Servicer (or its general partner) nor the Special Servicer
(or its general partner), nor any of their directors, officers, employees or
agents, will have any liability to the Trust Fund or the Certificateholders
for taking any action or refraining from taking an action in good faith or
for errors in judgment. The foregoing provision would not protect the Master
Servicer, the Special Servicer or such person for the breach of any of the
Master Servicer's or Special Servicer's respective representations or
warranties in the Pooling and Servicing Agreement, or against any specific
liability imposed on the Master Servicer or the Special
S-307
<PAGE>
Servicer for a breach of the servicing standards set forth in the Pooling and
Servicing Agreement, any liability by reason of willful misfeasance,
misrepresentation, bad faith, fraud or negligence in the performance of its
duties or by reason of its negligent disregard of obligations or duties under
the Pooling and Servicing Agreement.
The Pooling and Servicing Agreement will require the Master Servicer and
the Special Servicer to make reasonable efforts to collect all payments
called for under the terms and provisions of the Mortgage Loans, and to
follow collection procedures as are consistent with the servicing standard
under the Pooling and Servicing Agreement. Consistent with the above, the
Master Servicer or the Special Servicer, as applicable, may, in its
discretion, waive any late payment charge or penalty fee in connection with
any delinquent Monthly Payment or Balloon Payment with respect to any
Mortgage Loan.
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. A
delinquent Mortgage Loan will be transferred to the Special Servicer upon
such Mortgage Loan becoming a Specially Serviced Mortgage Loan. See
"--Special Servicing" herein.
ADVANCES
On or about each Distribution Date, the Master Servicer will be obligated,
subject to the recoverability determination described in the second
succeeding paragraph and Appraisal Reductions, to make advances (each, a "P&I
Advance") out of its own funds or, subject to the replacement thereof as
provided in the Pooling and Servicing Agreement, from funds held in the
Collection Account that are not required to be distributed to
Certificateholders on such Distribution Date, in an amount that is generally
equal to the aggregate of all Scheduled Payments (other that Balloon
Payments) and any Assumed Scheduled Payments, net of related Master Servicing
Fees and, if any, Principal Recovery Fees, due or deemed due, as the case may
be, in respect of the Mortgage Loans during the related Interest Accrual
Period, in each case to the extent such amount was not paid by or on behalf
of the related borrower or otherwise collected as of the close of business on
the related Determination Date. The Master Servicer's obligations to make P&I
Advances in respect of any Mortgage Loan will continue until liquidation of
such Mortgage Loan or disposition of any REO Property acquired in respect
thereof. However, if the Monthly Payment on any Mortgage Loan has been
reduced in connection with a bankruptcy or similar proceeding or a
modification, waiver or amendment granted or agreed to by a Special Servicer,
the Master Servicer will be required to advance only the amount of the
reduced Monthly Payment (net of related Master Servicing Fees and, if any,
Principal Recovery Fees) in respect of subsequent delinquencies. In addition,
if it is determined that an Appraisal Reduction Amount (as defined below)
exists with respect to any Required Appraisal Loan (as defined below), then,
with respect to the Distribution Date immediately following the date of such
determination and with respect to each subsequent Distribution Date for as
long as such Appraisal Reduction Amount exists, the Master Servicer will be
required in the event of subsequent delinquencies to advance in respect of
such Mortgage Loan only an amount equal to the product of (i) the amount of
the P&I Advance that would otherwise be required without regard to this
sentence, multiplied by (ii) a fraction, the numerator of which is equal to
the principal balance of such Mortgage Loan, net of such Appraisal Reduction
Amount, and the denominator of which is equal to the principal balance of
such Mortgage Loan. Pursuant to the terms of the Pooling and Servicing
Agreement, if the Master Servicer fails to make a P&I Advance required to be
made, the Trustee shall then be
S-308
<PAGE>
required to make such P&I Advance, and if the Trustee fails to make a P&I
Advance required to be made, the Fiscal Agent shall then be required to make
such P&I Advance. No default by the Trustee shall be deemed to have occurred
if the Fiscal Agent makes such P&I Advance in a timely manner, as set forth
in the Pooling and Servicing Agreement. See "--Appraisal Reductions" below.
The Master Servicer (or Special Servicer, as applicable) will also be
obligated to make certain advances of amounts payable in respect of the
Mortgaged Properties for real estate taxes, assessments, certain fire and
other hazard insurance premiums or other similar costs and expenses necessary
to preserve the priority of the related Mortgage to the extent the Borrower
defaults in its obligations to make such payments (a "Servicing Advance" and,
together with P&I Advances, the "Advances").
The Master Servicer (or the Trustee or Fiscal Agent, as applicable) will
be entitled to recover any Advance made out of its own funds from any amounts
collected in respect of the Mortgage Loan (net of related Servicing Fees with
respect to collections of interest) as to which such Advance was made,
whether such amounts are collected in the form of late payments, Insurance
Proceeds, Liquidation Proceeds or any other recovery of the related Mortgage
Loan or REO Property ("Related Proceeds"). Neither the Master Servicer, the
Trustee or the Fiscal Agent will be obligated to make any Advance that it
determines in accordance with the servicing standards described herein,
would, if made, not be recoverable out of Related Proceeds (a "Nonrecoverable
Advance"), and the Master Servicer (or the Trustee or the Fiscal Agent, as
applicable) will be entitled to recover, from general funds on deposit in the
Collection Account, any P&I Advance made that it later determines to be a
Nonrecoverable Advance. See "THE POOLING AND SERVICING AGREEMENT--Advances"
and "SERVICING OF THE MORTGAGE LOANS--Advances."
In connection with the recovery by the Master Servicer, the Trustee or the
Fiscal Agent of any P&I Advance made by it or the recovery by the Master
Servicer or Special Servicer of any reimbursable Servicing Advance incurred
by it, the Master Servicer, the Special Servicer, the Trustee of the Fiscal
Agent, as applicable, will be entitled to be paid, out of any amounts then on
deposit in the Collection Account, interest compounded annually at a per
annum rate (the "Reimbursement Rate") equal to the "prime rate" published in
the "Money Rates" section of The Wall Street Journal (or, if The Wall Street
Journal is no longer published, The New York Times), as such "prime rate" may
change from time to time, accrued on the amount of such Advance from the date
made to but not including the date of reimbursement. To the extent not offset
or covered by amounts otherwise payable on the Private Certificates, interest
accrued on outstanding Advances will result in a reduction in amounts payable
on the Offered Certificates, subject to the distribution priorities described
herein.
APPRAISAL REDUCTIONS
Upon the earliest of the date (each such date, a "Required Appraisal
Date") that (1) any Mortgage Loan is sixty (60) days delinquent in respect of
any Monthly Payment, (2) any REO Property is acquired on behalf of the Trust
Fund, (3) any Mortgage Loan has been modified by the Special Servicer to
reduce the amount of any Monthly Payment, other than a Balloon Payment, (4) a
receiver is appointed and continues in such capacity in respect of a
Mortgaged Property securing any Mortgage Loan, (5) a Borrower with respect to
any Mortgage Loan is subject to any bankruptcy proceeding or (6) a Balloon
Payment with respect to any Mortgage Loan is due and has not been paid on its
scheduled maturity date (each such Mortgage Loan, including an REO Mortgage
Loan, a "Required Appraisal Loan"), the Special Servicer will be required to
obtain (within 60 days of the applicable Required Appraisal Date) an
appraisal of the related Mortgaged Property conducted in accordance with the
standards of the Appraisal Institute by a Qualified Appraiser, unless such an
appraisal had been previously obtained within the prior twelve months. A
"Qualified Appraiser" is an independent appraiser, selected by the Special
Servicer, that is a member in good standing of the Appraisal Institute, and,
that, if the state in which the subject Mortgaged Property is located
certifies or licenses appraisers, certified or licensed in such state, and in
each such case who has a minimum of five years experience in the subject
property type and market. The cost of such appraisal will be an Advance by
the Master Servicer, subject to the Master Servicer's right to be reimbursed
therefor out of Related Proceeds or, if not reimbursable therefrom, out of
general funds on deposit in the Collection Account with interest thereon at
the Reimbursement Rate and subject to the
S-309
<PAGE>
Master Servicer's determination that such Advance would not be a
nonrecoverable Advance. As a result of any such appraisal, it may be
determined that an "Appraisal Reduction Amount" exists with respect to the
related Required Appraisal Loan, such determination to be made upon the later
of 30 days after the Required Appraisal Date if no new appraisal is required
or upon receipt of a new appraisal. The Appraisal Reduction Amount for any
Required Appraisal Loan will equal the excess, if any, of (a) the sum of, as
of the Determination Date immediately succeeding the date on which the
appraisal is obtained, (i) the principal balance of such Required Appraisal
Loan, (ii) all unpaid interest on the Required Appraisal Loan through the
most recent Due Date prior to such Determination Date at a per annum rate
equal to the related Net Mortgage Rate, (iii) all accrued but unpaid
Servicing Fees, Servicing Advances and any Additional Trust Fund Expenses in
respect of such Required Appraisal Loan and (iv) all currently due and unpaid
real estate taxes and assessments, insurance premiums, and, if applicable,
ground rents in respect of the related Mortgaged Property (net of any amount
escrowed therefor), over (b) an amount equal to 90% of the appraised value
(net of any prior liens) of the related Mortgaged Property as determined by
such appraisal. See "--Advances" above.
Notwithstanding the foregoing, if any Required Appraisal Loan as to which
an Appraisal Reduction Amount has been established in accordance with the
preceding paragraph becomes a Corrected Mortgage Loan, then the Appraisal
Reduction Amount shall be deemed to be zero, subject to such Mortgage Loan
again becoming subject to the appraisal requirement described above; provided
that, in the case of any Required Appraisal Loan that has been modified as
described in the immediately preceding paragraph, the Appraisal Reduction
Amount will be deemed to exist for so long as the terms of the modification
are in effect.
ACCOUNTS
Collection Account. The Master Servicer will, pursuant to the Pooling and
Servicing Agreement, establish and maintain a segregated account or accounts
(the "Collection Account") into which it will be required to deposit, within
one Business Day of receipt the following payments and collections received
or made by it on or with respect to the Mortgage Loans: (i) all payments on
account of principal on the Mortgage Loans, including the principal component
of Unscheduled Payments on the Mortgage Loans; (ii) all payments on account
of interest and Default Interest on the Mortgage Loans and the interest
portion of all Unscheduled Payments and all Prepayment Premiums; (iii) any
amounts required to be deposited by the Master Servicer in connection with
losses realized on Permitted Investments with respect to funds held in the
Collection Account and in connection with Prepayment Interest Shortfalls;
(iv) (x) all Net REO Proceeds transferred from an REO Account and (y) all
Condemnation Proceeds, Insurance Proceeds and Net Liquidation Proceeds not
required to be applied to the restoration or repair of the related Mortgaged
Property; (v) any amounts received from borrowers that represent recoveries
of Property Advances; and (vi) any other amounts required by the provisions
of the Pooling and Servicing Agreement to be deposited into the Collection
Account by the Master Servicer or the Special Servicer, including, without
limitation, proceeds of any purchase or repurchase of a Mortgage Loan as
described under "DESCRIPTION OF THE MORTGAGE POOL--Representations and
Warranties; Repurchase," "THE POOLING AND SERVICING AGREEMENT--Realization
Upon Mortgage Loans" and "DESCRIPTION OF THE CERTIFICATES--Early Termination"
herein.
The foregoing requirements for deposits in the Collection Account will be
exclusive, and any payments in the nature of late payment charges, late fees,
NSF check charges, assumption fees, loan modification fees, loan service
transaction fees, extension fees, demand fees, beneficiary statement charges
and similar fees need not be deposited in the Collection Account by the
Master Servicer and, to the extent permitted by applicable law, the Master
Servicer or the Special Servicer, as applicable, will be entitled to retain
any such charges and fees received with respect to the Mortgage Loans. In the
event that the Master Servicer deposits into the Collection Account any
amount not required to be deposited therein, the Master Servicer may at any
time withdraw such amount from the Collection Account.
Distribution Account. The Trustee will, pursuant to the Pooling and
Servicing Agreement, establish and maintain one or more segregated accounts
(collectively "Distribution Accounts") in the name of the Trustee for the
benefit of the holders of Certificates. With respect to each Distribution
Date, the Master
S-310
<PAGE>
Servicer will deposit in the Distribution Accounts, to the extent of funds on
deposit in the Collection Account, on or before the Remittance Date an
aggregate amount of immediately available funds equal to the Available Funds
plus (i) any Prepayment Premiums received by the Master Servicer during the
related Collection Period and (ii) Default Interest received with respect to
a Mortgage Loan that is in default with respect to its Balloon Payment. To
the extent not included in Available Funds, the Master Servicer will remit to
the Trustee all P&I Advances for deposit into the Distribution Account on the
related Remittance Date. See "DESCRIPTION OF THE CERTIFICATES--Distributions"
herein.
The Collection Account and the Distribution Accounts 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 Accounts will be either (i) a
segregated account or accounts maintained with either a federally or
state-chartered depository institution or trust company (a) the short term
unsecured debt obligations of which are rated at least "F1+" by Fitch or the
long term unsecured debt obligations of which (or of such institution's
parent holding company) are rated at least "AA" by Fitch and (b) the short
term unsecured debt obligations of which are rated at least "P1" by Moody's
and the long term unsecured debt obligations of which (or of such
institution's parent holding company) are rated at least "A2" by Moody's or
(ii) a segregated trust account or accounts maintained with a federally or
state chartered depository institution or trust company acting in its
fiduciary capacity, having, in either case, a combined capital and surplus of
at least $50,000,000 and subject to supervision or examination by federal or
state authority, or otherwise confirmed in writing by each of the Rating
Agencies that the maintenance of such account and subject to regulations
regarding fiduciary funds on deposit substantially similar to 12 CFR 9.10(b),
will not, in and of itself, result in a downgrading, withdrawal or
qualification of the rating then assigned by such Rating Agency to any Class
of Certificates (an "Eligible Bank"). Amounts on deposit in such accounts may
be invested in certain United States government securities and other
investments specified in the Pooling and Servicing Agreement ("Permitted
Investments"). See "DESCRIPTION OF THE CERTIFICATES--Accounts" in the
Prospectus for a listing of Permitted Investments.
WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Master Servicer may make withdrawals from the Collection Account for
the following purposes: (i) to remit on or before each Remittance Date to the
Distribution Account an amount equal to Available Funds and any Prepayment
Premiums for such Distribution Date; (ii) to pay or reimburse the Master
Servicer, the Trustee or the Fiscal Agent, as applicable, for Advances made
by it and interest on Advances; provided, however, that the Master Servicer's
right to reimburse itself for items described in this clause (ii) is limited
as described herein under "--Advances"; (iii) to pay to the Master Servicer,
the Trustee or the Fiscal Agent any unpaid interest with respect to any
Advance; (iv) to pay (a) on or before each Remittance Date, to the Master
Servicer and Special Servicer the unpaid fee portion of the servicing
compensation to be paid, in the case of the Servicing Fee, from interest
received on the related Mortgage Loan, (b) from time to time, to the Master
Servicer any interest or investment income earned on funds deposited in the
Collection Account, (c) to the Master Servicer as additional servicing
compensation any Prepayment Interest Surplus received in the preceding
Collection Period and (d) to the Master Servicer or the Special Servicer, as
applicable, any other amounts constituting additional servicing compensation;
(v) to pay on or before each Distribution Date to the Depositor, the
applicable 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; (vi) to the extent not reimbursed or paid pursuant
to any of the above clauses, to reimburse or pay the Master Servicer, the
Special Servicer, the Trustee, the Depositor and/or the Fiscal Agent, as
applicable, for certain other unreimbursed expenses incurred by or on behalf
of such person pursuant to and to the extent reimbursable under the Pooling
and Servicing Agreement and to satisfy any indemnification obligations of the
Trust Fund under the Pooling and Servicing Agreement; (vii) to pay to the
Trustee amounts requested by it to pay taxes on certain net income with
respect to REO Properties; (viii) to withdraw any amount deposited into the
Collection
S-311
<PAGE>
Account that was not required to be deposited therein; and (ix) to clear and
terminate the Collection Account pursuant to a plan for termination and
liquidation of the Trust Fund.
SPECIAL SERVICING
The initial Special Servicer will be Midland Loan Services, L.P. It is
anticipated that CRIIMI MAE Inc. or an affiliate will become the Special
Servicer on or soon after the Delivery Date. See "THE MASTER SERVICER AND
SPECIAL SERVICER" herein.
The Pooling and Servicing Agreement permits the holder (or holders) of the
majority of the Voting Rights allocated to holders of the Controlling Class
of Sequential Pay Certificates to replace the Special Servicer and to select
a representative (the "Controlling Class Representative") from whom the
Special Servicer will seek advice and approval and take direction under
certain circumstances. See "--The Controlling Class Representative." The
"Controlling Class of Sequential Pay Certificates" is the Class of Sequential
Pay Certificates that has the latest alphabetical Class designation and that
has a Certificate Balance that is greater than 20% of its original
Certificate Balance (or if no Classes of Sequential Pay Certificates has a
Certificate Balance that is greater than 20% of its original Certificate
Balance, the Class of Sequential Pay Certificates with the latest
alphabetical Class designation). The Class A-1, Class A-2 and Class A-3
Certificates will be treated as one Class for determining the Controlling
Class of Sequential Pay Certificates. With respect to any Mortgage Loan other
than the Copley Loan, any replacement of a Special Servicer by the
Controlling Class of Sequential Pay Certificates will be subject to, among
other things, (i) the delivery of notice of the proposed replacement to the
Rating Agencies and receipt of notice from the Rating Agencies that the
replacement will not result in a qualification, downgrade or withdrawal of
any of the then current ratings assigned to the Certificates, and (ii) the
written agreement of the successor Special Servicer to be bound by the terms
and conditions of the Pooling and Servicing Agreement. With respect to the
Copley Loan, the holder of the Copley Class B Note will have the right to
appoint a replacement Special Servicer, (i) upon the delivery of notice of
the proposed replacement to the Rating Agencies and receipt of notice from
the Rating Agencies that the replacement will not result in a qualification,
downgrade or withdrawal of any of the then current ratings assigned to the
Certificates and (ii) with the consent of the Controlling Class. Subject to
the foregoing, any Certificateholder or affiliate thereof may be appointed as
Special Servicer. See "DESCRIPTION OF CERTIFICATES--Voting Rights" herein.
The Special Servicer will be responsible for servicing and administering
any Mortgage Loan (other than the Copley Loan) as to which (a) any Monthly
Payment shall be delinquent 45 or more days (or, in the case of a Balloon
Payment, if the Master Servicer determines that the related Borrower has
obtained a commitment to refinance, such longer period of delinquency (not to
exceed 120 days) within which such refinancing is expected to occur); (b) the
Master Servicer shall have determined that a default in making a Monthly
Payment is likely to occur within 30 days and is likely to remain unremedied
for at least 60 days (or, in the case of a Balloon Payment, if the Master
Servicer determines that the related borrower has obtained commitment to
refinance, such longer period of delinquency (not to exceed 120 days) within
which such refinancing is expected to occur); (c) there shall have occurred a
default (other than as described in clause (a) above) that materially impairs
the value of the Mortgaged Property as security for the Mortgage Loan or
otherwise materially adversely affects the interests of Certificateholders
and that continues unremedied for the applicable grace period under the terms
of the Mortgage Loan (or, if no grace period is specified, for 30 days); (d)
a decree or order under any bankruptcy, insolvency or similar law shall have
been entered against the related Borrower and such decree or order shall have
remained in force, undischarged or unstayed for a period for 60 days; (e) the
related borrower shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency or similar proceedings of or
relating to such related Borrower or of or relating to all or substantially
all of its property; (f) the related Borrower shall admit in writing its
inability to pay its debts generally as they become due, file a petition to
take advantage of any applicable insolvency or reorganization statute, make
an assignment for the benefit of its creditors, or voluntarily suspend
payment of its obligations; (g) the Master Servicer shall have received
notice of the commencement of foreclosure or similar proceedings with respect
to the
S-312
<PAGE>
related Mortgaged Property; or (h) the Borrower shall be materially
delinquent with respect to payment of insurance premiums or property taxes,
including making escrow payments for the payment of insurance premiums or
property taxes. In the case of the Copley Loan, the Special Servicer will be
responsible for servicing and administering the Copley Loan on the earliest
of (w) the date of acceleration of the Copley Loan, (x) the date on which
payment or material performance under the Copley Class A Note, the Copley
Class B Note or related loan documents has been delinquent for 60 days, (y)
the date on which any payment at maturity on the Copley Loan becomes
delinquent or (z) the occurrence of a bankruptcy Event of Default under the
Copley Loan.
In the event of any of the foregoing servicing transfers occurs with
respect to any Mortgage Loan, the Master Servicer is required to use its
reasonable efforts to cause the transfer of its servicing responsibilities
with respect thereto to the Special Servicer within five business days.
Notwithstanding such transfer, the Master Servicer will continue to receive
payments on such Mortgage Loan (including amounts collected by the Special
Servicer), to make certain calculations with respect to such Mortgage Loan,
and to make remittances (including, if necessary, Advances) and prepare
certain reports to the Trustee with respect to such Mortgage Loan. If title
to the related Mortgaged Property is acquired by the Trust Fund (upon
acquisition, an "REO Property"), whether through foreclosure, deed in lieu of
foreclosure or otherwise, the Special Servicer will continue to be
responsible for the operation and management thereof. Mortgage Loans serviced
by a Special Servicer are referred to herein as "Specially Serviced Mortgage
Loans" and, together with any REO Properties, constitute "Specially Serviced
Trust Fund Assets." If the Special Servicer is not the Master Servicer, the
Master Servicer will have no responsibility for the Special Servicer's
performance of its duties under the Pooling and Servicing Agreement.
A Mortgage Loan (other than the Copley Loan) will cease to be a Specially
Serviced Mortgage Loan (and will become a "Corrected Mortgage Loan" as to
which the Master Servicer will re-assume servicing responsibilities):
(i) with respect to the circumstances described in clause (a) of the
second preceding paragraph, when the related Borrower has made three
consecutive full and timely Monthly Payments under the terms of such
Mortgage Loan (as such terms may be changed or modified in connection with
a bankruptcy or similar proceeding involving the related Borrower or by
reason of a modification, waiver or amendment granted or agreed to by the
Special Servicer);
(ii) with respect to any of the circumstances described in clauses (b),
(d), (e) and (f) of the second preceding paragraph, when such
circumstances cease to exist in the good faith, reasonable judgment of the
Special Servicer, but, with respect to any bankruptcy or insolvency
proceedings described in clauses (d), (e) and (f), no later than the entry
of an order or decree dismissing such proceeding;
(iii) with respect to the circumstances described in clause (c) and (h)
of the second preceding paragraph, when such default is cured; and
(iv) with respect to the circumstances described in clause (g) of the
second preceding paragraph, when such proceedings are terminated;
so long as at that time no circumstance identified in such clauses (a)
through (h) exists that would cause the Mortgage Loan to continue to be
characterized as a Specially Serviced Mortgage Loan.
As and to the extent described herein under "--Advances," the Master
Servicer will be entitled to receive interest, at the Reimbursement Rate, on
any Advances made by it and on any reimbursable servicing expenses incurred
by it. Such interest will compound annually and will be paid,
contemporaneously with the reimbursement of the related Advance or servicing
expense, from general collections on the Mortgage Loans then on deposit in
the Certificate Account.
The principal compensation to be paid to the Special Servicer in respect
of its special servicing activities will be the Special Servicing Fee and,
under the circumstances described herein, Principal Recovery Fees. The
"Special Servicing Fee" (except with respect to the Copley Loan) will accrue
at a rate (the "Special Servicing Fee Rate") equal to % per annum and will
be computed on the basis of the same principal amount and for the same period
respecting which any related interest payment on the
S-313
<PAGE>
related Specially Serviced Mortgage Loan is computed. The Special Servicing
Fee with respect to the Copley Loan will be equal to % per annum on the
monthly principal balance of the Copley Loan. However, earned Special
Servicing Fees will be payable out of general collections on the Mortgage
Loans then on deposit in the Certificate Account. The Special Servicing Fee
with respect to any Specially Serviced Mortgage Loan will cease to accrue if
such loan is liquidated or becomes a Corrected Mortgage Loan. The Special
Servicer will be entitled to a "Principal Recovery Fee" with respect to each
Specially Serviced Trust Fund Asset (other than the Copley Loan), which
Principal Recovery Fee generally will be in an amount equal to % of all
amounts received while such Mortgage Loan was a Specially Serviced Mortgage
Loan in respect thereof and allocable as a recovery of principal. However, no
Principal Recovery Fee will be payable in connection with, or out of
Liquidation Proceeds (as defined in the Prospectus) resulting from, the
purchase of any Specially Serviced Trust Fund Asset or Corrected Mortgage
Loan (i) by a Mortgage Loan Seller (as described herein under "DESCRIPTION OF
THE MORTGAGE POOL--Assignment of the Mortgage Loans; Repurchases" and
"--Representations and Warranties; Repurchases," (ii) by the Master Servicer
or the Depositor as described herein under "DESCRIPTION OF THE
CERTIFICATES--Termination" or (iii) in certain other limited circumstances
set forth in the Pooling and Servicing Agreement. In the case of the Copley
Loan, the Special Servicer will be entitled to % of the proceeds of any
liquidation of the Copley Loan or REO disposition with respect thereto. As
additional servicing compensation, the Special Servicer will be entitled to
retain all assumption fees, modification fees and late payment charges
received on or with respect to the Specially Serviced Mortgage Loans.
THE CONTROLLING CLASS REPRESENTATIVE
The Controlling Class Representative will be entitled to advise the
Special Servicer with respect to the following actions of the Special
Servicer, and the Special Servicer will not be permitted to take any of the
following actions as to which the Controlling Class Representative has
objected in writing within ten business days of being notified thereof
(provided that if such written objection has not been received by the Special
Servicer within such ten business days, then the Controlling Class
Representative's approval will be deemed to have been given):
(i) any foreclosure upon or comparable conversion (which may include
acquisition of an REO Property) of the ownership of properties securing
such of the Specially Serviced Mortgage Loans as come into and continue in
default;
(ii) any modification of a monetary term of a Specially Serviced Mortgage
Loan other than a modification consisting of the extension of the maturity
date of a Specially Serviced Mortgage Loan for one year or less;
(iii) any proposed sale of a Specially Serviced Mortgage Loan or REO
Property (other than in connection with the termination of the Trust Fund
as described under "DESCRIPTION OF THE CERTIFICATES--Termination" herein);
(iv) any determination to bring an REO Property into compliance with
applicable environmental laws;
(v) any acceptance of substitute or additional collateral for a Specially
Serviced Mortgage Loan;
(vi) any waiver of a "due-on-sale" or "due-on-encumbrance" clause; and
(vii) any acceptance of an assumption agreement releasing a borrower from
liability under a Specially Serviced Mortgage Loan.
In addition, except in the case of the Copley Loan, the Controlling Class
Representative may direct the Special Servicer to take or to refrain from
taking, such other action as the Controlling Class Representative may deem
advisable or as to which provision is otherwise made in the Pooling and
Servicing Agreement; provided that no such direction and no objection
contemplated by the prior paragraph may require or cause the Special Servicer
to violate any provision of the Pooling and Servicing Agreement, including
the Special Servicer's obligation to act in accordance with the servicing
standards described under "--General" above, expose the Master Servicer, the
Special Servicer, the Trust Fund or
S-314
<PAGE>
the Trustee to liability, or materially expand the scope of the Special
Servicer's responsibilities under the Pooling and Servicing Agreement. Any
out-of-pocket expenses incurred by the Special Servicer in connection with
its obtaining the approval of the Controlling Class Representative shall be
treated as an Advance and the Special Servicer shall be entitled to
reimbursement in respect thereof.
LIMITATION ON LIABILITY OF CONTROLLING CLASS REPRESENTATIVE
The Controlling Class Representative will have no liability to the
Certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Pooling and Servicing Agreement, or
for errors in judgment; provided, however, that the Controlling Class
Representative will not be protected against any liability which would
otherwise be imposed by reason of willful misfeasance, bad faith or gross
negligence in the performance of duties or by reason of reckless disregard of
obligations or duties. By its acceptance of a Certificate, each
Certificateholder confirms its understanding that the Controlling Class
Representative may take actions that favor the interests of one or more
Classes of the Certificates over other Classes of the Certificates, and that
the Controlling Class Representative may have special relationships and
interests that conflict with holders of some Classes of the Certificates and,
absent willful misfeasance, bad faith or gross negligence on the part of the
Controlling Class Representative, each Certificateholder agrees to take no
action against the Controlling Class Representative or any of its officers,
directors, employees, principals or agents as a result of such a special
relationship or conflict.
ENFORCEMENT OF "DUE-ON-SALE" AND "DUE-ON-ENCUMBRANCE" CLAUSES
The Master Servicer or the Special Servicer, as applicable, will be
obligated to enforce the Trustee's rights under the "due-on-sale" clause in
the related Mortgage Loan documents to accelerate the maturity of the related
Mortgage Loan, unless such provision is not enforceable under applicable law
or such enforcement is reasonably likely to result in meritorious legal
action by the related borrower or to the extent the Master Servicer or the
Special Servicer, as applicable, acting in accordance with the servicing
standard described herein, determines that such enforcement is not in the
best interests of the Trust Fund. A "due-on-sale" or "due-on-encumbrance"
clause may, under certain circumstances, be unenforceable against a borrower
that is a debtor in a case under the Bankruptcy Code.
If applicable law prohibits the enforcement of a "due-on-sale" clause or
the Master Servicer or Special Servicer is (i) otherwise prohibited from
taking such action as described in the preceding paragraph or (ii) determines
that such enforcement is not in the best interests of the Trust Fund and, as
a consequence, a Mortgage Loan is assumed, (x) the original borrower may be
released from liability for the unpaid principal balance of the related
Mortgage Loan and interest thereon at the applicable Mortgage Rate during the
remaining term of such Mortgage Loan, (y) the Master Servicer may accept
payments in respect of the Mortgage Loan from the new owner of the Mortgaged
Property and (z) the Master Servicer or the Special Servicer, as applicable,
may enter into an assumption agreement with a new purchaser whereby the new
owner of the Mortgaged Property will be substituted as the borrower and the
original borrower released, so long as (to the extent permitted by law) the
new owner satisfies the underwriting requirements customarily imposed by the
Master Servicer or the Special Servicer, as applicable, as a condition to its
approval of a borrower on a new mortgage loan substantially similar to such
Mortgage Loan. In the event a Mortgage Loan is assumed as described in the
preceding sentences, the Trustee, the Master Servicer and the Special
Servicer, will not permit any modification of such Mortgage Loan other than
as described below under "--Amendments, Modifications and Waivers." The
Master Servicer or Special Servicer, as applicable, will be entitled to
retain as additional servicing compensation any assumption fees paid by the
original borrower or the new owner in connection with such assumption. See
"CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS--Enforceability of Certain
Provisions--Due-on-Sale Provisions" in the Prospectus. A new owner of the
Mortgaged Property may be substituted or a junior or senior lien allowed on
the Mortgaged Property, without the consent of the Master Servicer, the
Special Servicer or the Trustee in a bankruptcy proceeding involving the
Mortgaged Property.
If any Mortgage Loan contains a provision in the nature of a
"due-on-encumbrance" clause, which by its terms (i) provides that such
Mortgage Loan will (or may at the related mortgagee's option) become
S-315
<PAGE>
due and payable upon the creation of any lien or other encumbrance on such
Mortgaged Property or (ii) requires the consent of the related mortgagee to
the creation of any such lien or other encumbrance on such Mortgaged
Property, then, for so long as such Mortgage Loan is included in the Trust
Fund, the Master Servicer or the Special Servicer, as applicable, on behalf
of the Trust Fund, will enforce such provision and in connection therewith
will (x) accelerate the payments due on such Mortgage Loan or (y) withhold
its consent to the creation of any such lien or other encumbrance, as
applicable, except, in each case, to the extent that the Master Servicer or
the Special Servicer, as applicable, acting in accordance with the applicable
servicing standard, determines that such enforcement would not be in the best
interests of the Trust Fund. Notwithstanding the foregoing, the Master
Servicer or the Special Servicer, as applicable, may forbear from enforcing
any "due-on-encumbrance" provision in connection with any junior or senior
lien on the Mortgaged Property imposed in connection with any bankruptcy
proceeding involving the Mortgaged Property.
INSPECTIONS
The Master Servicer (or the Special Servicer with respect to Specially
Serviced Mortgage Loans or REO Property) will be 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 in any
event, (i) the Master Servicer or the Special Servicer, as applicable, will
(at its own expense) inspect each Mortgaged Property at least once every 12
months with the first such inspection being completed on or prior to December
1998, unless each of the Rating Agencies has confirmed in writing that a
longer period between inspections (which may not exceed 24 months) will not
result, in and of itself, in a downgrading, withdrawal or qualification of
the rating then assigned by such Rating Agency to any Class of the
Certificates, and (ii) if any Monthly Payment becomes more than 60 days
delinquent (without giving effect to any grace period permitted under the
related Note or Mortgage) the Special Servicer (at its own expense) will
inspect each related Mortgaged Property as soon as practicable thereafter.
REALIZATION UPON MORTGAGE LOANS
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
S-316
<PAGE>
hazardous materials are present for which such action could be required,
after consultation with an environmental consultant, it would be in the best
economic interest of the Trust Fund to take such actions with respect to the
affected Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed-in-lieu of foreclosure, the deed or certificate of
sale will be issued to the Trustee, or to its nominee (which shall not
include the Master Servicer or the Special Servicer) or a separate trustee or
co-trustee on behalf of the Trustee as the holder of the REMIC I Certificates
and the holders of Certificates. Notwithstanding any such acquisition of
title and cancellation of the related Mortgage Loan, such Mortgage Loan will
be considered to be a Mortgage Loan held in the Trust Fund until such time as
the related REO Property is sold by the Trust Fund and will be reduced by Net
REO Proceeds allocated to principal.
If the Trust Fund acquires a Mortgaged Property by foreclosure or
deed-in-lieu of foreclosure upon a default of a Mortgage Loan, the Pooling
and Servicing Agreement will provide 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 will also require that any such Mortgaged
Property be managed and operated by an "independent contractor," within the
meaning of applicable Treasury regulations, who furnishes or renders services
to the tenants of such Mortgaged Property, unless the Special Servicer
provides the Trustee with an opinion of counsel that the operation and
management of the Mortgaged Property other than through an independent
contractor will not cause such Mortgaged Property to fail to qualify as
"foreclosure property" (which opinion will be an expense of the Trust Fund).
Generally, REMIC I will not be taxable on income received with respect to the
Mortgaged Property to the extent that it constitutes "rents from real
property," within the meaning of Code Section 856(c)(3)(A) and Treasury
regulations thereunder. "Rents from real property" do not include the portion
of any rental based on the net income or gain of any tenant or sub-tenant. NO
DETERMINATION HAS BEEN MADE WHETHER RENT ON ANY OF THE MORTGAGED PROPERTIES
MEETS THIS REQUIREMENT. "Rents from real property" include charges for
services customarily furnished or rendered in connection with the rental of
real property, whether the charges are separately stated. Services furnished
to the tenants of a particular building will be considered as customary if,
in the geographic market in which the building is located, tenants in
buildings that are of a similar class are customarily provided with the
service. NO DETERMINATION HAS BEEN MADE WHETHER THE SERVICES FURNISHED TO THE
TENANTS OF THE MORTGAGED PROPERTIES ARE "CUSTOMARY" WITHIN THE MEANING OF
APPLICABLE REGULATIONS. It is therefore possible that a portion of the rental
income with respect to a Mortgaged Property owned by the Trust Fund,
presumably allocated based on the value of any non-qualifying services, would
not constitute "rents from real property." In addition to the foregoing, any
net income from a trade or business operated or managed by an independent
contractor on a Mortgaged Property owned by REMIC I, including but not
limited to a skilled nursing care business, will not constitute "rents from
real property." Any of the foregoing types of income may instead constitute
"net income from foreclosure property," which would be taxable to REMIC I at
the highest marginal federal corporate rate (currently 35%; however, phase
out rates of 39% for taxable income between $100,000 and $335,000 and 38% for
taxable income between $15,000,000 and $18,333,333 apply) and may also be
subject to state or local taxes. Any such taxes would be chargeable against
the related income for purposes of determining the Net REO Proceeds available
for distribution to holders of Certificates. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of the REMIC and its Certificate 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
S-317
<PAGE>
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 not an Interested Person, or is determined to be such a
price by the Trustee (which may be based upon updated independent appraisals
received by the Trustee or the Special Servicer, as applicable), if the
highest offeror is an Interested Person; provided, however, that any offer by
an Interested Person in the amount of the Repurchase Price shall be deemed to
be a fair price. "Interested Person" means the Depositor, the Master
Servicer, the Special Servicer, the Trustee, any borrower or property manager
of a Mortgaged Property, an independent contractor engaged by the Special
Servicer to manage or operate an REO Property or any affiliate of any of the
foregoing. Notwithstanding anything to the contrary herein, neither the
Trustee, in its individual capacity, nor any of its affiliates may offer for
or purchase any Specially Serviced Mortgage Loan or any REO Property. In
addition, the Special Servicer may accept an offer that is not the highest
offer if it determines, in accordance with the servicing standard stated in
the Pooling and Servicing Agreement, that acceptance of such offer would be
in the best interests of the holders of Certificates (for example, if the
prospective buyer making the lower offer is more likely to perform its
obligations, or the terms offered by the prospective buyer making the lower
offer are more favorable).
Special Procedures with Respect to Foreclosure of Copley Place Loan. In
the event that a Payment Default or any other Event of Default under the
Copley Mortgage or other Loan Documents has occurred and is continuing for a
period of two months, or if a Maturity Default has occurred with respect to
the Copley Place Loan, and if the Copley Sub-Servicer, the Trust Fund (acting
through the Master Servicer) and the Class B Noteholder are unable to reach
agreement with respect to the appropriate course of action with respect
thereto, the Class B Noteholder may elect, by written notice to the Servicer
and the Trustee, to either (i) require the Copley Sub-Servicer to commence
foreclose proceedings as soon as practicable or (ii) to purchase from the
Trust Fund the Class A Note and the Trust Fund's interest in the Copley Loan.
In the event that an Event of Default with respect to the Copley Place Loan
shall have occurred and be continuing for a period in excess of five months
(in the absence of an election by Class B Noteholder during such period), and
if the Copley Sub-Servicer, the Trust Fund (acting through the Master
Servicer) and the Class B Noteholder are unable to reach agreement with
respect to the appropriate course of action, the Trust Fund (acting through
the Master Servicer) is required to make written demand on the Copley
Sub-Servicer and the Class B Noteholder for the commencement of foreclosure
proceedings which shall be commenced on the ninetieth day (or as soon
thereafter as practicable) following the date of the demand thereof by the
Trust Fund (acting through the Master Servicer). The Copley Sub-Servicer is
required to thereafter commence foreclosure proceedings unless the Class B
Noteholder shall irrevocably elect in writing prior to such ninetieth day to
purchase from the Trust Fund the Class A Note and Trust Fund's interest in
the Copley Place Loan at a purchase price equal to the sum of (i) the
outstanding principal balance of the Copley Class A Note, (ii) unpaid
interest at the Class A Interest Rate to the date of purchase and (iii)
unless the loan-to-value ratio exceeds 115% or such purchase occurs on a day
on or after the Copley Maturity Date, a yield maintenance fee on the Class A
Note calculated using the formula set forth in the Copley Class A Note for
the calculation of the Note Prepayment Premium provided for therein. The
Class B Noteholder is required to effect such purchase within ten business
days after giving notice of its election to purchase. Upon the receipt of the
purchase price, the Trust Fund will be required to assign and deliver the
Copley Class A Note to the Class B Noteholder and to take all such actions as
are reasonably necessary or appropriate to effect the transfer of the Copley
Class A Note and the Trust Fund's interests in the Copley Loan to the Class B
Noteholder.
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 the per annum rate set forth below (the "Servicing Fee
Rate") on the then outstanding principal balance of such Mortgage Loan
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The Servicing Fee relating to each Mortgage Loan will be retained by the
Master Servicer from payments and collections (including Insurance Proceeds
and Liquidation Proceeds) in respect of such Mortgage Loan. The Master
Servicer will also be entitled to retain as additional servicing compensation
(i) all investment income earned on amounts on deposit in the Reserve
Accounts (to the extent consistent with applicable law and the related
S-318
<PAGE>
Mortgage Loan documents), the Collection Account and the Distribution
Account, (ii) all amounts collected with respect to the Mortgage Loans (that
are not Specially Serviced Mortgage Loans) in the nature of late payment
charges, late fees, NSF check charges (including with respect to Specially
Serviced Mortgage Loans), loan service transaction fees, extension fees,
demand fees, modification fees, assumption fees, beneficiary statement
charges and similar fees and charges (but not including any Prepayment
Premiums so long as the Class IO Notional Balance is greater than zero or
Default Interest), (iii) Financial and Lease Reporting Fees (with respect to
any Mortgage Loan that is not a Specially Serviced Mortgage Loan and to the
extent permitted under the related Mortgage Loan) and (iv) any Prepayment
Interest Surplus (to the extent not offset against any Prepayment Interest
Shortfall in accordance with the provisions of the Pooling and Servicing
Agreement).
If the Master Servicer is removed upon an Event of Default under the
Pooling and Servicing Agreement, the Master Servicer may, at its option,
retain for itself any or all of the Master Servicer's right, title and
interest in and to the Servicing Fees that are in excess of the amount of the
related Servicing Fees calculated using a per annum rate of 0.01% (such
excess, the "Retained Servicing Interest"). The holder of the Retained
Servicing Interest will be entitled to receive payment in respect of the
Retained Servicing Interest at such time and to the extent the Master
Servicer is entitled to receive payment of the Servicing Fees under the terms
and provisions of the Pooling and Servicing Agreement; provided, that the
Retained Servicing Interest may be reduced by the Trustee as necessary in the
event no qualified successor Master Servicer is willing to receive servicing
compensation consisting of the Servicing Fees subject to the Retained
Servicing Interest.
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.
The Servicing Fee Rate applicable to each Mortgage Loan will be as
follows:
SERVICING
MORTGAGE LOAN FEE RATE
- ------------------------------------ ---------------
1. Copley Place Loan................. .010%
2. Brookfield Loan................... .045%
3. Tower Realty Loan................. .045%
4. Franklin Mills Loan............... .045%
5. Franklin Mills Loan............... .045%
6. Newton Oldacre McDonald Loan ..... .045%
7. Newton Oldacre McDonald Loan ..... .045%
8. Biltmore Loan..................... .045%
9. Ritz Loan......................... .045%
10. Austin Loan...................... .045%
11. Shilo Inn Loan................... .010%(1)
12. Shilo Inn Loan................... .010%(1)
13. Farb Loans....................... .010%(1)
14. AAC Loans........................ .045%
15. AAC Loans........................ .045%
(1) In addition, KeyCorp Real Estate Capital Markets, Inc., Shilo Loan and
L.J. Melody, as subservicer of the Farb Loans, receive subservicing fees
of .050% and .060%, respectively.
S-319
<PAGE>
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. The right of the Special Servicer to modify, amend,
waive or otherwise give consents will also be subject to direction by the
Controlling Class Representative as described under "--Controlling Class
Representative". Neither Master Servicer nor the Special Servicer may agree
to any retroactive modification, amendment, waiver or consent. In the case of
the Copley Loan, any modification may be made only with the consent of the
Class B Noteholder.
THE TRUSTEE
LaSalle National Bank, a nationally chartered bank with its principal
offices in Chicago, Illinois, will act as Trustee pursuant to the Pooling and
Servicing Agreement. The Trustee's corporate trust office is located at 135
South LaSalle Street, Suite 1740, Chicago, Illinois 60603. As compensation
for its services, the Trustee will be entitled to receive, from general funds
on deposit in the Collection Account, the Trustee Fee. The "Trustee Fee" for
each Distribution Date will be equal to one-twelfth of the product of (a) the
Trustee Fee Rate and (b) the aggregate of the Certificate Balance of the
Sequential Pay Certificates immediately prior to such Distribution Date. The
"Trustee Fee Rate" will be a per annum rate equal to .005%.
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 unsecured debt rating categories, will be confirmed
in writing by each of the Rating Agencies that such appointment of such
successor fiscal agent will not result, in and of itself, in a downgrading,
withdrawal or qualification of the rating then assigned by such Rating Agency
to any Class of the Certificates. If no successor trustee and successor
fiscal agent is appointed within 30 days after the giving of such notice of
resignation, the resigning Trustee and departing Fiscal Agent may petition
any court of competent jurisdiction for appointment of a successor trustee
and successor fiscal agent.
The Depositor or the Master Servicer may remove the Trustee and the Fiscal
Agent if, among other things, the Trustee ceases to be eligible to continue
as such under the Pooling and Servicing Agreement or if at any time the
Trustee or the Fiscal Agent becomes incapable of acting, or is adjudged
bankrupt or insolvent, or a receiver of the Trustee or the Fiscal Agent or
its property is appointed or any public officer takes charge or control of
the Trustee or the Fiscal Agent or of its property. The holders of
Certificates evidencing a majority of the aggregate Voting Rights may remove
the Trustee and the Fiscal Agent upon written notice to the Master Servicer,
the Special Servicer, the Depositor, the Trustee and the Fiscal Agent. Any
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 unsecured debt rating categories, fiscal
agent will not become effective until acceptance of the appointment by the
successor trustee and, if necessary, fiscal agent.
Pursuant to the Pooling and Servicing Agreement, the Trustee will be
entitled to receive a monthly fee from the Master Servicer.
S-320
<PAGE>
The Trust Fund will indemnify the Trustee, the Fiscal Agent and their
respective directors, officers, employees, agents and affiliates against any
and all losses, liabilities, damages, claims or expenses (including
reasonable attorneys' fees) arising in respect of the Pooling and Servicing
Agreement or the Certificates (but only to the extent that they are expressly
reimbursable under the Pooling and Servicing Agreement or are unanticipated
expenses incurred by the REMICs) other than those resulting from the
negligence, misrepresentation, fraud, bad faith or willful misconduct of the
Trustee and those for which such indemnified persons are indemnified pursuant
to the last sentence of this paragraph. The Trustee will not be required to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties under the Pooling and Servicing Agreement,
or in the exercise of any of its rights or powers, if in the Trustee's
opinion the repayment of such funds or adequate indemnity against such risk
or liability is not reasonably assured to it. Each of the Master Servicer and
the Special Servicer will indemnify the Trustee, the Fiscal Agent and their
respective directors, officers, employees, agents and affiliates for similar
losses incurred related to the willful misconduct, fraud, misrepresentation,
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 negligent disregard of the Master Servicer's or the
Special Servicer's respective obligations and duties under the Pooling and
Servicing Agreement.
VOTING RIGHTS
At all times during the term of the Pooling and Servicing Agreement, 100%
of the voting rights for the series offered hereby (the "Voting Rights") will
be allocated among the respective Classes of Sequential Pay Certificates in
proportion to the Certificate Balances of those Classes. Voting Rights
allocated to a Class of Certificates will be allocated among the related
Certificateholders in proportion to the percentage interests in such Class
evidenced by their respective Certificates. The Class A-1, Class A-2 and
Class A-3 Certificates will be treated as one Class for determining the
Controlling Class of Sequential Pay Certificates. See "DESCRIPTION OF THE
CERTIFICATES--Voting Rights" in the Prospectus.
DUTIES OF THE TRUSTEE
The Trustee, the Fiscal Agent, the Special Servicer and Master Servicer
will make no representation as to the validity or sufficiency of the Pooling
and Servicing Agreement, the Certificates, this Prospectus Supplement or the
validity, enforceability or sufficiency of the Mortgage Loans or related
documents. The Trustee and the Fiscal Agent will not be accountable for the
use or application by the Depositor of any Certificates or of the proceeds of
such Certificates, or for the use of or application of any funds paid to the
Depositor, the Master Servicer or the Special Servicer in respect of the
Mortgage Loans, or any funds deposited in or withdrawn from the Collection
Account or the Distribution Account by the Depositor, the Master Servicer or
the Special Servicer, other than with respect to any funds held by the
Trustee.
If no Event of Default has occurred of which the Trustee has actual
knowledge and after the curing of all Events of Default that may have
occurred, the Trustee will be 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 will be required to examine such documents and
to determine whether they conform on their face to the requirements of the
Pooling and Servicing Agreement.
If the Master Servicer fails to make any required Advance, the Trustee, as
acting or successor Master Servicer, will be required to make such Advance to
the extent that such Advance is not deemed to be nonrecoverable. The Trustee
will be entitled to rely conclusively on any determination by the Master
Servicer that an Advance, if made, would be nonrecoverable. The Trustee will
be entitled to reimbursement for each Advance made by it in the same manner
and to the same extent as the Master Servicer. See "--Advances" herein.
THE FISCAL AGENT
ABN AMRO Bank N.V., a Netherlands banking corporation and the corporate
parent of the Trustee, will act as Fiscal Agent for the Trustee and will be
obligated to make any Advance required to be made,
S-321
<PAGE>
and not made, by the Trustee under the Pooling and Servicing Agreement,
provided that the Fiscal Agent will not be obligated to make any Advance that
it deems to be nonrecoverable. The Fiscal Agent will be entitled to rely
conclusively on any determination by the Master Servicer that an Advance, if
made, would not be recoverable. The Fiscal Agent will be entitled to
reimbursement for each Advance made by it in the same manner and to the same
extent as the Trustee and the Master Servicer. See "--Advances" herein.
In the event of the resignation or removal of the Trustee, the Fiscal
Agent will be entitled to resign. The initial Fiscal Agent is not obligated
to act in such capacity at any time that LaSalle National Bank is not the
Trustee. No resignation or removal of the Fiscal Agent will become effective
until a successor fiscal agent has assumed the Fiscal Agent's obligations and
duties under the Pooling and Servicing Agreement and it is confirmed in
writing by each of the Rating Agencies that the appointment of such successor
fiscal agent will not result, in and of itself, in a downgrading, withdrawal
or qualification of the rating then assigned by such Rating Agency to any
Class of the Certificates.
REPORTS TO CERTIFICATEHOLDERS; AVAILABLE INFORMATION
Monthly Reports. On each Distribution Date, the Trustee will forward by
mail to each Certificateholder, with copies to the Depositor, the Paying
Agent, the Underwriter, the Master Servicer and each Rating Agency, a
statement as to such distribution setting forth for each class:
(i) the Group 1 Principal Distribution Amount and the amount allocable to
principal, included in Available Funds;
(ii) the Group 2 Principal Distribution Amount and the amount allocable
to principal, included in Available Funds;
(iii) The Class Interest Distribution Amount distributable to such Class
and the amount of Available Funds allocable thereto, together with any
Class Interest Shortfall allocable to such Class;
(iv) The amount of any P&I Advances by the Master Servicer, the Trustee
or the Fiscal Agent included in the amounts distributed to the
Certificateholders;
(v) The Certificate Balance of each Class of Certificates after giving
effect to the distribution of amounts in respect of the applicable
Principal Distribution Amount on such Distribution Date;
(vi) Realized Losses and their allocation to the Certificate Balance of
any Class of Certificates;
(vii) The Scheduled Principal Balance of the Mortgage Loans as of the Due
Date preceding such Distribution Date;
(viii) The number and aggregate principal balance of Mortgage Loans (A)
delinquent one month, (B) delinquent two months, (C) delinquent three or
more months, (D) as to which foreclosure proceedings have been commenced
and (E) that otherwise constitute Specially Serviced Mortgage Loans, and,
with respect to each Specially Serviced Mortgage Loan, the amount of
Property Advances made during the related Collection Period, the amount of
the P&I Advances made on such Distribution Date, the aggregate amount of
Property Advances theretofore made that remain unreimbursed and the
aggregate amount of P&I Advances theretofore made that remain
unreimbursed;
(ix) With respect to any Mortgage Loan that became an REO Mortgage Loan
during the preceding calendar month, the principal balance of such
Mortgage Loan as of the date it became an REO Mortgage Loan;
(x) As of the Due Date preceding such Distribution Date, as to any REO
Property sold during the related Collection Period, the date on which the
Special Servicer made a Final Recovery Determination and the amount of the
proceeds of such sale deposited into the Collection Account, and the
aggregate amount of REO Proceeds and Net REO Proceeds (in each case other
than Liquidation Proceeds) and other revenues collected by the Special
Servicer with respect to each REO Property during the related Collection
Period and credited to the Collection Account, in each case identifying
such REO Property by name;
S-322
<PAGE>
(xi) The outstanding principal balance of each REO Mortgage Loan as of
the close of business on the immediately preceding Due Date and the
appraised value of the related REO Property per the most recent appraisal
obtained;
(xii) The amount of the servicing compensation paid to the Master
Servicer with respect to such Distribution Date, and the amount of the
additional servicing compensation that was paid to the Master Servicer
with respect to such Distribution Date;
(xiii) The amount of any Special Servicing Fee, Disposition Fee or
Workout Fee paid to the Special Servicer with respect to such Distribution
Date; and
(xiv) (A) The amount of Prepayment Premiums, if any, received during the
related Collection Period, and (B) the amount of Default Interest received
during the related Collection Period.
In the case of information furnished pursuant to subclauses (i), (ii),
(iii), (iv) and (xiv)(A) above, the amounts will be expressed as a dollar
amount in the aggregate for all Certificates of each applicable Class and for
each Class of Certificates for a denomination of $1,000 initial Certificate
Balance or Notional Balance.
Within a reasonable period of time after the end of each calendar year,
the Trustee will furnish to each person who at any time during the calendar
year was a holder of a Certificate (except for a Residual Certificate) a
statement containing the information set forth in subclauses (i) and (ii)
above, aggregated for such calendar year or applicable portion thereof during
which such person was a Certificateholder. Such obligation of the Trustee
will be deemed to have been satisfied to the extent that it provided
substantially comparable information pursuant to any requirements of the Code
as from time to time in force.
On each Distribution Date, the Trustee will forward to each holder of a
Residual Certificate a copy of the reports forwarded to the other
Certificateholders on such Distribution Date and a statement setting forth
the amounts, if any, actually distributed with respect to the Residual
Certificates on such Distribution Date.
Within a reasonable period of time after the end of each calendar year,
the Trustee will furnish to each person who at any time during the calendar
year was a holder of a Residual Certificate a statement setting forth the
amounts actually distributed with respect to such Certificate aggregated for
such calendar year or applicable portion thereof during which such person was
a Certificateholder. Such obligation of the Trustee will be deemed to have
been satisfied to the extent that it provided substantially comparable
information pursuant to any requirements of the Code as from time to time in
force.
In addition, the Trustee will forward to each Certificateholder any
additional information, if any, regarding the Mortgage Loans that the Master
Servicer or the Special Servicer, in its sole discretion, delivers to the
Trustee for distribution to the Certificateholders.
A Certificateholder or Certificate Owner may obtain certain information
contained in each Distribution Date Statement by calling the Trustee's ASAP
System at (312) 904-2200 and requesting statement number or such other
mechanism as the Trustee may have in place from time to time. Account numbers
on the Trustee's ASAP System may be obtained by calling (312) 904-2200 and
following the voice prompts for obtaining account numbers. Separately, bond
factor information may be obtained from the Trustee by calling (800)
246-5761. In addition, if the Depositor or Master Servicer so directs the
Trustee and on terms acceptable to the Trustee, the Trustee will make
available through its electronic bulletin board system on a confidential
basis, certain information related to the Mortgage Loans. The bulletin board
is located at (714) 282-3990. Those who have an account on the bulletin board
may retrieve the loan level data file for each transaction in the directory.
An account number may be obtained by typing "NEW" upon logging into the
bulletin board.
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
S-323
<PAGE>
identified by a Certificateholder as a prospective transferee and such other
persons deemed appropriate by the Master Servicer. Information contained in
LPAS regarding the composition of the Mortgage Pool and certain other
information about the Mortgage Pool deemed appropriate by the Master Servicer
will be updated periodically. Certificateholders should contact Brad Hauger,
at telephone number (816) 435-5175, for access to LPAS.
Other Available Information. The Master Servicer or the Special Servicer,
if applicable, will promptly give notice to the Trustee, who will provide a
copy to each Certificateholder, each Rating Agency, the Depositor, the
Underwriter and The Mortgage Loan Seller of (a) any notice from a borrower or
insurance company regarding an upcoming voluntary or involuntary prepayment
(including that resulting from a Casualty or Condemnation) of all or part of
the related Mortgage Loan (provided that a request by a borrower or other
party for a quotation of the amount necessary to satisfy all obligations with
respect to a Mortgage Loan will not, in and of itself, be deemed to be such
notice); and (b) of any other occurrence known to it with respect to a
Mortgage Loan or REO Property that the Master Servicer or the Special
Servicer determines would have a material effect on such Mortgage Loan or REO
Property, which notice will include an explanation as to the reason for such
material effect (provided that any extension of the term of any Mortgage Loan
will be deemed to have a material effect).
In addition to the other reports and information made available and
distributed to the Depositor, the Underwriter, the Trustee or the
Certificateholders pursuant to other provisions of the Pooling and Servicing
Agreement, the Master Servicer and the Special Servicer will, in accordance
with such reasonable rules and procedures as it may adopt (which may include
the requirement that an agreement governing the availability, use and
disclosure of such information, and which may provide indemnification to the
Master Servicer or the Special Servicer, as applicable, for any liability or
damage that may arise therefrom, be executed to the extent the Master
Servicer or the Special Servicer, as applicable, deems such action to be
necessary or appropriate), also make available any information relating to
the Mortgage Loans, the Mortgaged Properties or the borrower for review by
the Depositor, the Underwriter, the Trustee, the Certificateholders and any
other persons to whom the Master Servicer or the Special Servicer, as the
case may be, believes such disclosure is appropriate, in each case except to
the extent doing so is prohibited by applicable law or by any documents
related to a Mortgage Loan.
The Trustee will also make available during normal business hours, for
review by the Depositor, the Rating Agencies, any Certificateholder, the
Underwriter, any person identified to the Trustee by a Certificateholder as a
prospective transferee of a Certificate and any other persons to whom the
Trustee believes such disclosure is appropriate, the following items: (i) the
Pooling and Servicing Agreement, (ii) all monthly statements to
Certificateholders delivered since the closing date, (iii) all annual
statements as to compliance delivered to the Trustee and the Depositor and
(iv) all annual independent accountants' reports delivered to the Trustee and
the Depositor. The Master Servicer or the Special Servicer, as appropriate,
will make available at its offices during normal business hours, for review
by the Depositor, the Underwriter, the Trustee, the Rating Agencies, any
Certificateholder, any person identified to the Master Servicer or the
Special Servicer, as applicable, by a Certificateholder as a prospective
transferee of a Certificate any other persons to whom the Master Servicer or
the Special Servicer, as applicable, believes such disclosure is appropriate,
the following items: (i) the inspection reports prepared by or on behalf of
the Master Servicer or the Special Servicer, as applicable, in connection
with the property inspections conducted by the Master Servicer or the Special
Servicer, as applicable, (ii) any and all modifications, waivers and
amendments of the terms of a Mortgage Loan entered into by the Master
Servicer or the Special Servicer and (iii) any and all officer's certificates
and other evidence delivered to the Trustee and the Depositor to support the
Master Servicer's determination that any Advance was, or if made would be, a
Nonrecoverable Advance, in each case except to the extent doing so is
prohibited by applicable laws or by any documents related to a Mortgage Loan.
The Master Servicer, the Special Servicer and the Trustee will be permitted
to require payment (other than from any Rating Agency) of a sum sufficient to
cover the reasonable costs and expenses incurred by it in providing copies of
or access to any of the above information.
The Master Servicer will, on behalf of the Trust Fund, prepare, sign and
file with the Commission any and all reports, statements and information
respecting the Trust Fund that the Master Servicer or the
S-324
<PAGE>
Trustee determines are required to be filed with the Commission pursuant to
Sections 13(a) or 15(d) of the 1934 Act, each such report, statement and
information to be filed on or prior to the required filing date for such
report, statement or information. Notwithstanding the foregoing, the
Depositor will file with the Commission, within 15 days of the closing date,
a Form 8-K together with the Pooling and Servicing Agreement.
None of the Trustee, the Fiscal Agent, the Master Servicer and the Special
Servicer will be responsible for the accuracy or completeness of any
information supplied to it by a borrower or other third party for inclusion
in any notice or in any other report or information furnished or provided by
the Master Servicer, the Special Servicer or the Trustee hereunder, and the
Master Servicer, the Special Servicer, the Trustee and the Fiscal Agent will
be indemnified and held harmless by the Trust Fund against any loss,
liability or expense incurred in connection with any legal action relating to
any statement or omission or alleged statement or omission therein, including
any liability related to the inclusion of such information in any report
filed with the Commission.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, two separate "real estate mortgage
investment conduit" ("REMIC") elections will be made with respect to the
Trust Fund, creating two REMICs. Upon the issuance of the Offered
Certificates, Morrison & Hecker L.L.P. will deliver its opinion, generally to
the effect that, assuming compliance with all provisions of the Pooling and
Servicing Agreement, (i) each pool of assets with respect to which a REMIC
election is made will qualify as a REMIC under the Code and (ii) (a) the
Class A-1, Class A-2, Class A-3, Class A-4, each regular interest included in
the Class IO Certificates, Class B, Class C, Class D, Class E, Class F, Class
G, Class H and Class J 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.
Because they represent regular interests, the Regular Certificates
generally will be treated as newly originated debt instruments for federal
income tax purposes. Holders of such Classes of Certificates will be required
to include in income all interest on such Certificates in accordance with the
accrual method of accounting, regardless of a Certificateholder's usual
method of accounting. Except as discussed with respect to the Class IO
Certificates, the Certificates are not expected to be treated for federal
income tax reporting purposes as having been issued with original issue
discount ("OID"). The Class IO Components constitute interest only Classes.
The Trustee intends to treat the Class IO Components as having no "qualified
stated interest." Accordingly, the Class IO Components will be considered to
be issued with OID in an amount equal to the excess of all distributions of
interest expected to be received thereon over its issue price (including
accrued interest, if any, unless the holder elects on its federal income tax
return to exclude such amount from the issue price and to recover it on the
first Distribution Date). Any "negative" amounts of OID on the Class IO
Certificates attributable to rapid prepayments with respect to the Mortgage
Loans will not be deductible currently, but may be offset against future
positive accruals of OID, if any. However, the holder of a Class IO
Certificate may be entitled to a loss deduction to the extent it becomes
certain that such holder will not recover a portion of its basis in such
Certificate. No representation is made as to the timing, amount or character
of such loss, if any. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation
of Regular Interests--Interest and Acquisition Discount" in the Prospectus.
For the purposes of determining the rate of accrual of market discount, OID
and premium for federal income tax purposes, it has been assumed that the
Mortgage Loans will prepay at the rate of 0% 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 , Class , Class , and Class
Certificates will qualify as "variable rate instruments" under the OID
Regulations, it will be assumed for purposes of determining the OID thereon
that such Certificates so qualify. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of Regular Interests--Interest and Acquisition
Discount" in the Prospectus.
S-325
<PAGE>
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 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 underlying assets of the REMIC are assets described in Section
7701(a)(19) of the Code. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of the REMIC and its Certificate Holders" in the
Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of the REMIC" in the Prospectus.
DUE TO THE COMPLEXITY OF THESE RULES AND THE CURRENT UNCERTAINTY AS TO THE
MANNER OF THEIR APPLICATION TO THE TRUST FUND AND CERTIFICATEHOLDERS, IT IS
PARTICULARLY IMPORTANT THAT POTENTIAL INVESTORS CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THEIR ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE CERTIFICATES.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and Section 4975 of the Code impose certain restrictions on (a) employee
benefit plans (as defined in Section 3(3) of ERISA) that are subject to Title
I of ERISA, (b) plans (as defined in Section 4975 of the Code) that are
subject to Section 4975 of the Code, (c) entities whose underlying assets
include plan assets by reason of a plan's investment in such entities (each
of (a), (b), and (c) a "Plan") and (d) persons who have certain specified
relationships to such Plans ("Parties in Interest" under ERISA and
"Disqualified Persons" under the Code). Moreover, based on the reasoning of
the United States Supreme Court in John Hancock Mutual Life Insurance Co. v.
Harris Trust and Savings Bank, 114 S. Ct. 517 (1993), an insurance company's
general account may be deemed to include assets of the Plans investing in the
general account (e.g., through the purchase of an annuity contract), and the
insurance company might be treated as a Party in Interest with respect to
such Plans by virtue of such investment. ERISA also imposes certain duties on
persons who are fiduciaries of Plans subject to ERISA, and both ERISA and the
Code prohibit certain transactions involving "plan assets" between a Plan and
Parties in Interest or Disqualified Persons with respect to such Plan.
Violation of these rules may result in the imposition of an excise tax or
penalty. Under ERISA, any person who exercises any authority or control
respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant).
Neither ERISA nor the Code defines the term "plan assets." However, the
Department of Labor ("DOL") has issued a final regulation (29 C.F.R. Section
2510.3-101) concerning the definition of what constitutes the assets of a
Plan. This regulation provides that, as a general rule, the underlying assets
and properties of corporations, partnerships, trusts and certain other
entities in which a Plan makes an "equity" investment will be deemed for
certain purposes, including the prohibited transaction provisions of ERISA
and Section 4975 of the Code, to be assets of the investing Plan unless
certain exceptions apply.
Under the terms of the regulation, if the assets of the Trust Fund were
deemed to constitute Plan assets by reason of a Plan's investment in an
Offered Certificate, such Plan assets would include an undivided interest in
the Mortgage Loans and any other assets of the Trust Fund, which in turn
could have
S-326
<PAGE>
the consequence that certain aspects of such investment, including (i) the
deemed extension of credit by such Plan to the Borrowers and (ii) the
operation of the Trust Fund might give rise to or result in prohibited
transactions under ERISA and Section 4975 of the Code.
CLASS A-1, CLASS A-2, CLASS A-3, CLASS A-4 AND CLASS IO CERTIFICATES
Plan investors considering the acquisition of the Class A-1, Class A-2,
Class A-3, Class A-4 and Class IO Certificates should note that the DOL has
granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated an
administrative exemption (Prohibited Transaction Exemption 90-29 ("DOL
Exemption 90-29")) from certain of the prohibited transaction rules of ERISA
and Section 4975 of the Code with respect to the initial purchase, the
holding and the subsequent resale by Plans of certain certificates
representing interests in asset-backed pass-through trusts that consist of
certain receivables, loans and other obligations that meet the conditions and
requirements of DOL Exemption 90-29. The obligations covered by DOL Exemption
90-29 include obligations such as the Mortgage Loans. The type of
certificates covered by DOL Exemption 90-29, however, is limited to
non-subordinated certificates, such as the Class A-1, Class A-2, Class A-3,
Class A-4 and Class IO Certificates, and does not include the remaining
Classes of Certificates. In addition, DOL Exemption 90-29 requires that
certain other conditions (certain of which are described below) be met.
Among the conditions that must be satisfied for DOL Exemption 90-29 to
apply are the following.
1. The acquisition of the Class A-1, Class A-2, Class A-3, Class A-4 and
Class IO Certificates by a Plan is on terms (including the price for such
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 the Class A-1, Class A-2, Class
A-3, Class A-4 and Class IO Certificates acquired by the Plan are not
subordinated to the rights and interests evidenced by other certificates
evidencing interests in the Trust Fund;
3. The Class A-1, Class A-2, Class A-3, Class A-4 and Class IO
Certificates acquired by the Plan have received a rating at the time of
such acquisition that is in one of the three highest generic rating
categories from either Standard & Poor's Ratings Services ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Credit Rating Co.
("D&P") or Fitch Investors Service, L.P. ("Fitch");
4. The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Class A-1, Class A-2, Class A-3,
Class A-4 and Class IO Certificates represents not more than reasonable
compensation for underwriting such Certificates. The sum of all payments
made to and retained by the Depositor or other sponsor of the Trust Fund
pursuant to the sale of the Mortgage Loans to the Trust Fund represents
not more than the fair market value of the Mortgage Loans. The sum of all
payments made to and retained by the Servicer or Special Servicer
represents not more than reasonable compensation for the Servicer's or
Special Servicer's services under the Pooling and Servicing Agreement and
reimbursement of the Servicer's or Special Servicer's reasonable expenses
in connection therewith;
5. The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
6. The Plan investing in the Class A-1, Class A-2, Class A-3, Class A-4
and Class IO Certificates is an "accredited investor" as defined in Rule
501(a)(1) of Regulation D of the Securities and Exchange Commission under
the Securities Act of 1933.
Because the rights and interests evidenced by the Class A-1, Class A-2,
Class A-3, Class A-4 and Class IO Certificates are not subordinated to the
rights and interests evidenced by other Certificates of the Trust Fund, the
second general condition set forth above is satisfied. It is a condition of
the issuance of the Class A-1, Class A-2, Class A-3, Class A-4 and Class IO
Certificates that they be rated in the highest rating category by Moody's. A
fiduciary of a Plan contemplating purchasing a Class A-1, Class A-2, Class
A-3, Class A-4 or Class IO Certificate (other than pursuant to the original
issuance of the Class A-1, Class A-2, Class A-3 and Class IO Certificates)
must make its own determination that at the time of such acquisition, the
Class A-1, Class A-2, Class A-3, Class A-4 and Class IO Certificates continue
to satisfy
S-327
<PAGE>
the third general condition set forth above. The Depositor and the Servicer
expect that the fifth general condition set forth above will be satisfied
with respect to the Class A-1, Class A-2, Class A-3, Class A-4 and Class IO
Certificates. A fiduciary of a Plan contemplating the purchase of a Class
A-1, Class A-2, Class A-3, Class A-4 or Class IO Certificate must make its
own determination that the first, fourth and sixth general conditions set
forth above will be satisfied with respect to the Class A-1, Class A-2, Class
A-3, Class A-4 and Class IO Certificates.
The Trust also must meet the following requirements:
a. the corpus of the Trust must consist solely of assets of the type
which have been included in other investment pools;
b. certificates evidencing interests in such other investment pools must
have been rated in one of the three highest rating categories of S&P,
Moody's, Duff & Phelps or Fitch for at least one year prior to the Plan's
acquisition of Class A-1, Class A-2, Class A-3, Class A-4 or Class IO
Certificates; 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 Class A-1, Class A-2, Class A-3, Class
A-4 and Class IO Certificates.
If certain other specific conditions of DOL Exemption 90-29 are also
satisfied, DOL Exemption 90-29 should provide relief from the restrictions
imposed by Sections 406(b)(1) and (b)(2) of ERISA and the taxes imposed by
Section 4975(a) and (b) of the Code by reason of Section 4975(c)(1)(E) of the
Code in connection with the direct or indirect sale, exchange, transfer or
holding of Class A-1, Class A-2, Class A-3, Class A-4 and Class IO
Certificates by or to a Plan (other than a Plan sponsored or maintained by
any member of the Restricted Group) when the person who has discretionary
authority or renders investment advice with respect to the Investment of Plan
assets in such Classes of Certificates is (a) an obligor with respect to 5%
or less of the fair market value of the Mortgage Loans or (b) an affiliate of
such person. The applicable conditions include the following:
(i) Solely in the case of an acquisition of certificates in connection
with the initial issuance of the Certificates, at least 50 percent of each
class of Certificates in which Plans have invested is acquired by persons
independent of the members of the Restricted Group and at least 50 percent
of the aggregate interest in the Trust Fund is acquired by persons
independent of the Restricted Group;
(ii) A Plan's investment in each Class of Certificates does not exceed 25
percent of all of the Certificates of that Class outstanding at the time
of the acquisition; and
(iii) Immediately after the acquisition of the Certificates, no more than
25 percent of the assets of a Plan with respect to which the person has
discretionary authority or renders investment advice are invested in
Certificates representing an interest in a trust containing assets sold or
serviced by the same entity.
The Depositor expects that such conditions will be satisfied with respect
to the initial issuance of the Class A-1, Class A-2, Class A-3, Class A-4 and
Class IO Certificates.
DOL Exemption 90-29 also applies to transactions in connection with the
servicing, management and operation of the Trust, provided that, in addition
to the general requirements described above, (a) such transactions are
carried out in accordance with the terms of a binding pooling and servicing
agreement and (b) the pooling and servicing agreement is provided to, or
described in all material respects in the Offering Circular provided to
investing Plans before their purchase of Class A Certificates issued by the
Trust. The Pooling and Servicing Agreement is a pooling and servicing
agreement as defined in DOL Exemption 90-29. All transactions relating to the
servicing, management and operations of the Trust Fund will be carried out in
accordance with the Pooling and Servicing Agreement. See "DESCRIPTION OF THE
POOLING AND SERVICING AGREEMENT."
It should be noted that DOL Exemption 90-29 does not apply to purchases of
Class A-1, Class A-2, Class A-3, Class A-4 and Class IO Certificates by Plans
(i) sponsored by the Depositor, the Underwriter,
S-328
<PAGE>
the Trustee, the Servicer, the Special Servicer, the Borrowers, any entity
deemed to be a "sponsor" of the Trust as such term is defined in the
exemption, or any affiliate of any such party (the "Restricted Group") or
(ii) over whose assets any of the Borrowers or any of their affiliates has
investment authority or control.
Any Plan fiduciary considering whether to purchase a Class A Certificate
on behalf of a Plan should consult with its counsel regarding the
applicability of DOL Exemption 90-29 and other relevant issues.
OFFERED CERTIFICATES OTHER THAN CLASS A-1, CLASS A-2, CLASS A-3, CLASS A-4
AND CLASS IO CERTIFICATES
Because the Class B, Class C, Class D and Class E Certificates (the
"Subordinated Certificates") are subordinated to the Class A-1, Class A-2,
Class A-3, Class A-4 and Class IO Certificates, DOL Exemption 90-29 will not
apply to the purchase of the Subordinated Certificates by or on behalf of a
Plan. In general, the Subordinated Certificates may not be purchased by, on
behalf of, or using the assets of any Plan. However, the Subordinated
Certificates may be acquired by an insurance company general account that
satisfies the relevant conditions of Sections I(a), III and IV of DOL
Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60").
Each initial investor that purchases a Subordinated Certificate or
interest therein and each subsequent transferee thereof will be deemed to
represent and warrant that either (a) it is not purchasing such Certificates
with the assets of any Plan or (b) part or all of the assets to be used to
purchase such Certificates constitutes assets of an insurance company general
account and PTCE 95-60 applies such that the use of such assets to acquire
and hold such Certificates does not and will not constitute a non-exempt
prohibited transaction for purposes of ERISA and Section 4975 of the Code.
SPECIAL CONSIDERATIONS FOR INSURANCE COMPANY GENERAL ACCOUNTS
It should be noted that the Small Business Job Protection Act of 1996
added new Section 401(c) of ERISA relating to the status of the assets of
insurance company general accounts under ERISA and Section 4975 of the Code.
Pursuant to Section 401(c), the Department of Labor is required to issue
final regulations (the "General Account Regulations") not later than December
3l, 1997 with respect to insurance policies issued on or before December 31,
1998 that are supported by an insurer's general account. The General Account
Regulations are to provide guidance on which assets held by the insurer
constitute "plan assets" for purposes of the fiduciary responsibility
provisions of ERISA and Section 4975 of the Code. Section 401(c) also
provides that, except in the case of avoidance of the General Account
Regulation and actions brought by the Secretary of Labor relating to certain
breaches of fiduciary duties that also constitute breaches of state or
federal criminal law, until the date that is 18 months after the General
Account Regulations become final, no liability under the fiduciary
responsibility and prohibited transaction provisions of ERISA and Section
4975 may result on the basis of a claim that the assets of the general
account of an insurance company constitute the plan assets of any Plan. The
plan asset status of insurance company separate accounts is unaffected by new
Section 401(c) of ERISA, and separate account assets continue to be treated
as the plan assets of any Plan invested in a separate account.
GENERAL
Any Plan fiduciary that proposes to cause a Plan to purchase Certificates
should consult with its counsel with respect to whether such transaction
would be subject to the prohibited transaction provisions of ERISA and
Section 4975 of the Code and, if so, whether an exemption from such
prohibited transaction rules would be available. Moreover, each Plan
fiduciary should determine whether, under the general fiduciary standards of
investment prudence and diversification, an investment in the Certificates is
appropriate for the Plan, taking into account the overall investment policy
of the Plan and the composition of the Plan's investment portfolio.
LEGAL INVESTMENT
The Class A-1, Class A-2, Class A-3, Class A-4, Class IO and Class B
Certificates (the "SMMEA Certificates") will constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984, as amended ("SMMEA"). HOWEVER, AS DISCUSSED BELOW, NO
S-329
<PAGE>
REPRESENTATION CAN BE MADE AS TO WHETHER THE SMMEA CERTIFICATES WILL
CONSTITUTE "COMMERCIAL MORTGAGE RELATED SECURITIES" AND THUS AS "TYPE IV
SECURITIES" FOR PURPOSES OF THE LEGAL INVESTMENT AUTHORITY OF DEPOSITORY
INSTITUTIONS. "Mortgage related securities" for purposes of SMMEA are
securities that (i) are rated in one of the two highest rating categories by
one or more rating agencies, (ii) represent interests in, or are secured by,
a trust fund consisting of mortgage loans secured by first mortgage liens and
(iii) were originated by certain types of originators. As "mortgage related
securities," the SMMEA Certificates will constitute legal investments for
persons, trusts, corporations, partnerships, associations, business trusts
and business entities (including, insurance companies, as well as trustees
and state government employee retirement systems) created pursuant to or
existing under the laws of the United States or of any state (including the
District of Columbia and Puerto Rico) whose authorized investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the
United States or any agency or instrumentality thereof constitute legal
investments for such entities. Pursuant to SMMEA, a number of states enacted
legislation, before the October 4, 1991 cutoff established by SMMEA for such
enactments, limiting to varying extents the ability of certain entities (in
particular insurance companies) to invest in mortgage related securities, in
most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Pursuant to Section 347 of the Riegle Community
Development and Regulatory Improvement Act of 1994, which amended the
definition of "mortgage related security" (effective December 31, 1996) to
include, in relevant part, certificates satisfying the rating, first lien and
qualified originator requirements for "mortgage related securities," but
representing interests in, or secured by, a trust fund consisting, in whole
or in part, of first liens on one or more parcels of real estate upon which
are located one or more commercial structures, states were authorized to
enact legislation, on or before September 23, 2001, specifically referring to
Section 347 and prohibiting or restricting the purchase, holding or
investment by state-regulated entities in such types of Offered Certificates.
Investors affected by such legislation will be authorized to invest in SMMEA
Certificates only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of depository
institutions as follows: savings and loan associations and savings banks may
invest in, sell or otherwise deal in "mortgage related securities" without
limitation as to the percentage of their assets represented thereby, federal
credit unions may invest in such securities, and banks may purchase such
securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. Section 24
(Seventh), subject in each case to such regulations as the applicable federal
regulatory authority may prescribe. In this connection, the Office of the
Comptroller of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to
authorize banks to purchase and sell for their own account, without
limitations as to a percentage of the bank's capital and surplus (but subject
to compliance with certain general standards concerning "safety and
soundness" and retention of credit information in 12 C.F.R. Section 1.5),
certain "Type IV securities," defined in 12 C.F.R. Section 1.2(1) to include
certain "commercial mortgage-related securities" and "residential
mortgage-related securities." As so defined, "commercial mortgage-related
security" and "residential mortgage-related security" mean, in relevant part,
"mortgage-related security" within the meaning of SMMEA, provided that, in
the case of a "commercial mortgage-related security," it "represents
ownership of a promissory note or certificate of interest or participation
that is directly secured by a first lien on one or more parcels of real
estate upon which one or more commercial structures are located and that is
fully secured by interests in a pool of loans to numerous obligors." In the
absence of any rule or administrative interpretation by the OCC defining the
term "numerous obligors," no representation is made as to whether any Class
of Offered Certificates will qualify as "commercial mortgage-related
securities," and thus as "Type IV securities," for investment by depository
institutions. Federal credit unions should review the National Credit Union
Administration ("NCUA") Letter to Credit Unions No. 96, as modified by Letter
to Credit Unions No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The
NCUA has adopted rules, codified as 12 C.F.R. Section Section 703.5(f)-(k),
which prohibit federal credit unions from investing in certain mortgage
related securities (including securities such as certain series or classes of
Offered Certificates), except under limited circumstances. Effective January
1, 1998, the NCUA has amended its rules governing investments by federal
credit unions at 12 C.F.R. Part 703; the revised rules will permit
investments in "mortgage related securities" under certain limited
circumstances, but will prohibit
S-330
<PAGE>
investments in stripped mortgage related securities (such as the Class IO
Certificates), residual interests in mortgage related securities, and
commercial mortgage related securities, unless the credit union has obtained
written approval from the NCUA to participate in the "investment pilot
program" described in 12 C.F.R. Section 703.140.
All depository institutions considering an investment in the Offered
Certificates should review the "Supervisory Policy Statement on Securities
Activities" dated January 28, 1992, as revised April 15, 1994 (the "Policy
Statement") of the Federal Financial Institutions Examination Council. The
Policy Statement, which has been adopted by the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the OCC
and the Office of Thrift Supervision, and by the NCUA (with certain
modifications), prohibits depository institutions from investing in certain
"high-risk mortgage securities" (including securities such as certain series
or classes of the Offered Certificates), except under limited circumstances,
and sets forth certain investment practices deemed to be unsuitable for
regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Offered
Certificates, as certain series or classes may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
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 which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," and, with regard to any Offered
Certificates issued in book-entry form, provisions which may restrict or
prohibit investments in securities which are issued in book-entry form.
The appropriate characterization of such Offered Certificates under
various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase such Offered Certificates, may be
subject to significant interpretive uncertainties.
Except as to the status of the SMMEA Certificates as "mortgage related
securities" under SMMEA, no representations are made as to the proper
characterization of the Offered Certificates for legal investment or
financial institution regulatory purposes, or as to the ability of particular
investors to purchase any Offered Certificates under applicable legal
investment restrictions. The uncertainties described above (and any
unfavorable future determinations concerning legal investment or financial
institution regulatory characteristics of the Offered Certificates) may
adversely affect the liquidity of the Offered Certificates.
Investors should consult with their own legal advisors in determining
whether and to what extent the Offered Certificates of any class constitute
legal investments or are subject to investment, capital or other
restrictions, and, if applicable, whether SMMEA has been overridden in any
jurisdiction relevant to such investor.
PLAN OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") between the Depositor and the
Underwriter, the Depositor has agreed to sell to Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the "Underwriter") and the Underwriter has
agreed to purchase all of the Offered Certificates if any are purchased.
Proceeds to the Depositor from the sale of the Offered Certificates,
before deducting expenses payable by the Depositor, will be approximately
$ , which includes accrued interest.
Distribution of the Offered Certificates will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices
to be determined at the time of sale. The Underwriter may effect such
transactions by selling the Offered Certificates to or through dealers, and
such dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from such Underwriter. In connection with the
purchase and sale of the Offered Certificates, the
S-331
<PAGE>
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts. The Underwriter and any dealers that
participate with the Underwriter in the distribution of the Offered
Certificates may be deemed to be underwriters and any profit on the resale of
the Offered Certificates positioned by them may be deemed to be underwriting
discounts and commissions under the Securities Act.
Purchasers of the Offered Certificates, including dealers, may, depending
on the facts and circumstances of such purchases, be deemed to be
"underwriters" within the meaning of the Securities Act in connection with
reoffers and sales by them of Offered Certificates. Certificateholders should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
The Depositor also has been advised by the Underwriter that the
Underwriter, through one or more of its affiliates, currently intends to make
a market in the Offered Certificates; however, the underwriter has no
obligation to do so, any market making may be discontinued at any time and
there can be no assurance that an active public market for the Offered
Certificates will develop. See "RISK FACTORS--Limited Liquidity" herein and
in the Prospectus.
The Depositor has agreed to indemnify the Underwriter and each person, if
any, who controls the Underwriter within the meaning of Section 15 of the
Securities Act against, or make contributions to the Underwriter and each
such controlling person with respect to, certain liabilities, including
liabilities under the Securities Act.
The Underwriter is an affiliate of the Mortgage Loan Seller.
USE OF PROCEEDS
The net proceeds from the sale of Offered 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 Offered
Certificates.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor by Morrison &
Hecker L.L.P. and for the Underwriter by Skadden, Arps, Slate, Meagher & Flom
LLP.
RATINGS
It is a condition to the initial issuance of the Certificates that the
Certificates have the following ratings:
CLASS S&P MOODY'S
-------- -----------
A-1 ...... AAA Aaa
A-2....... AAA Aaa
A-3....... AAA Aaa
A-4.......
IO ....... AAA Aaa
B ........ AA Aa2
C ........ A A2
D ........ BBB Baa2
E ........ BBB- Baa3
The Rating Agencies' ratings on mortgage pass-through certificates address
the likelihood of the timely receipt by holders thereof of all payments of
interest to which they are entitled and ultimate receipt of all payments of
principal 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
S-332
<PAGE>
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 IO 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 IO Certificateholders receive only a single month's interest and thus
suffer a nearly complete loss of their investment, all amounts "due" to such
holders will nevertheless have been paid, and such result is consistent with
the "AAA" and "Aaa" ratings received on the Class IO Certificates, scheduled
payments on the Mortgage Loan. The Class IO Notional Balance upon which
interest is calculated is reduced by the allocation of Realized Losses and
prepayments, whether voluntary or involuntary. The rating does not address
the timing or magnitude of reductions of Class IO Notional Balance, but only
the obligation to pay interest timely on the Class IO Notional Balance as so
reduced from time to time. Accordingly, the ratings of the Class IO
Certificates should be evaluated independently from similar ratings on other
types of securities.
There can be no assurance as to whether any rating agency not requested to
rate the Certificates will nonetheless issue a rating and, if so, what such
rating would be. A rating assigned to the Certificates by a rating agency
that has not been requested by the Depositor to do so may be lower than the
rating assigned by the Rating Agencies pursuant to the Depositor's request.
The rating of the Certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
S-333
<PAGE>
INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
PAGE
-------------
<S> <C>
1933 Act ............................................ S-2, S-219
AAC Accrued Interest ................................ S-42, S-274
AAC Agent Bank ...................................... S-276
AAC Allocated Loan Amount ........................... S-275
AAC Appraisals ...................................... S-42
AAC Borrower ........................................ S-41, S-267
AAC Capital Improvement Escrow Amounts .............. S-276
AAC Cash Collateral Agreement ....................... S-276
AAC Debt Service Escrow Account ..................... S-276
AAC Debt Service Escrow Amounts ..................... S-276
AAC Debt Service Payments ........................... S-274
AAC Discount Rate ................................... S-275
AAC DSCR ............................................ S-269
AAC Effective Maturity Date ......................... S-42, S-273
AAC Individual Threshold Amount ..................... S-278
AAC Initial Interest Rate ........................... S-42
AAC Loan ............................................ S-41, S-267
AAC Lockbox Account ................................. S-276
AAC Management Agreement ............................ S-268
AAC Maturity Date ................................... S-42
AAC Mortgage ........................................ S-41, S-267
AAC Mortgage Escrow Account ......................... S-276
AAC Mortgage Escrow Amounts ......................... S-274, S-276
AAC Note ............................................ S-267
AAC Properties ...................................... S-41, S-267
AAC Release Date .................................... S-275
AAC Revised Interest Rate ........................... S-42
AAC Total Loss ...................................... S-279
AAC Trade Payables Amounts .......................... S-276
AAC Treasury Rate ................................... S-274
AAC Yield Maintenance Premium ....................... S-275
Accounts ............................................ S-141, S-217,
S-234, S-261
accredited investor ................................. S-327
Additional Amount ................................... S-32, S-129,
S-130, S-139
Additional Increase Notice .......................... S-139
Additional Trust Fund Expenses ...................... S-295
ADR ................................................. S-181, S-193
Advance ............................................. S-18
Advance Date ........................................ S-85
Advance Rate ........................................ S-18
Advances ............................................ S-309
Air Rights Lease .................................... S-112
Allocated Loan Amount ............................... S-260
Alteration .......................................... S-280
Amendment to the First Advance Mortgage ............. S-147
Annual Budget ....................................... S-108, S-259
Annual Debt Service ................................. S-67
Appraisal Reduction Amount .......................... S-310
Appraised LTV ....................................... S-67
Appraised Value ..................................... S-67
Approved Annual Budget .............................. S-166
ARD ................................................. S-90, S-109,
S-146, S-180,
S-192, S-241,
S-266
ARD/Balloon LTV ..................................... S-67
Assumed Scheduled Payment ........................... S-17
Austin Accounts ..................................... S-195
Austin Accrued Interest ............................. S-38, S-197
Austin Agent ........................................ S-199
Austin Borrower ..................................... S-37, S-193
Austin Cash Collateral Agreement .................... S-199
Austin Debt Service Payment ......................... S-197
Austin Deed of Trust ................................ S-193
Austin Deed of Trust Escrow Account ................. S-195
Austin Discount Rate ................................ S-198
Austin Effective Maturity Date ...................... S-37, S-197
Austin FF&E Reserve Account ......................... S-195
Austin Initial Interest Rate ........................ S-37, S-197
Austin Interest Escrow Account ...................... S-195
Austin Loan ......................................... S-37, S-193
Austin Management Agreement ......................... S-194
Austin Maturity Date ................................ S-38
Austin Mortgage ..................................... S-37
Austin Note ......................................... S-37, S-193
Austin Operating Account ............................ S-199
Austin Property ..................................... S-37, S-193
Austin Subordination Agreement ...................... S-195
Austin Threshold Amount ............................. S-201
Austin Total Loss ................................... S-202
Austin Treasury Rate ................................ S-197
Austin Yield Maintenance Premium .................... S-198
Balloon Amount ...................................... S-67
Balloon Balance ..................................... S-67
Balloon Loans ....................................... S-58
Balloon Payment ..................................... S-59
Beaverton Ground Lease .............................. S-210
Belasco ............................................. S-112
Belasco Ground Lease ................................ S-112
Belasco Ground Sublease ............................. S-112
Beneficial Owners ................................... S-10, S-283
beneficiary ......................................... S-171, S-183,
S-195
Biltmore Accounts ................................... S-171
Biltmore Accrued Interest ........................... S-36, S-173
Biltmore Agent ...................................... S-175
Biltmore Borrower ................................... S-35, S-169
Biltmore Cash Collateral Agreement .................. S-175
Biltmore Debt Service Payment ....................... S-173
Biltmore Deed of Trust .............................. S-169
S-334
<PAGE>
PAGE
-------------
Biltmore Deed of Trust Escrow Account ............... S-171
Biltmore Discount Rate .............................. S-174
Biltmore Effective Maturity Date .................... S-36, S-173
Biltmore FF&E Reserve Account ....................... S-171
Biltmore Initial Interest Rate ...................... S-36, S-173
Biltmore Interest Escrow Account .................... S-171
Biltmore Loan ....................................... S-35, S-169
Biltmore Management Agreement ....................... S-170
Biltmore Maturity Date .............................. S-36
Biltmore Mortgage ................................... S-35
Biltmore Note ....................................... S-35
Biltmore Operating Account .......................... S-175
Biltmore Property ................................... S-35, S-169
Biltmore Revised Interest Rate ...................... S-36
Biltmore Subordination Agreement .................... S-171
Biltmore Threshold Amount ........................... S-177
Biltmore Total Loss ................................. S-178
Biltmore Treasury Rate .............................. S-173
Biltmore Yield Maintenance Premium .................. S-174
Tower Realty Agent Bank ............................. S-122
Birch Creek Ground Lease ............................ S-268
Birch Creek Property ................................ S-267
Book-Entry Certificate .............................. S-283
BRA ................................................. S-80
Brookfield Accrued Interest ......................... S-30, S-101
Brookfield Agent Bank ............................... S-103
Brookfield Borrower ................................. S-29, S-91
Brookfield Capital and TI Reserve Account ........... S-103
Brookfield Capital/TI Reserve Amounts................ S-104
Brookfield Cash Collateral Agreement ................ S-103
Brookfield Debt Service Payment ..................... S-101
Brookfield Discount Rate ............................ S-102
Brookfield Effective Maturity Date .................. S-30, S-101
Brookfield Initial Interest Rate .................... S-30, S-101
Brookfield Interest Escrow Account .................. S-103
Brookfield Loan ..................................... S-29, S-91
Brookfield Loan Maturity Date ....................... S-101
Brookfield Lockbox Account .......................... S-103
Brookfield Management Agreement ..................... S-92
Brookfield Material Lease ........................... S-108
Brookfield Maturity Date ............................ S-30
Brookfield Mortgage ................................. S-29, S-91
Brookfield Mortgage Escrow Account .................. S-103
Brookfield Mortgage Escrow Amount ................... S-102
Brookfield Note ..................................... S-91
Brookfield Operating Account ........................ S-103
Brookfield Pledge ................................... S-29
Brookfield Property ................................. S-29, S-91
Brookfield Property Account ......................... S-103
Brookfield Release Date ............................. S-103
Brookfield Reserve Amounts .......................... S-104
Brookfield Revised Interest Rate .................... S-30
Brookfield Threshold Amount ......................... S-107
Brookfield Total Loss ............................... S-107
Brookfield Treasury Rate ............................ S-101
Brookfield Yield Maintenance Premium................. S-102
Building Equipment .................................. S-142
Business Day ........................................ S-9
Capital Improvement Escrow Account .................. S-261, S-276
Cash Expenses ....................................... S-102, S-120,
S-274
Casualty ............................................ S-62
Casualty Amount ..................................... S-264, S-279
CBE ................................................. S-300
Central Area Ground Lease ........................... S-80
Certificate Balance ................................. S-287
Certificate Registrar ............................... S-286
Certificates ........................................ 1, S-8
Class A Interest Rate ............................... S-85
Class A Strip Interest .............................. S-85
Class A-1 Strip Interest Rate ....................... S-85
Class A-2 Strip Interest ............................ S-85
Class A-2 Strip Interest Rate ....................... S-85
Class B Interest Rate ............................... S-85
Class B Noteholder .................................. S-79
Class B Strip Interest .............................. S-85
Closing Date ........................................ S-57, S-130,
S-169, S-181,
S-193
CMBS Portfolio ...................................... S-282
CMP-1 Accrued Interest .............................. S-41, S-259
CMP-1 Agent Bank .................................... S-261
CMP-1 Borrower ...................................... S-40, S-242
CMP-1 Capital Improvement Escrow Amounts ............ S-261
CMP-1 Cash Collateral Agreement ..................... S-261
CMP-1 Debt Service Escrow Account ................... S-261
CMP-1 Debt Service Escrow Amounts ................... S-261
CMP-1 Debt Service Payment .......................... S-259
CMP-1 Discount Rate ................................. S-260
CMP-1 DSCR .......................................... S-244
CMP-1 Effective Maturity Date ....................... S-41, S-259
CMP-1 Individual Threshold Amount ................... S-263
CMP-1 Initial Interest Rate ......................... S-41, S-259
CMP-1 Loan .......................................... S-40, S-242
CMP-1 Lockbox Account ............................... S-261
CMP-1 Management Agreement .......................... S-244
CMP-1 Manager ....................................... S-244
CMP-1 Maturity Date ................................. S-41, S-259
CMP-1 Mortgage ...................................... S-40, S-242
CMP-1 Note .......................................... S-242
CMP-1 Operating Account ............................. S-261
CMP-1 Properties .................................... S-40, S-242
CMP-1 Property Account .............................. S-261
CMP-1 Revised Interest Rate ......................... S-41, S-259
S-335
<PAGE>
PAGE
-------------
CMP-1 Tax and Insurance Escrow Account .............. S-261
CMP-1 Tax and Insurance Escrow Amounts .............. S-261
CMP-1 Total Loss .................................... S-264
CMP-1 Trade Payables Amounts ........................ S-261
CMP-1 Treasury Rate ................................. S-259
CMP-1 Yield Maintenance Premium ..................... S-260
Collection Account .................................. S-310
Commission .......................................... S-2
Comparison Treasury Security ........................ S-216
Component ........................................... S-287
Condemnation ........................................ S-63
Consultant .......................................... S-81
Consulting Agreement ................................ S-81
Controlling Class Representative .................... S-9, S-312
Copley Borrower ..................................... S-79
Copley Class A Interest Rate ........................ S-27
Copley Class A Note ................................. S-26, S-79
Copley Class B Note ................................. S-27, S-79
Copley Default Rate ................................. S-86
Copley Ground Leases ................................ S-80
Copley Guarantor .................................... S-85
Copley Guaranty ..................................... S-85
Copley Loan Interest Rate ........................... S-27, S-85
Copley Management Agreement ......................... S-81
Copley Maturity Date ................................ S-27, S-85
Copley Monthly Debt Service Payments................. S-85
Copley Mortgage ..................................... S-26, S-79
Copley Notes ........................................ S-27
Copley Place Borrower ............................... S-26, S-79
Copley Place Loan ................................... S-26, S-79
Copley Property ..................................... S-26, S-79
Copley Servicing Agreement .......................... S-87
Copley Sub-Servicer ................................. S-28, S-87
Corrected Mortgage Loan ............................. S-313
Costs ............................................... S-222, S-239
Cross-Collateralized Loans .......................... S-52, S-65
Current Franklin Mills Indebtedness ................. S-130
Cut-off Date ........................................ S-2
Cut-off Date Principal Balance ...................... S-26, S-57
D. E. Shaw Security Deposit Account ................. S-122
Dain ................................................ S-91
Dartmouth Ground Lease .............................. S-81
DB Holdings ......................................... S-92
Debt Service Coverage Ratio ......................... S-67, S-139
Default Interest .................................... S-62
Default Prepayment Fee .............................. S-87
Default Rate ........................................ S-101, S-120,
S-139, S-173,
S-185, S-197,
S-259, S-274
S-103, S-121,
S-141, S-160,
S-174, S-186,
S-198, S-234,
Defeasance Collateral ............................... S-275
Defeasance Collateral Requirement ................... S-103, S-141,
S-174, S-186,
S-198
Defeasance Deposit .................................. S-234
Defeasance Differential ............................. S-234
Defeasance Event .................................... S-234
Definitive Certificate .............................. S-283
Delivery Date ....................................... 1
Depositor ........................................... S-2, S-25
Depository .......................................... S-10
Determination Date .................................. S-17
Distributable Certificate Interest .................. S-14, S-291
Distribution Accounts ............................... S-310
DOL ................................................. S-326
DOL Exemption 90-29 ................................. S-327
D&P ................................................. S-327
DSCR ................................................ S-67
DTC ................................................. 1, S-10
Edper Guaranty ...................................... S-100
Eligible Account .................................... S-217
Eligible Bank ....................................... S-311
Enhanced Treasury Rate .............................. S-87
Environmental Guarantors ............................ S-222, S-240
equity .............................................. S-326
ERISA ............................................... S-326
ERISA Considerations ................................ S-23
Event of Default .................................... S-86, S-102,
S-120, S-140,
S-159, S-173,
S-185, S-232,
S-259, S-274
Extraordinary Expenses .............................. S-102, S-120,
S-259, S-274
Farb Alteration ..................................... S-239
Farb Borrower ....................................... S-39, S-225
Farb Borrower GP .................................... S-225
Farb Borrowers ...................................... S-39, S-225
Farb Deed of Trust .................................. S-225
Farb Default Rate ................................... S-233
Farb Interest Rate .................................. S-39, S-232
Farb Loan 1 ......................................... S-39, S-225
Farb Loan 2 ......................................... S-39, S-225
Farb Loans .......................................... S-39
Farb Management Agreement ........................... S-227
Farb Manager ........................................ S-227
Farb Manager's Consent .............................. S-227
Farb Maturity Date .................................. S-39, S-232
Farb Mezzanine Lender ............................... S-240
Farb Mezzanine Loan 1 ............................... S-40
Farb Mezzanine Loan 2 ............................... S-40
S-336
<PAGE>
PAGE
-------------
Farb Mezzanine Loans ................................ S-40, S-240
Farb Mezzanine Maturity Date ........................ S-240
Farb Mezzanine Pledgors ............................. S-40
Farb Note ........................................... S-39, S-225
Farb Pledged Interests .............................. S-240
Farb Property ....................................... S-39, S-225
Farb Standstill Agreement ........................... S-240
Fee Owner ........................................... S-132
FF&E Work ........................................... S-217
First Advance ....................................... S-30, S-33,
S-147
First Advance Mortgage .............................. S-147
Fitch ............................................... S-327
FMP GP .............................................. S-242
Form 8-K ............................................ S-73
Franklin Mills Accrued Interest ..................... S-33, S-139
Franklin Mills Agent ................................ S-141
Franklin Mills Borrower ............................. S-32, S-130
Franklin Mills Capital Reserve Account............... S-141
Franklin Mills Cash Collateral Agreement ............ S-141
Franklin Mills Debt Service Payment ................. S-139
Franklin Mills Discount Rate ........................ S-141
Franklin Mills Effective Maturity Date .............. S-32, S-139
Franklin Mills Ground Lease ......................... S-132
Franklin Mills Initial Interest Rate ................ S-32, S-139
Franklin Mills Interest Escrow Account............... S-141
Franklin Mills Loan ................................. S-31, S-130
Franklin Mills Lockbox Account ...................... S-141
Franklin Mills Management Agreement.................. S-132
Franklin Mills Manager .............................. S-132
Franklin Mills Maturity Date ........................ S-32, S-139
Franklin Mills Mortgage ............................. S-32, S-130
Franklin Mills Mortgage Escrow Account .............. S-141
Franklin Mills Note ................................. S-31, S-130
Franklin Mills Property ............................. S-32, S-130
Franklin Mills Property Account ..................... S-142
Franklin Mills Release Date ......................... S-141
Franklin Mills Reserve Amounts ...................... S-142
Franklin Mills Revised Interest Rate ................ S-32
Franklin Mills Threshold Amount ..................... S-144
Franklin Mills Total Loss ........................... S-144
Franklin Mills Treasury Rate ........................ S-139
Franklin Mills Yield Maintenance Premium ............ S-141
Freddie Mac ......................................... S-281
Funding IV .......................................... S-267
Gaviidae I .......................................... S-91
Gaviidae I Note ..................................... S-100
Gaviidae II ......................................... S-91
General Account Regulations ......................... S-329
Ground Lease ........................................ S-92, S-268
Ground Rent Escrow Account .......................... S-276
Group 1 Assumed Scheduled Payment ................... S-16, S-292
Group 1 Principal Distribution Amount................ S-15, S-291
Group 1 Scheduled Payment ........................... S-16
Group 2 Assumed Scheduled Payment ................... S-292
Group 2 Principal Distribution Amount................ S-16, S-292
Group 2 Scheduled Payment ........................... S-17, S-292
Group 2 Weighted Average Rate ....................... S-15, S-287
Guarantor ........................................... S-100, S-222
S-239
Hemstreet ........................................... S-210
HUD ................................................. S-281
Identified Transaction .............................. S-143
Impositions ......................................... S-87
Indirect Participants ............................... S-284
Initial Additional Amount ........................... S-32, S-130
Initial Interest Rate ............................... S-273
Initial Pool Balance ................................ S-57
Interest Accrual Period ............................. S-15, S-288
JMB ................................................. S-85
KeyCorp ............................................. S-25, S-205
Large Lease ......................................... S-103
Lender .............................................. S-225
Lessee .............................................. S-132
Limited Exceptions .................................. S-86
L.J. Melody ......................................... S-225
Loan Documents ...................................... S-85, S-101,
S-120, S-139,
S-173, S-185,
S-197, S-259,
S-273
Loan-to-Value Ratio ................................. S-67
Lockbox and Reserves ................................ S-183, S-195
Lockout Date ........................................ S-216
Lockout Period ...................................... S-59
LTV ................................................. S-67
Major Tenant ........................................ S-52
Manager ............................................. S-81, S-92,
S-170, S-182,
S-194, S-268
Marina Playa Ground Lease ........................... S-268
Marina Playa Property ............................... S-267
Marriott Ground Lease ............................... S-81
Master Lease ........................................ S-29, S-100
Master Servicer Mortgage File ....................... S-307
Material Alteration ................................. S-280
Material Lease ...................................... S-123
Maturity Date ....................................... S-273
Maturity Default .................................... S-86
MCDA ................................................ S-29, S-91
MCDA Sublease ....................................... S-92
Melody .............................................. S-25
MetLife ............................................. S-47
Mezzanine Note ...................................... S-167
Mezzanine Pledgors .................................. S-240
S-337
<PAGE>
PAGE
-------------
Midland ............................................. S-25, S-91,
S-110, S-147,
S-281
Minimum Defeasance Collateral Requirement ........... S-121, S-160
MLMC ................................................ S-91, S-110,
S-205, S-242,
S-267
MLMC Mortgage Loan Purchase Agreement ............... S-57
Monthly Ground Rent Deposit ......................... S-276
Monthly Payments .................................... S-63
Moody's ............................................. S-24
Mortgage ............................................ S-57
Mortgage Equivalent Basis ........................... S-216
Mortgage File ....................................... S-307
Mortgage Loan Group ................................. S-2
Mortgage Loan Seller ................................ S-8, S-57,
S-281
Mortgage Loans ...................................... S-2, S-25,
S-57
Mortgage Pool ....................................... S-2, S-25
Mortgage Rate ....................................... S-58
Mortgaged Property .................................. S-2, S-25,
S-57
mortgagee ........................................... S-81, S-85,
S-92, S-132,
S-148, S-244,
S-268
Mortgages ........................................... S-57
MTA ................................................. S-80
NCUA ................................................ S-330
Net Operating Income ................................ S-66, S-144
Newton Oldacre McDonald Loan ........................ S-33
NOI ................................................. S-66
NOM Allocated Loan Amount ........................... S-160
NOM Alteration ...................................... S-166
NOM Anchor Tenants .................................. S-34
NOM Borrower ........................................ S-33, S-147
NOM Borrower Entity ................................. S-33, S-147
NOM Borrower GP ..................................... S-147
NOM Deferred Interest ............................... S-35
NOM Capital Replacement Reserve Account ............. S-161
NOM Capital Replacement Reserve Amount .............. S-158, S-161
NOM Cash Collateral Agreement ....................... S-161
NOM Casualty Amount ................................. S-165
NOM Debt Service Payments ........................... S-158
NOM Default Rate .................................... S-159
NOM Deferred Interest ............................... S-158
NOM Discount Rate ................................... S-159
NOM Effective Maturity Date ......................... S-35, S-158
NOM Extraordinary Expenses .......................... S-159
NOM Initial Interest Rate ........................... S-35, S-158
NOM Interest Escrow Account ......................... S-161
NOM Limited Partners ................................ S-167
NOM Loan ............................................ S-33
NOM Lockbox ......................................... S-161
NOM Lockbox Bank .................................... S-161
NOM Management Agreement ............................ S-148
NOM Manager ......................................... S-148
NOM Maturity Date ................................... S-35, S-158
NOM Mezzanine Borrowers ............................. S-35
NOM Mezzanine Lender ................................ S-167
NOM Mezzanine Loan .................................. S-35, S-167
NOM Mortgage ........................................ S-33, S-147
NOM Mortgage Escrow Account ......................... S-161
NOM Mortgage Escrow Amount .......................... S-158
NOM Note ............................................ S-33, S-147
NOM Operating Account ............................... S-161
NOM Operating Expense Amounts ....................... S-162
NOM Operating Expenses .............................. S-159
NOM Partial Defeasance .............................. S-160
NOM Pledged Interests ............................... S-167
NOM Properties ...................................... S-33, S-147
NOM Release Date .................................... S-160
NOM Revised Interest Rate ........................... S-158
NOM Tenant Improvement and Leasing Commission Reserve
Account ............................................ S-161
NOM Tenant Improvement and Leasing Commission Reserve
Amount ............................................. S-159, S-161
NOM Threshold Amount ................................ S-165
NOM Total Loss ...................................... S-164
NOM Treasury Rate ................................... S-159
NOM Yield Maintenance Premium ....................... S-159
Nonconsolidation Opinion ............................ S-218
Nonrecoverable Advance .............................. S-309
Note ................................................ S-57
Note Prepayment Fee ................................. S-87
Occupancy Rate ...................................... S-67
Offered Certificates ................................ 1
Officer's Certificate ............................... S-103, S-122,
S-141, S-160,
S-175, S-187,
S-199, S-275
OID ................................................. S-325
One Orlando Center .................................. S-110
OPCC ................................................ S-85
Option Agreement .................................... S-112
Original Tower Loan ................................. S-110
Partial Defeasance .................................. S-276
Participants ........................................ S-284
Paying Agent ........................................ S-284
Payment Date ........................................ S-85, S-101,
S-120, S-139,
S-158, S-173,
S-185, S-197,
S-214, S-232,
S-259, S-274
Payment Default ..................................... S-86
Permitted Debt ...................................... S-125
S-338
<PAGE>
PAGE
-------------
Permitted Encumbrances .............................. S-74
Permitted Investments ............................... S-311
Permitted Owner ..................................... S-176, S-187,
S-200
Permitted Transferee ................................ S-105
P&I Advance ......................................... S-18, S-308
plan assets ......................................... S-326
Pledge .............................................. S-100
PML ................................................. S-209
Policy Statement .................................... S-331
Pooling and Servicing Agreement ..................... S-8, S-305
Prepayment Premium .................................. S-59, S-293
Principal Recovery Fee .............................. S-314
Private Certificates ................................ S-8
Proceeds ............................................ S-107, S-126
Proceeds Account .................................... S-107
Property Account .................................... S-276
Property Management ................................. S-175, S-187,
S-199
PTCE 95-60 .......................................... S-23
Qualified Appraiser ................................. S-309
Qualifying Manager .................................. S-176, S-187,
S-199
qualifying manager .................................. S-265, S-280
Rate Differential ................................... S-293
Rated Final Distribution Date ....................... 1
Rating Agencies ..................................... S-24
real estate assets .................................. S-22
Realized Losses ..................................... S-295
Recourse Obligations ................................ S-85
Regular Certificates ................................ 1, S-22
regular interests ................................... S-22
Reimbursement Rate .................................. S-309
Related Proceeds .................................... S-309
Release Amount ...................................... S-260
Release Date ........................................ S-142, S-260
Release Debt Service Coverage Ratio ................. S-216
Remaining Amortization Term ......................... S-67
Remaining Shilo Mortgages ........................... S-216
Remaining Shilo Properties .......................... S-216
Remaining Term to Maturity .......................... S-67
REMIC ............................................... S-2, S-325
REMIC I ............................................. S-2, S-21
REMIC I Net Mortgage Rate ........................... S-287
REMIC II ............................................ S-2, S-21
REMIC III ........................................... S-2, S-21
REO Account ......................................... S-283
REO Mortgage Loan ................................... S-293
REO Property ........................................ S-283, S-313
Repair Escrow Account ............................... S-261, S-276
Repurchase Price .................................... S-77
Required Appraisal Date ............................. S-309
Required Appraisal Loan ............................. S-309
Required Defeasance Period .......................... S-298
Reserve Accounts .................................... S-63
Reserve Amounts ..................................... S-162
Residual Certificates ............................... 1
residual interest ................................... S-22
Restricted Group .................................... S-329
Retained Servicing Interest ......................... S-319
Revised Interest Rate ............................... S-90, S-129,
S-146, S-241,
S-266, S-274
Richland Ground Lease ............................... S-210
Ritz Accrued Interest ............................... S-37, S-185
Ritz Agent .......................................... S-187
Ritz Borrower ....................................... S-36, S-181
Ritz Cash Collateral Agreement ...................... S-187
Ritz Debt Service Payment ........................... S-185
Ritz Deed of Trust .................................. S-181
Ritz Deed of Trust Escrow Account ................... S-183
Ritz Discount Rate .................................. S-186
Ritz Effective Maturity Date ........................ S-37, S-185
Ritz FF&E Reserve Account ........................... S-183
Ritz Initial Interest Rate .......................... S-37, S-185
Ritz Interest Escrow Account ........................ S-183
Ritz Loan ........................................... S-36, S-181
Ritz Management Agreement ........................... S-182
Ritz Maturity Date .................................. S-37
Ritz Note ........................................... S-36, S-181
Ritz Operating Account .............................. S-187
Ritz Property ....................................... S-36, S-181
Ritz Revised Interest Rate .......................... S-37
Ritz Subordination Agreement ........................ S-183
Ritz Threshold Amount ............................... S-189
Ritz Total Loss ..................................... S-190
Ritz Yield Maintenance Premium ...................... S-186
Ritz Mortgage ....................................... S-36
Scenario ............................................ S-302
Scheduled Defeasance Payments ....................... S-234
Scheduled Principal Balance ......................... S-287
Second Additional Interest Rate ..................... S-140
Second Advance ...................................... S-30, S-33,
S-147
Second Advance Mortgage ............................. S-147
Second Funding Date ................................. S-140
Security Deposit Account/Orlando .................... S-122
Security Deposit Account/Tower 45 ................... S-122
Senior Certificates ................................. S-20, S-294
Sequential Pay Certificates ......................... S-8
Servicing Advance ................................... S-18, S-309
Servicing Fee ....................................... S-318
Servicing Fee Rate .................................. S-318
Shilo Alteration .................................... S-221
Shilo Borrower ...................................... S-205
Shilo Borrowers ..................................... S-205
Shilo Default Rate .................................. S-215
S-339
<PAGE>
PAGE
-------------
Shilo Ground Leases ................................. S-210
Shilo Inn Assignments of Leases ..................... S-205
Shilo Inn I Assignment of Leases .................... S-205
Shilo Inn I Interest Rate ........................... S-39, S-214
Shilo Inn I Loan .................................... S-205
Shilo Inn I Mortgage ................................ S-205
Shilo Inn I Note .................................... S-205
Shilo Inn II Assignment of Leases ................... S-205
Shilo Inn II Interest Rate .......................... S-39, S-214
Shilo Inn II Loan ................................... S-205
Shilo Inn II Mortgage ............................... S-205
Shilo Inn II Note ................................... S-205
Shilo Inn Loan Documents ............................ S-205
Shilo Inn Loans ..................................... S-38, S-205
Shilo Inn Mortgage .................................. S-38, S-205
Shilo Loan I Maturity Date .......................... S-39, S-214
Shilo Loan II Maturity Date ......................... S-39, S-214
Shilo Management Agreement .......................... S-211
Shilo Manager ....................................... S-211
Shilo Manager's Consent ............................. S-211
Shilo Managing Member ............................... S-205
Shilo Prepayment Charge ............................. S-216
Shilo Property ...................................... S-39, S-205
SMMEA ............................................... S-329
SMMEA Certificates .................................. S-329
S&P ................................................. S-24, S-282,
S-327
Special Servicing Fee ............................... S-313
Special Servicing Fee Rate .......................... S-313
Subordinate Certificates ............................ S-20, S-294
Subordinate Farb Deed of Trust ...................... S-232
Subordinate Shilo Mortgage .......................... S-214
Subordinated Certificates ........................... S-23, S-329
Successor Maker ..................................... S-234
Table Assumptions ................................... S-300
Taking .............................................. S-220, S-237
the Austin Maturity Date ............................ S-197
the Biltmore Maturity Date .......................... S-173
The Borrowers ....................................... S-225
the Ritz Maturity Date .............................. S-185
Title Policy ........................................ S-74
Tower 45 ............................................ S-110
Tower Allocated Loan Amount ......................... S-121
Tower DSCR .......................................... S-122
Tower General Partner ............................... S-110
Tower Managing Member ............................... S-110
Tower Partial Defeasance ............................ S-122
Tower Realty Accrued Interest ....................... S-31, S-120
Tower Realty Agent Bank ............................. S-122
Tower Realty Anticipated Repayment Date ............. S-120
Tower Realty Applicable Interest Rate ............... S-120
Tower Realty Approved Extraordinary Expenses ........ S-124
Tower Realty Approved Operating Expenses ............ S-124
Tower Realty Borrower ............................... S-30, S-110
Tower Realty Borrowing Accounts ..................... S-123
Tower Realty Capital Expenditure Reserve Account .... S-122
Tower Realty Debt Service Payments .................. S-120
Tower Realty Discount Rate .......................... S-121
Tower Realty Effective Maturity Date ................ S-31
Tower Realty Initial Interest Rate .................. S-31, S-120
Tower Realty Lease Expiration Reserve Amounts ....... S-123
Tower Realty Loan ................................... S-30, S-110
Tower Realty Lockbox Accounts ....................... S-122
Tower Realty Maturity Date .......................... S-31, S-120
Tower Realty Monthly Amount ......................... S-123
Tower Realty Mortgage ............................... S-30, S-110
Tower Realty Mortgage Escrow Account ................ S-122
Tower Realty Mortgage Escrow Amounts ................ S-120
Tower Realty Note ................................... S-30, S-110
Tower Realty Officer's Certificate .................. S-128
Tower Realty Operating Account ...................... S-122
Tower Realty P&I Escrow Account ..................... S-122
Tower Realty Proceeds ............................... S-126
Tower Realty Properties ............................. S-30, S-110
Tower Realty Release Date ........................... S-122
Tower Realty Reserve Amounts ........................ S-123
Tower Realty Revised Interest Rate .................. S-31
Tower Realty Threshold Amount ....................... S-126
Tower Realty TI and Leasing Reserve Account ......... S-122
Tower Realty Total Loss ............................. S-126
Tower Realty Treasury Rate .......................... S-120
Tower Realty Yield Maintenance Premium .............. S-121
Trade Payables Escrow Account ....................... S-261, S-276
Transfer ............................................ S-218, S-235
Transfer Fee ........................................ S-88
Trust Fund .......................................... S-2, S-25
Trustee Fee ......................................... S-320
Trustee Fee Rate .................................... S-320
Trustee Mortgage File ............................... S-305
Underwriter ......................................... 1, S-331
Underwriting Agreement .............................. S-331
Underwritten Cash Flow .............................. S-67
Underwritten DSCR ................................... S-67
Underwritten NOI .................................... S-66
Union ............................................... S-276
Urban ............................................... S-80
Voting Rights ....................................... S-321
Washington Square Ground Lease ...................... S-210
Weighted Average Maturity ........................... S-67
S-340
<PAGE>
PAGE
-------------
Work ................................................ S-89
Year Built .......................................... S-67
Year Renovated ...................................... S-67
Yield Maintenance Period ............................ S-59
Zoning Laws ......................................... S-51
</TABLE>
S-341
<PAGE>
ANNEX A
Annex A to the Prospectus Supplement will set forth in a table certain
information with respect to the Mortgage Loans and the Mortgaged Properties.
This information will be primarily derived from financial statements supplied
by each borrower for its related Mortgaged Property. The information provided
for each Mortgage Loan will generally include the following:
Loan Terms:
o Original Balance
o Cut-Off Date Balance
o Gross Interest Rate
o Servicing Fee
o Net Interest Rate
o Original Amortization Term
o Original Term to Maturity
o Original Note Date
o First Payment Date
o Maturity Date
o Remaining Amortization Term
o Remaining Term to Maturity
o Balloon Balance
o Mortgage Loan Seller
o Type of Call Protection
o Original Lockout/Defeasance Period
o Original Term to ARD/Balloon
o Months Open to Prepayment
o Seasoning (mos.)
o Reset Interest Rate
o Defeasance Permitted Date
Collateral Description:
o Property
o City
o State
o Zip
o Number of Units/Square Feet
o Year Built
o Year Renovated
Tenant Data:
o Largest Tenant
o Square Feet Leased
o Percentage of Property Leased
o Lease Expiration Date
o ADR
Collateral Value:
o Appraised Value
o Appraisal Date
o Cut-Off LTV
o ARD/Balloon LTV
Collateral Operating Performance:
o Occupancy Rate
o Underwritten Cash Flow
o Annual Debt Service
o Underwritten DSCR
o 1996 NOI
A-1
<PAGE>
ANNEX A
MORTGAGE LOAN TERMS
<TABLE>
<CAPTION>
GROSS NET ORIGINAL
ORIGINAL CUT-OFF DATE INTEREST SERVICING INTEREST AMORTIZATION
LOAN BALANCE BALANCE RATE FEE RATE TERM(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Copley Place $ 97,500,000 96,908,666 6.75 % .015% 6.735 % 360
Brookfield Properties $ 60,000,000 59,754,386 8.00 % .05 % 7.95 % 360
Tower Realty Trust, Inc. $107,000,000 107,000,000 6.8174% .05 % 6.7674% 360
The Mills Corporation $110,000,000 109,538,921 7.882 % .05 % 7.832 % 360
The Mills Corporation $ 20,000,000 19,954,654 7.44 % .05 % 7.39 % 360
- -----------------------------------------------------------------------------------------------------------
Newton Oldacre McDonald $ 76,702,000 76,640,023 7.56 % .05 % 7.51 % 360
Newton Oldacre McDonald $ 12,800,000 12,791,840 7.325 % .05 % 7.275 % 360
Four Seasons Biltmore Hotel $ 63,000,000 63,000,000 7.138 % .05 % 7.088 % 300
Ritz-Carlton Hotel $ 41,850,000 41,850,000 7.188 % .05 % 7.138 % 300
Four Seasons $ 45,150,000 45,150,000 7.188 % .05 % 7.138 % 300
- -----------------------------------------------------------------------------------------------------------
Shilo Inns $ 65,977,276 65,765,282 8.47 % .065% 8.405 % 240
Shilo Inns $ 20,000,000 19,967,537 8.36 % .065% 8.295 % 240
Farb Investments $ 64,880,000 64,781,452 7.40 % .075% 7.325 % 360
American Apartment Communities I $ 45,000,000 44,440,152 7.75 % .05 % 7.70 % 300
American Apartment Communities II $ 21,000,000 20,940,017 7.74 % .05 % 7.69 % 360
- -----------------------------------------------------------------------------------------------------------
TOTAL/WEIGHTED AVERAGE $850,859,276 $848,482,929 7.4621% 7.4127% 334.1
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL FIRST REMAINING REMAINING
TERM TO NOTE PAYMENT MATURITY AMORTIZATION TERM TO BALLOON
LOAN MATURITY DATE DATE DATE TERM MATURITY BALANCE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Copley Place 120 30-Jul-97 01-Sep-97 01-Aug-07 356 116 71,525,775
Brookfield Properties 360 13-May-97 01-Jul-97 01-Jun-27 354 354 52,634,822
Tower Realty Trust, Inc. 360 26-Nov-97 01-Dec-97 01-Nov-27 359 359 99,413,008
The Mills Corporation 360 05-May-97 01-Jul-97 01-Jun-27 354 354 96,261,010
The Mills Corporation 357 08-Aug-97 01-Sep-97 01-Jun-27 357 354 17,429,433
- ------------------------------------------------------------------------------------------------------------------
Newton Oldacre McDonald 360 14-Oct-97 01-Dec-97 01-Nov-27 359 359 58,215,063
Newton Oldacre McDonald 360 26-Nov-97 01-Dec-97 01-Nov-27 359 359 9,660,831
Four Seasons Biltmore Hotel 300 24-Nov-97 01-Jan-98 01-Dec-22 300 300 49,867,379
Ritz-Carlton Hotel 300 24-Nov-97 01-Jan-98 01-Dec-22 300 300 33,172,132
Four Seasons 300 24-Nov-97 01-Jan-98 01-Dec-22 300 300 35,787,856
- ------------------------------------------------------------------------------------------------------------------
Shilo Inns 240 29-Sep-97 01-Nov-97 01-Oct-17 238 238 --
Shilo Inns 240 28-Oct-97 01-Dec-97 01-Nov-17 239 239 --
Farb Investments 120 19-Sep-97 01-Nov-97 01-Oct-07 358 118 56,187,848
American Apartment Communities I 300 31-Dec-96 01-Feb-97 01-Jan-22 289 289 39,527,429
American Apartment Communities II 360 02-Jul-97 01-Aug-97 01-Jul-27 355 355 18,353,955
- ------------------------------------------------------------------------------------------------------------------
TOTAL/WEIGHTED AVERAGE 288.3 331.1 285.3 638,036,541
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Tower Realty Trust commences with a 2-year interest-only schedule,
followed by a 28-year amortization schedule. Figures shown are based on
the 28-year amortization schedule.
(2) A 24-day, interest-only payment of $99,200.00 was due on the Mills
Corporation $20,000,000 Additional Funding on 9/1/97. Regular monthly
payments began on 10/1/97.
Annex A-1
<PAGE>
<TABLE>
<CAPTION>
MONTHS
OPEN
ORIGINAL TO
MORTGAGE TYPE OF LOCKOUT/ PREPAYMENT
LOAN CALL DEFEASANCE ORIGINAL TERM AFTER ORIGINAL SEASONING
SELLER PROTECTION PERIOD TO ARD/BALLOON LOCKOUT PERIOD (MOS.)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Copley Place Associates LLC Yield Maintenance (T+50) 0 120 0 4
Brookfield DB, Inc. Lockout/Defeasance 114 120 6 6
Magnolia Associates, Ltd. Lockout/Defeasance 84 84 0 1
Franklin Mills Associates, L.P. & Liberty
Plaza, L.P. Lockout/Defeasance 114 120 6 6
- -- Lockout/Defeasance 114 118 6 4
- -----------------------------------------------------------------------------------------------------------------------------
15 Separate Limited Partnerships Lockout/Defeasance 180 180 0 1
- -- Lockout/Defeasance 180 180 0 1
Channel Drive LLC Lockout/Defeasance 117 120 3 0
HEF 1 -STL No. 1 LLC Lockout/Defeasance 117 120 3 0
HEF 1 -AUS No. 2 LLC Lockout/Defeasance 117 120 3 0
- -----------------------------------------------------------------------------------------------------------------------------
16 Separate Limited Partnerships Lockout/Yield Maintenance 117 240 3 2
(T-Flat)
Shilo Inn, Lincoln City, LLC Lockout/Yield Maintnenace 117 240 3 1
(T-Flat)
Farb Investments Nob Hill, Ltd. & Farb
Investments West Point, Ltd. Lockout/Defeasance 117 120 3 2
CMP -1 LLC Lockout/Defeasance 60 84 24 11
AAC Funding IV LLC Lockout/Defeasance 114 120 6 5
- -----------------------------------------------------------------------------------------------------------------------------
3.0
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MORTGAGE RESET DEFEASANCE
LOAN INTEREST PERMITTED
SELLER RATE DATE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Copley Place Associates LLC N/A N/A
Brookfield DB, Inc. Greater of 13.0% or IUST+5.0% Earlier of May 13, 2001 or 2-year
anniversary of deposit into REMIC
Magnolia Associates, Ltd. 8.8174% or IUST+2.0% Earlier of November 26, 2000 or 2-year
anniversary of deposit into REMIC
Franklin Mills Associates, L.P. & Liberty
Plaza, L.P. Greater of Initial Interest Rate+5.0% 2-year anniversary of securitization
or IUST+5.0%
- -- Greater of Initial Interest Rate+5.0% 2-year anniversary of securitization
or IUST+5.0%
- -----------------------------------------------------------------------------------------------------------------------------
15 Separate Limited Partnerships Greater of 9.56% or IUST+2.0% 3-year anniversary of securitization
- -- Greater of 9.325% or IUST+2.0% 3-year anniversary of securitization
Channel Drive LLC Greater of 9.138% or IUST+2.0% Earlier of November 24, 2000 or 2-year
anniversary of securitization
HEF 1 -STL No. 1 LLC Greater of 9.188% or IUST+2.0% Earlier of November 24, 2000 or 2-year
anniversary of securitization
HEF 1 -AUS No. 2 LLC Greater of 9.188% or IUST+2.0% Earlier of November 24, 2000 or 2-year
anniversary of securitization
- -----------------------------------------------------------------------------------------------------------------------------
16 Separate Limited Partnerships N/A N/A
Shilo Inn, Lincoln City, LLC N/A N/A
Farb Investments Nob Hill, Ltd. & Farb
Investments West Point, Ltd. N/A Earlier of September 19, 2002 or 2-year
anniversary of securitization
CMP -1 LLC Greater of 12.75% or IUST+5.0% 2-year anniversary of deposit into
REMIC
AAC Funding IV LLC Greater of 9.74% or IUST+2.0% 2-year anniversary of securitization
- --------------------------------------------- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
MORTGAGED PROPERTY CHARACTERISTICS
<TABLE>
<CAPTION>
LOAN PROPERTY CITY STATE STREET ZIP
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
COPLEY PLACE
- --------------------------------------------------------------------------------------------------------------------------
Copley Place Boston MA 100 Huntington Avenue N/A
- --------------------------------------------------------------------------------------------------------------------------
BROOKFIELD PROPERTIES CORPORATION
- --------------------------------------------------------------------------------------------------------------------------
Dain Bosworth Plaza, Gaviidae I & II Minneapolis MN 60 S. Sixth Street & 555 Nicollet Mall, 651 55402
Nicollet Mall
- --------------------------------------------------------------------------------------------------------------------------
TOWER REALTY TRUST
- --------------------------------------------------------------------------------------------------------------------------
Tower 45 New York NY 120 West 45th Street 10036
One Orlando Center Orlando FL 800 North Magnolia Avenue 32803-3252
- --------------------------------------------------------------------------------------------------------------------------
MILLS CORPORATION
- --------------------------------------------------------------------------------------------------------------------------
Franklin Mills Philadelphia PA 1455 Franklin Mills Circle 19114
Liberty Plaza Philadelphia PA SW C/O Liberty & Franklin Mills 19114
- --------------------------------------------------------------------------------------------------------------------------
NEWTON OLDACRE MCDONALD
- --------------------------------------------------------------------------------------------------------------------------
Nine Mile Plaza Pensacola FL 312 East Nine Mile Road N/A
Mandeville Marketplace Mandeville LA 600 N. Causeway Boulevard N/A
59 West Bessemer AL 710 Academy Drive N/A
Chicot Crossing Pascagoula MS Denny Avenue & Chicot Road N/A
River Square Hueytown AL Warrior River Road & Forest Road N/A
- --------------------------------------------------------------------------------------------------------------------------
Parker Center Parker FL Cherry Street & Tyndall Parkway N/A
Greenbrier Station Anniston AL 1408 Golden Springs Road N/A
Russell Crossing Phenix City AL 2010 Highway 280 N/A
Delchamps Plaza Long Beach MS 200 West Railroad Street N/A
29 North Cantonment FL US Highway 29 South N/A
- --------------------------------------------------------------------------------------------------------------------------
Betts Crossing Opelika AL 1441 Fox Run Parkway N/A
Bi-Lo Center McMinnville TN 835 New Smithville Road/Highway 56 N/A
The "Y" Panama City FL 17164 Front Beach Road N/A
Clanton Marketplace Clanton AL 640 Ollie Avenue N/A
Brownsville Place Brownsville TN Highway 76 & East Main Street N/A
- --------------------------------------------------------------------------------------------------------------------------
One Main Place Moss Point MS Telephone Road N/A
Franklin Center Franklin TN State Road 96 & Southwinds Drive N/A
Hollywood Video Franklin TN State Highway 96, West of Southwinds Drive N/A
Opp Marketplace Opp AL US HIghway 31 & Perry Store Road N/A
Hollywood Video Paducah KY Beltline Highway, East of Bethel Street N/A
- --------------------------------------------------------------------------------------------------------------------------
FOUR SEASONS BILTMORE HOTEL
- --------------------------------------------------------------------------------------------------------------------------
Four Seasons Biltmore Hotel Santa Barbara CA 1260 Channel Drive N/A
- --------------------------------------------------------------------------------------------------------------------------
RITZ-CARLTON HOTEL
- --------------------------------------------------------------------------------------------------------------------------
Ritz-Carlton Hotel Clayton MO 100 Carondelet Plaza 63105
- --------------------------------------------------------------------------------------------------------------------------
FOUR SEASONS HOTEL
- --------------------------------------------------------------------------------------------------------------------------
Four Seasons Hotel Austin TX 98 San Jacinto Boulevard N/A
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COLLATERAL DESCRIPTION
------------------------------------------------------------------------------------
NUMBER OF
UNITS/ PERCENTAGE LEASE
SQUARE YEAR YEAR LARGEST SQUARE FEET OF PROPERTY EXPIRATION
LOAN FEET BUILT RENOVATED TENANT LEASED LEASED DATE
- ----------------------------------------------------------------------------------------------------------
COPLEY PLACE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1,214,244 1984 N/A Bain & Co. 165,895 13.7% 8/31/04
- ----------------------------------------------------------------------------------------------------------
BROOKFIELD PROPERTIES
CORPORATION
- ----------------------------------------------------------------------------------------------------------
917,959 1989-91 N/A Interra 225,730 24.6% 12/1/06
Financial
Group
- ----------------------------------------------------------------------------------------------------------
TOWER REALTY 810,201
TRUST
- ----------------------------------------------------------------------------------------------------------
455,033 1989 N/A D.E. Shaw & Co. 63,871 14.0% 7/31/07
355,168 1987 N/A First Union 69,363 19.5% 12/31/02
Bank
- ----------------------------------------------------------------------------------------------------------
MILLS CORPORATION 1,965,742
- ----------------------------------------------------------------------------------------------------------
1,661,279 1989 1997 Boscov's 152,370 9.2% 5/7/09
304,463 1989 1997 Dick's 77,586 25.5% 3/1/11
Sporting
Goods
- ----------------------------------------------------------------------------------------------------------
NEWTON OLDACRE
MCDONALD 1,338,462
- ----------------------------------------------------------------------------------------------------------
191,787 1985 1997 Winn-Dixie 46,372 24.2% 8/1/06
77,786 1988 N/A Winn-Dixie 53,986 69.4% 5/1/17
95,591 1996 N/A Winn-Dixie 44,000 46.0% 7/1/16
122,360 1975 1996 Winn-Dixie 47,300 38.7% 4/1/16
89,303 1985 N/A Winn-Dixie 45,500 51.0% 5/1/05
68,680 1975 1997 Winn-Dixie 44,000 64.1% 5/1/17
62,840 1997 N/A Winn-Dixie 44,000 70.0% 1/1/17
72,312 1989 N/A Winn-Dixie 45,500 62.9% 12/1/11
62,859 1989 N/A Delchamps 35,059 55.8% 7/1/09
58,040 1997 N/A Winn-Dixie 44,000 75.8% 5/1/17
- ----------------------------------------------------------------------------------------------------------
58,400 1996 N/A Winn-Dixie 44,000 75.3% 12/1/16
51,844 1985 N/A Bi-Lo 38,864 75.0% 5/1/05
64,848 1983 1996 Winn-Dixie 43,422 67.0% 10/1/14
65,250 1993 N/A Winn-Dixie 45,500 69.7% 5/1/17
76,762 1989 N/A Wal-Mart 54,962 71.6% 4/1/10
- ----------------------------------------------------------------------------------------------------------
68,566 1988 1996 Revco/Big B 10,064 14.7% 5/1/05
10,908 1997 N/A Eckerd 10,908 100.0% 5/1/17
7,488 1997 N/A Hollywood 7,488 100.0% N/A
Video
25,350 1995 N/A Harco 8,450 33.3% 5/1/12
7,488 1997 N/A Hollywood 7,488 100.0% N/A
Video
- ----------------------------------------------------------------------------------------------------------
FOUR SEASONS
BILTMORE HOTEL
- ----------------------------------------------------------------------------------------------------------
217 1927;1937; 1988-90 N/A N/A N/A N/A
1983
- ----------------------------------------------------------------------------------------------------------
RITZ-CARLTON HOTEL
- ----------------------------------------------------------------------------------------------------------
301 1990 N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------
FOUR SEASONS HOTEL
- ----------------------------------------------------------------------------------------------------------
291 1986 N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLLATERAL VALUE
------------------------------------------------------
ARD/
APPRAISED APPRAISAL CUT-OFF BALLOON
ADR VALUE DATE LTV LTV
- ------------------------------------------------------------------------------
COPLEY PLACE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
N/A 315,000,000 June 30, 1997 30.8% 22.7%
- ------------------------------------------------------------------------------
BROOKFIELD PROPERTIES
CORPORATION
- ------------------------------------------------------------------------------
N/A 98,000,000 March 15, 1996 61.0% 53.7%
- ------------------------------------------------------------------------------
TOWER REALTY 150,000,000 71.3% 66.3%
TRUST
- ------------------------------------------------------------------------------
N/A 95,000,000 October 2, 1997
N/A 55,000,000 September 23, 1997
- ------------------------------------------------------------------------------
MILLS CORPORATION 214,000,000 60.5% 53.1%
- ------------------------------------------------------------------------------
N/A 193,000,000 April 16, 1997
N/A 21,000,000 April 16, 1997
- ------------------------------------------------------------------------------
NEWTON OLDACRE
MCDONALD 111,005,000 80.6% 61.1%
- ------------------------------------------------------------------------------
N/A 13,000,000 August 13, 1997
N/A 10,900,000 August 18, 1997
N/A 8,600,000 August 4, 1997
N/A 8,720,000 August 18, 1997
N/A 7,850,000 November 14, 1997
- ------------------------------------------------------------------------------
N/A 5,600,000 August 9, 1997
N/A 5,500,000 August 7, 1997
N/A 5,500,000 August 5, 1997
N/A 5,410,000 August 19, 1997
N/A 5,050,000 August 13, 1997
- ------------------------------------------------------------------------------
N/A 5,000,000 August 4, 1997
N/A 4,800,000 October 21, 1997
N/A 4,385,000 August 9, 1997
N/A 5,190,000 August 15, 1997
N/A 3,610,000 August 14, 1997
- ------------------------------------------------------------------------------
N/A 3,430,000 August 18, 1997
N/A 3,050,000 November 20, 1997
N/A 2,530,000 November 20, 1997
N/A 1,480,000 August 6, 1997
N/A 1,400,000 November 24, 1997
- ------------------------------------------------------------------------------
FOUR SEASONS
BILTMORE HOTEL
- ------------------------------------------------------------------------------
$254.99 90,500,000 October 1, 1997 69.6% 55.1%
- ------------------------------------------------------------------------------
RITZ-CARLTON HOTEL
- ------------------------------------------------------------------------------
$149.72 60,000,000 October 1, 1997 69.8% 55.3%
- ------------------------------------------------------------------------------
FOUR SEASONS HOTEL
- ------------------------------------------------------------------------------
$166.05 60,200,000 October 1, 1997 75.0% 59.4%
- ------------------------------------------------------------------------------
</TABLE>
Annex A-2
<PAGE>
<TABLE>
<CAPTION>
COLLATERAL OPERATING PERFORMANCE
- ------------------------------------------------------------------------
ANNUAL
OCCUPANCY UNDERWRITTEN DEBT UNDERWRITTEN 1996
RATE CASH FLOW SERVICE DSCR NOI
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------
97.1% 21,882,091 8,132,794(1) 2.69x 25,370,123
- ------------------------------------------------------------------------
94.8% 7,921,547 5,283,105 1.50x 5,322,047
- ------------------------------------------------------------------------
99.5% 14,048,919 8,572,328 1.64x 17,301,629
- ------------------------------------------------------------------------
99.2% 9,994,189 11,909,991
100.0% 4,054,729 5,391,638
- ------------------------------------------------------------------------
88.5% 18,545,245 11,240,781 1.65x 18,314,963
- ------------------------------------------------------------------------
94.5% 16,735,288 16,988,556
56.1% 1,809,957 1,326,407
- ------------------------------------------------------------------------
97.2% 9,426,049 7,609,166 1.24x N/A
- ------------------------------------------------------------------------
96.0% 1,097,609 N/A
100.0% 942,957 862,344
100.0% 740,814 N/A
91.0% 737,116 N/A
89.1% 648,231 343,348
- ------------------------------------------------------------------------
100.0% 477,223 N/A
97.7% 489,877 N/A
97.6% 505,260 540,504
96.2% 460,522 422,066
100.0% 449,866 N/A
- ------------------------------------------------------------------------
96.9% 456,055 N/A
100.0% 395,682 242,961
92.8% 388,745 348,793
100.0% 449,249 324,050
98.4% 294,486 295,869
- ------------------------------------------------------------------------
100.0% 226,223 N/A
100.0% 276,556 N/A
100.0% 151,402 N/A
100.0% 116,913 136,390
100.0% 121,264 N/A
- ------------------------------------------------------------------------
80.3% 8,616,344 5,460,269 1.58x 6,603,428
- ------------------------------------------------------------------------
75.6% 5,879,132 3,643,604 1.61x 5,054,393
- ------------------------------------------------------------------------
80.6% 6,165,711 3,930,910 1.57x 4,670,912
- ------------------------------------------------------------------------
(1) Copley Place Annual Debt Service is for the Class A Note only and is
1/2 of the Annual Debt Service for the entire $195 million loan.
</TABLE>
<PAGE>
MORTGAGED PROPERTY CHARACTERISTICS (CONTINUED)
<TABLE>
<CAPTION>
LOAN PROPERTY CITY STATE STREET ZIP
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHILO INNS
- -----------------------------------------------------------------------------------------------
Shilo Inn--Lincoln City Lincoln City OR 1501 N.W. 40th Street 97367
Shilo Inn--Newport Newport OR 536 SW Elizabeth 97365-5098
Shilo Inn--
Portland/Beaverton Portland OR 9900 SW Canyon Road 97225-2996
Shilo Inn--Idaho Falls Idaho Falls ID 780 Lindsay Blvd 83402-1822
Shilo Inn--Yuma Yuma AZ 1550 S. Castle Dome 85365-1702
- -----------------------------------------------------------------------------------------------
Shilo Inn--Richland Richland WA 50 Comstock Street 99352-4499
Shilo Inn--Boise/Riverside Boise ID 3031 Main Street 83702-2048
Shilo Inn--The Dalles The Dalles OR 3223 Bret Clodfelter Way 97058-9718
Shilo Inn--Warrenton Warrenton OR 1605 E. Harbor Drive 97146
Shilo Inn--Washington Square Portland OR 10830 SW Greenburg Road 97223-1409
- -----------------------------------------------------------------------------------------------
Shilo Inn--Spokane Spokane WA E. 923 Third Avenue 99202-2215
Shilo Inn--Oakhurst Oakhurst CA 40644 Highway 41 93644-9621
Shilo Inn--Pomona Pomona CA 3200 Temple Avenue 91768-3283
Shilo Inn--Casper Casper WY I-25 & Curtis Road 82636-0246
Shilo Inn--Nampa Boulevard Nampa ID 617 Nampa Blvd 83687-3065
- -----------------------------------------------------------------------------------------------
Shilo Inn--Grants Pass Grants Pass OR 1880 N.W. 6th Street 97526-1038
Shilo Inn--Delano Delano CA 2231 Girard Street 93215-1048
- -----------------------------------------------------------------------------------------------
FARB INVESTMENTS
- -----------------------------------------------------------------------------------------------
Nob Hill Apartments Houston TX 5410 N. Braeswood Blvd. 77096
West Point Apartments Houston TX 8600 Westheimer 77063
- -----------------------------------------------------------------------------------------------
AMERICAN APARTMENT COMMUNITIES I
- -----------------------------------------------------------------------------------------------
The Circles Apartments Salinas CA 2260-98 North Main Street 93906
Boronda Manor Apartments Salinas CA 2073 Santa Rita Street 93906
The Elms Apartments Salinas CA 424 Noice Drive 93906
Heather Plaza Apartments Salinas CA 939-78 Heather Circle 93906
North Plaza Apartments Salinas CA 2310 -48 North Main Street 93906
- -----------------------------------------------------------------------------------------------
Pine Grove Apartments Pacific Grove CA 230 Grove Avenue 93950
Laurel Tree Apartments Salinas CA 1185 Monroe Street 93906
Westlake Apartments Salinas CA 25-82 Stephanie Drive 93901
The Capri Apartments Salinas CA 349 Iris Drive 93906
Harding Park Townhomes Salinas CA 1019 Polk Street 93906
- -----------------------------------------------------------------------------------------------
AMERICAN APARTMENT COMMUNITIES II
- -----------------------------------------------------------------------------------------------
Marina Playa Apartments Santa Clara CA 3500 Granada Avenue 95051
Birch Creek Apartments Mountain View CA 575 South Rengstorff Avenue 94040
- -----------------------------------------------------------------------------------------------
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
COLLATERAL DESCRIPTION
-----------------------------------------------------------------------------------
NUMBER OF
UNITS/ PERCENTAGE LEASE
SQUARE YEAR YEAR LARGEST SQUARE FEET OF PROPERTY EXPIRATION
LOAN FEET BUILT RENOVATED TENANT LEASED LEASED DATE
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
SHILO INNS 2,000
- -----------------------------------------------------------------------------------------------------
245 1968 1995 N/A N/A N/A N/A
179 1966-72;1987 N/A N/A N/A N/A N/A
142 1935-79 1996-97 N/A N/A N/A N/A
162 1988 N/A N/A N/A N/A N/A
134 1986 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
150 1968 1995-96 N/A N/A N/A N/A
112 1974;1987 1996-97 N/A N/A N/A N/A
112 1972;1991 N/A N/A N/A N/A N/A
62 1990 N/A N/A N/A N/A N/A
77 1984 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
105 1973 1995-96 N/A N/A N/A N/A
80 1988 N/A N/A N/A N/A N/A
160 1984 N/A N/A N/A N/A N/A
101 1979;1985 N/A N/A N/A N/A N/A
61 1973 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
70 1974 N/A N/A N/A N/A N/A
48 1986 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
FARB INVESTMENTS 2,606
- -----------------------------------------------------------------------------------------------------
1,326 1969-70 N/A N/A N/A N/A N/A
1,280 1969-72 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
AMERICAN APARTMENT
COMMUNITIES I 1,598
- -----------------------------------------------------------------------------------------------------
319 1979-83 1996-97 N/A N/A N/A N/A
207 1978-79 N/A N/A N/A N/A N/A
188 1979 N/A N/A N/A N/A N/A
218 1974 N/A N/A N/A N/A N/A
120 1986 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
100 1963 N/A N/A N/A N/A N/A
157 1977 N/A N/A N/A N/A N/A
139 1972-76 N/A N/A N/A N/A N/A
114 1965;1973 N/A N/A N/A N/A N/A
36 1984 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
AMERICAN 456
APARTMENT
COMMUNITIES II
- -----------------------------------------------------------------------------------------------------
272 1971 N/A N/A N/A N/A N/A
184 1968 N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
COLLATERAL VALUE
--------------------------------------------------
ARD/
APPRAISED APPRAISAL CUT-OFF BALLOON
ADR VALUE DATE LTV LTV
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHILO INNS 78.21 131,125,000 65.4% 0.0%
- ----------------------------------------------------------------------------
100.16 30,500,000 August 14, 1997
100.34 18,900,000 November 7, 1996
76.11 10,000,000 November 20, 1996
63.92 10,200,000 November 8, 1996
75.76 8,600,000 October 9, 1996
- ----------------------------------------------------------------------------
58.56 7,800,000 November 7, 1996
54.41 6,050,000 November 8, 1996
58.69 5,350,000 November 13, 1996
74.68 5,300,000 November 5, 1996
63.07 5,200,000 November 7, 1996
- ----------------------------------------------------------------------------
60.41 4,850,000 November 13, 1996
76.22 3,950,000 November 7, 1996
60.56 4,550,000 November 13, 1996
43.05 3,500,000 November 7, 1996
47.98 3,100,000 November 7, 1996
- ----------------------------------------------------------------------------
54.48 2,500,000 November 14, 1996
47.43 775,000 November 13, 1996
- ----------------------------------------------------------------------------
FARB INVESTMENTS 81,100,000 79.9% 69.3%
- ----------------------------------------------------------------------------
N/A 45,300,000 August 7, 1997
N/A 35,800,000 July 29, 1997
- ----------------------------------------------------------------------------
AMERICAN APARTMENT
COMMUNITIES I 69,700,000 63.8% 56.7%
- ----------------------------------------------------------------------------
N/A 21,000,000 September 28, 1996
N/A 8,700,000 November 19, 1997
N/A 8,000,000 September 28, 1996
N/A 8,300,000 September 28, 1996
N/A - September 27, 1996
- ----------------------------------------------------------------------------
N/A 5,800,000 September 30, 1996
N/A 8,500,000 September 28, 1996
N/A 5,400,000 September 28, 1996
N/A 4,000,000 September 28, 1996
N/A - September 27, 1996
- ----------------------------------------------------------------------------
AMERICAN 32,430,000 64.6% 56.6%
APARTMENT
COMMUNITIES II
- ----------------------------------------------------------------------------
N/A 21,380,000 December 1, 1996
N/A 11,050,000 December 1, 1996
- ----------------------------------------------------------------------------
</TABLE>
- ------------
(1) The underwritten cash flow for the Circles Apartment and North Plaza
Apartments in American Apartment Communities I are combined.
Annex A-3
<PAGE>
<TABLE>
<CAPTION>
COLLATERAL OPERATING PERFORMANCE
- ---------------------------------------------------------------------
ANNUAL
OCCUPANCY UNDERWRITTEN DEBT UNDERWRITTEN 1996
RATE CASH FLOW SERVICE DSCR NOI
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
57.9% 13,541,963 8,917,327 1.52x 15,607,409
- ---------------------------------------------------------------------
58.0% 3,026,439 3,094,154
56.0% 2,194,741 2,491,885
62.0% 1,110,182 1,242,452
61.0% 988,448 1,203,235
55.0% 876,156 1,032,625
- ---------------------------------------------------------------------
54.0% 744,255 894,480
63.0% 588,682 764,901
58.0% 551,016 675,751
64.0% 580,310 688,627
70.0% 502,723 706,131
- ---------------------------------------------------------------------
66.0% 623,206 606,956
56.0% 406,768 551,627
45.0% 421,873 453,100
63.0% 424,092 494,118
66.0% 255,741 365,812
- ---------------------------------------------------------------------
43.0% 177,644 241,778
51.0% 69,687 99,777
- ---------------------------------------------------------------------
97.5% 7,291,234 5,390,592 1.35x 5,817,686
- ---------------------------------------------------------------------
98.7% 3,921,962 3,320,289
96.3% 3,369,272 2,497,397
- ---------------------------------------------------------------------
96.4% 7,139,030 4,078,775 1.75x 7,230,240
- ---------------------------------------------------------------------
97.5% 2,448,410 2,417,662
94.2% 832,730 857,753
96.8% 809,758 724,596
92.7% 820,833 869,592
97.5% (1)- -
- ---------------------------------------------------------------------
100.0% 526,163 556,991
98.1% 550,135 658,199
99.3% 526,398 521,591
93.9% 394,798 391,559
97.2% 229,805 232,299
- ---------------------------------------------------------------------
97.4% 3,337,800 1,803,618 1.85x 2,726,502
- ---------------------------------------------------------------------
97.4% 2,049,793 1,713,288
97.3% 1,288,010 1,013,214
- ---------------------------------------------------------------------
</TABLE>
<PAGE>
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 6 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 26, 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
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.
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
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT ....................................................................... iii
ADDITIONAL INFORMATION ...................................................................... iii
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE ........................................... iv
REPORTS ..................................................................................... iv
SUMMARY OF PROSPECTUS ....................................................................... 1
RISK FACTORS ................................................................................ 6
Limited Liquidity; Lack of Market for Resale ............................................... 6
Limited Assets as Security for Investment in Certificates; No Personal Liability ........... 6
Effects of Prepayments on Average Life of Certificates and Yields .......................... 6
Limited Nature of Ratings .................................................................. 7
Risks Associated with Lending on Income Producing Properties ............................... 7
Certain Tax Considerations of Variable Rate Certificates ................................... 9
Limited Nature of Credit Ratings ........................................................... 9
Potential Inability to Verify Underwriting Standards ....................................... 9
Nonrecourse Mortgage Loans; Limited Recovery ............................................... 10
Inclusion of Delinquent and Non-Performing Mortgage Loans May Adversely Affect Yields ...... 10
Junior Mortgage Loans ...................................................................... 10
Balloon Payments ........................................................................... 10
Extensions and Modifications of Defaulted Mortgage Loans; Additional Servicing Fees ........ 10
Risks Related to the Mortgagor's Form of Entity and Sophistication ......................... 11
Credit Enhancement Limitations ............................................................. 11
Risks to Subordinated Certificateholders; Lower Payment Priority ........................... 12
Taxable Income in Excess of Distributions Received ......................................... 12
Due-on-Sale Clauses and Assignments of Leases and Rents .................................... 12
Environmental Risks ........................................................................ 13
ERISA Considerations ....................................................................... 13
Certain Federal Tax Considerations Regarding Residual Certificates ......................... 13
Special Hazard Losses ...................................................................... 14
Control; Decisions by Certificateholders ................................................... 14
Book-Entry Registration .................................................................... 14
THE DEPOSITOR ............................................................................... 16
THE MASTER SERVICER ......................................................................... 16
USE OF PROCEEDS ............................................................................. 16
DESCRIPTION OF THE CERTIFICATES ............................................................. 16
General .................................................................................... 17
Distributions on Certificates .............................................................. 17
Accounts ................................................................................... 18
Amendment .................................................................................. 20
Termination ................................................................................ 21
v
<PAGE>
PAGE
--------
Reports to Certificateholders ........................................................... 21
The Trustee ............................................................................. 21
THE MORTGAGE POOLS ....................................................................... 22
General ................................................................................. 22
Assignment of Mortgage Loans ............................................................ 23
Mortgage Underwriting Standards and Procedures .......................................... 24
Representations and Warranties .......................................................... 25
SERVICING OF THE MORTGAGE LOANS .......................................................... 27
General ................................................................................. 27
Collections and Other Servicing Procedures .............................................. 27
Insurance ............................................................................... 28
Fidelity Bonds and Errors and Omissions Insurance ....................................... 29
Servicing Compensation and Payment of Expenses .......................................... 29
Advances ................................................................................ 30
Modifications, Waivers and Amendments ................................................... 30
Evidence of Compliance .................................................................. 30
Certain Matters With Respect to the Master Servicer, the Special Servicer, the Trustee
and the Depositor ...................................................................... 31
Events of Default ....................................................................... 32
Rights Upon Event of Default ............................................................ 33
CREDIT ENHANCEMENT ....................................................................... 34
General ................................................................................. 34
Subordinate Certificates ................................................................ 34
Reserve Funds ........................................................................... 35
Cross-Support Features .................................................................. 35
Certificate Guarantee Insurance ......................................................... 36
Limited Guarantee ....................................................................... 36
Letter of Credit ........................................................................ 36
Pool Insurance Policies; Special Hazard Insurance Policies .............................. 36
Surety Bonds ............................................................................ 36
Fraud Coverage .......................................................................... 36
Mortgagor Bankruptcy Bond ............................................................... 37
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS .............................................. 37
General ................................................................................. 37
Types of Mortgage Instruments ........................................................... 37
Personalty .............................................................................. 38
Installment Contracts ................................................................... 38
Junior Mortgages; Rights of Senior Mortgagees or Beneficiaries .......................... 39
Foreclosure ............................................................................. 40
Environmental Risks ..................................................................... 46
Enforceability of Certain Provisions .................................................... 49
Soldiers' and Sailors' Relief Act ....................................................... 50
Applicability of Usury Laws ............................................................. 50
Alternative Mortgage Instruments ........................................................ 51
Leases and Rents ........................................................................ 51
Secondary Financing; Due-on-Encumbrance Provisions ...................................... 52
vi
<PAGE>
PAGE
--------
Certain Laws and Regulations .............................................................. 52
Type of Mortgaged Property ................................................................ 53
Criminal Forfeitures ...................................................................... 53
Americans With Disabilities Act ........................................................... 53
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ................................................... 54
General ................................................................................... 54
Taxation of the REMIC and its Certificate Holders ......................................... 54
Qualification as a REMIC .................................................................. 54
Taxation of Regular Interests ............................................................. 56
REMIC Expenses ............................................................................ 62
Sale or Exchange of Regular Certificates .................................................. 62
Taxation of the REMIC ..................................................................... 63
Taxation of Holders of Residual Certificates .............................................. 65
Excess Inclusions ......................................................................... 66
Restrictions on Ownership and Transfer of Residual Certificates ........................... 67
Mark-to-Market Rules ...................................................................... 69
Administrative Matters .................................................................... 69
Tax Status as a Grantor Trust ............................................................. 70
Miscellaneous Tax Aspects ................................................................. 74
Tax Treatment of Foreign Investors ........................................................ 74
STATE TAX CONSIDERATIONS ................................................................... 75
ERISA CONSIDERATIONS ....................................................................... 75
Prohibited Transactions ................................................................... 76
LEGAL INVESTMENT ........................................................................... 77
PLAN OF DISTRIBUTION ....................................................................... 78
LEGAL MATTERS .............................................................................. 78
FINANCIAL INFORMATION ...................................................................... 79
RATING ..................................................................................... 79
</TABLE>
vii
<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), 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. Each such mortgage loan or
Installment Contract is herein referred to
as a "Mortgage Loan." The Mortgage Loans
will not be guaranteed or insured by the
Depositor or any of its affiliates. The
Prospectus Supplement will indicate whether
the Mortgage Loans will be guaranteed or
insured by any governmental agency or
instrumentality or other person. The
Mortgage Loans will have the additional
characteristics described under "THE
MORTGAGE POOLS" herein and "DESCRIP-
1
<PAGE>
TION 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 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
2
<PAGE>
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 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.
3
<PAGE>
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 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."
4
<PAGE>
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 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.
5
<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
6
<PAGE>
payments will conform to any model described in any Prospectus Supplement. If
prevailing interest rates fall significantly below the applicable rates borne
by the Mortgage Loans included in a Trust Fund, principal prepayments are
likely to be higher than if prevailing rates remain at or above the rates
borne by those Mortgage Loans. As a result, the actual maturity of any Class
of Certificates could occur significantly earlier than expected.
Alternatively, the actual maturity of any Class of Certificates could occur
significantly later than expected as a result of prepayment premiums or the
existence of defaults on the Mortgage Loans, particularly at or near their
maturity dates. In addition, the Master Servicer or the Special Servicer, if
any, may have the option under the Agreement for such Series to extend the
maturity of the Mortgage Loans following a default in the payment of a
balloon payment, which would also have the effect of extending the average
life of each Class of related Certificates. A Series of Certificates may
include one or more Classes of Certificates with priorities of payment 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
7
<PAGE>
as the liquidation value of such property, whereas a decline in the income of
a mortgagor on a single-family property will likely affect the performance of
the related loan but may not affect the liquidation value of such property.
Further, the concentration of default, foreclosure and loss risks for
Mortgage Loans in a particular Trust Fund or the related Mortgaged Properties
will generally be greater than for pools of single-family loans both because
the Mortgage Loans in a Trust Fund will generally consist of a smaller number
of loans than would a single-family pool of comparable aggregate unpaid
principal balance and because of the higher principal balance of individual
Mortgage Loans.
The performance of a mortgage loan secured by an income-producing property
leased by the mortgagor to tenants as well as the liquidation value of such
property may be dependent upon the 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."
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
8
<PAGE>
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 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 of 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.
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.
9
<PAGE>
CERTAIN TAX CONSIDERATIONS OF VARIABLE RATE CERTIFICATES
There are certain tax matters as to which counsel to the Depositor is
unable to opine at the time of the issuance of the Prospectus due to
uncertainty in the law. Specifically, the treatment of Interest Weighted
Certificates and Variable Rate Regular Interests are subject to unsettled law
which creates uncertainty as to the exact method of income accrual which
should control. The REMIC will accrue income using a method which is
consistent with certain regulations; however, there can be no assurance that
such method will be controlling.
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.
10
<PAGE>
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
11
<PAGE>
to produce a greater recovery amount than liquidation, there can be no
assurance that such flexibility with respect to extensions or modifications
or payment of a workout fee will increase the amount of receipts from or
proceeds of Mortgage Loans that are in default or as to which a payment
default is reasonably foreseeable.
RISKS RELATED TO THE MORTGAGOR'S FORM OF ENTITY AND SOPHISTICATION
Mortgage loans made to partnerships, corporations or other entities may
entail risks of loss from delinquency and foreclosure that are greater than
those of mortgage loans made to individuals. For example, an entity, as
opposed to an individual, may be more inclined to seek legal protection from
its creditors, such as a mortgagee, under the bankruptcy laws. Unlike
individuals involved in bankruptcies, various types of entities generally do
not have personal assets and creditworthiness at stake. The bankruptcy of a
mortgagor may impair the ability of the mortgagee to enforce its rights and
remedies under the related mortgage. See "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS--Foreclosure--Bankruptcy 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
12
<PAGE>
of delinquencies, foreclosures and losses could be higher than those now
generally experienced by institutional lenders for similar mortgage loans. In
addition, adverse economic conditions (which may or may not affect real
property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly,
the rates of delinquencies, foreclosures and losses with respect to any Trust
Fund. To the extent that such losses are not covered by Credit Enhancement,
such losses will be borne, at least in part, by the holders of one or more
Classes of the Certificates of the related Series. See "--Limited Nature of
Ratings," "DESCRIPTION OF THE CERTIFICATES" and "CREDIT ENHANCEMENT."
RISKS TO SUBORDINATED CERTIFICATEHOLDERS; 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."
13
<PAGE>
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
14
<PAGE>
Residual Certificateholder will be disregarded under certain circumstances
with the transferor remaining liable for any taxable income derived from the
Residual Interest by the transferee Residual Certificateholder. See "MATERIAL
FEDERAL INCOME TAX 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."
15
<PAGE>
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.
<F1>
DESCRIPTION OF THE CERTIFICATES *
The Certificates of each Series will be issued pursuant to a separate
Pooling and Servicing Agreement (the "Agreement") to be entered into among
the Depositor, the Master Servicer, the Special Servicer, if any, and the
Trustee for that Series and any other parties described in the applicable
Prospectus Supplement, substantially in the form filed as an exhibit to the
Registration Statement of which this Prospectus is a part or in such other
form as may be described in the applicable Prospectus Supplement. The
following summaries describe 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.
- ------------
* 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.
16
<PAGE>
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.
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
17
<PAGE>
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 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
18
<PAGE>
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 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;
19
<PAGE>
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 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
20
<PAGE>
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."
21
<PAGE>
THE MORTGAGE POOLS
GENERAL
Each Mortgage Pool will consist of mortgage loans secured by first or
junior mortgages, deeds of trust or similar security instruments (each, a
"Mortgage") on, or installment contracts ("Installment Contracts") for the
sale of, fee simple or leasehold interests in commercial real estate
property, multifamily residential property, and/or mixed-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), 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 "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.
22
<PAGE>
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
23
<PAGE>
attorney's opinion of title issued as of the date of origination of the
Mortgage Loan; (v) if the security agreement and/or assignment of leases,
rents and profits is separate from the Mortgage, an executed assignment of
such security agreement and/or 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.
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
24
<PAGE>
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 Protection Expenses, (c) interest on all advances made with respect
to such Mortgage Loan at
25
<PAGE>
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.
26
<PAGE>
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
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
27
<PAGE>
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 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,
28
<PAGE>
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.
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.
29
<PAGE>
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.
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
30
<PAGE>
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, 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
31
<PAGE>
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 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
32
<PAGE>
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, 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.
33
<PAGE>
CREDIT ENHANCEMENT
GENERAL
If specified in the related Prospectus Supplement for any Series, credit
enhancement may be provided with respect to one or more Classes thereof or
the related Mortgage Loans ("Credit Enhancement"). Credit Enhancement may be
in the form of a letter of credit, the subordination of one or more Classes
of the Certificates of such Series, the establishment of one or more reserve
funds, surety bonds, certificate guarantee insurance, the use of
cross-support features, limited guarantees or another method of Credit
Enhancement described in the related Prospectus Supplement, or any
combination of the foregoing.
It is unlikely that Credit Enhancement will provide protection against all
risks of loss or guarantee repayment of the entire principal balance of the
Certificates and interest thereon. If losses occur that exceed the amount
covered by Credit Enhancement or that are not covered by Credit Enhancement,
Certificateholders will bear their allocable share of deficiencies. See "RISK
FACTORS--Credit Enhancement Limitations."
If Credit Enhancement is provided with respect to a Series, or the related
Mortgage Loans, the applicable Prospectus Supplement will include a
description of (a) the amount payable under such Credit Enhancement, (b) any
conditions to payment thereunder not otherwise described herein, (c) the
conditions (if any) under which the amount payable under such Credit
Enhancement may be reduced and under which such Credit Enhancement may be
terminated or replaced and (d) the material provisions of any agreement
relating to such Credit Enhancement. Additionally, the applicable Prospectus
Supplement will set forth certain information with respect to the issuer of
any third-party Credit Enhancement, including (i) a brief description of its
principal business activities, (ii) its principal place of business, the
jurisdiction of organization and the jurisdictions under which it is
chartered or licensed to do business, (iii) if applicable, the identity of
regulatory agencies that exercise primary jurisdiction over the conduct of
its business and (iv) its total assets and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in such
Prospectus Supplement. If the holders of any Certificates of any Series will
be materially dependent upon the issuer of any third party Credit Enhancement
for timely payment of interest and/or principal on their Certificates, the
Depositor will file a current report on Form 8-K within 15 days after the
initial issuance of such Certificates, which will include any material
information regarding such issuer, including audited financial statements to
the extent required.
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more Classes
of a Series may be Subordinate Certificates. If so specified in the related
Prospectus Supplement, the rights of the holders of subordinate Certificates
(the "Subordinate Certificates") to receive distributions of principal and
interest from the Distribution Account on any Distribution Date will be
subordinated to such rights of the holders of senior Certificates (the
"Senior Certificates") to the extent specified in the related Prospectus
Supplement. In addition, subordination may be effected by the allocation of
losses first to Subordinate Certificates in reduction of the principal
balance of such Certificates until the principal balance thereof is reduced
to zero before any losses are allocated to Senior Certificates. The Agreement
may require a trustee that is not the Trustee to be appointed to act on
behalf of holders of Subordinate Certificates.
A Series may include one or more Classes of Subordinate Certificates
entitled to receive cash flows remaining after distributions are made to all
other Classes designated as being senior thereto. Such right to receive
payments will effectively be subordinate to the rights of holders of such
senior designated Classes of Certificates. A Series may also include one or
more Classes of Subordinate Certificates that will be allocated losses prior
to any losses being allocated to Classes of Subordinate Certificates
designated as being senior thereto. If so specified in the related Prospectus
Supplement, the subordination of a Class may apply only in the event of (or
may be limited to) certain types of losses not covered by insurance policies
or other Credit Enhancement, such as losses arising from damage to property
securing a Mortgage Loan not covered by standard hazard insurance policies.
The related Prospectus Supplement will describe any such subordination in
greater detail and set forth information concerning, among other things, to
the extent applicable, (i) the amount of subordi-
34
<PAGE>
nation 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.
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.
35
<PAGE>
CERTIFICATE GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, certificate
guarantee insurance, if any, with respect to a Series of Certificates will be
provided by one or more insurance companies. Such certificate guarantee
insurance will guarantee, with respect to one or more Classes of Certificates
of the applicable Series, timely distributions of interest and full
distributions of principal on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the certificate guarantee insurance will also guarantee against
any payment made to a Certificateholder that is subsequently recovered as a
"voidable preference" payment under the Bankruptcy Code. A copy of the
certificate guarantee insurance for a Series, if any, will be filed with the
Commission as an exhibit to the Form 8-K to be filed with the Commission
within 15 days of issuance of the Certificates of the applicable Series.
LIMITED GUARANTEE
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, Credit Enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
LETTER OF CREDIT
Alternative Credit Enhancement with respect to one or more Classes of
Certificates of a Series of Certificates may be provided by the issuance of a
letter of credit by the bank or financial institution specified in the
applicable Prospectus Supplement. The coverage, amount and frequency of any
reduction in coverage provided by a letter of credit issued with respect to
one or more Classes of Certificates of a Series will be set forth in the
Prospectus Supplement relating to such Series.
POOL INSURANCE POLICIES; SPECIAL HAZARD INSURANCE POLICIES
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor will obtain a pool insurance policy for the
Mortgage Loans in the related Trust Fund. The pool insurance policy will
cover any loss (subject to the limitations described in a related Prospectus
Supplement) by reason of default to the extent a related Mortgage Loan is not
covered by any primary mortgage insurance policy. The amount and terms of any
such coverage will be set forth in the Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, for each Series
of Certificates as to which a pool insurance policy is provided, the
Depositor will also obtain a special hazard insurance policy for the related
Trust Fund in the amount set forth in such Prospectus Supplement. The special
hazard insurance policy will, subject to the limitations described in the
applicable Prospectus Supplement, protect against loss by reason of damage to
Mortgaged Properties caused by certain hazards not insured against under the
standard form of hazard insurance policy for the respective states in which
the Mortgaged Properties are located. The amount and terms of any such
coverage will be set forth in the Prospectus Supplement.
SURETY BONDS
If so specified in the Prospectus Supplement relating to a Series of
Certificates, Credit Enhancement with respect to one or more Classes of
Certificates of a Series may be provided by the issuance of a surety bond
issued by a financial guarantee insurance company specified in the applicable
Prospectus Supplement. The coverage, amount and frequency or any reduction in
coverage provided by a surety bond will be set forth in the Prospectus
Supplement relating to such Series.
FRAUD COVERAGE
If so specified in the applicable Prospectus Supplement, losses resulting
from fraud, dishonesty or misrepresentation in connection with the
origination or sale of the Mortgage Loans may be covered to a limited extent
by (i) representations and warranties to the effect that no such fraud,
dishonesty or misrepresentation had occurred, (ii) a Reserve Fund, (iii) a
letter of credit or (iv) some other method. The amount and terms of any such
coverage will be set forth in the Prospectus Supplement.
36
<PAGE>
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 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
37
<PAGE>
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.
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.
38
<PAGE>
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 impaired, the mortgagor must be allowed to use any
applicable insurance proceeds or partial condemnation awards to restore the
property.
The form of mortgage used by many institutional lenders also typically
contains a "future advance" clause that provides that additional amounts
advanced to or on behalf of the mortgagor by the mortgagee are to be secured
by the mortgage. Such a clause is valid under the laws of most states. In
some states, however, the priority of any advance made under the clause
depends upon whether the advance was an "obligatory" or "optional" advance.
If the mortgagee is obligated to advance the additional amounts, the advance
may be entitled to receive the same priority as amounts initially made under
the mortgage, notwithstanding that other junior mortgages or other liens may
have encumbered the property between the date of recording of the senior
mortgage and the date of the future advance, and that the mortgagee had
actual knowledge of such intervening junior mortgages or other liens at the
time of the advance. If the mortgagee is not obligated to advance the
additional amounts and has actual knowledge of any such intervening junior
mortgages or other liens, the advance may be subordinate to such intervening
junior mortgages or other liens. In many other states, all advances under a
"future advance" clause are given the same priority as amounts initially made
under the mortgage so long as such advances do not exceed a specified "credit
limit" amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage used by many
institutional lenders obligates the mortgagor: (i) to pay all taxes and
assessments affecting the property prior to delinquency; (ii) to pay, when
due, all other encumbrances, charges and liens affecting the property that
may be prior to the lien of the mortgage; (iii) to provide and maintain
hazard insurance on the property; (iv) to maintain and repair the property
and not to commit or permit any waste thereof; and (v) to appear in and
defend any action or proceeding purporting to affect the property or the
rights of the mortgagee under the mortgage. Upon a failure of the mortgagor
to perform any of these obligations, the mortgage typically provides the
mortgagee the option to perform the obligation itself, with the mortgagor
agreeing to reimburse the mortgagee for any sums expended by the mortgagee in
connection therewith. All sums so expended by the mortgagee also typically
become part of the indebtedness secured by the mortgage. The form of mortgage
used by many institutional lenders also typically requires the mortgagor to
obtain the consent of the mortgagee as to all actions affecting the mortgaged
property, including, without limitation, all leasing activities (including
new leases and termination or modification of existing leases), any
alterations, modifications or improvements to the buildings and other
improvements forming a part of the
39
<PAGE>
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 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
40
<PAGE>
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 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
41
<PAGE>
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 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
42
<PAGE>
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 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
43
<PAGE>
reasons, the ground lessee breaches or defaults in its obligations under the
ground lease or there is a bankruptcy of the ground lessee or the ground
lessor. Examples of protective provisions that may be included in the related
ground lease, or a separate agreement between the ground lessee, the ground
lessor and the mortgagee, in order to minimize such risk are the right of the
mortgagee to receive notices from the ground lessor of any defaults by the
mortgagor; the right to cure such defaults, with adequate cure periods; if a
default is not susceptible of cure by the mortgagee, the right to acquire the
leasehold estate through foreclosure or otherwise prior to any termination of
the ground lease; the ability of the ground lease to be assigned to and by
the mortgagee or a purchaser at a foreclosure sale and for a release of the
assigning ground lessee's liabilities thereunder; the right of the mortgagee
to enter into a ground lease with the ground lessor on the same terms and
conditions as the old ground lease in the event of a termination thereof; and
provisions for disposition of any insurance proceeds or condemnation awards
payable upon a casualty to, or condemnation of, the mortgaged property. In
addition to the foregoing protections, the leasehold mortgage may prohibit
the ground lessee from treating the ground lease as terminated in the event
of the ground lessor's bankruptcy and rejection of the ground lease by the
trustee for the debtor-ground lessor, and may assign to the mortgagee the
debtor-ground lessee's right to reject a lease pursuant to Section 365 of the
Bankruptcy Code, although the enforceability of such assignment has not been
established. An additional manner in which to obtain protection against the
termination of the ground lease is to have the ground lessor enter into a
mortgage encumbering the fee estate in addition to the mortgage encumbering
the leasehold interest under the ground lease. Additional protection is
afforded to the mortgagee, because if the ground lease is terminated, the
mortgagee may nonetheless possess rights contained in the fee mortgage.
Without the protections described in this paragraph, a leasehold mortgagee
may be more likely to lose the collateral securing its leasehold mortgage. No
assurance can be given that any or all of the above described provisions will
be obtained in connection with any particular Mortgage Loan.
Bankruptcy Laws. Mortgagors often file bankruptcy to delay or prevent
exercise of remedies under loan documents. Numerous statutory and common law
provisions, including the Bankruptcy Code and state laws affording relief to
debtors, may interfere with and delay the ability of a mortgagee to obtain
payment of the loan, to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the Bankruptcy Code virtually all
actions (including foreclosure actions and deficiency judgment proceedings)
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
44
<PAGE>
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 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.
45
<PAGE>
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,
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
46
<PAGE>
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 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.
47
<PAGE>
"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 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.
48
<PAGE>
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.
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.
49
<PAGE>
Acceleration on Default. It is expected that the Mortgage Loans will
include a "debt-acceleration" clause, which permits the mortgagee to
accelerate the full debt upon a monetary or nonmonetary default of the
mortgagor. The courts of all states will enforce such acceleration clauses in
the event of a material payment default if appropriate notices of default
have been effectively given. However, the equity courts of any state may
refuse to foreclose a mortgage when an acceleration of the indebtedness would
be inequitable or unjust or the circumstances would render the acceleration
unconscionable. Furthermore, in some states, the mortgagor may avoid
foreclosure and reinstate an accelerated loan by paying only the defaulted
amounts and, in certain states, the costs and attorneys' fees incurred by the
mortgagee in collecting such defaulted payments.
State courts also are known to apply various legal and equitable
principles to avoid enforcement of the forfeiture provisions of Installment
Contracts. For example, a mortgagee's practice of accepting late payments
from the mortgagor may be deemed a waiver of the forfeiture clause. State
courts also may impose equitable grace periods for payment of arrearages or
otherwise permit reinstatement of the Installment Contract following a
default. Not infrequently, if a mortgagor under an Installment Contract has
significant equity in the property, equitable principles will be applied to
reform or reinstate the Installment Contract or to permit the mortgagor to
share the proceeds upon a foreclosure sale of the property if the sale price
exceeds the debt.
SOLDIERS' AND SAILORS' RELIEF ACT
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the "Relief Act"), a mortgagor who enters military service
(including the Army, Navy, Air Force, Marines, Coast Guard, members of the
National Guard or any Reserves who are called to active duty status after the
origination of their mortgage loan and officers of the U.S. Public Health
Service assigned to duty with the military) after the origination of such
mortgagor's mortgage loan may not be charged interest (including fees and
charges) above an annual rate of 6% during the period of such mortgagor's
active duty status, unless a court orders otherwise upon application of the
mortgagee. Any shortfall in interest collections resulting from the
application of the Relief Act, to the extent not covered by any applicable
Credit Enhancement, could result in losses to the holders of the
Certificates. In addition, the Relief Act imposes limitations that would
impair the ability of the Master Servicer or the Special Servicer, if any, to
foreclose on an affected Mortgage Loan during the mortgagor's period of
active duty status and, under certain circumstances, during an additional
three months thereafter. Thus, in the event that such a Mortgage Loan goes
into default, there may be delays and losses occasioned by the inability to
realize upon the Mortgaged Property in a timely fashion. Because the Relief
Act applies to mortgagors who enter military service (including reservists
who are later called to active duty) after origination of 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
50
<PAGE>
and any penalty owed by the mortgagee. A second type of statute is more
severe. A violation of this type of usury law results in the invalidation of
the transaction, thereby permitting the mortgagor to have the recorded
mortgage or deed of trust cancelled without any payment and prohibiting the
mortgagee from foreclosing.
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that state usury limitations do
not apply to certain types of residential (including multifamily, but not
other commercial) first mortgage loans originated by certain lenders after
March 31, 1980. A similar federal statute was in effect with respect to
mortgage loans made during the first three months of 1980. The statute
authorized any state to reimpose interest rate limits by adopting, before
April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage
loans, originated by non-federally chartered lenders have historically been
subjected to a variety of restrictions. Such restrictions differed from state
to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender was in
compliance with applicable law. These difficulties were alleviated
substantially with respect to residential (including multifamily, but not
other commercial) mortgage loans as a result of the enactment of Title VIII
of the Garn-St. Germain Act ("Title VIII"). Title VIII provides that,
notwithstanding any state law to the contrary: (i) state-chartered banks may
originate alternative mortgage instruments in accordance with regulations
promulgated by the Comptroller of the Currency with respect to origination of
alternative mortgage instruments by national banks; (ii) state-chartered
credit unions may originate alternative mortgage instruments in accordance
with regulations promulgated by the National Credit Union Administration (the
"NCUA") with respect to origination of alternative mortgage instruments by
federal credit unions; and (iii) all other non-federally chartered housing
creditors, including state-chartered savings and loan associations,
state-chartered savings banks and mortgage banking companies, may originate
alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board (now the Office of Thrift
Supervision) with respect to origination of alternative mortgage instruments
by federal savings and loan associations. Title VIII authorized any state to
reject applicability of the provisions of Title VIII by adopting, prior to
October 15, 1985, a law or constitutional provision expressly rejecting the
applicability of such provisions. Certain states have taken such action. A
mortgagee's failure to comply with the applicable federal regulations in
connection with the origination of an alternative mortgage instrument could
subject such mortgage loan to state restrictions that would not otherwise be
applicable.
LEASES AND RENTS
Some of the Mortgage Loans may be secured by an assignment of leases and
rents, either through assignment provisions incorporated in the mortgage,
through a separate assignment document or both. Under an assignment of leases
and rents, the mortgagor typically assigns to the mortgagee the mortgagor's
right, title and interest as landlord under each lease and the income derived
therefrom, while retaining a revocable license to collect the rents for so
long as there is no default under the mortgage loan documentation. In the
event of such a default, the license terminates and the mortgagee may be
entitled to collect rents. A mortgagee's failure to perfect properly its
interest in rents may result in the loss of a substantial pool of funds that
could otherwise serve as a source of repayment for the loan. Some state laws
may require that in addition to recording properly the assignment of leases
and rents, the mortgagee must also take possession of the property and/or
obtain judicial appointment of a receiver before such mortgagee is entitled
to collect rents. Although mortgagees actually taking possession of the
property may become entitled to collect the rents therefrom, such mortgagees
may also incur potentially substantial
51
<PAGE>
risks attendant to such possession, including liability for environmental
clean-up costs and other risks inherent to property ownership and operation.
In addition, if a bankruptcy or similar proceeding is commenced by or in
respect of the mortgagor, the mortgagee's ability to collect the rents may
also be adversely affected.
SECONDARY FINANCING; DUE-ON-ENCUMBRANCE PROVISIONS
Some of the Mortgage Loans may not restrict secondary financing, thereby
permitting the mortgagor to use the Mortgaged Property as security for one or
more additional loans. Some of the Mortgage Loans may preclude secondary
financing (often by permitting the senior mortgagee to accelerate the
maturity of its loan if the mortgagor further encumbers the Mortgaged
Property) or may require the consent of the senior mortgagee; however, such
provisions may be unenforceable in certain jurisdictions under certain
circumstances. The Agreement for each Series will generally provide that if
any Mortgage Loan contains a provision in the nature of a
"due-on-encumbrance" clause, which by its terms: (i) provides that such
Mortgage Loan will (or may at the mortgagee's option) become due and payable
upon the creation of any lien or other encumbrance on the related Mortgaged
Property; or (ii) requires the consent of the related mortgagee to the
creation of any such lien or other encumbrance on the related Mortgaged
Property; then for so long as such Mortgage Loan is included in a given Trust
Fund, the Master Servicer or, if such Mortgage Loan is a Specially Serviced
Mortgage Loan, the Special Servicer, if any, on behalf of such Trust Fund,
will exercise (or decline to exercise) any right it may have as the mortgagee
of record with respect to such Mortgage Loan to (x) accelerate the payments
thereon or (y) withhold its consent to the creation of any such lien or other
encumbrance, in a manner consistent with the servicing standard set forth in
the Agreement.
If a mortgagor encumbers a mortgaged property with one or more junior
liens, the senior mortgagee is subjected to additional risk, such as the
following. First, the mortgagor may have difficulty servicing and repaying
multiple loans. In addition, if the junior loan permits recourse to the
mortgagor and the senior loan does not, a mortgagor may be more likely to
repay sums due on the junior loan than those due on the senior loan. Second,
acts of the senior mortgagee that prejudice the junior mortgagee or impair
the junior mortgagee's security may create a superior equity in favor of the
junior mortgagee. For example, if the mortgagor and the senior mortgagee
agree to an increase in the principal amount of, or the interest rate payable
on, the senior loan, the senior mortgagee may lose its priority to the extent
an existing junior mortgagee is prejudiced or the mortgagor is additionally
burdened. Third, if the mortgagor defaults on the 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.
52
<PAGE>
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.
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.
53
<PAGE>
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 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
54
<PAGE>
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 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,
55
<PAGE>
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 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.
56
<PAGE>
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.
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
57
<PAGE>
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
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
58
<PAGE>
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.
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).
59
<PAGE>
Purchasers of Regular Certificates bearing a variable rate of interest
should be aware that there is uncertainty concerning the application of Code
Section 1272(a)(6) and the Final Regulations to such Certificates. In the
absence of other authority, the Depositor intends to be guided by the
provisions of the Final Regulations governing variable rate debt instruments
in adapting the provisions of Code Section 1272(a)(6) to such Certificates
for the purpose of preparing tax reports furnished to the IRS and
Certificateholders. In that regard, in determining OID with respect to
Regular Certificates bearing interest at a Single Variable Rate, (a) all
stated interest with respect to a Regular Certificate is treated as qualified
stated interest and (b) the amount and accrual of OID, if any, is determined
under the OID rules applicable to fixed rate debt instruments discussed above
by assuming that the Single Variable Rate is a fixed rate equal to (i) in the
case of a qualified floating rate or qualified inverse floating rate, the
issue date value of the rate or (ii) in the case of any other objective rate,
a fixed rate that reflects the yield that is reasonably expected for the
Regular Certificate. Interest and OID attributable to the Regular
Certificates bearing interest at a Multiple Variable Rate similarly will be
taken into account under a methodology that converts the Certificate into an
equivalent fixed rate debt instrument. However, in determining the amount and
accrual of OID, the assumed fixed rates are (a) for each qualified floating
rate, the value of each such rate as of the issue date (with appropriate
adjustment for any differences in intervals between interest adjustment
dates); (b) for a qualified inverse floating rate, the value of the rate as
of the issue date; and (c) for any other objective rate, the fixed rate that
reflects the yield that is reasonably expected for the Certificate. In the
case of a Certificate that provides for stated interest at a fixed rate in
one or more accrual periods and either one or more qualified floating rates
or a qualified inverse floating rate in other accrual periods, the fixed rate
is initially converted into a qualified floating rate (or a qualified inverse
floating rate, if the Certificate provides for a qualified inverse floating
rate). The qualified floating rate or qualified inverse floating rate that
replaces the fixed rate must be such that the fair market value of the
Regular Certificate as of its issue date is approximately the same as the
fair market value of an otherwise identical debt-instrument that provides for
either the qualified floating rate or the qualified inverse floating rate.
Subsequent to converting the fixed rate into either a qualified floating rate
or a qualified inverse floating rate, the Regular Certificate is then treated
as converted into an equivalent fixed rate debt instrument in the manner
described above. If the interest paid or accrued with respect to a Single
Variable Rate or Multiple Variable Rate Certificate during an accrual period
differs from the assumed fixed interest rate, such difference will be an
adjustment (to interest or OID, as applicable) to the Certificateholder's
taxable income for the taxable period or periods to which such difference
relates.
Purchasers of Certificates bearing a variable rate of interest should be
aware that the provisions of the Final Regulations governing variable rate
debt instruments are limited in scope and may not apply to some Regular
Certificates having variable rates. If such a Certificate is not subject to
the provisions of the Final Regulations governing variable rate debt
instruments, it may be subject to the provisions of the Final Regulations
applicable to debt instruments having contingent payments. Prospective
purchasers of variable rate Regular Certificates should consult their tax
advisers concerning the appropriate tax treatment of such Certificates.
Market Discount and Premium. A purchaser of a Regular Certificate may also
be subject to the market discount rules of Code Section 1276 if the stated
redemption price at maturity (or the revised issue price where OID has
accrued on such Certificate) exceeds the basis of the Certificate in the
hands of the purchaser. Such purchaser generally will be required to
recognize accrued market discount as ordinary income as payments of principal
are received on such Regular Certificate, or upon the sale or exchange of the
Regular Certificate. In general terms, until regulations are promulgated,
market discount may be treated as accruing, at the election of the
Certificateholder, either (i) under a constant yield method, taking into
account the Prepayment Assumption, or (ii) in proportion to accruals of OID
(or, if there is no OID, in proportion to accruals of stated interest)
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
60
<PAGE>
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 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.
61
<PAGE>
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.
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
62
<PAGE>
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 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
63
<PAGE>
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 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.
64
<PAGE>
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 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
65
<PAGE>
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.
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
66
<PAGE>
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 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
67
<PAGE>
(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
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
68
<PAGE>
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 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
69
<PAGE>
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 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
70
<PAGE>
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 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
71
<PAGE>
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 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.
72
<PAGE>
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 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.
73
<PAGE>
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 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.
74
<PAGE>
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.
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.
75
<PAGE>
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.
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
76
<PAGE>
the Trust Fund may be deemed to be "plan assets" of each Plan that purchases
Certificates, in the absence of an exemption, the purchase, sale or holding
of Certificates of any Series or Class by or with "plan assets" of a Plan may
result in a prohibited transaction and the imposition of civil penalties or
excise taxes. Depending on the relevant facts and circumstances, certain
prohibited transaction exemptions may apply to the purchase, sale or holding
of Certificates of any Series or Class by a Plan--for example, Prohibited
Transaction Class Exemption ("PTCE") 95-60, which exempts certain
transactions between insurance company general accounts and parties in
interest; PTCE 91-38, which exempts certain transactions between bank
collective investment funds and parties in interest; PTCE 90-1, which exempts
certain transactions between insurance company pooled separate accounts and
parties in interest; or PTCE 84-14, which exempts certain transactions
effected on behalf of a plan by a "qualified professional asset manager."
There can be no assurance that any of these exemptions will apply with
respect to any Plan's investment in any Certificates or, even if an exemption
were deemed to apply, that any exemption would apply to all prohibited
transactions that may occur in connection with such investment. Also, the
Department has issued individual administrative exemptions from application
of certain prohibited transaction restrictions of ERISA and the Code to most
underwriters of mortgage-backed securities (each, an "Underwriter's
Exemption"). Such an Underwriter's Exemption can only apply to
mortgage-backed securities which, among other conditions, are sold in an
offering with respect to which such an underwriter serves as the sole or a
managing underwriter, or as a selling or placement agent. If such an
Underwriter's Exemption might be applicable to a Series of Certificates, the
related Prospectus Supplement will refer to such possibility. Further, the
related Prospectus Supplement may provide that certain Classes or Series of
Certificates may not be purchased by, or transferred to, Plans or may only be
purchased by, or transferred to, an insurance company for its general account
under circumstances that would not result in a prohibited transaction.
ANY FIDUCIARY OR OTHER PLAN INVESTOR WHO PROPOSES TO INVEST "PLAN ASSETS"
OF A PLAN IN CERTIFICATES OF ANY SERIES OR CLASS SHOULD CONSULT WITH ITS
COUNSEL WITH RESPECT TO THE POTENTIAL CONSEQUENCES UNDER ERISA AND SECTION
4975 OF THE CODE OF ANY SUCH ACQUISITION AND OWNERSHIP OF SUCH CERTIFICATES.
UNRELATED BUSINESS TAXABLE INCOME--RESIDUAL INTERESTS
The purchase of a Certificate evidencing an interest in the Residual
Interest in a Series that is treated as a REMIC by any employee benefit or
other plan that is exempt from taxation under Code Section 501(a), including
most varieties of Plans, may give rise to "unrelated business taxable income"
as described in Code Sections 511-515 and 860E. Further, prior to the
purchase of an interest in a Residual Interest, a prospective transferee may
be required to provide an affidavit to a transferor that it is not, nor is it
purchasing an interest in a Residual Interest on behalf of, a "Disqualified
Organization," which term as defined above includes certain tax-exempt
entities not subject to Code Section 511, such as certain governmental plans,
as discussed above under "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation
of Holders of Residual Certificates" and "--Restrictions on Ownership and
Transfer of Residual Certificates."
DUE TO THE COMPLEXITY OF THESE RULES AND THE PENALTIES IMPOSED UPON
PERSONS INVOLVED IN PROHIBITED TRANSACTIONS, IT IS PARTICULARLY IMPORTANT
THAT INDIVIDUALS RESPONSIBLE FOR INVESTMENT DECISIONS WITH RESPECT TO ERISA
PLANS AND CODE PLANS CONSULT WITH THEIR COUNSEL REGARDING THE CONSEQUENCES
UNDER ERISA AND/OR THE CODE OF THEIR ACQUISITION AND OWNERSHIP OF
CERTIFICATES.
THE SALE OF CERTIFICATES TO A PLAN IS IN NO RESPECT A REPRESENTATION BY
THE DEPOSITOR, THE APPLICABLE UNDERWRITER OR ANY OTHER SERVICE PROVIDER WITH
RESPECT TO THE CERTIFICATES, SUCH AS THE TRUSTEE, THE MASTER SERVICER AND THE
SPECIAL SERVICER, IF ANY, THAT THIS INVESTMENT MEETS ALL RELEVANT LEGAL
REQUIREMENTS WITH RESPECT TO INVESTMENTS BY PLANS GENERALLY OR ANY PARTICULAR
PLAN OR THAT THIS INVESTMENT IS APPROPRIATE FOR PLANS GENERALLY OR ANY
PARTICULAR PLAN.
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.
77
<PAGE>
All depository institutions considering an investment in the Certificates
should review the Supervisory Policy Statement on Securities Activities dated
January 28, 1992 (the "Policy Statement") of the Federal Financial
Institutions Examination Council (to the extent adopted by their respective
regulators), which in relevant part prohibits depository institutions from
investing in certain "high-risk" mortgage securities, except under limited
circumstances, and sets forth certain investment practices deemed to be
unsuitable for regulated institutions.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions that may restrict or prohibit investment in securities that are
not "interest bearing" or "income-paying," and provisions that may restrict
or prohibit investments in securities that are issued in book-entry form.
The appropriate characterization of the Certificates under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is
subject to legal restrictions should consult their own legal advisers to
determine whether, and to what extent, the Certificates will constitute legal
investments for them.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the
offering for that Series and will state the public offering or purchase price
of each Class of Certificates of such Series, or the method by which such
price is to be determined, and the net proceeds to the Depositor from such
sale.
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of
commitment therefor. Firm commitment underwriting and public reoffering by
underwriters may be done through underwriting syndicates or through one or
more firms acting alone. The specific managing underwriter or underwriters,
if any, with respect to the offer and sale of a particular Series of
Certificates will be set forth on the cover of the Prospectus Supplement
related to such Series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement. The Prospectus Supplement will
describe any discounts and commissions to be allowed or paid by the Depositor
to the underwriters, any other items constituting underwriting compensation
and any discounts and commissions to be allowed or paid to the dealers. The
obligations of the underwriters will be subject to certain conditions
precedent. The underwriters with respect to a sale of any Class of
Certificates will generally be obligated to purchase all such Certificates if
any are purchased. Pursuant to each such underwriting agreement, the
Depositor will indemnify the related underwriters against certain civil
liabilities, including liabilities under the 1933 Act.
If any Certificates are offered other than through underwriters pursuant
to such underwriting agreements, the related Prospectus Supplement or
Prospectus Supplements will contain information regarding the terms of such
offering and any agreements to be entered into in connection with such
offering.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the 1933 Act in connection with reoffers 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.
78
<PAGE>
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.
79
<PAGE>
INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
1933 Act .............................. iii
1934 Act .............................. iv
ACMs .................................. 48
ADA ................................... 53
Agreement ............................. 3, 16
AMTI .................................. 67
Bankruptcy Code ....................... 41
Calculation of REMIC Income ........... 69
Cash Flow Bond Method ................. 72
CERCLA ................................ 14, 46
Certificateholders .................... 17
Certificates .......................... 1
Closing Date .......................... 23
Code .................................. 5
Code Plans ............................ 75
Collection Account .................... 2, 18
Commission ............................ iii
Compound Interest Certificates ....... 57
Credit Enhancement .................... 3, 34
Cut-off Date .......................... 4, 18
Department ............................ 76
Distribution Account .................. 2, 18
Distribution Date ..................... 4, 18
Enhancement Act ....................... 77
EPA ................................... 48
ERISA ................................. 5, 75
ERISA Plans ........................... 75
Escrow Account ........................ 27
Escrow Payments ....................... 27
Event of Default ...................... 32
Fannie Mae ............................ 19
FHA ................................... 24
FHLMC ................................. 19
Final Regulations ..................... 57
Forfeiture Laws ....................... 53
Form 8-K .............................. 23
HUD ................................... 24
Installment Contracts ................. 1, 22
Interest Weighted Certificate ......... 59, 73
IRS ................................... 55
Lead Paint Act ........................ 48
Lender Liability Act .................. 47
Master Servicer ....................... 27
Master Servicer Remittance Date ...... 18
Midland ............................... 16
Mortgage .............................. 1, 22
Mortgage Loan ......................... 22
Mortgage Loan File .................... 24
Mortgage Loan Schedule ................ 23
Mortgage Pool ......................... 1
Mortgaged Property .................... 1, 22
Multiple Variable Rate ................ 59
NCUA .................................. 51
Negative Adjustment ................... 73
Nonresidents .......................... 74
Note .................................. 22
OID ................................... 57
Pass-Through Certificates ............. 70
Pass-Through Rate ..................... iii
Plans ................................. 75
Policy Statement ...................... 78
Prepayment Assumption ................. 57, 58
Proposed Premium Regulations .......... 61
PTCE .................................. 77
Rating Agency ......................... 5
Ratio Strip Certificates .............. 72
Registration Statement ................ iii
Regular Certificates .................. 5, 56
Regulations ........................... 76
Relief Act ............................ 50
REMIC ................................. ii
REO Account ........................... 19
Reserve Account ....................... 17
Reserve Fund .......................... 35
Residual Certificate .................. 65
Residual Certificates ................. 5
Seller ................................ 25
Senior Certificates ................... 34
Servicing Fee ......................... 70
Simple Interest Loans ................. 22
Single Variable Rate .................. 57
S&P ................................... 20
Special Servicer ...................... 1
Special Servicing Fee ................. 30
Specially Serviced Mortgage Loans .... 27
Stripped Certificates ................. 70
Subordinate Certificates .............. 34
Tiered REMICs ......................... 56
TIN ................................... 74
Title V ............................... 51
Title VIII ............................ 51
Trust Fund ............................ 17
Trustee ............................... 1, 21
UCC ................................... 38
USTs .................................. 48
Voting Rights ......................... 15
</TABLE>
80
<PAGE>
INSTRUCTIONS TO READ CD-ROM FOR MLMI SERIES 1997-ML1
ACCESSING APPRAISALS IN ADOBE ACROBAT(1) PDF (PORTABLE DOCUMENT FORMAT)
FOR USERS WITH PRE-INSTALLED ACROBAT READERS
o Insert the disk in the CD-ROM drive and double-click on your CD-ROM drive
icon.
o Please note that the file index.pdf has a listing of all mortgage loans.
Double click on the file index.pdf. Acrobat Reader will launch and display
an index page with a table of contents of the CD-ROM.
o Within index.pdf click on the name of the mortgage loan you wish to
review.
o Acrobat Reader will display the contents of the file (appraisal) on the
screen.
o Once in the Acrobat Reader, use the "Help" menu, which is located in the
upper right hand corner of the screen, to learn about features of the
Reader.
FOR USERS WHO NEED TO INSTALL THE ACROBAT READER
o Insert the disk in the CD-ROM drive and double-click on your CD-ROM drive
icon.
o Double click on the "Acrobat" folder.
o If you are a Windows 95 or Windows NT 4.0 user, double-click on the
"Win95" folder. Once inside the folder, double-click on the "Ar32e30.exe"
file (the Acrobat Reader installation program). Follow the instructions of
the installation program.
o If you are a Windows 3.11 user, double-click on the "Win31" folder. Once
inside the folder, double-click on the "Ar16e30.exe" file (the Acrobat
Reader installation program). Follow the instructions of the installation
program.
o Once your reader is installed, go back to the CD-ROM. Please note that the
file index.pdf has a listing of all mortgage loans. Double click on the
file index.pdf. Acrobat Reader will launch and display an index page with
a table of contents of the CD-ROM.
o Within index.pdf click on the name of the mortgage loan you wish to
review.
o Acrobat Reader will display the contents of the file (appraisal) on
screen.
o Once in the Acrobat Reader, use the "Help" menu, which is located in the
upper right hand corner of the screen, to learn about features of the
Reader.
ACCESSING APPRAISALS IN RTF (RICH TEXT FORMAT) (SUITABLE FOR WORDPERFECT,
WORD AND EXCEL)
o Accessing the RTF files requires only that you have one of the following
word processing applications: MICROSOFT(2) WORD (version 6.0 or later) or
WORDPERFECT(3) (version 6.0/6.1 or later). Viewing an appraisal in RTF
will allow you to cut and paste blocks of text into another word
processing file and/or cut and paste tabular data directly into a
spreadsheet program such as EXCEL, preserving the delimited data fields.
(NOTE: The RTF files consist of the same material content as the PDF
files.)
o Insert the disk in the CD-ROM drive.
o Start your word processor and go through the File/Open drop down menu and
dialog box and locate your CD-ROM drive. Double click on the folder of the
mortgage loan that you are interested in reviewing. Change your "file
type" to RTF (Rich Text Format). To access the RTF version of the
appraisal click on the file you wish to review and click "Open".
- ------------
(1) Adobe and Acrobat are registered trademarks of Adobe Systems
Incorporated.
(2) Microsoft, Word and Excel are registered trademarks of Microsoft
Corporation.
(3) WordPerfect is a registered trademark of Corel Corporation Limited.
<PAGE>
This CD ROM contains an electronic version of appraisals for the Mortgaged
Properties in both PDF and RTF format. The appraisals for the Mortgaged
Properties were prepared prior to the date of this Prospectus Supplement.
Accordingly, the information included in such appraisals may not reflect the
current economic, competitive, market and other conditions with respect to
the Mortgaged Properties. The information contained in this CD ROM does not
appear elsewhere in paper form in this Prospectus Supplement and must be
considered together with the information contained elsewhere in this
Prospectus Supplement and the Prospectus. The information contained in this
CD ROM has been filed by the Depositor with the Securities and Exchange
Commission as part of a Current Report on Form 8-K, which is incorporated by
reference in this Prospectus Supplement, and is also available through the
public reference branch of the Securities and Exchange Commission. Defined
terms used in this CD ROM but not otherwise defined therein shall have the
respective meanings assigned to them in the paper portion of the Prospectus
Supplement and the Prospectus. All of the information contained in this CD
ROM is subject to the same limitations and qualifications contained in this
Prospectus Supplement and the Prospectus. Prospective investors are strongly
urged to read the paper portion of this Prospectus Supplement and the
Prospectus in its entirety prior to accessing this CD ROM. If this CD ROM was
not received in a sealed package, there can be no assurances that it remains
in its original format and should not be relied upon for any purpose.
Prospective investors may contact John Gluszak of Merrill Lynch, Pierce,
Fenner & Smith Incorporated at (212) 449-7834 to receive an original copy of
the CD ROM.
If and when the words "expects," "intends," "anticipates," "estimates" and
analogous expressions are used on the CD ROM, such statements are subject to
a variety of risks and uncertainties that could cause results to differ
materially from those projected. Such risks and uncertainties include, among
others, general economic and business conditions, competition, changes in
political, social and economic conditions, regulatory initiatives and
compliance with governmental regulations, and various other events,
conditions and circumstances, many of which are beyond the control of the
Depositor, the Underwriter, the Trustee, the Fiscal Agent, the Master
Servicer and the Special Servicer. Any forward-looking statements speak only
as of their date. The Depositor expressly disclaims any obligation or
undertaking to release publicly any updates or revisions to any
forward-looking statement contained in the CD ROM to reflect any change in
events, conditions or circumstances on which any such statement is based.
This diskette contains in Microsoft Excel(1) Version 7.0 format an
electronic copy of the information contained in Annex A. The information
contained in this diskette appears elsewhere in paper form in this Prospectus
Supplement and must be considered as part of, and together with, the
information contained elsewhere in this Prospectus Supplement and the
Prospectus. Defined terms used in this diskette but not otherwise defined
therein shall have the respective meanings assigned to them in the paper
portion of the Prospectus Supplement and Prospectus. All of the information
contained in this diskette is subject to the same limitations and
qualifications contained elsewhere in this Prospectus Supplement and the
Prospectus. Prospective investors are strongly urged to read the paper
portion of this Prospectus Supplement and the Prospectus in its entirety
prior to accessing this diskette. If this diskette was not received in a
sealed package, there can be no assurances that it remains in its original
format and should not be relied upon for any purpose. Prospective investors
may contact John Gluszak of Merrill Lynch, Pierce, Fenner & Smith
Incorporated at (212) 449-7834 to receive an original copy of the diskette.
Upon opening the Microsoft Excel file contained on this diskette, a legend
will be displayed, which should be read carefully.
- ------------
(1) Microsoft Excel is a registered trademark of Microsoft Corporation.
<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-5
Risk Factors.................................... S-43
Description of the Mortgage Pool................ S-57
The Mortgage Loan Seller........................ S-281
The Master Servicer and the Special Servicer .. S-281
Description of the Certificates................. S-283
Yield and Maturity Considerations............... S-297
The Pooling and Servicing Agreement............. S-305
Material Federal Income Tax Consequences ....... S-325
ERISA Considerations............................ S-326
Legal Investment................................ S-329
Plan of Distribution............................ S-331
Use of Proceeds................................. S-332
Legal Matters................................... S-332
Ratings......................................... S-332
Index of Definitions............................ S-334
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.................................... 6
The Depositor................................... 16
The Master Servicer............................. 16
Use of Proceeds................................. 16
Description of the Certificates................. 16
The Mortgage Pools.............................. 22
Servicing of the Mortgage Loans................. 27
Credit Enhancement.............................. 34
Certain Legal Aspects of the Mortgage Loans .... 37
Material Federal Income Tax Consequences ....... 54
State Tax Considerations........................ 75
ERISA Considerations............................ 75
Legal Investment................................ 77
Plan of Distribution............................ 78
Legal Matters................................... 78
Financial Information........................... 79
Rating.......................................... 79
Index of Definitions............................ 80
COMMERCIAL MORTGAGE
ACCEPTANCE CORP.
(DEPOSITOR)
$730,000,000
(APPROXIMATE)
COMMERCIAL MORTGAGE
PASS-THROUGH CERTIFICATES
SERIES 1997-ML1
PROSPECTUS SUPPLEMENT
MERRILL LYNCH & CO.
DECEMBER , 1997
