As filed with the Securities Exchange Commission on August 5, 1998
Registration No. 333-__________
==========================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------------------
COMMERCIAL MORTGAGE ACCEPTANCE CORP.
(Exact name of registrant as specified in its charter)
Missouri 43-1681393
(State or other jurisdiction (I.R.S. Employer of
incorporation or organization) Identification Number)
Commercial Mortgage Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
---------------
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Alan L. Atterbury
Commercial Mortgage Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
(816) 435-5000
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
--------------------------------------
Copy to:
William A. Hirsch
Patrick J. Respeliers
Morrison & Hecker L.L.P.
2600 Grand Avenue
Kansas City, Missouri 64108
==========================================================================
Approximate date of commencement of proposed sale to the public: From time to
time after the effective date of this Registration Statement as determined by
market conditions.
If the only securities being registered on this form are being
offered pursuant to dividend or interest reinvestment plans, please
check the following box. |_|
If any of the securities being registered on this form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. |X|
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434 under the Securities Act of 1933, please check the following
box. |_|
<PAGE>
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------
Title of Amount to be Proposed Proposed Amount
securities to registered<F1> maximum offering maximum aggregate of registration
be registered price offering price<F2> fee
per security<F2>
- ----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Mortgage
Pass-Through $3,200,000,000 100% $3,200,000,000 $944,000<F3>
Certificates,
issued in series
- ----------------------------------------------------------------------------------------
<FN>
<F1>or, if any of the securities registered hereunder are interest only
securities, such greater amount as shall result in net proceeds of
$3,200,000,000 to the registrant.
<F2>Estimated solely for the purpose of calculating the registration
fee.
<F3>$1,867,771,558 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the Registrant under Registration Statement No.
333-51817 and not previously sold are consolidated in this Registration
Statement pursuant to Rule 429. $550,992.61 has been previously paid by the
Registrant under the foregoing Registration Statements in connection with such
unsold amount of Mortgage Pass-Through Certificates.
</FN>
</TABLE>
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains (i) a base prospectus to be used for
transactions involving mortgage loans secured by multifamily and commercial
properties containing concentrations of general commercial properties (which
consist of office, retail, including shopping centers, industrial, warehouse,
mini-warehouse and similar types of commercial properties, including commercial
properties that mix the foregoing property types) and multifamily properties
(which consist of apartments, congregate care facilities and mobile home parks)
and (ii) alternate pages to the base prospectus for transactions involving
mortgage loans secured by commercial and multifamily properties containing
concentrations of (a) general commercial properties, multifamily properties and
hotels, (b) general commercial properties, multifamily properties and nursing
homes and (c) general commercial properties, multifamily properties, hotels and
nursing homes.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus supplement and the prospectus to which it relates
shall not constitute an offer to sell or the solicitation of an offer to buy nor
shall there by 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. 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 by any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
PRELIMINARY PROSPECTUS SUPPLEMENT, DATED August 5, 1998
SUBJECT TO COMPLETION
PROSPECTUS SUPPLEMENT
(To Prospectus dated _______________)
$ (Approximate)
Commercial Mortgage Acceptance Corp.
(Depositor)
Midland Loan Services, Inc. (Master Servicer and Special Servicer)
Commercial Mortgage Pass-Through Certificates, Series 1998-____
-------------------------
The Commercial Mortgage Pass-Through Certificates, Series 1998-____ (the
"Certificates") will consist of 16 Classes of Certificates, designated as the
Class A-1 Certificates, the Class A-2 Certificates, the Class X Certificates,
the Class B Certificates, the Class C Certificates, the Class D Certificates,
the Class E Certificates, the Class F Certificates, the Class G Certificates,
the Class H Certificates, the Class J Certificates, the Class K Certificates,
the Class L-PO Certificates and the Class L-IO Certificates (collectively, the
"Regular Certificates") and the Class R-I Certificates and the Class R-II
Certificates (together, the "Residual Certificates"). Only the Class A-1, Class
A-2, Class B, Class C, Class D and Class E Certificates (the "Offered
Certificates") are offered hereby. (cover page continued on following pages)
-------------------------
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, THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENTAL AGENCY OR INSTRUMENTALITY.
-------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Prospective Investors should review fully this Prospectus Supplement and
the Prospectus, including, without limitation, the material risks discussed
under "RISK FACTORS" at page S-19 in this Prospectus Supplement and Page 6 of
the Prospectus before purchasing any of the Offered Certificates.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------- ------------------ ----------------- --------------------- ---------------------
Class Initial Pass-Through Rated Final Scheduled Final
Certificate Rate <F2> Distribution Date Distribution Date
Balance <F1> <F3> <F4>
- ------------------------- ------------------ ----------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Class A-1........... $ ___%
- ------------------------- ------------------ ----------------- --------------------- ---------------------
Class A-2........... $ ___%
- ------------------------- ------------------ ----------------- --------------------- ---------------------
Class B ............ $ ___%
- ------------------------- ------------------ ----------------- --------------------- ---------------------
Class C ............ $ ___%
- ------------------------- ------------------ ----------------- --------------------- ---------------------
Class D ............ $ ___%
- ------------------------- ------------------ ----------------- --------------------- =====================
Class E ............ $ ___%
- ------------------------- ------------------ ----------------- --------------------- =====================
<FN>
<F1>Approximate, subject to an upward or downward variance of up to 5%.
<F2>In addition to distributions of principal and interest, holders of certain
Classes of Certificates will be entitled to receive a portion of the Prepayment
Premiums received from the borrowers as described herein. See "DESCRIPTION OF
THE CERTIFICATES--Distributions--Prepayment Premiums" herein.
<F3>The Rated Final Distribution Date (the "Rated Final Distribution Date") for
each Class of Offered Certificates is the Distribution Date occurring two years
after the latest Assumed Maturity Date of any of the Mortgage Loans. The
"Assumed Maturity Date" of (a) any Mortgage Loan that is not a Balloon Loan is
the maturity date of such Mortgage Loan and (b) any Balloon Loan is the date on
which such Mortgage Loan would be deemed to mature in accordance with its
original amortization schedule absent its Balloon Payment.
<F4>The "Scheduled Final Distribution Date" with respect to any Class of
Certificates is the Distribution Date on which the final distribution would
occur for such Class of Certificates based on the assumptions described in
"DESCRIPTION OF THE CERTIFICATES-Distributions" herein.
</FN>
</TABLE>
The Offered Certificates will be purchased by ___________________________
(the "Underwriter") from the Depositor and will be offered by the Underwriter
from time to time to the public in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the Depositor
from the sale of the Offered Certificates will be approximately $ , before
deducting certain expenses expected to be approximately $ payable by the
Depositor. The Offered Certificates are offered by the Underwriter, subject to
prior sale, when, as and if delivered to and accepted by the Underwriter and
subject to its right to reject orders in whole or in part. It is expected that
delivery of the Offered Certificates will be made in book-entry form through the
Same-Day Funds Settlement System of The Depository Trust Company ("DTC"), on or
about _____________, 1998 (the "Delivery Date"), against payment therefor in
immediately available funds.
-------------------------------
__________, 1998
S-ii
<PAGE>
(continued from cover)
[IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY EFFECT
TRANSACTIONS WHICH STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE
PRICE OF THE OFFERED CERTIFICATES, INCLUDING [LIST TYPES OF
TRANSACTIONS]. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN
OF DISTRIBUTION."]
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.
There is currently no secondary market for the Offered Certificates. The
Underwriter has advised the Depositor that it currently intends to make a
secondary market in the Offered Certificates, but it is under no obligation to
do so. There can be no assurance that such a market will develop or, if it does
develop, that it will continue or will provide investors with a sufficient level
of liquidity of investment. See "RISK FACTORS--Limited Liquidity" herein.
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-iii
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
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>
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- ==============
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Class Rating by Initial % of Approximate Description Pass-Through Weighted Principal
____________ Aggregate Total Credit Rate Average Window
Certificate Support Life (years) <F1>
Principal (years)
Amount <F1>
=========================================================================================================================
Senior Certificates
=========================================================================================================================
A-1 $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
A-2 $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
X N/A <F2> N/A Excess % <F3> N/A N/A
Interest
=========================================================================================================================
Subordinate Certificates
=========================================================================================================================
B $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
C $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
D $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
E $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
F $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
G $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
H $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
J $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
K $ % Fixed Rate %
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
L-PO Unrated $ % Principal N/A
Only
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
L-IO Unrated $N/A N/A Interest % N/A N/A
Only
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
- ----------- --------------- --------------- --------- ------------- ------------ -------------- ---------- --------------
<FN>
<F1>Based respectively on Scenario 2, which assumes a 0% CPR, no defaults and an
auction in ____________ and Scenario 1, which assumes a 0% CPR and no defaults.
See "YIELD AND MATURITY CONSIDERATIONS-Weighted Average Life" herein.
<F2>The Class X Notional Balance is equal to the aggregate Certificate Balance
of the Regular Certificates (other than the Class X and Class L-IO
Certificates).
<F3>Initial Pass-Through Rate. The Pass-Through Rate will be equal to the excess
of the Weighted Average Net Mortgage Rate over the Weighted Average Pass-Through
Rate.
</FN>
</TABLE>
S-1
<PAGE>
Title of
Certificates.......Commercial Mortgage Acceptance Corp. Commercial Mortgage
Pass-Through Certificates, Series 1998-____ (the
"Certificates").
The Certificates will be issued pursuant to a Pooling and
Servicing Agreement to be dated as of ________________, 1998
(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 B, Class C, Class D and
Class E Certificates are offered hereby.
The Class X, Class F, Class G, Class H, Class J, Class K,
Class L-PO, Class L-IO, Class R-I and Class R-II
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 wholly owned
subsidiary of Midland Loan Services, Inc. (the Master
Servicer and the Special Servicer). See "THE DEPOSITOR" in
the Prospectus.
Master Servicer.....Midland Loan Services, Inc. (the "Master Servicer"), a
wholly owned subsidiary of PNC Bank, National Association.
See "MIDLAND LOAN SERVICES, INC." herein.
Special Servicer....Midland Loan Services, Inc. (the "Special Servicer"), a
wholly owned subsidiary of PNC Bank, National Association.
See "MIDLAND LOAN SERVICES, INC." herein.
Trustee.............___________________________, a ____________________ (the
"Trustee"). See "THE POOLING AND SERVICING AGREEMENT--The
Trustee" herein.
Fiscal Agent........________________________________, a ______________________
(the "Fiscal Agent"). See "THE POOLING AND SERVICING
AGREEMENT--The Fiscal Agent" herein.
Cut-off Date........__________________, 1998, [except with respect to the Newly
Originated Loans for which the Cut-off Date will be the date
each such Mortgage Loan was funded.]
Closing Date........On or about ___________________, 1998.
S-2
<PAGE>
Distribution Date...The [25th] day of each month, or if such [25th] day is not a
Business Day, the Business Day immediately following such
day, commencing in ________________ 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 __________ 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 X ....................
Class B ....................
Class C ....................
Class D ....................
Class E ....................
Class F ......................
Class G ....................
Class H ....................
Class J ....................
Class K ......................
Class L-PO.....................
Class L-IO ....................
The Scheduled Final Distribution Dates set forth above
have been determined on the basis of the assumptions
described in "DESCRIPTION OF THE
CERTIFICATES--Scheduled Final Distribution Date"
herein.
Rated Final
Distribution Date...As to each Class of Certificates, ____________.
Record Date.........With respect to each Distribution Date, the close of
business on the last Business Day of the month preceding 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.
S-3
<PAGE>
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 ______________, 1998 on the
day after the Cut-off Date) and ending on the Determina-
tion Date in the month in which such Distribution Date
occurs.
Determination Date..The [17th] day of any month, or if such [17th] day is not a
Business Day, the Business Day immediately preceding such
[17th] day, commencing in _______________, 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 the
Mortgage Loans, is the first day of the month (the "Due
Date"").
Denominations.......The Class A-1, Class A-2, Class B, Class C, Class D and
Class E Certificates will be issued in minimum denominations
of Certificate Balance or Notional Balance, as applicable,
of $100,000 and integral multiples of $1,000 in excess
thereof and will be registered in the name of a nominee of
The Depository Trust Company ("DTC" and, together with any
successor depository selected by the Depositor, the
"Depository") and beneficial interests therein will be held
by investors through the book-entry facilities of the
Depository. The Depositor has been informed by DTC that its
nominee will be Cede & Co. Beneficial Owners will hold and
transfer their respective ownership interests in and to such
Book-Entry Certificates through the book- entry facilities
of DTC and will not be entitled to definitive, fully
registered Certificates except in the limited circumstances
set forth herein. See "DESCRIPTION OF THE
CERTIFICATES--Delivery, Form and Denomination" herein.
Distributions.......Distributions on the Certificates will be made on each
Distribution Date, commencing in ____________ 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-Method, Timing, and Amount" for a detailed
description of what constitutes Available Funds for any
Distribution Date.
On each Distribution Date, the Available Funds will be
applied to make distributions to the holders of the Class
A-1, Class A-2 and Class X Certificates, concurrently, and
then to the holders of each other Class of Regular
Certificates, in the order of their alphabetic designation,
as follows: first, in payment of interest
S-4
<PAGE>
accrued on such Class during the preceding month and any
interest accrued on such Class in prior months but not
previously paid, second, if such Class has a Certificate
Balance and the Certificate Balance of each Class with an
earlier alphabetic designation has been reduced to zero, in
distribution of principal, up to an amount equal to the
lesser of (x) the Certificate Balance of such Class and (y)
the Pooled Principal Distribution Amount for such
Distribution Date (less any portion thereof distributed on
such Distribution Date to any Class with an earlier
alphabetic designation) and third, in reimbursement of any
Realized Loss allocated to such Class on a prior
Distribution Date, together with interest thereon at the
Pass-Through Rate for such Class.
[In the event that, on any Distribution Date, any portion of
Available Funds has not been distributed to
Certificateholders after applying Available Funds in the
manner and in the amounts described in the preceding
paragraph, the remaining amount will be applied to make
principal distributions to the Regular Certificates (other
than the Class X and Class L-IO Certificates), in reverse
order of their alphabetic designations, in each case until
the Certificate Balance of such Class has been reduced to
zero, and any remaining amount will be distributed to the
holder of the applicable Class of Residual Certificates. No
such additional distributions are anticipated.]
Additional Master Servicer or Special Servicer compensation,
interest on Advances, extraordinary expenses of the Trust
Fund and other similar items will create a shortfall in
Available Funds, which generally will result in a Class
Interest Shortfall for the most subordinate Class then
outstanding.
See "DESCRIPTION OF THE CERTIFICATES--Distributions" herein.
Distribution of
Prepayment
Premiums...........Any Prepayment Premium (whether described in the related
Mortgage Loan documents as a fixed payment premium or a
yield maintenance amount) actually collected with respect to
a Mortgage Loan during any particular Collection Period will
be distributed on the related Distribution Date to the
holders of the Certificates as set forth in "DESCRIPTION OF
THE CERTIFICATES--Distributions- -Prepayment Premiums".
Yield
Considerations.....The yield to an investor in the Certificates ("Investor")
will depend on, among other things, the price paid by the
Certificateholder, the rate and timing of principal payments
(including prepayments) on the Mortgage Loans, the magnitude
and timing of losses on the Mortgage Loans due to liquida-
tions of defaulted Mortgage Loans and modifications, waivers
and amendments (including forbearance of scheduled payments
of
S-5
<PAGE>
interest and principal, debt forgiveness and extensions of
Balloon Payments) with respect to the Specially Serviced
Mortgage Loans. Each Mortgage Loan is either fully
amortizing or provides for payments only of interest or
payments of principal and interest based on an amortization
schedule that extends beyond its maturity date with all
unpaid principal and interest due at maturity (i.e., a
Balloon Payment). The yield to an Investor in the
Certificates also will be affected by, among other things,
Pass-Through Rates in effect from time to time, additional
Trust Fund expenses, Anticipated Losses and Realized Losses,
which may adversely affect the amounts distributable to one
or more Classes of Regular Certificates. See DESCRIPTION OF
THE CERTIFICATES--Distributions". Prepayments and
liquidations of defaulted Mortgage Loans are likely to
reduce the amount of interest and/or principal payable to
the holders of the Regular Certificates. See "DESCRIPTION OF
THE CERTIFICATES" and "YIELD AND MATURITY CONSIDERATIONS".
Advances............Subject to the limitations described herein, the Master
Servicer is required to make advances (each such amount, a
"P&I Advance") in respect of delinquent Monthly Payments on
the Mortgage Loans. The Master Servicer will not be required
to advance the full amount of any Balloon Payment not made
by the related borrower on its due date, but will advance an
amount equal to the monthly payment (or portion thereof not
received) deemed to be due on the Mortgage Loan after such
default, calculated on the original amortization schedule of
such Mortgage Loan with interest as described herein. Upon
determination of the Anticipated Loss with respect to any
Seriously Delinquent Loan, the amount of any P&I Advance
required to be made with respect to such Seriously
Delinquent Loan on any Distribution Date will be an amount
equal to the product of (A) the amount of the P&I Advance
that would be required to be made in respect of such
Seriously Delinquent Loan without regard to the application
of this sentence, multiplied by (B) a fraction, the
numerator of which is equal to the Scheduled Principal
Balance of such Seriously Delinquent Loan as of the
immediately preceding Determination Date less the
Anticipated Loss and the denominator of which is such
Scheduled Principal Balance. See "THE POOLING AND SERVICING
AGREEMENT-- Advances" herein. Subject to a determination of
non-recoverability, if the Master Servicer fails to make a
required P&I Advance, the Trustee, acting in accordance with
the servicing standard, will be required to make such P&I
Advance, and if the Trustee fails to make a required P&I
Advance, the Fiscal Agent will be required to make such P&I
Advance. See "THE POOLING AND SERVICING AGREEMENT--The
Fiscal Agent" herein.
S-6
<PAGE>
Subordination;
Allocation of
Realized Losses....The rights of the Class B, Class C, Class D, Class E, Class
F, Class G, Class H, Class J, Class K, Class L-IO and Class
L-PO Certificates (the "Subordinate Certificates") to
receive payments of principal and interest will be
subordinated to the rights of the Class A-1, Class A-2 and
Class X Certificates (the "Senior Certificates"), to the
extent described herein and, further, in the case of any
particular Class of Subordinate Certificates to the rights
of the holders of each other Class of Subordinate
Certificates, if any, with an earlier alphabetical Class
designation, as described herein. Such subordination will be
accomplished by (i) the application of Available Funds in
the order described above under "--Distributions" and (ii)
the allocation of Realized Losses to the Regular
Certificates (other than the Class X and Class L-IO
Certificates, which may nonetheless incur reductions of
their Notional Balances) in reverse order of their
alphabetical Class designations; provided that Realized
Losses are allocated pro rata to the Class A-1 and Class A-2
Certificates in accordance with their respective Certificate
Balances. In addition, the rights of the holders of the
Residual Certificates to receive distributions with respect
to the Mortgage Loans will be subordinated to the rights of
the holders of the Regular Certificates, to the extent
described herein. No other form of credit enhancement is
offered for the benefit of the holders of the Certificates.
Early Termination...Any holder of the Class R-I Certificates representing more
than a 50% Percentage Interest of the Class R-I
Certificates, the Master Servicer and the Depositor will
each have the option to purchase, at the purchase price
specified herein, all of the Mortgage Loans, and all
property acquired through exercise of remedies in respect of
any Mortgage Loans, remaining in the Trust Fund, and thereby
effect a termination of the Trust Fund and early retirement
of the then outstanding Certificates, on any Distribution
Date on which the aggregate Scheduled Principal Balance of
the Mortgage Loans remaining in the Trust Fund is less than
10% of the Initial Pool Balance. See "DESCRIPTION OF THE
CERTIFICATES--Early Termination" herein.
Auction Call Date...If the Trust Fund has not been terminated earlier as
described under "DESCRIPTION OF THE CERTIFICATES--Early
Termination" herein, the Trustee will on the Distribution
Date occurring in September of each year from and including
and on any date after the Distribution Date occurring in on
which the Trustee receives an unsolicited bona fide offer to
purchase all (but not less than all) of the Mortgage Loans
(each, an "Auction Valuation Date"), request that four
independent financial advisory or investment banking or
investment brokerage firms nationally recognized in the
field of real estate analysis and reasonably acceptable to
the Master Servicer
S-7
<PAGE>
provide the Trustee with an estimated value at which the
Mortgage Loans and all other property acquired in respect of
any Mortgage Loan in the Trust Fund could be sold pursuant
to an auction. If the aggregate value of the Mortgage Loans
and all other property acquired in respect of any Mortgage
Loan, as determined by the average of the three highest such
estimates, equals or exceeds the aggregate amount of the
Certificate Balances of all Certificates outstanding on the
Auction Valuation Date, plus unpaid interest thereon, the
anticipated Auction Fees, unpaid servicing compensation,
unreimbursed Advances (together with interest thereon at the
Advance Rate) and unpaid Trust Fund expenses, the Trustee
will auction the Mortgage Loans and such property and
thereby effect a termination of the Trust Fund and early
retirement of the then outstanding Certificates on or after
the Distribution Date in . The Trustee will accept no bid
lower than the Minimum Auction Price. See "DESCRIPTION OF
THE CERTIFICATES--Auction" herein.
Certain Federal
Income Tax
Consequences.......Elections will be made to treat the Trust REMICs, and the
Trust REMICs will qualify, as two separate real estate
mortgage investment conduits (each, "REMIC I" and "REMIC
-------- ----- II") for federal income tax purposes. The
Class A-1, Class A-2, Class X, Class B, Class C, Class D,
Class E, Class F, Class G, Class H, Class J, Class K, Class
L-PO and Class L-IO 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
Certificates will be designated as the sole Class of
"residual interest" in REMIC I.
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
[Identify Classes, if any] Certificates will not, and the
[Identify Classes, if any] Certificates, will be treated as
having been issued with original issue discount for federal
income tax reporting purposes. 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 not be
voluntarily prepaid prior to their respective maturity dates
and that the Trust Fund will be terminated on the
Distribution Date occurring in __________ pursuant to the
auction termination procedure described herein. No
representation is made as to whether the Mortgage Loans will
prepay at that rate or any other rate or whether the Trust
Fund
S-8
<PAGE>
will be terminated on such date. 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 Internal Revenue Code of 1986
(the "Code"), and interest (including original issue
discount) 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 the REMIC are secured by
residential property or otherwise are assets described in
Section 7701(a)(19)(C) of the Code and, accordingly, an
investment in the Certificates may not be suitable for some
thrift institutions. See "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of the REMIC and its Holders" in the
Prospectus.
For further information regarding the federal income tax
consequences of investing in the Offered Certificates, see
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of the
REMIC" in the Prospectus and "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES" herein.
S-9
<PAGE>
ERISA
Considerations.....The United States Department of Labor has issued to
______________________ an individual prohibited transaction
exemption, Prohibited Transaction Exemption ______, which
generally exempts from the application of certain of the
prohibited transaction provisions of Section 406 of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and ----- the excise taxes imposed by Sections
4975(a) and (b) of the Code and the civil penalties imposed
by 502(i) of ERISA, transactions relating to the purchase,
sale and holding of pass-through Senior Certificates, such
as the Class A-1, Class A-2 and Class X Certificates, by (a)
employee benefit plans and certain other retirement
arrangements, including individual retirement accounts and
Keogh plans, which are subject to ERISA, the Code or a
governmental plan subject to any Similar Law (all of which
are hereinafter referred to as "Plans"), (b) -----
collective investment funds in which such Plans are
invested, (c) other persons acting on behalf of any such
Plan or using the assets of any such Plan or any entity
whose underlying assets include Plan assets by reason of a
Plan's investment in the entity (within the meaning of
Department of Labor Regulations Section 2510.3-101) and (d)
insurance companies that are using assets of any insurance
company separate account or general account in which the
assets of such Plans are invested (or which are deemed
pursuant to ERISA or any Similar Law to include assets of
such Plans) and the servicing and operation of mortgage
pools such as the Mortgage Pool, provided that certain
conditions are satisfied. See "ERISA CONSIDERATIONS" herein.
THE SUBORDINATE CERTIFICATES AND THE RESIDUAL CERTIFICATES
DO NOT MEET THE REQUIREMENTS OF THE FOREGOING EXEMPTION AND,
ACCORDINGLY, THE SUBORDINATE CERTIFICATES AND THE RESIDUAL
CERTIFICATES MAY NOT BE PURCHASED BY OR TRANSFERRED TO A
PLAN OR PERSON ACTING ON BEHALF OF ANY PLAN OR USING THE
ASSETS OF ANY SUCH PLAN, OTHER THAN TO AN INSURANCE COMPANY
USING ASSETS OF ITS GENERAL ACCOUNT UNDER CIRCUMSTANCES IN
WHICH SUCH PURCHASE OR TRANSFER AND SUBSEQUENT HOLDING OF
SUCH CERTIFICATES WOULD NOT CONSTITUTE OR RESULT IN A
PROHIBITED TRANSACTION. THE RESIDUAL CERTIFICATES MAY ALSO
NOT BE PURCHASED BY OR TRANSFERRED TO A PLAN.
S-10
<PAGE>
Ratings.............It is anticipated that the Certificates will have the
following ratings from _______________________________, (the
"Rating Agencies"):
Class ______
-------
A-1
A-2
X
B
C
D
E
F
G
H
J
K
L-PO
L-IO
R-I
R-II
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 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 X
Certificates consist only of interest. If the entire pool of
Mortgage Loans were to prepay in the initial month, with the
result that the holders of the Class X Certificates receive
only a single month's interest and thus suffer a nearly
S-11
<PAGE>
complete loss of their investment, all amounts "due" to such
holders will nevertheless have been paid, and such result is
consistent with the " " and " " ratings received on the
Class X Certificates. The Class X Notional Balance upon
which interest is calculated is reduced by the allocation of
Realized Losses, scheduled payments on the Mortgage Loans
and prepayments, whether voluntary or involuntary. The
rating does not address the timing or magnitude of
reductions of the Class X Notional Balance, but only the
obligation to pay interest timely on the Class X Notional
Balance as so reduced from time to time. Accordingly, the
ratings of the Class X Certificates should be evaluated
independently from similar ratings on other types of
securities. See "RISK FACTORS" and "RATINGS" herein.
Legal Investment....The Certificates will not constitute "mortgage related
securities" within the meaning of the Secondary Mortgage
Market Enhancement Act of 1984. The appropriate
characterization of the Certificates under various legal
investment restrictions, and thus the ability of investors
subject to these restrictions to purchase the Certificates,
may be subject to significant interpretative uncertainties.
Accordingly, investors should consult their own legal
advisors to determine whether and to what extent the
Certificates constitute legal investments for them. See
"LEGAL INVESTMENT" herein and in the Prospectus.
Collateral Overview:
Loan Details.......The Certificates will represent beneficial ownership
interests in a trust fund (the "Trust Fund") to be created
by ------------- Commercial Mortgage Acceptance Corp. (the
"Depositor"). The Trust Fund will --------- consist
primarily of a pool (the "Mortgage Pool") of ___ fixed-rate
---------------- mortgage loans (the "Mortgage Loans")
--------------- secured by first liens on commercial and
multifamily residential properties (each, a "Mortgaged
Property"). ---------------------- of the Mortgage Loans
were originated by Midland Loan Services, Inc. ("Midland")
or its predecessor in interest. of the Mortgage Loans were
originated by ----------------- ("-------------"). Midland
and _______________ are sometimes collectively referred to
herein as the "Mortgage Loan Seller"). The Mortgage Loans
will be sold to the Depositor by the applicable Mortgage
Loan Seller on or prior to the date of initial issuance of
the Certificates. The characteristics of the Mortgage Loans
and the related Mortgaged Properties are described under
"RISK FACTORS" and "DESCRIPTION OF THE MORTGAGE POOL"
herein.
S-12
<PAGE>
See Annex A hereto for certain characteristics of Mortgage
Loans on a loan-by-loan basis. All numerical information
provided herein with respect to the Mortgage Loans is
provided on an approximate basis. All weighted average
information regarding the Mortgage Loans reflects weighing
of the Mortgage Loans by their Cut-off Date Principal
Balances. The "Cut-off Date Principal Balance" of each
Mortgage Loan is equal to the unpaid principal balance
thereof as of the Cut-off Date, after application of all
payments of principal due on or before such date, whether or
not received. See also "DESCRIPTION OF THE MORTGAGE POOL"
for additional statistical information regarding the
Mortgage Loans.
Characteristics
Aggregate Cut-off Date Principal Balance . . . . . . . . . . $
Number of Mortgage Loans . . . . . . . . . . . . . . . . . .
Weighted Average Mortgage Rate . . . . . . . . . . . . . . . %
Weighted Average Remaining Term to Maturity . . . . . . . .
Weighted Average DSCR (1) . . . . . . . . . . . . . . . . .
Average Mortgage Loan Balance . . . . . . . . . . . . . . . $
Balloon Mortgage Loans . . . . . . . . . . . . . . . . . . . %
- -------------
(1) Debt Service Coverage Ratio ("DSCR") is calculated based on the ratio of
Underwritten Cash Flow to the Annual Debt Service. For more information on the
Debt Service Coverage Ratios, see "DESCRIPTION OF THE MORTGAGE POOL--Certain
Characteristics of the Mortgage Pool" herein.
S-13
<PAGE>
Cut-off Date Principal Balances
% by Cut-off Number
Date Principal of
Cut-off Date Principal Balance Balance Mortgage Loans
- ------------------------------ -------------- --------------
$ 500,000-.............$ 999,999
$ 1,000,000-.............$ 1,999,999
$ 2,000,000-.............$ 2,999,999
$ 3,000,000-.............$ 3,999,999
$ 4,000,000-.............$ 4,999,999
$ 5,000,000-.............$ 5,999,999
$ 6,500,000-.............$ 6,999,999
$ 7,000,000-.............$ 7,999,999
$ 8,000,000-.............$ 8,999,999
$ 9,000,000-.............$ 9,999,999
$10,000,000-.............$10,999,999
$11,000,000-.............$11,999,999
$12,000,000-.............$12,999,999
$16,000,000-.............$16,999,999
$17,000,000-.............$17,999,999
$27,000,000-.............$27,999,999
Total .......................
Geographical Distribution
% by Cut-off Number
Date Principal of
Jurisdiction Balance Mortgage Loans
- ------------ -------------- --------------
.................................
.................................
.................................
.................................
.................................
.................................
.................................
Other (1) .............................
Total............................
- ---------------
(1) No other jurisdiction has Mortgage Loans aggregating more than ___% of the
Initial Pool Balance.
S-14
<PAGE>
Debt Service Coverage Ratios (1)
% by Cut-off Number
Date Principal of
Range of Debt Service Coverage Ratios Balance Mortgage Loans
- ------------------------------------- -------------- --------------
1.15-1.19 ..........................
1.20-1.24 ..........................
1.25-1.29 ..........................
1.30-1.34 ..........................
1.35-1.39 ..........................
1.40-1.44 ..........................
1.45-1.49 ..........................
1.50-1.54 ..........................
1.55-1.59 ..........................
1.60-1.64 ..........................
2.45-2.49 ..........................
2.70-2.74 ..........................
Total..........................
- ------------
Weighted Average DSCR
- ------------
(1) Calculated based on the ratio of Underwritten Cash Flow to Annual Debt
Service. See "DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of
the Mortgage Pool" herein for more information relating to the calculation
of debt service coverage ratios.
Loan-to-Value Ratios
% by Cut-off Number
Date Principal of
Range of Loan-to-Value Ratios Balance Mortgage Loans
- ----------------------------- -------------- --------------
30.0% to less than 35.0% ..........
35.0% to less than 40.0% ..........
40.0% to less than 45.0% ..........
50.0% to less than 55.0% ..........
55.0% to less than 60.0% ..........
60.0% to less than 65.0% ..........
65.0% to less than 70.0% ..........
70.0% to less than 75.0% ..........
75.0% to less than 80.0% ..........
80.0% to less than 85.0% ..........
85.0% to less than 90.0%...........
Total .................
- ------------
Weighted Average LTV
S-15
<PAGE>
Property Types
% by Cut-off Number
Date Principal of
Property Types Balance Mortgage Loans
- -------------- -------------- --------------
Congregate Care.....................
Hotel .......................
Industrial .......................
Industrial/Warehouse................
Mini Warehouse......................
Mixed Use .......................
Mobile Home Park....................
Multifamily .......................
Office .......................
Office/R&D .......................
Office/Retail.......................
Office/Warehouse....................
Retail, Anchored....................
Retail, Factory Outlet..............
Retail, Single Tenant...............
Retail, Unanchored.................
Other
Total......................
Maturity Years
% by Cut-off Number
Date Principal of
Year Balance Mortgage Loans
- ---- -------------- --------------
2001 .............................
2002 .............................
2003 .............................
2004 .............................
2005 .............................
2006 .............................
2007 .............................
2008 .............................
2010 .............................
2011 .............................
2016 .............................
2021 .............................
Total......................
S-16
<PAGE>
Delinquency Status as of [___________]
% by Cut-off Number
Date Principal of
Status Balance Mortgage Loans
- ------ -------------- --------------
No Delinquencies ...................
S-17
<PAGE>
<TABLE>
<CAPTION>
Prepayment Lockout/Premium Analysis <F1>
Percentage of Mortgage Pool by Prepayment
Restriction Assuming No Prepayments
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prepayment
Restrictions
Lockout...........
Greater of Yield
Maintenance or
Percentage Premium
of:
5.00% or greater.
4.00% to 3.99%...
3.00% to 2.99%...
2.00% to 1.99%...
0.00% to 0.99%...
Total of Yield
Maintenance.......
Total of Yield
Maintenance
and Lockout......
Percentage Premium:
5.00% or greater.
4.00% to 3.99%...
3.00% to 2.99%...
2.00% to 1.99%...
0.00% to 0.99%...
Total with
Percentage
Premium.........
Open.............
Total............
% of Initial Pool
Balance <F2>
<FN>
- ------------------
<F1> This table sets forth an analysis of the percentage of the declining
balance of the Mortgage Pool that, on , in each of the years indicated,
will be within a Lockout Period or in which Principal Prepayments must be
accompanied by the indicated Prepayment Premium or yield maintenance
charge. See "DESCRIPTION OF THE MORTGAGE POOL--Certain Terms and
Conditions of the Mortgage Loans-Prepayment Provisions" for the
assumptions used in preparing this table.
<F2> Represents the approximate percentage of the Initial Pool Balance that
will remain outstanding at the indicated date based upon the assumptions
used in preparing this table.
</FN>
</TABLE>
<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, 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.
Many of the Mortgage Loans are nonrecourse loans or loans for which
recourse may be restricted or unenforceable. As to those Mortgage Loans,
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. However, even with respect to those Mortgage Loans that provide for
recourse against the borrower and its assets generally, there can be no
assurance that the enforcement of such recourse provisions will be practicable,
or that the assets of the borrower will be sufficient to permit a recovery in
respect of a defaulted Mortgage Loan in excess of the liquidation value of the
related Mortgaged Property. None of the Mortgage Loans is insured or guaranteed
by any governmental agency or instrumentality or by any other person.
S-19
<PAGE>
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 customer 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 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.
S-20
<PAGE>
c. Competition. Other multifamily and commercial properties located
in the areas of the Mortgaged Properties compete with the Mortgaged Properties
of similar types to attract customers, tenants and other occupants. Such
properties generally compete on the basis of rental rates, location, condition
and features of the property. If competing properties in the applicable market
have lower 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 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.
d. 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, 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. Mortgages encumbering mortgaged properties that
are owned under a condominium or cooperative form of ownership are subject to
the documentation creating and regulating such form of ownership, e.g., the
organizational documents creating the cooperative and other rules and
regulations of such cooperative or the declaration, by-laws and other rules and
regulations of the condominium association, as applicable. 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.
S-21
<PAGE>
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 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 Mini Warehouse Facilities. Tenant privacy, anonymity
and unsupervised access may heighten environmental risks to a lender making a
loan secured by a Mini Warehouse Property. The environmental site assessments
discussed herein did not include an inspection of the contents of the
self-storage units included in the Mini Warehouse Properties and there is no
assurance that all of the units included in the Mini Warehouse Properties are
free from hazardous substances or other pollutants or contaminants or will
remain so in the future. See "--Environmental Risks" below. Due to the short
term nature of Mini Warehouse Leases, Mini Warehouse Properties also may be
subject to more volatility in terms of supply and demand than loans secured by
other types of properties. Additionally, because of the construction utilized in
connection with certain mini warehouse facilities, it might be difficult or
costly to convert such a facility to an alternative use. Thus, the liquidation
value of such Mini Warehouse Properties may be substantially less than would be
the case if the same were readily adaptable to other uses.
Risks Particular to Hotel Properties. 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 limited service hotels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of such hotels could occur in any given region, which would likely
adversely affect occupancy and daily room rates. Additionally, the revenues of
certain hotels, particularly those located in regions whose economies depend
upon tourism, may be highly seasonal in nature.
S-22
<PAGE>
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 the vagaries of 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.
Risks Particular to Congregate Care Facilities. Congregate care facilities
provide housing and limited services such as meal programs to the "well
elderly." While congregate care facilities are not typically subject to
extensive licensing requirements, it is possible that such facilities may be
subject to increased governmental regulation and supervision given the growing
number of senior citizens in the general population. Additionally, the operator
of a congregate care facility may face increased operational expenses in
providing tenants with the varied array of personal services required for such
facility to compete with other similar facilities. Some of such competing
facilities may offer services not offered by such operators or may be owned by
non-profit organizations or government agencies supported by endowments,
charitable contributions, tax revenues and other sources not available to such
operators. Further, congregate care retirement residences are required to be
licensed by a state or municipal authority to provide food service. The failure
of a borrower under a Congregate Care Loan to maintain or renew any required
license could impair its ability to generate operating income.
[Risks Particular to Nursing Home Facilities. Nursing homes provide long
term around-the-clock residential health care services to residents who require
a lower level of care than that provided by an acute care hospital, but a higher
level of care than that provided in a non-institutional home-like setting.
Providers of long-term nursing care and other medical services are subject to
federal and state laws that relate to the adequacy of medical care, distribution
of pharmaceuticals, rate setting, equipment, personnel, operating policies and
additions to facilities and services and, to the extent they are dependent on
patients whose fees are reimbursed by private insurers, to the reimbursement
policies of such insurers. In addition, facilities where such care or other
medical services are provided are subject to periodic inspection by governmental
authorities to determine compliance with various standards necessary to
continued licensing under state law and continued participation in the Medicaid
and Medicare reimbursement programs. The failure of a borrower under a Nursing
Home Loan to maintain or renew any required license or regulatory approval could
prevent it from continuing operations at the related Nursing Home Property or,
if applicable, bar it from participation in government reimbursement programs.
S-23
<PAGE>
Nursing home facilities may receive a substantial portion of their
revenues from government reimbursement programs, primarily Medicaid and
Medicare. Medicaid and Medicare are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings, policy interpretations,
delays by fiscal intermediaries and government funding restrictions. Moreover,
governmental payors have employed cost-containment measures that limit payments
to health care providers, and from time to time Congress has considered various
proposals for national health care reform that could further limit those
payments. Accordingly, there can be no assurance that payments under government
reimbursement programs will, in the future, be sufficient to reimburse fully the
cost of caring for program beneficiaries. If not, net operating income of the
Nursing Home Properties that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their Mortgage Loan
obligations, could be adversely affected. Additionally, the continued operation
of a nursing home facility subsequent to a foreclosure is dependent upon the
proposed operator satisfying all applicable legal requirements, such as
processing the required license to operate such facility and/or dispense
required pharmaceuticals.
The operators of such nursing homes are likely to compete on a local and
regional basis with others that operate similar facilities. Some of their
competitors may be better capitalized, may offer services not offered by such
operators or may be owned by non-profit organizations or government agencies
supported by endowments, charitable contributions, tax revenues and other
sources not available to such operators. The successful operation of a Nursing
Home Property will generally depend upon the number of competing facilities in
the local market, as well as upon other factors such as its age, appearance,
reputation and management, the types of services it provides and, where
applicable, the quality of care and the cost of that care.]
Risks Particular to Mobile Home Parks. Mortgage lenders whose loans are
secured by mortgages encumbering Mobile Home Park Properties may be subject to
additional risks not faced by lenders whose loans are secured by other types of
income producing properties. Since the borrower often does not own the mobile
homes located upon the related Mortgaged Property, the borrower (and the lender
subsequent to any foreclosure) may face additional costs and delays in obtaining
evictions of tenants and the removal of mobile homes upon a default or
abandonment by a tenant.
Risks Particular to Industrial Properties. Mortgage Loans secured by an
Industrial Property may be adversely affected by reduced demand for industrial
space occasioned by a decline in a particular industry segment. Furthermore,
such a property that suited the particular needs of a tenant may be difficult to
lease to a future tenant or may become functionally obsolete relative to newer
properties. Given the inherent nature of the operations which are typically
conducted upon Industrial Properties, a lender secured by a lien over such
properties may be subject to increased environmental risks. See "Environmental
Risks" herein.
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 applicable 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 applicable 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 their respective 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 applicable Mortgage Loan
Seller will be in a financial position to effect such repurchase. See "MIDLAND
LOAN SERVICES, INC." herein.
S-24
<PAGE>
Limited Recourse. Many of the Mortgage Loans are non-recourse loans or
loans under which the lender's recourse is restricted or limited. With respect
to Mortgage Loans where recourse to the borrower or a guarantor is permitted, no
current evaluation has been undertaken of the financial condition of the
borrower or such guarantor and their respective assets generally. Accordingly,
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. Prospective Investors should consider each of the Mortgage
Loans to be a non-recourse loan, 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. In those cases where
recourse to a borrower or guarantor is permitted by the loan documents, the
Depositor has not undertaken any evaluation of the financial condition of any
such person (in many cases, the borrower is a special purpose entity having no
assets other than those pledged to secure the related Mortgage Loan).
Accordingly, prospective Investors should consider all of the Mortgage Loans to
be nonrecourse loans as to which recourse in the case of default will be limited
to the related Mortgaged Property or Properties securing the defaulted Mortgage
Loans.
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
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.
[Inability to Verify Underwriting Standards; No Reunderwriting of Mortgage
Loans. [Some][All] of the Mortgage Loans included in the Trust Fund were
originated by entities unaffiliated with the Depositor. The Depositor has not
been able to verify the underwriting standards used to originate [some][all] of
these Mortgage Loans because [they were purchased from sellers that had
originally acquired the Mortgage Loans in the open market][they were originated
over a long period of time pursuant to varying underwriting standards which
cannot now be confirmed].
The underwriting standards used to originate the aforesaid Mortgage Loans
may be different and/or less stringent than the underwriting standards used by
affiliates of the Depositor. These Mortgage Loans, therefore, may have a higher
rate of delinquency than mortgage loans originated by affiliates of the
Depositor.
The Depositor has not reunderwritten the Mortgage Loans. Instead, the
Depositor has relied on the representations and warranties made by the
applicable Mortgage Loan Seller, and the applicable 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 applicable Mortgage Loan
S-25
<PAGE>
Seller will be able to repurchase a Mortgage Loan if a representation or
warranty has been breached. See "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchase" herein.]
Tax Considerations Related to Foreclosure. 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.
Such taxable net income does not include qualifying "rents from real property,"
or any rental income based on the net profits of a tenant or sub-tenant or
allocable to a service that is customary in the area and for the type of
property involved. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Regular Interests," "--Taxation of the REMIC" and "--Taxation of Holders of
Residual Certificates" in the Prospectus.
Future Changes in the Composition of the Mortgage Pool. 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 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. See
"DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage Pool"
and "Annex A" herein for a more detailed discussion of the location of the
Mortgaged Properties on a state-by-state basis. 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
S-26
<PAGE>
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.
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 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
S-27
<PAGE>
Agreement will effectively insulate the Trust Fund from potential liability
under environmental laws. See "THE POOLING AND SERVICING AGREEMENT--Realization
Upon Mortgage Loans--Standards for Conduct Generally in Effecting Foreclosure or
the Sale of Defaulted Loans" herein and "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Environmental Risks" in the Prospectus.
Special Hazards 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.
Other Financing. In general, the borrowers are prohibited from encumbering
the related Mortgaged Property with additional secured debt or the lender's
approval is required for such an encumbrance. However, a violation of such
prohibition may not become evident until the related Mortgage Loan otherwise
defaults. In cases in which one or more subordinate liens are imposed on a
Mortgaged Property or the borrower incurs other indebtedness, the Trust Fund is
subject to additional risks, including, without limitation, the risks that the
necessary maintenance of the Mortgaged Property could be deferred to allow the
borrower to pay the required debt service on the subordinate financing and that
the value of the Mortgaged Property may fall as a result, and that the borrower
may have a greater incentive to repay the subordinate or unsecured indebtedness
first and that it may be more difficult for the borrower to refinance the
Mortgage Loan or to sell the Mortgaged Property for purposes of making any
Balloon Payment upon the maturity of the Mortgage Loan. See "CERTAIN LEGAL
ASPECTS OF THE MORTGAGE LOANS--Secondary Financing; Due-on-Encumbrance
Provisions" in the Prospectus, and "DESCRIPTION OF THE MORTGAGE POOL--Certain
Characteristics of the Mortgage Pool--Other Financing" herein.
Risks Related to the Borrower's Form of Entity and Sophistication. The
borrowers may be either individuals or legal entities. Mortgage loans made to
legal entities may entail risks of loss greater than those of mortgage loans
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. Most of the borrowers are not
bankruptcy-remote entities, and therefore may be more likely to become insolvent
or the subject of a voluntary or involuntary bankruptcy proceeding because such
borrowers may be (a) operating entities with businesses distinct from the
operation of the property with the associated liabilities and risks of operating
an ongoing business and (b) individuals who may have personal liabilities
unrelated to the property. However, any borrower, even a bankruptcy-remote
entity, as owner of real estate will be subject to certain potential liabilities
and risks. No assurance can be given that a borrower will not file for
bankruptcy protection or that creditors of a borrower or a corporate or
S-28
<PAGE>
individual general partner or managing member of a borrower will not initiate a
bankruptcy or similar proceeding against such borrower or corporate or
individual 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 the 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 as of the Cut-off Date is
presented under "DESCRIPTION OF THE MORTGAGE POOL--Certain Characteristics of
the Mortgage Pool" herein for illustrative purposes only. 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.
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
S-29
<PAGE>
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.
[Contracts for Deed and Purchase Options. Certain of the Mortgage Loans
are secured, wholly or in part, by [first] mortgage liens: (i) on the related
borrower's interest in an Installment Contract with respect to all or part of
the related Mortgaged Property; and/or (ii) subject to an existing option to
purchase all or part of the related Mortgaged Property. Mortgage Loans secured,
wholly or in part, by a Mortgage encumbering the related borrower's interest in
an Installment Contract may expose a lender to a
S-30
<PAGE>
greater risk of loss than a Mortgage Loan secured by a Mortgage encumbering a
fee interest, including, without limitation, the potential that upon a default
by the borrower under the Installment Contract, the vendor under such contract
may be entitled to enforce a forfeiture of the borrower's interest in the
Mortgaged Property, thereby depriving the lender of its security. Examples of
protections that may be obtained by a lender in order to minimize this risk
include obtaining the agreement of the vendor under the Installment Contract to
provide the lender with: (i) notice of any defaults by the borrower; (ii) the
right to cure such defaults, with adequate cure periods; (iii) if a default is
not susceptible of cure by the lender, the right to acquire the interest of the
borrower through foreclosure or otherwise prior to any termination of the
Installment Contract; (iv) the ability to assign the Installment Contract to a
purchaser at a foreclosure sale and for a release of its liabilities thereunder;
(v) the right to enter into an Installment Contract with the vendor on the same
terms and conditions as the old Installment Contract in the event of a
termination thereof; and (vi) provisions for disposition of any insurance
proceeds or condemnation awards payable upon a casualty to, or condemnation of,
the Mortgaged Property. In addition to the foregoing protections, the Mortgage
may prohibit the vendor from treating the Installment Contract as terminated in
the event of the vendor's bankruptcy and rejection of the ground lease by the
trustee for the debtor-vendor, and may assign to the lender the
debtor-borrower's right to reject the Installment Contract pursuant to Section
365 of the Bankruptcy Code (the "Bankruptcy Code"), although the enforceability
of such assignment has not been established. An additional manner in which to
obtain protection against the termination of the Installment Contract is to have
the vendor enter into a mortgage encumbering the fee estate in addition to the
mortgage encumbering the borrower's interest under the Installment Contract.
Additional protection is afforded to the lender, because if the Installment
Contract is terminated, the lender may nonetheless possess rights contained in
the fee mortgage. Without the protections described in this paragraph, a lender
holding a mortgage encumbering a borrower's interest under an Installment
Contract may be more likely to lose the collateral. No assurance can be given
that any or all of the above described provisions will be obtained in connection
with any particular Mortgage Loan. See "RISK FACTORS--Contracts for Deed and
Purchase Options" herein and "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Installment Contracts" in the Prospectus.
Mortgage Loans secured, wholly or in part, by a Mortgage which is subject
to an existing option to purchase all or part of the related Mortgaged Property
may expose a lender to the risk that its mortgage lien may be eliminated upon
the effective exercise of such option. This risk may be minimized if the
agreement of the holder of the purchase option to subordinate its option to the
lien of the related Mortgage can be obtained, or if the purchase price to be
obtained by the borrower upon an exercise of such option is appropriately
assigned to the lender, is adequate to fully satisfy the indebtedness remaining
under the Mortgage Loan or is at least equivalent to the fair market value of
the Mortgaged Property. No assurance can be given that any or all of the above
described provisions will be obtained in connection with any particular Mortgage
Loan. See "RISK FACTORS--Contracts for Deed and Purchase Options" herein.]
[Risks Associated with Low Income Housing Tax Credits. Certain of the
Mortgaged Properties may be eligible to receive low income housing tax credits
("Tax Credits") pursuant to the requirements of Section 42 of the Internal
Revenue Code of 1986, as amended (the "Code"). The rent limitations imposed on
such Mortgaged Properties pursuant to the Code may adversely affect the ability
of the applicable borrowers to increase rents to maintain such Mortgaged
Properties in proper condition during periods of rapid inflation or declining
market value of such Mortgaged Properties. In addition, the income restrictions
on tenants imposed by Section 42 of the Code may reduce the number of eligible
tenants in such Mortgaged Properties and result in a reduction in occupancy
rates applicable thereto. In the event a Mortgaged Property eligible for Tax
Credits (a "Tax Credit Project") does not maintain compliance with the Tax
Credit restrictions on tenant income or rental rates, the owners of the Tax
Credit Project may lose the Tax Credits related to the period of the
noncompliance and face the recapture of the "accelerated portions" of any Tax
Credit previously taken, plus interest. Recapture does not occur if
noncompliance is corrected within a "reasonable period," as determined under the
Code. In the event of a foreclosure upon a
S-31
<PAGE>
Tax Credit Project during the period when tax credits are applicable (the "Tax
Credit Period"), the subsequent owner will be required to ensure continued
compliance with the requirements of Section 42 of the Code, or the remaining Tax
Credits will be no longer be available. See "DESCRIPTION OF THE MORTGAGE
POOL--The Tax Credit Loans."]
Litigation. From time to time, there may be legal proceedings pending or
threatened against the borrowers and their affiliates relating to the business
of, or arising out of the ordinary course of business of, the borrowers and
their affiliates. There can be no assurance that any such litigation will not
have a material adverse effect on any borrower's ability to meet its obligations
under the related Mortgage Loan and, thus, on the distributions to
Certificateholders.
Condemnations. From time to time, there may be Condemnations pending or
threatened against one or more of the Mortgaged Properties. There can be no
assurance that the proceeds payable in connection with a total Condemnation will
be sufficient to restore the related Mortgaged Property or to satisfy the
remaining indebtedness of the related Mortgage Loan. The occurrence of a partial
Condemnation may have a material adverse effect on the continued use of the
affected Mortgaged Property, or on any borrower's ability to meet its
obligations under the related Mortgage Loan. Therefore, no assurance can be made
that the occurrence of any Condemnation will not have a negative impact upon the
distributions to Certificateholders.
Repurchase of Mortgage Loans
As more fully described under "DESCRIPTION OF THE MORTGAGE POOL--General"
and "--Representations and Warranties; Repurchase" herein, the applicable
Mortgage Loan Seller will be obligated to substitute a Qualified Substitute
Mortgage Loan or to repurchase a Mortgage Loan if (i) there is a defect with
respect to the documents relating to such Mortgage Loan or (ii) one or more of
its representations or warranties concerning such Mortgage Loan in the related
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 applicable Mortgage Loan Seller will be in a financial
position to effect such substitution or repurchase. [The applicable Mortgage
Loan Seller generally will have the right to require the entity from which it
acquired a Mortgage Loan to repurchase such Mortgage Loan if a representation or
warranty in the agreement pursuant to which the applicable Mortgage Loan Seller
acquired such Mortgage Loan is also breached.] The ability of Midland to perform
its obligations as Master Servicer and Special Servicer under the Pooling and
Servicing Agreement may be jeopardized if it incurs significant liabilities for
the repurchase of Mortgage Loans as to which there has been a breach of a
representation or warranty.
[A "Qualified Substitute Mortgage Loan" is a mortgage loan which must, on
the date of substitution: (i) have an outstanding principal balance, after
application of all scheduled payments of principal and interest due during or
prior to the month of substitution, not in excess of the Scheduled Principal
Balance of the deleted mortgage loan as of the Due Date in the calendar month
during which the substitution occurs; (ii)(a) in the case of a Qualified
Substitute Mortgage Loan as to which the related note permits periodic
adjustments following the Cut-off Date to the related mortgage rate: (1) have
the same index as the index on the deleted mortgage loan; (2) have a gross
margin not less than the gross margin on the deleted mortgage loan; (3) if
applicable, have a maximum mortgage rate and minimum mortgage rate not less than
the maximum mortgage rate and minimum mortgage rate, respectively, on the
deleted mortgage loan; (4) provide for adjustments to the applicable monthly
payment to occur not less frequently than on the deleted mortgage loan and (5)
not permit negative amortization unless the deleted mortgage loan permits
negative amortization; and (b) in the case of a Qualified Substitute Mortgage
Loan as to which the related note does not permit periodic adjustments following
the Cut-off Date to the related mortgage rate, have a mortgage rate not less
than the Mortgage Rate of the deleted mortgage loan; (iii)
S-32
<PAGE>
have a remaining term to maturity not later than the earlier of the remaining
term to maturity of the deleted mortgage loan and the latest maturity permitted
if such Qualified Substitute Mortgage Loan were subject to the modifications
standards set forth in the Pooling and Servicing Agreement; (iv) have an
original loan-to-value ratio not higher than that of the deleted mortgage loan
and a current loan-to-value ratio (equal to the principal balance on the date of
substitution divided by its current appraised value determined by an Updated
Appraisal) not higher than 80%; (v) comply as of the date of substitution with
all of the representations and warranties set forth in the Mortgage Loan
Agreement; (vi) at the Trustee's request, be determined by Opinion of Counsel to
be a "qualified replacement mortgage" within the meaning of Section 860G(a)(4)
of the Code; (vii) not have a maturity date after the date three years prior to
the Rated Final Distribution Date; and (viii) not be substituted for a deleted
mortgage loan unless the Trustee has received prior confirmation in writing by
each Rating Agency that such substitution will not result in the withdrawal,
downgrade, or qualification of the rating assigned by the Rating Agency to any
Class of Certificates then rated by the Rating Agency. In the event that one or
more mortgage loans are substituted for one or more deleted mortgage loans, then
the amounts described in clause (i) shall be determined on the basis of
aggregate principal balances.]
Prepayments and Yield Considerations
Effect of Prepayments and Other Unscheduled Payments. The investment
performance of the Certificates may vary materially and adversely from the
investment expectations of investors due to the rate of prepayments on the
Mortgage Loans being higher or lower than anticipated by investors. In addition,
in the event of any repurchase of a Mortgage Loan by a Mortgage Loan Seller from
the Trust Fund under the circumstances described under "DESCRIPTION OF THE
MORTGAGE POOL--Representations and Warranties; Repurchase" herein, the
Repurchase Price paid will be passed through to the holders of the Certificates
with the same effect as if such Mortgage Loan had been prepaid in full (except
that no Prepayment Premium will be payable with respect to any such repurchase).
No representation is made as to the anticipated rate of prepayments (voluntary
or involuntary) on the Mortgage Loans or as to the anticipated yield to maturity
of any Certificate. Furthermore, the distribution of Liquidation Proceeds to the
Class or Classes of Certificates then entitled to distributions in respect of
principal will reduce the weighted average lives of such Classes and may reduce
or increase the weighted average life of other Classes of Certificates. See
"YIELD AND MATURITY CONSIDERATIONS" herein.
In general, the yield on Certificates purchased at a premium or at a
discount and the yield on the Class X and Class L-IO Certificates, which have no
Certificate Balances, will be sensitive to the amount and timing of principal
distributions thereon (or of reductions of the respective Notional Balances).
The occurrence of principal distributions at a rate faster than that anticipated
by an investor at the time of purchase will cause the actual yield to maturity
of a Certificate purchased at a premium to be lower than anticipated. The yield
to maturity of the Class X and Class L-IO Certificates will be especially
sensitive to the occurrence of high rates of principal distributions which could
result in the failure of the holders of such Classes to recover fully their
initial investments. Conversely, if a Certificate is purchased at a discount
(especially the Class L-PO Certificates) and principal distributions thereon
occur at a rate slower than that assumed at the time of purchase, the investor's
actual yield to maturity will be lower than assumed at the time of purchase.
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,
S-33
<PAGE>
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 X
Certificates are anticipated to receive most, if not all, Prepayment Premiums,
potential purchasers of this Class should especially consider that provisions
requiring Prepayment Premiums may not be enforceable in some states and under
federal bankruptcy law and may constitute interest for usury purposes.
Accordingly, no assurance can be given that the obligation to pay a Prepayment
Premium will be enforceable under applicable state or federal law or, if
enforceable, that the foreclosure proceeds received with respect to a defaulted
Mortgage Loan will be sufficient to make such payment. See "DESCRIPTION OF THE
MORTGAGE POOL--Certain Terms and Conditions of the Mortgage Loans--Prepayment
Provisions" herein.
Effect of Interest on Advances, Special Servicing Fees and other Servicing
Expenses. As and to the extent described herein, the Master Servicer, the
Trustee or the Fiscal Agent, as applicable, will be entitled to receive interest
on unreimbursed Advances at the Advance Rate from the date on which the related
Advance is made to the date on which such amounts are reimbursed (which in no
event will be later than the Determination Date following the date on which
funds are available to reimburse such Advance with interest thereon at the
Advance Rate). The Master Servicer's, the Trustee's or the Fiscal Agent's right,
as applicable, to receive such payments of interest is prior to the rights of
Certificateholders to receive distributions on the Regular Certificates and,
consequently, may result in decreased distributions to the Regular Certificates
that would not otherwise have resulted, absent the accrual of such interest. See
"THE POOLING AND SERVICING AGREEMENT--Advances" herein. In addition, certain
circumstances, including delinquencies 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 X or Class L-IO
Certificates, such losses result in a reduction of the Class X Notional Balance
or the Class L-IO Notional Balance, respectively, such purchaser's actual yield
to maturity will be lower than the anticipated yield calculated and could, under
certain extreme scenarios, be negative. The timing of any loss on a liquidated
Mortgage Loan will also affect the actual yield to maturity of the Regular
Certificates to which a portion of such loss is allocable, even if the rate of
defaults and severity of losses are consistent with an investor's expectations.
In general, the earlier a loss borne by an investor occurs, the greater will be
the effect on such investor's yield to maturity.
Most of the Mortgage Loans are Balloon Loans, which involve a greater risk
of default than self-amortizing loans because the ability of a borrower to make
a Balloon Payment typically will depend upon its ability either to refinance the
related Mortgaged Property or to sell such Mortgaged Property at a price
sufficient to permit the borrower to make the Balloon Payment. The ability of a
borrower to accomplish either of these goals will be affected by a number of
factors at the time of attempted sale or refinancing, including the level of
available mortgage rates, the fair market value of the related Mortgaged
Property, the borrower's equity in the related Mortgaged Property, the financial
condition of the borrower and the operating history of the related Mortgaged
Property, tax laws, prevailing economic conditions and the
S-34
<PAGE>
availability of credit for multifamily or commercial properties (as the case may
be) generally. See "YIELD AND MATURITY CONSIDERATIONS--Yield
Considerations--Balloon Payments" 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 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 Funds generally consist of, as more fully described herein,
principal and interest on the Mortgage Loans actually collected or advanced. The
Master Servicer's, the Trustee's or the Fiscal Agent's obligation, as
applicable, to make Advances is limited to the extent described under "THE
POOLING AND SERVICING AGREEMENT--Advances" herein. In particular, upon
determination of the Anticipated Loss with respect to any Seriously Delinquent
Loan, the amount of any P&I Advance required to be made with respect to such
Seriously Delinquent Loan on any Distribution Date will be an amount equal to
the product of (A) the amount of the P&I Advance that would be required to be
made in respect of such Seriously Delinquent Loan without regard to the
application of this sentence, multiplied by (B) a fraction, the numerator of
which is equal to the Scheduled Principal Balance of such Seriously Delinquent
Loan as of the immediately preceding Determination Date less the Anticipated
Loss and the denominator of which is such Scheduled Principal Balance. In
addition, no Advances are required to be made to the extent that, in the good
faith judgment of the Master Servicer, the Trustee or the Fiscal Agent, as
applicable, any such Advance, if made, would be nonrecoverable from proceeds of
the Mortgage Loan to which such Advance relates. See "THE POOLING AND SERVICING
AGREEMENT--Advances" herein.
Limited Liquidity
There is currently no secondary market for the Offered Certificates. The
Underwriter has advised the Depositor that it currently 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. The Offered Certificates will not be listed on any
securities exchange.
Limited Information.
The information set forth in this Prospectus Supplement with respect to
the Mortgage Loans is derived principally from (i) a review of the available
credit and legal files relating to the Mortgage Loans, (ii) inspections of the
Mortgaged Properties undertaken by or on behalf of the applicable Mortgage Loan
Seller, (iii) unaudited operating statements for the Mortgaged Properties
supplied by the borrowers, (iv) appraisals for the Mortgaged Properties that
generally were performed at origination (which appraisals
S-35
<PAGE>
were used in presenting information regarding the values of the Mortgaged
Properties as of the Cut-off Date under "DESCRIPTION OF THE MORTGAGE POOL" and
under "Annex A" herein for illustrative purposes only) and/or (v) information
supplied by entities from which Midland acquired, or which currently service,
certain of the Mortgage Loans. Also, certain Mortgage Loans constitute
acquisition financing; and accordingly, limited or no operating information is
available with respect to the related Mortgaged Property.
DESCRIPTION OF THE MORTGAGE POOL
General
The Mortgage Pool will consist of multifamily and commercial "whole"
mortgage loans (the "Mortgage Loans"). The Mortgage Loans have an aggregate
Cut-off Date Principal Balance of approximately $ (the "Initial Pool Balance"),
subject to a variance of plus or minus 5%. The "Cut-off Date Principal Balance"
of each Mortgage Loan is the unpaid principal balance thereof as of the Cut-off
Date, after application of all payments of principal due on or before such date,
whether or not received. Any description of the terms and provisions of the
Mortgage Loans herein is a generalized description of the terms and provisions
of the Mortgage Loans in the aggregate. Many of the individual Mortgage Loans
have special terms and provisions that deviate from the generalized, aggregated
description.
Generally, each Mortgage Loan is evidenced by a separate promissory note
(collectively the "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") 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 or commercial use. The Mortgaged Properties consist of
properties improved by (a) a congregate care facility (a "Congregate Care
Property," and any Mortgage Loan secured thereby, a "Congregate Care Loan"); (b)
a factory outlet retail facility (a "Factory Outlet Property," and any Mortgage
Loan secured thereby, a "Factory Outlet Loan" or a "Retail, Factory Outlet
Loan"); (c) a hotel (a "Hotel Property," and any Mortgage Loan secured thereby,
a "Hotel Loan"); (d) an industrial property (an "Industrial Property," and any
Mortgage Loan secured thereby, an "Industrial Loan"); (e) an
industrial/warehouse property (an "Industrial/Warehouse Property," and any
Mortgage Loan secured thereby, an "Industrial/Warehouse Loan"); (f) a mini
warehouse facility (a "Mini Warehouse Property," and any Mortgage Loan secured
thereby, a "Mini Warehouse Loan"); (g) a multifamily, office and retail property
(a "Mixed Use Property," and any Mortgage Loan secured thereby, a "Mixed Use
Loan"); (h) a mobile home park (a "Mobile Home Park Property," and any Mortgage
Loan secured thereby, a "Mobile Home Park Loan"); (i) an apartment building or
complex consisting of five or more rental units or a complex of duplex units (a
"Multifamily Property," and any Mortgage Loan secured thereby, a "Multifamily
Loan"); (j) an office building (an "Office Property," and any Mortgage Loan
secured thereby, an "Office Loan"); (k) an office/research facility (an
"Office/R&D Property," and any Mortgage Loan secured thereby, an "Office/R&D
Loan"); (l) an office/retail property (an "Office/Retail Property," and any
Mortgage Loan secured thereby, an "Office/Retail Loan"); (m) an office/warehouse
property (an "Office/Warehouse Property," and any Mortgage Loan secured thereby,
an "Office/Warehouse Loan"); (n) an anchored retail property (a "Retail,
Anchored Property," and any Mortgage Loan secured thereby, a "Retail, Anchored
Loan"); (o) a single tenant retail property (a "Retail, Single Tenant Property,"
and any Mortgage Loan secured thereby, a "Retail, Single Tenant Loan"); or (p)
an unanchored retail property (a "Retail, Unanchored Property," and any Mortgage
Loan secured thereby, a "Retail, Unanchored Loan"). The percentage of the
Initial Pool Balance represented by each type of Mortgaged Property is as
follows:
S-36
<PAGE>
Percentage of Initial
Property Type Pool Balance Number of Loans
Congregate Care
Hotel
Industrial
Industrial/Warehouse
Mini Warehouse
Mixed Use
Mobile Home Park
Multifamily
Office
Office/R&D
Office/Retail
Office/Warehouse
Retail, Anchored
Retail, Factory Outlet
Retail, Single Tenant
Retail, Unanchored
Total
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, Mortgage Loan Seller, the Master Servicer, the
Special Servicer, the Trustee, the Fiscal Agent, the Underwriter or any of their
respective affiliates. of the Mortgage Loans, representing approximately % of
the Initial Pool Balance, provide for full recourse against the related borrower
and of the Mortgage Loans, representing % of the Initial Pool Balance, have a
limited guaranty against the related borrower, while the remainder of the
Mortgage Loans are non-recourse loans. In the event of a borrower default under
a non-recourse Mortgage Loan, recourse generally may be had only against the
specific Mortgaged Property or Mortgaged Properties securing such Mortgage Loan
and such limited other assets as have been pledged to secure such Mortgage Loan,
and not against the borrower's other assets. However, generally, upon the
occurrence of certain circumstances as set forth in the Mortgage Loan documents,
typically including, without limitation, fraud, intentional misrepresentation,
waste, misappropriation of tenant security deposits or rent, and in some cases
failure to maintain any required insurance or misappropriation of any insurance
proceeds or condemnation awards, recourse generally may be had against the
borrower for damages sustained by the mortgagee. In connection with at least of
the Mortgage Loans, representing approximately % of the Initial Pool Balance, a
guaranty of all or a portion of each such Mortgage Loan was obtained by the
separate originators of such Mortgage Loans (herein collectively, the
"Originators" and individually an "Originator"). Such guaranties are intended to
encourage the performance by the related borrower or the guarantor of the
obligations to which the guaranty relates. However, the guarantors may have
limited assets and there can be no assurance that such guarantors will have
sufficient assets to support their respective obligations under such guaranties.
In addition, any action to enforce such guaranties will likely involve
significant expense and delays to the Trust Fund and may not be enforceable if
the related guarantor should become the subject of a bankruptcy, insolvency,
reorganization, moratorium or other similar proceedings. Furthermore, in some
states, actions against guarantors may be limited by anti-deficiency
legislation. The Master Servicer or the
S-37
<PAGE>
Special Servicer, as applicable, on behalf of the Trustee and the
Certificateholders, will be entitled to enforce the terms of such guaranties.
______________ of the Mortgage Loans (the "Midland Mortgage Loans"),
representing approximately __% of the Initial Pool Balance, were originated
either by (a) Midland or its predecessor generally in accordance with Midland's
customary underwriting criteria and practices, with such exceptions thereto as
are customarily acceptable to commercial mortgage lenders, or (b) unaffiliated
entities and subsequently acquired by Midland after evaluating such Mortgage
Loans according to Midland's customary underwriting criteria and practices, with
such exceptions thereto as are customarily acceptable to commercial mortgage
lenders. Midland's underwriting criteria and practices are described under
"--The Midland Mortgage Loan Program--General," "--Midland's Underwriting
Standards" and "--Midland Underwriting and Closing Procedures" herein.
The Depositor will purchase (a) the Midland Mortgage Loans on or before
the Closing Date from Midland pursuant to a Mortgage Loan Purchase and Sale
Agreement (the "Midland Mortgage Loan Purchase Agreement") to be dated as of
____, 1998 (the "Loan Purchase Closing Date"), between Midland and the
Depositor, and (b) the ________________ Mortgage Loans on or before the Closing
Date from _______________ pursuant to a Mortgage Loan Purchase and Sale
Agreement (the "_______________ Mortgage Loan Purchase Agreement") to be dated
as of
, 1998 between ________________ and the Depositor. The Midland Mortgage
Loan Purchase Agreement and the ______________ Mortgage Loan Purchase Agreement
are sometimes collectively referred to in this Prospectus Supplement and the
Prospectus as the "Mortgage Loan Purchase Agreement." As described under
"DESCRIPTION OF THE MORTGAGE POOL--Representations and Warranties; Repurchase"
herein, the applicable Mortgage Loan Seller will be obligated to repurchase a
Mortgage Loan or substitute a Qualified Substitute Mortgage Loan in the event of
a breach of a representation or warranty made by the Mortgage Loan Seller in the
applicable 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 or
substitution 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 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.
S-38
<PAGE>
__________ of the Mortgage Loans, representing approximately ___% of the
Initial Pool Balance, provide for full recourse against the related borrower and
__________ of the Mortgage Loans, representing approximately ___% of the Initial
Pool Balance, have a limited guaranty against the related borrower, while the
remainder of the Mortgage Loans are non-recourse loans. However, borrowers
generally have limited assets and there can be no assurance that any borrower
will have sufficient assets to support any such recourse obligations that may
arise. 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. Mortgage Loans, representing approximately % of the Initial
Pool Balance, are each secured by a first lien encumbering only the related
borrower's leasehold interest in the related Mortgaged Property. The related
ground leases expire on _______ and ________, respectively. 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.
Purchase Options; Rights of First Refusal; Installment Contracts. With
respect to Loan #___, which represents approximately __% of the Initial Pool
Balance, the property developer from whom the borrower acquired the Mortgaged
Property retained both (a) an option to purchase such Mortgaged Property, at
market value on the date of the exercise of such option, conditional upon the
borrower ceasing operations at such Mortgaged Property; and (b) a right of first
refusal with respect to any bona fide offers to purchase the Mortgaged Property
received by the borrower. The terms of the purchase option indicate that unless
the property developer elects to assume the related Mortgage Loan and takes
title subject to the lien of the related Mortgage, such Mortgage Loan must be
satisfied and the Mortgage must be released when such option is exercised. With
respect to Loan # __, which represents approximately __% of the Initial Pool
Balance, the tenant/operator of the Mortgaged Property possesses an option to
purchase such Mortgaged Property upon certain specified terms and conditions,
which option has been specifically subordinated to the lien of the related
Mortgage. With respect to Loan #__, which represents approximately __% of the
Initial Pool Balance, the Housing Department of the ____________________
possesses a right of first refusal with respect to any future sale of the
related Mortgaged Property. No assurance can be made that such rights of first
refusal would not apply in the context of a foreclosure of the related Mortgage,
and consequently, there may be additional risks, delays and costs associated
with any such foreclosure. See "RISK FACTORS--Prepayment and Yield
Considerations" and "YIELD AND MATURITY CONSIDERATIONS" herein.
With respect to of the Mortgage Loans, representing approximately __% of
the Initial Pool Balance, the related Mortgaged Property is the subject of an
executory installment contract. The related
S-39
<PAGE>
Mortgage was executed by both the vendor (the borrower) and vendee under such
contract, and encumbers all of their respective interests in the related
Mortgaged Property. Such vendee's execution of such Mortgage as security for the
indebtedness of such borrower may be subject to challenge as a fraudulent
conveyance. See "--Certain Characteristics of the Mortgage Pool--Limitations on
Enforceability of Cross-Collateralization" herein and "CERTAIN LEGAL ASPECTS OF
THE MORTGAGE LOANS--Installment Contracts" in the Prospectus.
The Midland Mortgage Loan Program-General
The mortgage loan program under which Midland originated its Mortgage
Loans targeted the origination of multi-family and commercial real estate loans
(generally with principal balances ranging from $750,000 to $15,000,000). To
generate a sufficient volume of loan submissions of this size from a variety of
geographic areas, Midland has developed a network of mortgage bankers, mortgage
brokers and commercial bankers who are paid a fee, at closing, for referrals and
any other services they may provide in connection with the underwriting and
closing of such mortgage loans. See "MIDLAND LOAN SERVICES, INC." herein.
Midland's Underwriting Standards
Midland's customary underwriting policies and procedures require an
evaluation of both the prospective borrower and the proposed real estate
collateral. Factors typically analyzed in connection with a prospective borrower
include its credit history, capitalization and overall financial resources and
management skill and experience in the applicable property type. Factors
typically analyzed in connection with a Mortgaged Property include its
historical and anticipated future cash flow; age and condition; appraised value;
gross square footage; net rentable area; gross land area; number of units, rooms
or beds; current tenants' size, identity and any termination or purchase option
rights; property interest to be mortgaged (fee or leasehold); term, expiration
and rental rates under current leases; projected future leasing commissions and
retaining costs; applicable market rentals for similar properties; historical
vacancy rate and credit loss rate; debt service coverage ratio; and loan to
value ratio.
Midland generally analyzed historical and current financial information
regarding a Mortgaged Property provided by a prospective borrower to determine
the initial maximum amount of a proposed Midland Mortgage Loan. This analysis
allowed Midland to calculate the initial debt service coverage ratio and
loan-to-value ratio for a proposed Midland Mortgage Loan, based upon the
revenues generally available from the related Mortgaged Property minus the
expenses incurred in operating and maintaining the related Mortgaged Property,
all as adjusted by the actual, historical and market factors applicable to the
property type and location of the related Mortgaged Property. Except as approved
by Midland's credit review committee in connection with a specific Mortgage
Loan, Midland applied its customary underwriting policies with respect to these
ratios and maximum amortization periods in connection with the Mortgage Loans in
the Mortgage Pool originated by it. Midland's customary underwriting policies
for these ratios and maximum amortization periods are as follows:
S-40
<PAGE>
Amortization
Property Type Minimum DSCR Maximum LTLV Period
Congregate Care 1.35 70% 25 years
Hotel 1.40 70% 20 years
Industrial 1.25 75% 25 years
Industrial/Warehouse 1.25 75% 25 years
Mini Warehouse 1.35 70% 20 years
Mobile Home Park 1.25 75% 20 years
Multifamily 1.20 75% 25 years
Office 1.25 75% 25 years
Office/R&D 1.25 75% 25 years
Office/Retail 1.25 75% 25 years
Office/Warehouse 1.25 75% 25 years
Retail, Anchored 1.25 75% 25 years
Retail, Factory
Outlet 1.30 75% 25 years
Retail, Single
Tenant 1.25 75% 25 years
Retail, Unanchored 1.30 75% 25 years
With respect to Mortgage Loans secured by a Mixed Use Property, Midland's
customary underwriting policies require an analysis of the percentage of the net
operating income from each of the varied uses of the related Mixed Use Property
in order to determine the appropriate debt service coverage ratio, loan-to-value
ratio and amortization period.
Actual debt service coverage ratios, loan-to-value ratios and amortization
periods for the Mortgage Loans originated by Midland may and do vary from the
guidelines described above. See "--Certain Characteristics of the Mortgage Pool"
and "Annex A" herein.
Midland Underwriting and Closing Procedures
General. Based on information obtained from Midland, which has not been
independently verified for accuracy or completeness by any of the Depositor, the
Underwriter, the Trustee, the Master Servicer, the Special Servicer or Midland,
the following is a general summary of the customary underwriting policies and
procedures typically utilized by Midland in connection with its underwriting of
the Midland Mortgage Loans.
Financial Review. The information utilized by Midland to determine whether
to issue a binding loan commitment typically included two or more years of
financial history for the related Mortgaged Property, a site plan, a rent roll,
recent photographs, a fact sheet completed by the prospective borrower detailing
requested loan terms, ownership information, existing debt, zoning and property
improvement information, copies of specified leases, copies of rent deposits and
utility bills for the most recent 12 months, copies of the most recent property
tax bills and insurance premium statements and a listing of all
S-41
<PAGE>
other income property owned by the principals of the prospective borrower
detailing revenue, expense, debt service, valuation and current encumbrances.
Midland's analysis of the foregoing included any adjustments deemed advisable by
Midland to take into account projected increases or decreases in terms of
revenue and/or expense. Midland also generally performed a site inspection of
the subject Mortgaged Property, investigated (when possible) four lease
comparables and four sales comparables, met the principals of the prospective
borrower (when practicable), and gathered market information through interviews
with property managers, leasing agents, real estate brokers and appraisers
familiar with the subject Mortgaged Property's market area. The prospective
borrower also was typically required to make a cash deposit equal to 1% of the
requested loan balance with Midland concurrently with the prospective borrower's
submission of a formal loan application.
To complete the underwriting of a proposed Mortgage Loan to be originated
by it, Midland derived an estimate of stabilized net cash flow available to pay
debt service. On the revenue side, Midland evaluated the proposed Mortgaged
Property's rental rates in relation to rental rates for similar properties in
the same market. If the proposed Mortgaged Property is leased to relatively few
tenants (e.g., retail, office, light industrial/industrial), Midland analyzed
the terms of each of the major leases. On the expense side, Midland collected
documentation for major operating expense items, such as taxes, insurance and
utilities (and, in the case of Hotel Properties, franchise and management fees),
to ensure that Midland's assumptions regarding property expenses were realistic
and in line with historical experience. Midland also substantiated the financial
performance of the proposed Mortgaged Property by reference to industry
standards and to the more specialized expertise of local real estate brokers and
appraisers. If the proposed Mortgaged Property was an office building, retail
center or industrial property, Midland analyzed potential roll-over risk for the
purpose of making appropriate assumptions regarding the average annual
investment in tenant improvements and leasing commissions likely to be required
to keep occupancy of the proposed Mortgaged Property at or above the occupancy
level assumed by Midland.
Midland evaluated underwriting information received with respect to a
proposed Mortgage Loan to be originated by it through the use of Midland's
mortgage loan analysis model, and a final underwriting memorandum with respect
to such proposed Mortgage Loan was prepared which summarized proposed loan
terms, described the prospective borrower, and discussed the major underwriting
assumptions, competitive status of the subject Mortgaged Property, market
conditions in the locale of the subject Mortgaged Property and the strengths,
weaknesses and mitigating factors with respect to such proposed Mortgage Loan.
This information was then presented to Midland's credit review committee for a
determination as to whether a binding commitment for the proposed Mortgage Loan
should be issued.
Appraisal, Architectural, Engineering and Environmental Assessments.
Generally, following acceptance of the commitment by the prospective borrower,
Midland ordered an appraisal, an architectural and engineering report and a
Phase I environmental site assessment. In certain instances, Midland may have
utilized a report prepared by a third party not selected by Midland but only if
the qualifications of such third party were approved by Midland and the report
met Midland's specifications for such a report.
It was a condition of closing in each of Midland's commitments to make a
proposed Mortgage Loan originated by it that Midland receive third-party reports
satisfactory to it. If the appraisal of a proposed Mortgaged Property did not
confirm the minimum debt service coverage ratio and the maximum loan-to-value
ratio specified in Midland's loan commitment, the loan commitment gave Midland
the flexibility to reduce the loan amount in order to maintain those ratios. If
the architectural and engineering report indicated that critical repairs (equal
to or exceeding $10,000 in the aggregate) needed to be made to the proposed
Mortgaged Property, the prospective borrower was required to make those repairs
prior to the closing or Midland held back an amount sufficient to complete those
repairs from the Mortgage Loan proceeds. All Phase I environmental site
assessments were reviewed by McRoberts & Associates, P.C.
S-42
<PAGE>
(the "Environmental Consultant"), an independent third party environmental
attorney retained by Midland. If the Phase I environmental site assessment
indicated the existence of a potentially material and significant
environmentally hazardous condition and recommended further investigation, the
Environmental Consultant prepared a scope of work for a Phase II assessment and
Midland engaged a consultant to perform the additional work. If either the Phase
I or Phase II environmental site assessment indicated the presence of hazardous
material or a significant environmentally hazardous condition at the proposed
Mortgaged Property, the prospective borrower was required to remediate such
condition, provide environmental insurance in an amount acceptable to Midland,
escrow an amount sufficient to pay the costs of such remediation, provide an
indemnity for such costs from a potentially culpable party, or, if appropriate,
implement an operations and maintenance plan for the management of such
condition.
Underwriting File. Generally, each completed underwriting file for a
Midland Mortgage Loan contains the following documents:
A Midland Loan Fact Sheet;
Financial statements for the preceding two or more years and the most
recent year-to-date interim statement for the proposed Mortgaged Property,
the prospective borrower, and any proposed guarantor, co-borrower, general
partner of the borrowing entity and/or limited partner owning 10% or more
of the borrowing entity;
Tax returns for the preceding three years for the prospective borrower and
any proposed guarantor, co-borrower, general partner of the borrowing
entity and/or limited partner owning 10% or more of the borrowing entity;
A current rent roll, certified by the prospective borrower;
For a proposed Mortgaged Property leased to relatively few tenants (e.g.,
retail, office, light industrial/industrial), copies of all leases;
A copy of any ground lease that may affect the proposed Mortgaged
Property;
A site plan of the proposed Mortgaged Property;
A map of the area in which the proposed Mortgaged Property is located; and
Pictures of the proposed Mortgaged Property and the surrounding area.
Midland's closing of the Midland Mortgage Loans was generally managed by
one staff attorney supervising a team of closing coordinators with
responsibility for processing mortgage loans through closing. Each Midland
Mortgage Loan was documented on Midland's form of mortgage loan documents, which
were conformed by legal counsel to the requirements and customary loan
documentation of the state where the related Mortgaged Property is located.
Certain Terms and Conditions of the Mortgage Loans
Due Dates. The Mortgage Loans provide for Monthly Payments to be due on the
first day of each month.
Mortgage Rates; Calculations of Interest. The Mortgage Loans accrue
interest on the basis of a 360-day year and the actual number of days the
principal is outstanding. Except as set forth below, each
S-43
<PAGE>
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. of the Mortgage Loans (the "Balloon Loans"),
which represent approximately ___% of the Initial Pool Balance, provide for
monthly payments of principal based on amortization schedules longer than their
remaining terms, thereby leaving substantial principal amounts due and payable
on their respective maturity dates (each such payment, together with interest on
the related Balloon Loan for the one-month period ending on the day preceding
such Balloon Loan's maturity date, a "Balloon Payment"), unless previously
prepaid. of the Mortgage Loans (Loan #__, Loan #__ and Loan #__), which
represent approximately __% of the Initial Pool Balance, have remaining
amortization terms that are the same as their respective remaining terms to
maturity. The weighted average Balloon LTV applicable to the Mortgage Pool is
__%. With respect to of the Mortgage Loans, which represent approximately _____%
of the Initial Pool Balance, the Monthly Payments due on ______________, 1998
include an amount allocable to the amortization of the principal amounts of such
Mortgage Loans. With respect to of the Mortgage Loans, which represent
approximately % of the Initial Pool Balance (the "Newly Originated Loans"), the
Monthly Payments due on ___, 1998 are allocable to interest only on such
Mortgage Loans, with the principal amounts thereof scheduled to commence
amortizing effective with the 1, 1998 Monthly Payments. The Newly Originated
Loans were originated after _____________ 1, 1998. Accordingly, the Monthly
Payment due on , 1998 with respect to each Newly Originated Loan will represent
less than one full month of accrued interest thereon. To offset any resulting
interest shortfall to the Certificateholders, the Depositor will deposit into
the Trust Fund on or before the Closing Date an amount that, when added to the
aggregate amount of Monthly Payments due on the Newly Originated Mortgage Loans
on , 1998, will constitute an amount equal to one full month of interest on all
such Newly Originated Loans.
Prepayment Provisions. The imposition of a premium or fee (a "Prepayment
Premium") payable in connection with a voluntary prepayment of each of the
Mortgage Loans is designed primarily to deter a borrower from voluntarily
prepaying the principal amount of its Mortgage Loan. Although certain of the
Mortgage Loans are subject to specified periods following the origination of
such Mortgage Loans wherein no voluntary prepayments are allowed (any such
period, a "Lockout Period"), the Mortgage Loans generally permit each borrower
to voluntarily prepay the entire principal balance of its Mortgage Loan provided
that any applicable Prepayment Premium is paid in connection therewith;
provided, however, that the applicable Prepayment Premium requirement expires
prior to the maturity date of all of the Mortgage Loans. Voluntary prepayments
of less than the full outstanding principal balance of a Mortgage Loan are
generally prohibited. With respect to each of Loan #__ and Loan #__,
representing approximately __% of the Initial Pool Balance, the related borrower
is permitted to make partial voluntary prepayments of its Mortgage Loan subject
to certain specified conditions and limitations, including payment of the
required Prepayment Premium. Additionally, with respect to Loan #__,
representing approximately ___% of the Initial Pool Balance, the related
borrower is permitted to make voluntary prepayments over either a or ____ year
amortization period without the payment of Prepayment Premiums.
The Prepayment Premium applicable with respect to the majority of the
Mortgage Loans is generally calculated (a) for a certain period (any such
period, a "Yield Maintenance Period") after the origination of such Mortgage
Loan or the expiration of the applicable Lockout Period, if any, on the basis of
a yield maintenance formula and/or a specified percentage of the amount prepaid,
and (b) after the expiration of the applicable Yield Maintenance Period, a
specified percentage (which percentage may either remain constant or decline
over time) of the amount prepaid. "Annex A" attached hereto contains more
specific information regarding the Prepayment Premiums applicable to each of the
Mortgage Loans.
S-44
<PAGE>
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.
The following "Prepayment Lockout/Premium Analysis" table sets forth an
analysis of the percentage of the declining balance of the Mortgage Pool that,
on __________, in each of the years indicated, will be within a Lockout Period
or in which Principal Prepayments must be accompanied by the indicated
Prepayment Premium or yield maintenance charge.
S-45
<PAGE>
<TABLE>
<CAPTION>
Prepayment Lock-out/Premium Analysis <F1>
Percentage of Mortgage Pool by Prepayment
Restriction Assuming No Prepayments
-------- --------- -------- -------- --------- -------- --------- -------- --------- -------- ------
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
1998 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prepayment Restrictions
- -----------------------
Lock-Out
Yield Maintenance
Greater of Yield
Maintenance or
Percentage Premium of:
5.00% and greater
4.00% to 4.99%
3.00% to 3.99%
2.00% to 2.99%
1.00% to 1.99%
Total of Yield Maintenance
Total of Yield Maintenance
and Lockout
Percentage Premium:
5.00% and greater
4.00% to 4.99%
3.00% to 3.99%
2.00% to 2.99%
1.00% to 1.99%
Total with Percentage Premium
Open
- --------------- ------- ------- ------- ------- ------- ------ ------- ------- ------- -------
TOTALS 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Mortgage Pool Balance
(in millions)
% of Initial Pool
Balance <F2>
- ------------------
<FN>
<F1>This table sets forth an analysis of the percentage of the declining balance
of the Mortgage Pool that, on __________ ___, in each of the years
indicated, will be within a Lock-out Period or in which Principal
Prepayments must be accompanied by the indicated Prepayment Premium or
yield maintenance charge. The table was prepared generally on the basis of
Scenario 1 described herein, except that it was assumed in preparing the
table that no Mortgage Loan will be prepaid, voluntarily or involuntarily.
See Annex B for more detailed information regarding prepayment provisions
of the Mortgage Loans.
<F2> Represents the percentage of the Initial Pool Balance that will remain
outstanding at the indicated date based upon the assumptions used in
preparing this table.
</FN>
</TABLE>
S-46
<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, (iv) an acceptable assumption agreement is executed, and (v) a
specified assumption fee (generally 1% to 1.5% of the then outstanding principal
balance of the applicable Note) has been received by the mortgagee. Certain of
the Mortgages may also allow transfers of interests in the related Mortgaged
Property in the nature of residential leases and easements and changes in
ownership between partners, family members, for estate planning purposes,
affiliated companies and certain specified individuals. In the event of any
transfer or change in ownership of the Mortgaged Property in violation of the
applicable provisions of the related Mortgage Loan documents, the related
Mortgage Loan documents generally provide that the mortgagee is permitted to
accelerate the maturity of the related Mortgage Loan. See "CERTAIN LEGAL ASPECTS
OF MORTGAGE LOANS--Enforceability of Certain Provisions--Due-on-Sale Provisions"
in the Prospectus. The Depositor makes no representation as to the
enforceability of any due-on-sale or due-on-encumbrance provision in any
Mortgage Loan which is the subject of a proceeding under the Bankruptcy Code.
Default Provisions. Except as described below, the related Mortgage Loan
documents generally provide that an event of default will exist if (a) any
regular installment of principal and/or interest is not paid when specified
(generally either (i) upon the date the same is due, or (ii) within a specified
period (generally ranging from 5 days to 30 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
S-47
<PAGE>
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 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 either (a)
a specified rate, (b) a specified rate above the stated interest rate of such
Mortgage Loan, or (c) a rate equal to the greater of (i) a specified rate above
the stated interest rate of such Mortgage Loan, or (ii) a specified rate above a
specified base rate (typically the prime rate reported in The Wall Street
Journal). 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 $1,000,000 per occurrence, (b) if any part of
the Mortgaged Property upon which a material improvement is located lies in a
special flood hazard area and for which flood insurance has been made available,
a flood insurance policy in an amount equal to the lesser of the outstanding
principal balance of the related Note or the maximum limit of coverage available
from governmental sources, (c) if deemed advisable by the Originator, rent loss
and/or business interruption insurance in an amount equal to all rents or
estimated gross revenues from the operation of the Mortgaged Property for a
period as required by the Mortgage, (d) if applicable, insurance against loss or
damage from explosion of steam boilers, air conditioning equipment, high
pressure piping, machinery and equipment, pressure vessels or similar apparatus,
and (e) such other insurance as may from time to time reasonably be required by
the mortgagee. With respect to many of the Mortgage Loans, the related borrower
has satisfied the applicable insurance requirements by obtaining blanket
insurance policies, subject to the review and approval of the same by the
mortgagee, including the amount of insurance and the number of properties
covered by such policies.
Casualty and Condemnation. The related Mortgage Loan documents typically
provide that in the event of damage to the related Mortgaged Property by reason
of fire or other casualty (a "Casualty"), all insurance proceeds will be paid to
the mortgagee and then it is such mortgagee's option as to whether to apply such
proceeds to the outstanding indebtedness of the related Mortgage Loan, or to
allow such proceeds to be applied to the restoration of the related Mortgaged
Property; provided, however, that if certain conditions are satisfied, the
mortgagee may be required to disburse such proceeds in connection with a
restoration of the related Mortgaged Property. These required conditions
typically include one or more of the following: (a) if the insurance proceeds
payable are less than a specified amount, (b) if less
S-48
<PAGE>
than a specified percentage of the related Mortgaged Property is destroyed or if
the value of the related Mortgaged Property following such Casualty remains
greater than either a specified amount or a specified percentage of the value of
the related Mortgaged Property immediately preceding such Casualty, (c) if the
Casualty affects less than a specified percentage of the net rentable area of
the Mortgaged Property or interrupts less than a specified percentage of the
rentals from the Mortgaged Property, (d) if such restoration will cost less than
a specified amount and if sufficient funds are available to complete such
restoration, (e) if such restoration can be accomplished within a specified time
period, (f) if the restored Mortgaged Property will adequately secure the
related Mortgage Loan, (g) if adequate income (including rentals and insurance)
will be available during the restoration period and (h) if no event of default
then exists. In certain of the Mortgage Loans, the lease between the related
borrower and a tenant of all or part of the related Mortgaged Property may
require the borrower or the tenant to rebuild the buildings located upon the
related Mortgaged Property in the event of a Casualty, and the related Mortgage
Loan documents may permit the application of insurance proceeds to satisfy such
requirement, regardless of the value of such Mortgaged Property following such
Casualty.
Generally, the Mortgage Loans provide that all awards payable to the
borrower in connection with any taking or exercise of the power of eminent
domain with respect to the related Mortgaged Property (a "Condemnation") will be
paid directly to the mortgagee, and then it is such mortgagee's option as to
whether to apply such proceeds to the outstanding indebtedness of the related
Mortgage Loan, or to allow such proceeds to be applied to the restoration of the
related Mortgaged Property; provided, however, that if certain conditions are
satisfied, the mortgagee may be required to disburse such awards in connection
with a restoration of the related Mortgaged Property. These required conditions
typically include one or more of the following: (a) if the award is less than a
specified amount, (b) if less than a specified percentage of the related
Mortgaged Property is taken, (c) if the Condemnation affects less than a
specified percentage of the net rentable area of the Mortgaged Property or
interrupts less than a specified percentage of the rentals from the Mortgaged
Property, (d) if such restoration will cost less than a specified amount and if
sufficient funds are available to complete such restoration, (e) if such
restoration can be accomplished within a specified time period, (f) if adequate
income (including the Condemnation award, rentals and insurance) will be
available during the restoration period, (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 lease between the related borrower and a tenant of all or
part of the related Mortgaged Property may require the borrower or the tenant to
restore the related Mortgaged Property in the event of a Condemnation and the
related Mortgage Loan documents may permit the application of condemnation
proceeds to satisfy such requirement.
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. However, in the case of owner-occupied properties, the borrower
typically provides financial information with respect to itself instead of the
Mortgaged Property.
Delinquencies and Modifications. As of the Cut-off Date for each Mortgage
Loan, no Mortgage Loan was more than 30 days delinquent in respect of any
Monthly Payment, and no Mortgage Loan has been modified in any material manner
since its origination in connection with any default or threatened default on
the part of the related borrower. Any future modifications would be subject to
the conditions and requirements contained in the Pooling and Servicing
Agreement.
S-49
<PAGE>
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, improvements
mandated under the Americans with Disabilities Act of 1990, 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
____________, 1998, regarding Mortgage Loans for which a Reserve Account existed
on such date.
- ---------------------------------------------------------------------
Property Reserve Orig. Curr. Monthly
Loan No. Name Description Reserve Reserve Reserve
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
The Tax Credit Loans
Mortgage Loans Loan # , Loan # and Loan # ) representing
approximately % of the Initial Pool Balance (the "Section 42 Mortgage Loans"),
are secured by Mortgaged Properties believed eligible to receive Tax Credits.
The Section 42 Mortgage Loans were originated by ______________. All of the
Section 42 Mortgage Loans were underwritten to a Debt Service Coverage Ratio of
not less than [1.15x] and a Loan-to-Value Ratio of not greater than [85%].
Background. The Tax Reform Act of 1986 eliminated or restricted most of
the existing federal tax incentives for the production of rental housing (such
as tax-exempt bond financing, accelerated depreciation and deduction of
construction period interest) and replaced them with a federal tax credit for
qualifying property that was acquired, constructed or rehabilitated after
December 31, 1986. The Low Income Housing Tax Credit provisions are set forth in
Section 42 of the Code. The Tax Credit program is administered by the U.S.
Treasury Department. The intent of the Tax Credit program is to facilitate,
through the tax credit mechanism, the construction or substantial rehabilitation
of affordable multifamily housing with the benefits of this indirect subsidy
flowing to a targeted tenant profile. All of the Mortgaged Properties relating
to the Section 42 Mortgage Loans have been allocated Tax Credits.
General Rules. Under the Tax Credit provisions, a property owner must
comply with the tenant income restrictions and rental restrictions over a
minimum 15-year compliance period. In addition, agreements governing the
property will normally require an "extended use period" which has the effect of
extending the income and rental restrictions for an additional 15 years.
However, at any time during the last year of the compliance period or at any
time during the extended use period, the property owner may demand that the
related state housing finance agency find a buyer for the property who will
purchase the property subject to the income and rental restrictions and who will
pay enough to both retire any debt on the property and return the owner's equity
investment plus cost-of-living adjustments. If the related state housing finance
agency cannot find such a purchaser within one year of such demand, the income
and rental restrictions cease to apply and rents may be increased to market
rates over a three-year period. In return for agreeing to these restrictions,
the property owner is entitled to receive a Tax Credit (e.g., a
S-50
<PAGE>
dollar-for-dollar reduction of federal taxes) in each taxable year over a period
of 10 years for a qualified low-income project commencing with occupancy by
qualified tenants.
Income Targeting Test. At the time the project is placed in service, the
property owner must make an irrevocable election of one of two set-aside rules,
either (i) at least 20% of the units must be rented to tenants with incomes of
50% or less of median income, as adjusted for family size (the "20-50"
set-aside), or (ii) at least 40% of the units must be rented to tenants with
incomes of 60% or less of median income, as adjusted for family size (the
"40-60" set-aside). The aggregate number of Tax Credits the owner is entitled to
is based upon the percentage of total units made available to qualified tenants.
See "--Value of Tax Credits" below.
The applicable set-aside requirement must be met on an annual basis over
the 15-year compliance periods with tenant income each year measured against the
income limit applicable for that year. Most owners have elected the 40-60
set-aside rule and designated 100% of the units for tenants that qualify under
the income requirements.
Once qualified, tenant income can rise to 140% of the applicable income
limitation for that year without disqualification of the tenant. The provisions
allow the income of an existing tenant to exceed the 140% limit without
disqualification if the next available rental unit of comparable size is rented
(or made available) to a tenant qualifying at 60% of the median income (or 50%
for the 20-50 set-aside projects). In practice, there is no income limit for
existing tenants who initially met the applicable income requirements in a
housing project eligible for Tax Credits (a "Tax Credit Project") for which the
owner has elected to rent 100% of the units thereof to qualified tenants. A
majority of the Section 42 Mortgage Loans are secured by Mortgaged Properties
where the related borrower had elected to rent 100% of the units to qualified
tenants.
Rental Requirements. The Tax Credit provisions require that gross rent for
each low-income unit not exceed 30% of the annual HUD median income, adjusted
for the household size expected to occupy the particular unit. The gross rental
charged for a unit must take into account an allowance for utilities. If
utilities are paid by the tenant, then the maximum allowable Tax Credit rent is
reduced according to utility allowances, as provided in regulations of the
Internal Revenue Service (the "IRS").
Value of Tax Credits. The number of Tax Credits received by the owner of a
qualified project will depend largely on the "qualified basis," which is the
portion of the project's "eligible basis" attributable to low-income units. In
general, qualified basis is the eligible basis times the percentage of total
rental units (up to a maximum of 100%) rented to or made available to qualifying
tenants. Eligible basis is essentially project cost (exclusive of land).
Qualified basis can change from year to year during the relevant period when tax
credits are applicable (the "Tax Credit Period") if owners elect to make more
(or fewer) rental units available to qualifying tenants. Accordingly, the number
of Tax Credits received from year to year could vary.
The number of Tax Credits available to the owner of the property each year
is equal to the "annual tax credit percentage" times the qualified basis. The
annual tax credit percentage available to a particular property is generally
determined when the property is placed in service and will not change
thereafter. In 1987, the "annual tax credit percentage" for new construction was
9% and the annual tax credit percentage for acquisition of existing buildings
was 4%. In subsequent years, the IRS has published monthly factors to compute
the annual tax credit percentage for projects placed in service that month.
These annual percentages approximate 9% and 4%.
For example, for a newly-constructed Tax Credit Project, Tax Credits equal
to approximately 9% of the project's qualified basis would be available for each
year of the Tax Credit Period. Thus, the
S-51
<PAGE>
aggregate number of Tax Credits available over the Tax Credit Period would equal
approximately 90% of the project's qualified basis, which for projects which are
(and remain) 100% Tax Credit qualified, may approximate almost 90% of the
project cost (excluding the cost of land). However, when investors consider the
amount of funds they are willing to contribute as limited partners to a
partnership which owns a Tax Credit Project, they generally consider (among
other factors) the timing of the receipt of Tax Credits (future Tax Credits have
lower present values). Accordingly, investor capital contributions for 9%
projects generally approximate 45-50% of the aggregate number of Tax Credits
allocated to a property.
Compliance and Recapture of Tax Credits. Tax Credit compliance over the
15-year compliance period is based on whether tenants qualify. This is
determined by reviewing tenant income (adjusted for family size) in relation to
the HUD median income for the area as described above under "--Income Targeting
Test."
In the event a Tax Credit Project does not maintain compliance with the
Tax Credit restrictions on tenant income or rental rates, the owners of the Tax
Credit Project may lose the Tax Credits related to the period of the
noncompliance and face the partial recapture of previously taken Tax Credits.
The loss of Tax Credits, and the possibility of recapture of Tax Credits already
taken, may provide significant incentive for project owners to keep the Tax
Credit Project in compliance. Additionally, in many cases, it may be
economically prudent for project owners to subsidize poorly performing projects
as opposed to permitting a default on a Section 42 Mortgage Loan secured by the
Tax Credit Project. As the Tax Credits flow to the owner of the Tax Credit
Project, a default on a Section 42 Mortgage Loan that leads to a foreclosure
would result in the prior owners losing any future Tax Credits and the potential
recapture of a portion of any Tax Credits already taken as discussed in the
following paragraph. Additionally, in the event of a foreclosure upon a Tax
Credit Project during the Tax Credit Period, the subsequent owner will be
entitled to the remaining Tax Credits in the same manner as the original owner
of the Tax Credit Project, subject to continued compliance with Section 42 of
the Code. Accordingly, the resale value of the Tax Credit Project during such
Tax Credit Period may be enhanced by the existence of the Tax Credits. In the
event of a foreclosure sale during such period, prospective purchasers may
assign a value to the remaining Tax Credits and reflect such value in the price
they are willing to pay to acquire the Tax Credit Project. Conventional
valuation analysis, such as that based upon net operating income, does not
recognize this value. Thus, the true value may be understated. However, the
actual value assigned by prospective purchasers to the Tax Credits will depend
on the remaining term of the Tax Credit Period, the prevailing market for Tax
Credit properties and other economic factors, and no assurance can be given that
the existence of Tax Credits will generate any increase in the value of the
related Mortgaged Properties. All the Section 42 Mortgage Loans are secured by
liens on related Mortgaged Properties which have been allocated Tax Credits.
Under certain circumstances, a property owner is subject to the recapture
of the "accelerated portions" of any Tax Credit previously taken, plus interest.
Because the Tax Credits are taken over a 10-year period while the Section 42
compliance period is 15 years, one-third of the Tax Credit taken in years 1
through 10 is considered "accelerated" and is subject to recapture. If the
non-compliance events occur in years 11 through 15, the total accelerated
portion (which equals one-third of the total Tax Credits taken) is reduced pro
rata each subsequent year. Additionally, if a project as a whole fails to meet
the minimum requirements (e.g., the 20-50 or 40-60 set-aside, whichever is
elected), there is recapture of 100% of the accelerated portion of the Tax
Credits taken in each preceding year. Recapture does not occur if noncompliance
is corrected within a "reasonable period," as determined under the Code.
In substantially all cases, the Tax Credits were allocated to the
Mortgaged Properties securing the Section 42 Mortgage Loans based upon most of
the units therein being held available or occupied by individuals whose income
is 60% or less of the area median gross income for the area in which the related
Mortgaged Properties is located. Under Section 42 of the Code, the rent that can
be charged for the
S-52
<PAGE>
qualified units must be restricted on the basis of unit size (or number of
occupants in pre-1990 properties) and area median income. In addition, to avoid
a recapture of a portion of the Tax Credits previously taken by a borrower, the
Mortgaged Properties securing the Section 42 Mortgage Loans must meet the income
and rental requirements for at least 15 years.
__________ received, with respect to each Mortgaged Property securing the
Section 42 Mortgage Loans, evidence as to (i) the number of Tax Credits, (ii)
the "eligible basis," (iii) the "qualified basis," (iv) the "date placed in
service," and (v) compliance with the Tax Credit regulations to date. As part of
the documents related to the origination of each Mortgage Loan, the Originator
also received a copy of the Tax Credit agreement with the applicable state or
local housing finance agency.
Certain Characteristics of the Mortgage Pool
Concentration of Mortgage Loans and Borrowers. Several of the Mortgage
Loans have Cut-off Date Principal Balances that are substantially higher than
the average Cut-off Date Principal Balance. The largest single Mortgage Loan
(Loan #___) has a Cut-off Date Principal Balance that represents approximately %
of the Initial Pool Balance. The five largest individual Mortgage Loans have
Cut-off Date Principal Balances that represent in the aggregate approximately %
of the Initial Pool Balance.
The Mortgage Pool consists of ___ Mortgage Loans to ___ separate borrowers.
________ of the Mortgage Loans were made to a borrower which was also the
borrower in one or more of the other Mortgage Loans. ____ of the Mortgage Loans
were made to borrowers that are affiliated with the borrower of another Mortgage
Loan. However, no set of Mortgage Loans made to a single borrower or to a single
group of affiliated borrowers constitutes more than approximately __% of the
Initial Pool Balance. _____ Mortgage Loans (representing approximately __% of
the Initial Pool Balance) are cross-collateralized and cross-defaulted with one
or more other Mortgage Loans to the related borrower or to a related affiliated
borrower. See "--Limitations on Enforceability of Cross-Collateralization"
herein. The following table sets forth more detailed information regarding
Mortgage Loans made to a single borrower or to a single group of affiliated
borrowers. The column entitled "%" in such table sets forth the approximate
percentage of the Initial Pool Balance represented by each identified group of
Mortgage Loans.
Relationship Cross-Collateralized
Loan Numbers % of Borrowers and Cross-Defaulted
- ------------ - ------------ --------------------
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 24 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
S-53
<PAGE>
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. [Describe any known environmental
issues.]
Investors should understand that the results of the environmental site
assessments do not constitute an assurance or guaranty by the Underwriter, the
Depositor, the Originators, the Mortgage Loan Seller, the borrowers, any
environmental consultants or any other person as to the absence or extent of the
existence of any environmental condition on the Mortgaged Properties that could
result in environmental liability. Given the scope of the environmental site
assessments, an environmental condition that affects a Mortgaged Property may
not be discovered or its severity revealed during the course of the assessment.
Further, no assurance can be given that future changes in applicable
environmental laws, the development or discovery of presently unknown
environmental conditions at the Mortgaged Properties or the deterioration of
existing conditions will not require material expenses for remediation or other
material liabilities.
Other Financing. The related Mortgage Loan documents generally prohibit
subordinate financing without the mortgagee's prior consent. With respect to __
of the Mortgage Loans, representing approximately ____% of the Initial Pool
Balance, the related Mortgage Loan documents allow the borrower, under certain
specified circumstances, to either maintain an existing subordinate mortgage
encumbering the related Mortgaged Properties, or to grant such a subordinate
mortgage in the future. Generally, prior to any such subordinate mortgage being
allowed, certain conditions specified in the related Mortgage Loan documents
must be satisfied. Such conditions may include one or more of the following: (a)
the purpose, amount, term and amortization period of the proposed subordinate
debt, together with the identity of the subordinate lender and the terms of the
subordinate loan documents, must be acceptable to the senior mortgagee; (b)
pursuant to either the specific terms of the subordinate mortgage or a separate
recorded agreement obtained from such subordinate lender, the subordinate
mortgage must be unconditionally subordinated to the related Mortgage Loan
documents, and the subordinate lender is also typically prohibited from
exercising any remedies against the borrower without the senior mortgagee's
consent and from receiving any payments on such subordinate debt if, for the
immediately prior 12 months, either (i) the aggregate debt service coverage
ratio for such Mortgage Loan and such subordinate debt is less than a specified
ratio, or (ii) the aggregate loan to value ratio for such Mortgage Loan and such
subordinate debt is greater than a specified ratio; (c) the subordinate debt
must be non-recourse; and (d) acceptable economic conditions regarding the
related Mortgaged Property must exist as of the effective date of such
subordinate financing, typically including (i) an aggregate debt service
coverage ratio for such Mortgage Loan and such subordinate debt equal to or
exceeding a specified ratio, and/or (ii) an aggregate loan to value ratio for
such Mortgage Loan and such subordinate debt of less than a specified ratio.
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.
S-54
<PAGE>
[Property Tax Abatement. Mortgaged Properties (representing approximately
% of the Initial Pool Balance) are currently exempt from real property taxes in
an amount equal to the percentage portion of the related Mortgaged Property
which is rented to lower income households; provided, however, that in order for
such exemption to continue, the related Mortgaged Property must be: (a) owned
and operated by a religious, hospital, scientific or charitable fund, foundation
or corporation (including a limited partnership in which the managing general
partner is an eligible nonprofit organization) which is eligible for and
receives Tax Credits pursuant to Section 42 of the Code; (b) used exclusively
for rental housing and related facilities; and (c) 20% or more occupied by
tenants which qualify as "low income households" and whose rent does not exceed
a statutorily prescribed rate.]
Limitations on Enforceability of Cross-Collateralization. of the Mortgage
Loans (the "Cross-Collateralized Loans"), each of which was made to a borrower
that is affiliated with the borrower under another Mortgage Loan 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 "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.
S-55
<PAGE>
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.
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, replacement reserves, 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.
S-56
<PAGE>
(2) "Cash Flow" means, with respect to any Mortgage Loan, the NOI for the
related Mortgaged Property decreased by tenant improvements, leasing commissions
and other non-recurring expenditures, as appropriate.
(3) "Underwritten NOI" means, with respect to any Mortgage Loan, the NOI
for the related Mortgage Property as determined by the applicable 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, with a vacancy
rate equal to the higher of the Mortgaged Property's historical rate, the market
rate or an assumed vacancy rate. Other revenues, such as parking fees, are
included only if sustainable. Certain revenues, such as application fees and
lease termination fees, are not included. Operating and fixed expenses generally
are adjusted to reflect the higher of the Mortgaged Property's average expenses
or a midrange industry norm for expenses on similar properties in similar
locations (generally adjusted upward to account for inflation), a market rate
management fee and an annual reserve for replacement of capital items.
(4) "Underwritten Cash Flow" means, with respect to any Mortgage Loan, the
Underwritten NOI for such Mortgage Loan decreased by an amount that the
applicable Mortgage Loan Seller has determined to be an appropriate allowance
for average annual tenant improvements and leasing commissions based upon their
respective underwriting guidelines.
(5) "Appraised Value" means, for each of the Mortgaged Properties, the
appraised value of such property as determined by an appraisal thereof made not
more than nine months prior to the origination date of the related Mortgage Loan
and reviewed by the Originator of such Mortgage Loan.
(6) "Annual Debt Service" means, for any Mortgage Loan, the current annual
debt service (including interest allocable to payment of the Servicing Fee and
principal) payable with respect to such Mortgage Loan during the 12-month period
commencing on the Cut-off Date (assuming no principal prepayments occur).
(7) "Debt Service Coverage Ratio," "Underwritten DSCR" or "DSCR" means,
with respect to any Mortgage Loan, (a) the Underwritten Cash Flow for the
related Mortgaged Property divided by (b) the Annual Debt Service for such
Mortgage Loan.
(8) "Loan-to-Value Ratio," "Appraised LTV" or "LTV" means, with respect to
any Mortgage Loan, the principal balance of such Mortgage Loan as of the Cut-off
Date divided by the Appraised Value of the Mortgaged Property securing such
Mortgage Loan.
(9) "Balloon LTV" for any Mortgage Loan is calculated in the same manner
as LTV, except that the Balloon Amount is used instead of the Cut-off Date
principal balance.
(10) "Balloon Amount" or "Balloon Balance" for each Mortgage Loan is equal
to the principal amount, if any, due at maturity, taking into account scheduled
amortization, assuming no prepayments or defaults.
(11) "Occupancy Rate" means the percentage of gross leasable area, rooms,
units, beds, pads or sites of a Mortgaged Property that are leased or occupied.
Occupancy Rates are calculated based upon the most recent rent information
received by the applicable Mortgage Loan Seller.
S-57
<PAGE>
(12) "Property Age" means, with respect to the related Mortgaged Property
(or Mortgaged Properties), the difference between the Cut-off Date year (1998)
and the year in which the oldest Mortgaged Property securing a Mortgage Loan was
initially constructed.
(13) "Effective Age" means, with respect to the related Mortgaged Property
(or Mortgaged Properties), the difference between the Cut-off Date year (1998)
and the more recent of the year in which the oldest Mortgaged Property securing
a Mortgage Loan was either initially constructed or renovated.
(14) "Remaining Term to Maturity" generally means the number of months
remaining from the Cut-off Date until the maturity of a mortgage loan. The
method for calculating the "Remaining Term to Maturity" for any Mortgage Loan 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.
(15) "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.
(16) 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.
(17) The "Occupancy Percentage" and "Occupancy Date" for each Mortgage
Loan are based upon rent information received by the applicable Mortgage Loan
Seller from the related borrower.
(18) All calculations of any applicable Lockout Period, Yield Maintenance
Period or Prepayment Premium for a Mortgage Loan are determined based upon such
Mortgage Loan's first scheduled payment date.
(19) "Weighted Average Maturity" means the weighted average of the
Remaining Terms to Maturity of the Mortgage Loans.
(20) Due to rounding, percentages may not add to 100% and amounts may not
add to the indicated total.
[(21) Mortgage Loans with an "*" under Original Note Date were not closed
as of _______________, 1998. Accordingly, certain terms of such Mortgage Loans
set forth on Annex A may be subject to change.]
S-58
<PAGE>
<TABLE>
<CAPTION>
Range of Cut-off Date Principal Balances
Range of Cut- Aggregate Pct by Number of Percent Weighted Weighted Weighted
Off Balances Cut-off Date Aggregate Mortgage by Average Average Average
Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Geographic Distribution of Mortgaged Properties
Property Aggregate Pct by Number of Percent Weighted Weighted Weighted
Location Cut-off Date Aggregate Mortgage by Average Average Average
Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Range of DSCRs
Range Aggregate Pct by Number of Percent Weighted Weighted Weighted
of Cut-off Date Aggregate Mortgage by Average Average Average
DSCR(x) Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
S-59
<PAGE>
<TABLE>
<CAPTION>
Range of LTVs
Range of Aggregate Pct by Number of Percent Weighted Weighted Weighted
LTV Cut-off Date Aggregate Mortgage by Average Average Average
Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Types of Mortgaged Properties
Property Aggregate Pct by Number of Percent Weighted Weighted Weighted
Type Cut-off Date Aggregate Mortgage by Average Average Average
Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Range of Maturity Years
Year of Maturity Aggregate Pct by Number of Percent Weighted Weighted Weighted
Cut-off Date Aggregate Mortgage by Average Average Average
Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
S-60
<PAGE>
<TABLE>
<CAPTION>
Range of Mortgage Rates
Range of Aggregate Pct by Number of Percent Weighted Weighted Weighted
Mortgage Rates Cut-off Date Aggregate Mortgage by Average Average Average
Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Range of Remaining Term of Amortization (in Months)
Range of Aggregate Pct by Number of Percent Weighted Weighted Weighted
Remaining Cut-off Date Aggregate Mortgage by Average Average Average
Amount Principal Cut-off Date Loans Number Mortgage DSCR Maturity
(in Months) Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Range of Property Age (in Years)
Range of Aggregate Pct by Number of Percent Weighted Weighted Weighted
Property Age Cut-off Date Aggregate Mortgage by Average Average Average
(in Years) Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
S-61
<PAGE>
<TABLE>
<CAPTION>
Range of Effective Property Age (in Years)
Range of Aggregate Pct by Number of Percent Weighted Weighted Weighted
Effective Cut-off Date Aggregate Mortgage by Average Average Average
Property Age Principal Cut-off Date Loans Number Mortgage DSCR Maturity
(in Years) Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
<TABLE>
<CAPTION>
Range of Loan Origination Years
Year of Aggregate Pct by Number of Percent Weighted Weighted Weighted
Origination Cut-off Date Aggregate Mortgage by Average Average Average
Principal Cut-off Date Loans Number Mortgage DSCR Maturity
Balance Principal Rate
<S> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
S-62
<PAGE>
Changes in Mortgage Pool Characteristics
The description in this Prospectus Supplement of the Mortgage Pool and the
Mortgaged Properties is based upon the Mortgage Pool as expected to be
constituted at the close of business on the Cut-off Date, as adjusted for
scheduled principal payments due on the Mortgage Loans on or before the Cut-off
Date. Prior to the issuance of the Certificates, one or more Mortgage Loans may
be removed from the Mortgage Pool if the Depositor deems such removal necessary
or appropriate or if it is prepaid. A limited number of other mortgage loans may
be included in the Mortgage Pool prior to the issuance of the Certificates,
unless including such mortgage loans would materially alter the characteristics
of the Mortgage Pool as described herein. Accordingly, the range of Mortgage
Rates and maturities, as well as the other characteristics of the Mortgage Loans
constituting the Mortgage Pool at the time the Certificates are issued may vary
from those described herein.
A Current Report on Form 8-K (the "Form 8-K") will be filed, together with
the Pooling and Servicing Agreement, with the Securities and Exchange Commission
within 15 days after the initial issuance of the Certificates. The Form 8-K will
be available to the Certificateholders promptly after its filing. In the event
that Mortgage Loans are removed from or added to the Mortgage Pool as set forth
in the preceding paragraph, such removal or addition will be noted in the Form
8-K.
Representations and Warranties; Repurchase
In the Pooling and Servicing Agreement, the Depositor will assign to the
Trustee for the benefit of Certificateholders certain representations and
warranties made by the Mortgage Loan Seller in the applicable Mortgage Loan
Purchase Agreement. In the applicable 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 Loan Purchase 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 the 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) The proceeds of such Mortgage Loan have been fully disbursed, and
there is no requirement for future advances thereunder.
(5) Each related Mortgage Loan document is the legal, valid and binding
obligation of the related borrower or other party executing such Mortgage Loan
document, enforceable in accordance with its terms, there is no valid offset,
defense or counterclaim to any Mortgage Loan, and to the Mortgage Loan Seller's
knowledge, no default, breach, violation or event of acceleration exists under
the related Mortgage or the related Note.
S-63
<PAGE>
(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 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 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
S-64
<PAGE>
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 expiration of the amortization period of the related Mortgage Loan;
(B) the related borrower is permitted to mortgage and sublease its
leasehold interest, and except as may be indicated in the related Title Policy,
the related Mortgage is a first priority lien over such leasehold interest;
(C) the mortgaged leasehold interest may be transferred in a foreclosure
of the related Mortgage or a conveyance in lieu thereof, and thereafter may be
transferred, upon notice to, but without the consent of, the related lessor (or,
if any such consent is required, either (1) it has been previously obtained or
(2) it is not to be unreasonably withheld) provided that such lease has not been
terminated and all amounts owed thereunder have been paid;
(D) the related lessor has agreed, in writing: (1) to provide the
mortgagee with a notice of any default by the related borrower under such lease,
and a cure period equal to the time provided to such lessee under such lease;
and (2) 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 (a) security
interests in personal property and fixtures, (b) Loan # , Loan # , Loan # , Loan
# and Loan # (each of which permits subordinate financing under the limited
circumstances set forth in the related Mortgage Loan documents),and (c) Loan #
and Loan # (in which each related Mortgaged Property is subject to an
installment contract which is subject and subordinate to the related Mortgage
Loan).
(17) Each Mortgage Loan is a "qualified mortgage" for purposes of Section
860G of the Code.
S-65
<PAGE>
(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 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 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.
S-66
<PAGE>
(26) A tenant estoppel was obtained from all tenants whose leases covered
more than 10% (20% for any such Mortgage Loan with an original principal balance
less than or equal to $2,500,000) of the net leasable area of the related
Mortgaged Property, and based upon such estoppel, no defaults with respect to
any such lease existed as of the date of such estoppel. To the Mortgage Loan
Seller's knowledge, no default or 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
any hazardous materials to exist on, the related Mortgaged Property in 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.
(30) No Mortgage Loan or group of Mortgage Loans made to a borrower or to
affiliated borrowers accounted for more than 5% of the Initial Pool Balance.
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.
The Pooling and Servicing Agreement will require that the custodian, 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 applicable 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 85 days after notice of such breach from the custodian, the Master
Servicer, the Special Servicer or the Trustee, the Mortgage Loan Seller will
either (1) repurchase such Mortgage Loan at its outstanding principal balance,
plus unpaid accrued interest at the applicable rate (in absence of a default)
to, but not including, the date of repurchase, the amount of any unreimbursed
Property Advances relating to such Mortgage Loan, accrued interest on Advances
(including P&I Advances) at the Advance Rate, the amount of any unpaid servicing
compensation (other than Servicing Fees) 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") or (2) substitute
a Qualified Substitute Mortgage Loan (as defined in the Pooling and Servicing
Agreement) for such Mortgage Loan, provided, however, if such defect or breach
cannot be cured within such 85-day period, so long as the Mortgage Loan Seller
has commenced and is diligently proceeding with the cure of such breach, such
85-day period will be extended for an additional 90 days; provided, further,
that no such extension will be applicable unless the Mortgage Loan Seller
delivers to the Depositor (or its successor in interest) an
S-67
<PAGE>
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 85-day period in the preceding sentence
will apply.
Any Qualified Substitute Mortgage Loan substituted for a defective
Mortgage Loan, among other things, is required to comply as of the date of
substitution with all of the representations and warranties set forth in the
third preceding paragraph, and shall not result in the withdrawal, downgrade or
qualification of the rating assigned by the Rating Agencies to any Class of
Certificates.
The obligations of the Mortgage Loan Seller to substitute, repurchase or
cure constitute the sole remedies available to the Trustee for the benefit of
the holders of Certificates 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 (unless the Mortgage Loan
Seller is the Master Servicer and is otherwise obligated as described herein)
nor the Depositor will be obligated to purchase a Mortgage Loan if the Mortgage
Loan Seller defaults on its respective obligation to substitute, 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 and REMIC II may be disqualified.
MIDLAND LOAN SERVICES, INC.
Midland Loan Services, L.P., was organized under the laws of the State of
Missouri in 1992 as a limited partnership. On April 3, 1998, substantially all
of the assets of Midland Loan Services, L.P., were acquired by Midland Loan
Services, Inc. ("Midland"), a newly formed, wholly owned subsidiary of PNC Bank,
National Association. Midland is a real estate financial services company that
provides loan servicing and asset management for large pools of commercial and
multifamily real estate assets and that originates commercial real estate loans.
Midland's address is 210 West 10th Street, 6th Floor, Kansas City, Missouri
64105. Midland will serve as the Master Servicer and the Special Servicer for
the Trust Fund under the Pooling and Servicing Agreement. In addition, Midland
(or its predecessor in interest, Midland Loan Services, L.P.) is the Originator
and Mortgage Loan Seller with respect to ___ of the Mortgage Loans.
As of _____________, 1998, Midland was responsible for the servicing of
approximately _________ commercial and multifamily loans with an aggregate
principal balance of approximately $________ billion, the collateral for which
is located in all 50 states, Puerto Rico and the District of Columbia. With
respect to such loans, approximately __________ loans with an aggregate
principal balance of approximately $____ 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 also provides commercial loan servicing for
newly-originated loans and loans acquired in the secondary market on behalf of
issuers of commercial and multifamily mortgage-backed securities, financial
institutions and private investors.
Midland provides asset management and disposition services for commercial
and multifamily mortgage-backed securities transactions, private investors and
the Resolution Trust Corporation. As of ____________, 1998, Midland or its
predecessor in interest, Midland Loan Services, L.P. have provided such services
for a portfolio of approximately _____ assets with book values of $_____
billion. Midland and its affiliates have liquidated, disposed of or otherwise
resolved approximately _____ assets with book values of approximately $_____
billion.
S-68
<PAGE>
Since 1998, Midland has been originating commercial and multifamily
mortgage loans for the purpose of disposing of such mortgage loans in
securitization transactions such as this offering. As of __________, 1998,
Midland has originated or issued commitments for _____ commercial and
multifamily mortgage loans, with an aggregate original principal balance of
approximately $_____ million, including _____ of the Mortgage Loans, with an
aggregate original principal balance of approximately $_____ million, included
in the Mortgage Pool. See "DESCRIPTION OF THE MORTGAGE POOL--The Midland
Mortgage Loan Program-General" herein.
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.
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------------------------------
1995 1996 1997
---- ---- ----
By By Dollar By By Dollar By By Dollar
No. of Amount No. of Amount No. of Amount
Loans of Loans Loans of Loans Loans of Loans
(Dollar amount in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio................ 651 $1,899,207 2,782 $6,557,024
=== ========== ===== ==========
Period of delinquency<F1>
30-59 days.................. 16 $ 80,888 198 $ 89,419
60 to 89 days............... 3 1,372 17 10.479
90 days or more<F2>......... 6 49,607 18 33,898
--- ---------- ----- ------
Total delinquent loans......... 25 $ 131,866 233 $ 133,795
=== ========== ===== ==========
Percent of portfolio........... 4% 7% 8% 2%
<FN>
<F1> 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.
<F2> Includes pending foreclosures.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of March 31,
------------------------------------------------------------------------------------
1997 1998
----------------------------------------- -------------------------------------
By By Dollar By By Dollar
No. of Amount No. of Amount
Loans of Loans Loans of Loans
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Total Portfolio................ $ $
==== ========== ======= =====
Period of delinquency<F1>
30-59 days.................. $ $
60 to 89 days...............
90 days or more<F2>.........
Total delinquent loans......... $ $
==== ========== ====== =====
Percent of portfolio........... % * % %
......
*Less than 1%.
<FN>
<F1> 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.
<F2> Includes pending foreclosures.
</FN>
</TABLE>
The following delinquency tables set forth information concerning the
delinquency experience on commercial and multi-family mortgage loans serviced by
the Master Servicer for commercial mortgage-backed securities transactions
sponsored by the RTC (the "RTC Portfolio").
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------
1995 1996 1997
------------------------------- ------------------------ ------------------------
By By Dollar By By Dollar By By Dollar
No. of Amount No. of Amount No. of Amount
Loans of Loans Loans of Loans Loans of Loans
(Dollar amount in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio................ 9,408 $4,290,220 7,870 $3,544,352
===== ========= ===== ==========
Period of delinquency<F1>
30-59 days.................. 314 $ 130,974 91 $ 42,771
60 to 89 days............... 128 69,046 54 29,658
90 days or more<F2>......... 486 311,873 328 175,568
--- --------- --- ----------
Total delinquent loans......... 928 $ 511,894 473 $ 248,024
=== ========= === ==========
Percent of portfolio........... 10% 12% 6% 7%
<FN>
<F1> 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
S-70
<PAGE>
due on January 1 would first be considered delinquent on February 1). The
delinquencies reported above were determined as of the dates indicated.
<F2> Includes pending foreclosures.
</FN>
</TABLE>
<TABLE>
<CAPTION>
As of March 31,
-----------------------------------------------------------------------------------
1997 1998
---------------------------------------------- -------------------------------
By By Dollar By By Dollar
No. of Amount No. of Amount
Loans of Loans Loans of Loans
(Dollar amounts in thousands)
<S> <C> <C> <C> <C>
Total Portfolio................ $ $
==== ========== ======= ======
Period of delinquency<F1>
30-59 days.................. $ $
60 to 89 days...............
90 days or more<F2>.........
Total delinquent loans......... $ $
=== ========== ======= ======
Percent of portfolio........... % % % %
......
<FN>
<F1> 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.
<F2> Includes pending foreclosures.
</FN>
</TABLE>
Based on information published by the FDIC, the percentage of mortgage
loans delinquent 30 to 59 days, 60 to 89 days, and 90 days or more was ___%,
___% and ___% as of March 31, 1998 for all RTC commercial and multi-family
mortgage-backed securities transactions. The Depositor is not aware of any
similar industry wide statistics regarding delinquency experience for non-RTC
commercial and multi-family mortgage-backed certificates.
The delinquency experience set forth above is historical and is based on
the servicing of mortgage loans that may not be representative of the Mortgage
Loans in the Mortgage Pool. Consequently, there can be no assurance that the
delinquency experience on the Mortgage Loans in the Mortgage Pool will be
consistent with the data set forth above. The CMBS Portfolio, for example,
includes mortgage loans having a wide variety of characteristics (including
geographic location and property type) that may not be representative of the
characteristics of the Mortgage Loans in the Mortgage Pool. In addition, most of
the mortgage loans included in the CMBS Portfolio were originated by persons
that are not affiliated with the Master Servicer and were not reunderwritten by
the Master Servicer. These mortgage loans were originated by numerous entities
over a long period of time in accordance with a variety of underwriting policies
and standards, which underwriting standards may be materially different from
those used to underwrite the Mortgage Loans included in the Mortgage Pool.
Furthermore, some of the mortgage loans included in the CMBS Portfolio are being
primary serviced or sub-serviced by third parties.
S-71
<PAGE>
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 IBCA, Inc.
("Fitch") and Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("S&P"). Midland is ranked "Strong" as a commercial loan
servicer and asset manager and "Above Average" as a master servicer by S&P, and
"Acceptable" as a master servicer and "Above Average" as a special servicer by
Fitch. S&P ranks commercial loan servicers, asset managers and master 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 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 16 Classes to be designated as the Class A-1
Certificates, the Class A-2 Certificates, the Class X Certificates, the Class B
Certificates, the Class C Certificates, the Class D Certificates, the Class E
Certificates, the Class F Certificates, the Class G Certificates, the Class H
Certificates, the Class J Certificates, the Class K Certificates, the Class L-PO
Certificates, the Class L-IO Certificates, the Class R-I Certificates and the
Class R-II Certificates. Only the Class A-1, Class A-2, 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 applicable
S-72
<PAGE>
Mortgage Loan Purchase Agreement; and (vi) all of the mortgagee's right, title
and interest in the Reserve Accounts.
The Certificate Balance of any Class of Certificates outstanding at any
time represents the maximum amount that the holders thereof are entitled to
receive as distributions allocable to principal from the cash flow on the
Mortgage Loans and the other assets in the Trust Fund. The respective
Certificate Balance of each Class of Certificates will in each case be reduced
by amounts actually distributed on such Class that are allocable to principal
and by any Realized Losses allocated to such Class. The Class X and Class L-IO
Certificates are interest only Certificates, have no Certificate Balances and
are not entitled to distributions in respect of principal. The Class L-PO
Certificates are principal only certificates and are not entitled to
distributions in respect of interest.
Distributions
Method, Timing and Amount. Distributions on the Regular Certificates will
be made on the [25th] day of each month or, if such day is not a Business Day,
then on the next succeeding Business Day, commencing in ________, 1998 (each, a
"Distribution Date"). All distributions (other than the final distribution on
any Certificate) will be made by the Trustee to the persons in whose names the
Certificates are registered at the close of business on the last Business Day of
the month preceding the month in which such Distribution Date occurs (the
"Record Date"). Such distributions will be made (i) by wire transfer of
immediately available funds to the account specified by the Certificateholder at
a bank or other entity having appropriate facilities therefor, if such
Certificateholder (a) is DTC or its nominee or (b) provides the Trustee with
wiring instructions no less than five Business Days prior to the related Record
Date and is the registered owner of Certificates the aggregate Certificate
Balance or Notional Balance of which is at least $5,000,000 or (ii) by check
mailed to such Certificateholder. The "Class X Notional Balance" as of any date
is equal to the aggregate Certificate Balance of the Regular Certificates (other
than the Class X Certificates and the Class L-IO Certificates). The "Class L-IO
Notional Balance" as of any date is equal to the Certificate Balance of the
Class L-PO Certificates. The Class X and Class L-IO Notional Balances are
referred to herein generally as "Notional Balances." The final distribution on
any Certificate will be made in like manner, but only upon presentment or
surrender of such Certificate at the location specified in the notice to the
holder thereof of such final distribution. All distributions made with respect
to a Class of Certificates on each Distribution Date will be allocated pro rata
among the outstanding Certificates of such Class based on their respective
Percentage Interests. The "Percentage Interest" evidenced by any Regular
Certificate is equal to the initial denomination thereof as of the Closing Date
divided by the initial Certificate Balance (or, with respect to the Class X and
Class L-IO Certificates, the initial Class X Notional Balance or initial Class
L-IO Notional Balance) of the related Class.
The aggregate distribution to be made on the Regular Certificates on any
Distribution Date will equal the Available Funds. The "Available Funds" for a
Distribution Date will be the sum of all previously undistributed Monthly
Payments or other receipts on account of principal and interest on or in respect
of the Mortgage Loans (including Unscheduled Payments and Net REO Proceeds, if
any) received by the Master Servicer in the related Collection Period, including
all P&I Advances made by the Master Servicer, the Trustee or the Fiscal Agent,
as applicable, in respect of such Distribution Date, plus all other amounts
required to be placed in the Collection Account by the Master Servicer pursuant
to the Pooling and Servicing Agreement allocable to the Mortgage Loans, but
excluding the following:
(a) amounts permitted to be used to reimburse the Master Servicer, the
Trustee or the Fiscal Agent, as applicable, for previously unreimbursed Advances
and interest thereon as described herein under "THE POOLING AND SERVICING
AGREEMENT--Advances";
S-73
<PAGE>
(b) those portions of each payment of interest which represent the
applicable servicing compensation;
(c) all amounts in the nature of late fees, late charges and similar fees,
NSF check charges, loan modification fees, extension fees, loan service
transaction fees, demand fees, beneficiary statement charges, assumption fees
and similar fees, which the Master Servicer or the Special Servicer, as
applicable, is entitled to retain as additional servicing compensation;
(d) all amounts representing scheduled Monthly Payments due after the Due
Date in the related Collection Period (such amounts to be treated as received on
the Due Date when due);
(e) that portion of (i) amounts received in connection with the
liquidation of Specially Serviced Mortgage Loans, by foreclosure, trustee's sale
or otherwise, (ii) amounts received in connection with a sale of a Specially
Serviced Mortgage Loan or REO Property in accordance with the terms of the
Pooling and Servicing Agreement, (iii) amounts (other than Insurance Proceeds)
received in connection with the taking of a Mortgaged Property by exercise of
the power of eminent domain or condemnation ("Condemnation Proceeds"; clauses
(i), (ii) and (iii) are collectively referred to as "Liquidation Proceeds") or
(iv) proceeds of the insurance policies (to the extent such proceeds are not to
be applied to the restoration of the property or released to the borrower in
accordance with the normal servicing procedures of the Master Servicer or the
related sub-servicer, subject to the terms and conditions of the related
Mortgage and Note) ("Insurance Proceeds") with respect to a Mortgage Loan that
represents any unpaid servicing compensation to which the Master Servicer or
Special Servicer is entitled;
(f) all amounts representing certain expenses reimbursable to the Master
Servicer, the Special Servicer, the Trustee or the Fiscal Agent and other
amounts permitted to be retained by the Master Servicer or the Special Servicer
or withdrawn by the Master Servicer from the Collection Account pursuant to the
terms of the Pooling and Servicing Agreement;
(g) Prepayment Premiums received in the related Collection Period;
(h) any interest or investment income on funds on deposit in the
Collection Account or in Permitted Investments in which such funds may be
invested; and
(i) Default Interest received in the related Collection Period with
respect to a Mortgage Loan that is in default with respect to its Balloon
Payment.
The "Monthly Payment" with respect to any Mortgage Loan for any
Distribution Date (other than any REO Mortgage Loan) is the scheduled monthly
payment of principal and interest, excluding any Balloon Payment, which is
payable by the related borrower on the related Due Date. The Monthly Payment
with respect to an REO Mortgage Loan for any Distribution Date is the monthly
payment that would otherwise have been payable on the related Due Date had the
related Note not been discharged (after giving effect to any extension or other
modification), determined as set forth in the Pooling and Servicing Agreement.
"Unscheduled Payments" are all Liquidation Proceeds, Condemnation Proceeds
and Insurance Proceeds payable under the Mortgage Loans, the Repurchase Price of
any Mortgage Loans that are repurchased or purchased pursuant to the Pooling and
Servicing Agreement and any other payments under or with respect to the Mortgage
Loans not scheduled to be made, including Principal Prepayments, but excluding
Prepayment Premiums.
S-74
<PAGE>
"Prepayment Premiums" are payments received on a Mortgage Loan as the
result of a Principal Prepayment thereon, not otherwise due thereon in respect
of principal or interest, which are intended to be a disincentive to prepayment.
"Net REO Proceeds" with respect to any REO Property and any related
Mortgage Loan are all revenues received by the Special Servicer with respect to
such REO Property or REO Mortgage Loan that do not constitute Liquidation
Proceeds, net of any insurance premiums, taxes, assessments and other costs and
expenses permitted to be paid from the related REO Account pursuant to the
Pooling and Servicing Agreement.
"Principal Prepayments" are payments of principal made by a borrower on a
Mortgage Loan which are received in advance of the scheduled Due Date for such
payments and which are not accompanied by an amount of interest representing the
full amount of scheduled interest due on any date or dates in any month or
months subsequent to the month of prepayment.
The "Collection Period" with respect to a Distribution Date is the period
beginning on the day following the Determination Date in the month preceding the
month in which such Distribution Date occurs (or, in the case of the
Distribution Date occurring in ___________________, 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" means the [17th] day of any month, or if such [17]th
day is not a Business Day, the Business Day immediately preceding such [17th]
day, commencing in ______________, 1998.
"Default Interest" with respect to any Mortgage Loan is interest accrued
on such Mortgage Loan at the excess of the Default Rate over the Mortgage Rate.
The "Default Rate" with respect to any Mortgage Loan is the annual rate at
which interest accrues on such Mortgage Loan following any event of default on
such Mortgage Loan including a default in the payment of a Monthly Payment or a
Balloon Payment.
Priorities. As used below in describing the priorities of distribution of
Available Funds for each Distribution Date, the terms set forth below will have
the following meanings.
"Class Interest Distribution Amount" with respect to any Distribution Date
and any of the P&I Certificates will equal interest for the related Interest
Accrual Period at the applicable Pass-Through Rate for such Class of
Certificates for such Interest Accrual Period on the Certificate Balance of such
Class. With respect to any Distribution Date and the Class X Certificates, the
"Class Interest Distribution Amount" will equal the product of the Class X
Pass-Through Rate and the Class X Notional Balance. The Class L-PO Certificates
are principal only Certificates and have no Class Interest Distribution Amount.
With respect to any Distribution Date and the Class L-IO Certificates, the
"Class Interest Distribution Amount" will equal the product of the Class L-IO
Pass-Through Rate and the Class L-IO Notional Balance. For purposes of
determining any Class Interest Distribution Amount, any distributions in
reduction of Certificate Balance (and any resulting reductions in Notional
Balance) as a result of allocations of Realized Losses on the Distribution Date
occurring in such Interest Accrual Period will be deemed to have been made as of
the first day of such Interest Accrual Period. Notwithstanding the foregoing,
the Class Interest Distribution Amount for each Class of Certificates otherwise
calculated as described above will be reduced by such Class's pro rata
(excluding the portion representing the Trustee Fees) share of any Prepayment
Interest Shortfall not offset by Prepayment Interest Surplus, the Servicing Fee
and, if the Master Servicer and the Special Servicer are the same person, the
Special Servicing Fee
S-75
<PAGE>
with respect to such Distribution Date (pro rata according to each respective
Class's Class Interest Distribution Amount determined without regard to this
sentence).
"Class X Pass-Through Rate" with respect to any Interest Accrual Period is
a per annum rate equal to the excess of the Weighted Average Net Mortgage Rate
over the Weighted Average Pass-Through Rate.
"Prepayment Interest Shortfall" with respect to any Distribution Date and
any Mortgage Loan as to which a Principal Prepayment was made by the related
borrower during the related Collection Period is the amount by which (i) 30 full
days of interest at the related Net Mortgage Rate on the Scheduled Principal
Balance of such Mortgage Loan in respect of which interest would have been due
in the absence of such Principal Prepayment on the Due Date next succeeding the
date of such Principal Prepayment exceeds (ii) the amount of interest received
from the related borrower in respect of such Mortgage Loan during such
Collection Period. Such shortfall may result because interest on a Principal
Prepayment is paid by the related borrower only to the date of prepayment or
because no interest is paid on a Principal Prepayment, to the extent that such
Principal Prepayment is applied to reduce the principal balance of the related
Mortgage Loan as of the Due Date preceding the date of prepayment. Prepayment
Interest Shortfalls with respect to each Distribution Date (to the extent not
offset as provided in the following two sentences) will be allocated to each
Class of Certificates pro rata based on such Class's Class Interest Distribution
Amount (without taking into account the amount of Prepayment Interest Shortfalls
to such Class on such Distribution Date) for such Distribution Date. The amount
of any Prepayment Interest Shortfall with respect to any Distribution Date will
be offset by the Master Servicer first by the amount of any Prepayment Interest
Surplus and then up to an amount equal to the aggregate Servicing Fees to which
the Master Servicer would otherwise be entitled on such Distribution Date
(excluding the portion representing the Trustee Fees). If the Master Servicer
and the Special Servicer are the same person, any remaining Prepayment Interest
Shortfall after the application of the prior sentence will be offset by the
aggregate Special Servicing Fees to which the Special Servicer would otherwise
be entitled to on such Distribution Date.
"Prepayment Interest Surplus" with respect to any Distribution Date and
any Mortgage Loan as to which a Principal Prepayment was made by the related
borrower during the related Collection Period is the amount by which (i) the
amount of interest received from the related borrower in respect of such
Mortgage Loan during such Collection Period exceeds (ii) 30 full days of
interest at the related Net Mortgage Rate on the Scheduled Principal Balance of
such Mortgage Loan in respect of which interest would have been due in the
absence of such Principal Prepayment on the Due Date next succeeding the date of
such Principal Prepayment. The Master Servicer will be entitled to retain any
Prepayment Interest Surplus as additional servicing compensation to the extent
not required to offset Prepayment Interest Shortfalls as described in the
preceding paragraph.
The "Pass-Through Rate" for any Class of Regular Certificates is the per
annum rate at which interest accrues on the Certificates of such Class during
any Interest Accrual Period. The Pass-Through Rate on the Class A-1 and A-2
Certificates during the Interest Accrual Period will be: % and % respectively.
The Pass-Through Rate on the Class X Certificates during any Interest Accrual
Period will be the Class X Pass-Through Rate. The Pass-Through Rate on the Class
B Certificates during any Interest Accrual Period will be equal to the Weighted
Average Net Mortgage Rate less the Class B Strip. The Pass-Through Rate on the
Class C Certificates during any Interest Accrual Period will be equal to the
Weighted Average Net Mortgage Rate less the Class C Strip. The Pass-Through Rate
on the Class D Certificates during any Interest Accrual Period will be equal to
the Weighted Average Net Mortgage Rate less the Class D Strip. The Pass-Through
Rate on the Class E Certificates during any Interest Accrual Period will be
equal to the Weighted Average Net Mortgage Rate less the Class E Strip. The
Pass-Through Rate on the Class F, Class G, Class H, Class J and Class L-IO
Certificates during any Interest
S-76
<PAGE>
Accrual Period will be equal to the Weighted Average Net Mortgage Rate. The
Class L-PO Certificates are principal only certificates and are not entitled to
distributions in respect of interest.
The "Class B Strip" is a rate per annum equal to %.
The "Class C Strip" is a rate per annum equal to %.
The "Class D Strip" is a rate per annum equal to %.
The "Class E Strip" is a rate per annum equal to %.
The "Weighted Average Net Mortgage Rate" for any Interest Accrual Period
is a per annum rate equal to the weighted average of the Net Mortgage Rates as
of the first day of such Interest Accrual Period. The "Net Mortgage Rate" for
each Mortgage Loan, is the Mortgage Rate for such Mortgage Loan (in the absence
of a default) minus the Servicing Fee Rate.
The "Weighted Average Pass-Through Rate" for any Interest Accrual Period
is a per annum rate equal to the weighted average of the Pass-Through Rates for
the Regular Certificates (other than the Class X Certificates) as of the first
day of such Interest Accrual Period. For purposes of computing the "Weighted
Average Pass-Through Rate" the Class L-PO and Class L-IO Certificates shall be
deemed to be a single Class that has both a principal component and an interest
component.
The "Interest Accrual Period" with respect to any Distribution Date is the
calendar month preceding the month in which such Distribution Date occurs.
Interest for each Interest Accrual Period is calculated based on a 360-day year
consisting of twelve 30-day months.
"Class Interest Shortfall" means on any Distribution Date for any Class of
Certificates, the excess, if any, of the amount of interest required to be
distributed to the holders of such Class of Certificates on such Distribution
Date over the amount of interest actually distributed to such holders. No
interest will accrue on unpaid Class Interest Shortfalls.
The "Pooled Principal Distribution Amount" for any Distribution Date will
be equal to the sum of (without duplication):
(i) the principal component of all scheduled Monthly Payments (other than
Balloon Payments) that become due (regardless of whether received) on the
Mortgage Loans during the related Collection Period;
(ii) the principal component of all Assumed Scheduled Payments, as
applicable, deemed to become due (regardless of whether received) during the
related Collection Period with respect to any Balloon Loan that is delinquent in
respect of its Balloon Payment;
(iii) the Scheduled Principal Balance of each Mortgage Loan that was,
during the related Collection Period, repurchased from the Trust Fund in
connection with the breach of a representation or warranty as described herein
under "DESCRIPTION OF THE MORTGAGE POOL--Representations and Warranties;
Repurchase" or purchased from the Trust Fund as described herein under
"DESCRIPTION OF THE MORTGAGE POOL--Early Termination" and "--Auction";
(iv) the portion of Unscheduled Payments allocable to principal of any
Mortgage Loan that was liquidated during the related Collection Period;
S-77
<PAGE>
(v) the principal component of all Balloon Payments received during the
related Collection Period;
(vi) all other Principal Prepayments received in the related Collection
Period; and
(vii) any other full or partial recoveries in respect of principal,
including Insurance Proceeds, Liquidation Proceeds, Condemnation Proceeds and
Net REO Proceeds.
The "Assumed Scheduled Payment" is an amount deemed due in respect of (i)
any Mortgage Loan that is delinquent in respect of its Balloon Payment and (ii)
any REO Mortgage Loan, which will be equal to the Monthly Payment that would
have been due on the Mortgage Loan in accordance with the terms of the related
Note if (a) the maturity date for such Mortgage Loan had not occurred, (b) the
related Mortgaged Property had not become an REO Property, such Mortgage Loan
was still outstanding and no acceleration of the Mortgage Loan had occurred, and
(c) in the case of any Mortgage Loan that provided for amortization of principal
prior to its maturity date, principal continued to amortize on the same
amortization schedule.
An "REO Mortgage Loan" is any Mortgage Loan as to which the related
Mortgaged Property has become an REO Property.
On each Distribution Date, Available Funds will be distributed to the
holders of the Class A-1, Class A-2 and Class X Certificates, concurrently, and
then to the holders of each other Class of Regular Certificates, in the order of
their alphabetic designation, as follows: first, in payment of interest accrued
on such Class during the preceding month and any interest accrued on such Class
in prior months but not previously paid, second, if such Class has a Certificate
Balance and the Certificate Balance of each Class with an earlier alphabetic
designation has been reduced to zero, in distribution of principal, up to an
amount equal to the lesser of (x) the Certificate Balance of such Class and (y)
the Pooled Principal Distribution Amount for such Distribution Date (less any
portion thereof distributed on such Distribution Date to any Class with an
earlier alphabetic designation) and third, in reimbursement of any Realized Loss
allocated to such Class on a prior Distribution Date, together with interest
thereon at the Pass-Through Rate for such Class.
[In the event that, on any Distribution Date, any portion of Available
Funds has not been distributed to Certificateholders after applying Available
Funds in the manner and in the amounts described in the preceding paragraph, the
remaining amount will be applied to make principal distributions to the Regular
Certificates (other than the Class X and Class L-IO Certificates), in reverse
order of their alphabetic designations, in each case until the Certificate
Balance of such Class has been reduced to zero, and any remaining amount will be
distributed to the holder of the applicable Class of Residual Certificates. No
such additional distributions are anticipated.]
Additional Master Servicer or Special Servicer compensation, interest on
Advances, extraordinary expenses of the Trust Fund and other similar items will
create a shortfall in Available Funds, which generally will result in a Class
Interest Shortfall for the most subordinate Class then outstanding.
Distributions of Principal on the Class A-1 and Class A-2 Certificates.
Notwithstanding anything to the contrary herein or in the Pooling and Servicing
Agreement, on each Distribution Date prior to the earlier of (i) the Senior
Principal Distribution Cross-Over Date and (ii) the final Distribution Date in
connection with the termination of the Trust Fund, all distributions of
principal to the Class A-1 Certificates and the Class A-2 Certificates will be
paid, first, to holders of the Class A-1 Certificates until the Certificate
Balance of such Certificates is reduced to zero, and thereafter, to holders of
the Class A-2
S-78
<PAGE>
Certificates, until the Certificate Balance of such Certificates is reduced to
zero. On each Distribution Date on and after the Senior Principal Distribution
Cross-Over Date, and in any event on the final Distribution Date in connection
with the termination of the Trust Fund, distributions of principal on the Class
A-1 Certificates and the Class A-2 Certificates will be paid to holders of such
two Classes of Certificates, pro rata in accordance with their respective
Certificate Balances outstanding immediately prior to such Distribution Date,
until the Certificate Balance of each such Class of Certificates is reduced to
zero.
The "Senior Principal Distribution Cross-Over Date" will be the first
Distribution Date as of which the aggregate Certificate Balance of the Class A-1
Certificates and Class A-2 Certificates outstanding immediately prior thereto
exceeds the sum of (i) the aggregate Scheduled Principal Balance of the Mortgage
Loans that will be outstanding immediately following such Distribution Date and
(ii) the portion of the Available Distribution Amount for such Distribution Date
that will remain after the distribution of interest to be made on the Class A-1
and Class A-2 Certificates on such Distribution Date has been made.
Prepayment Premiums. All of the Mortgage Loans generally provide that a
prepayment be accompanied by the payment of a Prepayment Premium for all or a
portion of the period during which such prepayments are permitted.
Any Prepayment Premiums calculated with reference to a yield maintenance
formula ("Yield Maintenance Charges") received in the related Collection Period
will be distributed to the holders of the Certificates outstanding on such
Distribution Date, in the following amounts and order of priority:
(i) to each of the Class A-1, Class A-2, Class B, Class C, Class D and
Class E Certificates, an amount equal to the product of (A) a fraction, the
numerator of which is the amount distributed as principal to such Class on such
Distribution Date, and the denominator of which is the total amount distributed
as principal to all Classes of Certificates on such Distribution Date, (B) the
Base Interest Fraction for the related principal payment and such Class of
Offered Certificates and (C) the aggregate amount of Yield Maintenance Charges
collected on such principal prepayment during the related Collection Period; and
(ii) any remaining Prepayment Premiums following the distribution in
clause (i) immediately above, to the Class X Certificates.
Any Prepayment Premiums that are not Yield Maintenance Charges received in
the related Collection Period will be distributed to the holders of the Class X
Certificates.
The "Base Interest Fraction" with respect to any principal prepayment on
any Mortgage Loan and with respect to any Class of Offered Certificates is a
fraction (A) the numerator of which is the greater of (x) zero and (y) the
difference between the Pass-Through Rate on such Class of Offered Certificates
and the discount rate used in calculating the Yield Maintenance Charge with
respect to such Principal Prepayment and (B) the denominator of which is the
difference between the Mortgage Rate on the related Mortgage Loan and the
discount rate used in calculating the Yield Maintenance Charge with respect to
such Principal Prepayment; provided, however, that under no circumstances shall
the Base Interest Fraction be greater than one. If the discount rate used in
calculating the Yield Maintenance Charge with respect to any Principal
Prepayment is greater than the Mortgage Rate on the related Mortgage Loan, then
the Base Interest Fraction shall equal zero.
S-79
<PAGE>
Notwithstanding the foregoing, Prepayment Premiums will be distributed on
any Distribution Date only to the extent they are received in respect of the
Mortgage Loans in the related Collection Period.
Default Interest with Respect to Balloon Payments. Default Interest
received with respect to a Mortgage Loan that is in default with respect to its
Balloon Payment will be distributed on such Distribution Date to the holders of
the Class of Certificates that is entitled to distributions in respect of
principal on such Distribution Date; provided that if more than one Class of
Certificates is entitled to distributions in respect of principal on such
Distribution Date, the amount of such Default Interest will be allocated among
such Classes pro rata in accordance with their respective Certificate Balances
immediately prior to said Distribution Date.
Realized Losses. The Certificate Balance of the Regular Certificates
(other than the Class X and Class L-IO Certificates) will be reduced without
distribution on any Distribution Date as a write-off to the extent of any
Realized Loss with respect to such Distribution Date. As referred to herein, the
"Realized Loss" with respect to any Distribution Date will mean the amount, if
any, by which (i) the aggregate Certificate Balance after giving effect to
distributions made on such Distribution Date exceeds (ii) the aggregate
Scheduled Principal Balance of the Mortgage Loans as of the Due Date in the
month in which such Distribution Date occurs. Any such Realized Losses will be
applied to the Classes of Certificates in reverse alphabetical order until each
is reduced to zero; provided that Realized Losses will be applied to the Class
A-1 and Class A-2 Certificates pro rata in accordance with their respective
Certificate Balances immediately prior to said Distribution Date. Any amounts
recovered in respect of any amounts previously written off as Realized Losses
will be distributed to the Classes of Certificates in reverse order of
allocation of Realized Losses thereto. Realized Losses allocated to the Class
L-PO Certificates will reduce the Class L-IO Notional Balance. Realized Losses
allocated to the Regular Certificates (other than the Class X and Class L-IO
Certificates) will reduce the Class X Notional Balance.
Notwithstanding anything to the contrary contained herein or in the
Pooling and Servicing Agreement, the aggregate amount distributable to each
Class will be reduced by the aggregate amount paid of any indemnification
payments made to any person under the Pooling and Servicing Agreement, such
reduction to be allocated among such Classes pro rata, based upon the respective
amounts so distributable without taking into account the provision of this
paragraph. Such reduction amounts otherwise distributable to a Class shall be
allocated first in respect of interest and second in respect of principal. For
purposes of determining Class Interest Shortfalls and Certificate Balances, the
amount of any such reduction so allocated to a Class shall be deemed to have
been distributed to such Class. See "SERVICING OF THE MORTGAGE LOANS--Certain
Matters With Respect to the Master Servicer, the Special Servicer, the Trustee
and the Depositor" in the Prospectus.
The "Scheduled Principal Balance" of any Mortgage Loan as of any Due Date
will be the principal balance of such Mortgage Loan as of such Due Date, after
giving effect to (i) any Principal Prepayments, non-premium prepayments or other
unscheduled recoveries of principal and any Balloon Payments received during the
related Collection Period and (ii) all payments in respect of principal, if any,
due on or before such Due Date (other than a Balloon Payment, but including the
principal portion of any Assumed Scheduled Payment, if applicable), irrespective
of any delinquency in payment by the borrower. The Scheduled Principal Balance
of any REO Mortgage Loan is equal to the principal balance thereof outstanding
on the date that the related Mortgaged Property became an REO Property minus any
Net REO Proceeds allocated to principal on such REO Mortgage Loan and reduced by
the principal component of Monthly Payments due thereon on or before such Due
Date. With respect to any Mortgage Loan, from and after the date on which the
Master Servicer makes a determination that it has recovered all amounts that it
reasonably expects to be finally recoverable (a "Final Recovery Determination"),
the Scheduled Principal Balance thereof will be zero.
S-80
<PAGE>
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:
Class Designation Scheduled Final Distribution Date
Class A-1
Class A-2
Class X
Class B
Class C
Class D
Class E
Class F
Class G
Class H
Class J
Class K
Class L-PO
Class L-IO
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 auction, no
Early Termination, no defaults, no modifications and no extensions. Since the
rate of payment (including prepayments) of the Mortgage Loans can be expected to
exceed the scheduled rate of payments, and could exceed such scheduled rate by a
substantial amount, the actual final Distribution Date for one or more Classes
of the Certificates may be earlier, and could be substantially earlier, than the
related scheduled Final Distribution Date(s). The rate of payments (including
prepayments) on the Mortgage Loans will depend on the characteristics of the
Mortgage Loans, as well as on the prevailing level of interest rates and other
economic factors, and no assurance can be given as to actual payment experience.
S-81
<PAGE>
Subordination
As a means of providing a certain amount of protection to the holders of
the Senior Certificates against losses associated with delinquent and defaulted
Mortgage Loans, the rights of the holders of the Subordinate Certificates to
receive distributions of interest and principal, as applicable, will be
subordinated to such rights of the holders of the Senior Certificates to the
extent described herein, and, further, in the case of any particular Class of
Subordinate Certificate to the rights of holders of each other Class of
Subordinate Certificates, if any, with an earlier alphabetical class
designation, as described herein. Such subordination will be accomplished by (i)
the application of Available Funds in the order described above
"--Distributions" herein and (ii) the allocation of Realized Losses to the
Regular Certificates (other than the Class X and Class L-IO Certificates, which
may nonetheless incur reductions of their Notional Balances) in reverse order of
their alphabetical Class designations; provided that Realized Losses are
allocated pro rata to the Class A-1 and Class A-2 Certificate in accordance with
their respective Certificate Balances. In addition, the rights of holders of
Regular Certificates to receive distributions with respect to the Mortgage Loans
will be subordinated to the rights of holders of the Regular Certificates, to
the extent described herein. No other form of credit enhancement will be
available for the benefit of the holders of the 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.
A holder of a greater than 50% Percentage Interest of the Class R-I
Certificates may, under certain circumstances, purchase the remaining assets of
the Trust Fund, thereby effecting the termination of the Trust REMICs. See
"--Early Termination" herein.
Early Termination
The holder of the Class R-I Certificates representing greater than a 50%
Percentage Interest of the Class R-I Certificates, and, if such holder does not
exercise its option, the Master Servicer and the Depositor, will have the option
to purchase all of the Mortgage Loans and all property acquired in respect of
any Mortgage Loan remaining in the Trust Fund, and thereby effect termination of
the Trust Fund and early retirement of the then outstanding Certificates, on any
Distribution Date on which the aggregate Scheduled Principal Balance of the
Mortgage Loans remaining in the Trust Fund is less than 10% of the aggregate
principal balance of such Mortgage Loans as of the Cut-off Date. The purchase
price payable upon the exercise of such option on such a Distribution Date will
be an amount equal to not less than the greater of (i) the sum of (A) 100% of
the outstanding principal balance of each Mortgage Loan included in the Trust
Fund as of the last day of the month preceding such Distribution Date (less any
Advances previously made on account of principal); (B) the fair market value of
all other property included in the Trust Fund as of the last day of the month
preceding such Distribution Date, as determined by an independent appraiser as
of a date not more than 30 days prior to the last day of the month preceding
such Distribution Date; (C) all unpaid interest accrued on such principal
balance of each such Mortgage Loan (including any Mortgage Loan as to which
title to the related Mortgaged Property has been acquired) at the Mortgage Rate
to the last day of the month preceding such Distribution Date (less any Advances
S-82
<PAGE>
previously made on account of interest); and (D) unreimbursed Advances with
interest thereon at the Advance Rate, unpaid servicing compensation and unpaid
Trust Fund expenses; or (ii) the aggregate fair market value of the Mortgage
Loans, and all other property acquired in respect of any Mortgage Loan in the
Trust Fund, on the last day of the month preceding such Distribution Date, as
determined by an independent appraiser as of a date not more than 30 days prior
to the last day of the month preceding such Distribution Date, together with one
month's interest thereon at the related Mortgage Rate plus disposition expenses.
See "--Additional Rights of the Residual Certificates" herein.
Auction
On each of (i) the Distribution Date occurring in of each year from and
including and (ii) any date after the Distribution Date occurring in on which
the Trustee receives an unsolicited bona fide offer to purchase all (but not
less than all) of the Mortgage Loans (each, an "Auction Valuation Date"), the
Trustee will request that four independent financial advisory or investment
banking or investment brokerage firms nationally recognized in the field of real
estate analysis and reasonably acceptable to the Master Servicer provide the
Trustee with an estimated value at which the Mortgage Loans and all other
property acquired in respect of any Mortgage Loan in the Trust Fund could be
sold pursuant to an auction. If the average of the three highest such estimates
received equals or exceeds the aggregate amount of the Certificate Balances of
all Certificates outstanding on the Auction Valuation Date, plus unpaid interest
thereon, the anticipated Auction Fees, unpaid servicing compensation,
unreimbursed Advances (together with interest thereon at the Advance Rate) and
unpaid Trust Fund expenses, the Trustee will conduct an auction of the Mortgage
Loans. The Trustee will, in such case, appoint an auction agent (the "Auction
Agent") to solicit offers from prospective purchasers, that the Auction Agent
determines possess to the financial ability and are otherwise qualified to
purchase all of the Mortgage Loans to purchase all (but not less than all) of
the Mortgage Loans and such property, for a price not less than an amount equal
to the aggregate amount of the Certificate Balances of all Certificates
outstanding as of the close of business on the closing date (the "Auction
Closing Date"), plus unpaid interest thereon, the Auction Fees, unpaid servicing
compensation, unreimbursed Advances (together with interest thereon at the
Advance Rate) and unpaid Trust Fund expenses (the "Minimum Auction Price"). The
Auction Closing Date shall be no earlier than the Distribution Date in . In
determining the aggregate Certificate Balances of all Certificates, all
Certificates owned by or on behalf of the Depositor, a property manager, the
Master Servicer, the Special Servicer, the Trustee, a borrower or any affiliate
thereof will be included.
If the Trustee receives no bids that are qualified pursuant to the terms
of the Pooling and Servicing Agreement, the Trust Fund will not be terminated
pursuant to these auction procedures. If the Trustee receives qualified bids,
the Trustee will accept the highest of such bids, will notify the
Certificateholders of the anticipated termination of the Trust and will sell the
Mortgage Loans and such property to the successful bidder on or before the
Remittance Date immediately preceding the third Distribution Date following the
Auction Valuation Date (or such later Distribution Date determined by the
Auction Agent appointed in accordance with the immediately preceding paragraph).
Such sale will effect a termination of the Trust Fund and an early retirement of
the then outstanding Certificates. The Trustee will be entitled to be reimbursed
from the Collection Account for expenses that it or any Auction Agent incurs in
connection with an auction, including all fees and reasonable expenses of legal
counsel and other professionals ("Auction Fees"). Certificateholders will not
receive notice of the auction until the Trustee accepts the highest qualified
bid and will not have a vote in the auction process.
Any auction will be conducted in accordance with auction procedures to be
developed by the Auction Agent in connection with such auction, provided that
such procedures will include at a minimum provisions substantially to the effect
that: (i) no due diligence of the Master Servicer's, the Special Servicer's or
the Trustee's records with respect to the Mortgage Loans may be conducted by any
bidder
S-83
<PAGE>
prior to being notified that it has submitted the highest bid; (ii) the Auction
Agent is entitled to require that the highest bidder provide a non-refundable
good faith deposit sufficient to reimburse the Trustee and the Auction Agent for
all expenses in connection with the evaluation of such bid and in connection
with such highest bidder's due diligence; (iii) each bidder may be required to
enter into a confidentiality agreement with the Master Servicer, the Special
Servicer, the Auction Agent and the Trustee prior to being permitted to conduct
due diligence; (iv) borrowers on any of the Mortgage Loans will be prohibited
from submitted bids; and (v) in the event that the highest bidder withdraws, the
next highest bidder will be permitted to conduct due diligence of the Master
Servicer's, the Special Servicer's or the Trustee's records with respect to the
Mortgage Loans as if it were the highest bidder.
If an auction is completed it will decrease the weighted average life of,
and affect a holder's yield on, any Certificates for such Series outstanding on
the date of the closing of the auction. In addition, the holders of any such
outstanding Certificates will bear the reinvestment risk associated with such
Certificates. See "YIELD AND MATURITY CONSIDERATIONS."
Delivery, Form and Denomination
Book-Entry Certificates. No Person acquiring a Class A-1, Class A-2, Class
B, Class C, Class D or Class E Certificate (each such Certificate, a "Book-Entry
Certificate") will be entitled to receive a physical certificate representing
such Certificate, except under the limited circumstances described below. Absent
such circumstances, the Book-Entry Certificates will be registered in the name
of a nominee of DTC and beneficial interests therein will be held by investors
("Beneficial Owners") through the book-entry facilities of DTC, as described
herein, in denominations of $100,000 initial Certificate Balance or Notional
Balance and integral multiples of $1,000 in excess thereof, except one
certificate of each such Class may be issued that represents a different initial
Certificate Balance or Notional Balance to accommodate the remainder of the
initial Certificate Balance or Notional Balance of such Class. The Depositor has
been informed by DTC that its nominee will be Cede & Co. Accordingly, Cede & Co.
is expected to be the holder of record of the Book-Entry Certificates.
No Beneficial Owner of a Book-Entry Certificate will be entitled to
receive a definitive Certificate (a "Definitive Certificate") representing such
person's interest in the Book-Entry Certificates, except as set forth below.
Unless and until Definitive Certificates are issued to Beneficial Owners in
respect of the Book-Entry Certificates under the limited circumstances described
herein, all references to actions taken by Certificateholders or holders will,
in the case of the Book-Entry Certificates, refer to actions taken by DTC upon
instructions from its participants, and all references herein to distributions,
notices, reports and statements to Certificateholders or holders will, in the
case of the Book-Entry Certificates, refer to distributions, notices, reports
and statements to DTC or Cede & Co., as the case may be, for distribution to
Beneficial Owners in accordance with DTC procedures. 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
S-84
<PAGE>
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 Direct Participants and by the New York Stock Exchange,
Inc., the American Stock Exchange, Inc. and the National Association of
Securities Dealers, Inc.
Purchases of Book-Entry Certificates under the DTC system must be made by
or through Direct Participants, which will receive a credit for the Book-Entry
Certificates on DTC's records. The ownership interest of each Beneficial Owner
is in turn to be recorded on the Direct and Indirect Participants' records.
Beneficial Owners will not receive written confirmation from DTC of their
purchase, but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the Direct or Indirect Participant through which the Beneficial
Owner entered into the transaction. Transfers of ownership interests in the
Book-Entry Certificates are to be accomplished by entries made on the books of
Participants acting on behalf of Beneficial Owners. Beneficial Owners will not
receive certificates representing their ownership interests in the Certificates
except in the event that use of the book-entry system for the Book-Entry
Certificates is discontinued. Neither the Certificate Registrar nor the Trustee
will have any responsibility to monitor or restrict the transfer of ownership
interests in Book-Entry Certificates through the book-entry facilities of DTC.
To facilitate subsequent transfers, all Book-Entry Certificates deposited
by Participants with DTC are registered in the name of DTC's partnership
nominee, Cede & Co. The deposit of Book-Entry Certificates with DTC and their
registration in the name of Cede & Co. effect no change in beneficial ownership.
DTC has no knowledge of the actual Beneficial Owners of the Book-Entry
Certificates; DTC's records reflect only the identity of the Direct Participants
to whose accounts such Book-Entry Certificates are credited, which may or may
not be the Beneficial Owners. The Participants will remain responsible for
keeping account of their holdings on behalf of their customers. Beneficial
Owners will not be recognized as Certificateholders, as such term is used in the
Pooling and Servicing Agreement, by the Trustee or any paying agent (each, a
"Paying Agent") appointed by the Trustee. Beneficial Owners will be permitted to
exercise the rights of Certificateholders only indirectly through DTC and its
Participants.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Beneficial
Owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the DTC system, or to otherwise act with respect to such
Book-Entry Certificates, may be limited due to lack of a definitive Certificate
for such Book-Entry Certificates. In addition, under a book-entry format,
Beneficial Owners may experience delays in their receipt of payments, since
distributions will be made by the Trustee or a Paying Agent on behalf of the
Trustee to Cede & Co., as nominee for DTC.
Neither DTC nor Cede & Co. will consent or vote with respect to the
Book-Entry Certificates. Under its usual procedures, DTC mails an Omnibus Proxy
to the Trustee as soon as possible after the record date. The Omnibus Proxy
assigns Cede & Co.'s consenting or voting rights to those Direct Participants to
whose accounts the Securities are credited on that record date (identified in a
listing
S-85
<PAGE>
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 X, Class F, Class G, Class H, Class J,
Class K, Class L-PO, Class L-IO, Class R-I and Class R-II Certificates will be
issued in fully registered certificated form only. The Class X, Class F, Class
G, Class H, Class J, Class K, Class L-PO and Class L-IO Certificates will be
issued in denominations of $100,000 initial Certificate Balance or Notional
Balance, as applicable, and integral multiples of $1 in excess thereof, except
one Certificate of each such Class may be issued that represents a different
initial Certificate Balance or Notional Balance to accommodate the remainder of
the initial Certificate Balance or Notional Balance. The Residual Certificates
will be issued in definitive, physical, registered form in Percentage Interests
of 5% and integral multiples of a 1% Percentage Interest in excess thereof.
Book-Entry Certificates will be converted to Definitive Certificates and
reissued to Beneficial Owners or their nominees, rather than to DTC or its
nominee, only if (i)(A) the Depositor advises the Certificate Registrar in
writing that DTC is no longer willing or able to discharge properly its
responsibilities as Depository with respect to any Class of the Book-Entry
Certificates and (B) the Depositor is unable to locate a qualified successor or
(ii) the Depositor, at its option, advises the Trustee and Certificate Registrar
that it elects to terminate the book-entry system through DTC with respect to
any Class of the Book-Entry Certificates.
Upon the occurrence of any event described in the immediately preceding
paragraph, the Certificate Registrar will be required to notify all affected
Beneficial Owners through DTC of the availability of Definitive Certificates.
Upon surrender by DTC of the physical certificates representing the affected
Book-Entry Certificates and receipt of instructions for re-registration, the
Certificate Registrar will reissue the Book-Entry Certificates as Definitive
Certificates to the Beneficial Owners. Upon the issuance of Definitive
Certificates for purposes of evidencing ownership of the Class A-1, Class A-2,
Class B, Class C, Class D or Class E Certificates, the registered holders of
such Definitive Certificates will be recognized as Certificateholders under the
Pooling and Servicing Agreement and, accordingly, will be entitled directly to
receive payments on, and exercise Voting Rights with respect to, and to transfer
and exchange such Definitive Certificates.
Definitive Certificates will be transferable and exchangeable at the
offices of the Trustee or the Certificate Registrar in accordance with the terms
of the Pooling and Servicing Agreement.
S-86
<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.
No fee or service charge will be imposed by the Certificate Registrar for
its services in respect of any registration of transfer or exchange referred to
herein; provided, however, that in connection with the transfer of Private
Certificates to certain institutional accredited investors, the Certificate
Registrar will be entitled to be reimbursed by the transferor for any costs
incurred in connection with such transfer. The Certificate Registrar may require
payment by each transferor of a sum sufficient to pay any tax, expense or other
governmental charge payable in connection with any such transfer.
For a discussion of certain transfer restrictions, see "ERISA
CONSIDERATIONS" herein.
YIELD AND MATURITY CONSIDERATIONS
Yield Considerations
General. The yield on any Regular Certificate will depend on (a) the price
at which such Certificate is purchased by an investor and (b) the rate, timing
and amount of distributions on such Certificate. The rate, timing and amount of
distributions on any Regular Certificate will in turn depend on, among other
things, (i) the rate and timing of principal payments (including voluntary
prepayments, involuntary prepayments resulting from defaults and liquidations or
other dispositions of the Mortgage Loans and Mortgaged Properties or the
application of insurance or condemnation proceeds and/or the purchase of the
Mortgage Loans as described under "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchase" and "DESCRIPTION OF THE
CERTIFICATES--Early Termination" and "--Auction") and the extent to which such
amounts are to be applied in reduction of the Certificate Balance (or Notional
Balance) of the Class of Certificates to which such Certificate belongs, (ii)
the rate, timing and severity of Realized Losses on the Mortgage Loans and the
extent to which such losses are allocable in reduction of the Certificate
Balance (or Notional Balance) of the Class of Certificates to which such
Certificate belongs and (iii) with respect to the Class X Certificates, the
Pass-Through Rate as in effect from time to time.
S-87
<PAGE>
Rate and Timing of Principal Payments. The yield to holders of the Regular
Certificates purchased at a discount or premium will be affected by the rate and
timing of principal payments made in reduction of the Certificate Balance of
such Certificates. As described herein, the Pooled Principal Distribution Amount
for each Distribution Date generally will be distributable in its entirety in
respect of the Class A-1 Certificates until the Certificate Balance thereof is
reduced to zero, and will thereafter be distributable in its entirety to each
remaining Class of Regular Certificates, sequentially in order of Class
designation, in each case until the Certificate Balance of each such Class of
Certificates is, in turn, reduced to zero. Consequently, the rate and timing of
principal payments made in reduction of the Certificate Balance of the Regular
Certificates will be directly related to the rate and timing of principal
payments on or in respect of the Mortgage Loans, which will in turn be affected
by the amortization schedules thereof, the dates on which Balloon Payments are
due and the rate and timing of Principal Prepayments and other unscheduled
collections thereon (including, for this purpose, collections made in connection
with liquidations of Mortgage Loans due to defaults, Casualties or Condemnations
affecting the Mortgaged Properties or purchases of Mortgage Loans out of the
Trust Fund in the manner described under "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchase" and "DESCRIPTION OF THE
CERTIFICATES--Early Termination" and "--Auction" herein). Prepayments and,
assuming the respective stated maturity dates therefor have not occurred,
liquidations and purchases of the Mortgage Loans will result in distributions on
the Regular Certificates (other than the Class X and Class L-IO Certificates) of
amounts that would otherwise have been distributed over the remaining terms of
the Mortgage Loans. Defaults on the Mortgage Loans, particularly at or near
their stated maturity dates, may result in significant delays in payments of
principal on the Mortgage Loans and, accordingly, on the Regular Certificates
while work-outs are negotiated, foreclosures are completed or bankruptcy
proceedings are resolved. The yield to investors in the Subordinate Certificates
will be very sensitive to the timing and magnitude of losses on the Mortgage
Loans due to liquidations following a default, and will also be very sensitive
to delinquencies in payment. In addition, the Special Servicer has the option,
subject to certain limitations, to extend the maturity of Mortgage Loans
following a default in the payment of a Balloon Payment. See "THE POOLING AND
SERVICING AGREEMENT--Servicing of the Mortgage Loans; Collection of Payments"
and "--Realization Upon Mortgage Loans" herein and "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS--Foreclosure" in the Prospectus.
The rate and timing of principal payments and defaults and the severity of
losses on the Mortgage Loans may be affected by a number of factors, including,
without limitation, the terms of the Mortgage Loans (for example, the provisions
requiring the payment of Prepayment Premiums and amortization terms that require
Balloon Payments), prevailing interest rates, the market value of the Mortgaged
Properties, the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located, the general supply and demand for
such facilities (and their uses) in such areas, the quality of management of
Mortgaged Properties, the servicing of the Mortgage Loans, federal and state tax
laws (which are subject to change) and other opportunities for investment.
The rate of prepayment on the Mortgage Pool is likely to be affected by
the amount of any required Prepayment Premiums and the borrowers' ability to
refinance their related Mortgaged Loans. If prevailing market interest rates for
mortgage loans of a comparable type, term and risk level have decreased enough
to offset any required Prepayment Premium, a borrower may have an increased
incentive to refinance its Mortgage Loan for purposes of either (i) converting
to another fixed rate loan with a lower interest rate and thereby "locking in"
such rate or (ii) taking advantage of an initial "teaser rate" on an adjustable
rate mortgage loan (that is, a mortgage interest rate below that which would
otherwise apply if the applicable index and gross margin were applied). However,
the ability of a borrower to refinance its Mortgage Loan will be affected not
only by prevailing market rates, but also by the current market value of the
Mortgage Property. See "RISK FACTORS--Prepayment and Yield
S-88
<PAGE>
Considerations" herein and "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Enforceability of Certain Provisions" in the Prospectus.
In addition, some borrowers may sell Mortgaged Properties in order to
realize their equity therein, to meet cash flow needs or to make other
investments. Some borrowers may also 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.
If the markets for commercial and multifamily real estate should
experience an overall decline in property values such that the outstanding
balances of the Mortgage Loans exceed the value of the respective Mortgaged
Properties, a borrower under a non-recourse loan may have a decreased incentive
to fund operating cash flow deficits and, as a result, actual losses may be
higher than those originally anticipated by investors.
Neither the Depositor nor the Mortgage Loan Seller makes any
representation as to the particular factors that will affect the rate and timing
of prepayments and defaults on the Mortgage Loans, as to the relative importance
of such factors, as to the percentage of the principal balance of the Mortgage
Loans that will be prepaid or as to which a default will have occurred as of any
date or as to the overall rate of prepayment, default or principal payment on
the Mortgage Loans.
The extent to which the yield to maturity of any Class of Regular
Certificates may vary from the anticipated yield will depend upon the degree to
which they are purchased at a discount or premium and when, and to what degree,
payments of principal on the Mortgage Loans are in turn distributed in reduction
of the Certificate Balance of such Certificates. An investor should consider, in
the case of any Regular Certificate purchased at a discount, especially the
Class L-PO Certificates, the risk that a slower than anticipated rate of
principal payments on the Mortgage Loans could result in an actual yield to such
investor that is lower than the anticipated yield and, in the case of any
Regular Certificate purchased at a premium (or the Class X and Class L-IO
Certificates, which have no Certificate Balances), the risk that a faster than
anticipated rate of principal payments could result in an actual yield to such
investor that is lower than the anticipated yield. In general, the earlier a
payment of principal on the Mortgage Loans is distributed in reduction of the
Certificate Balance of any Regular Certificate purchased at a discount or
premium (or, in the case of the Class X and Class L-IO Certificates, applied in
reduction of the Notional Balance), the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an investor's yield of
principal payments on the Mortgage Loans occurring at a rate higher (or lower)
than the rate anticipated by the investor during any particular period would not
be fully offset by a subsequent like reduction (or increase) in the rate of such
principal payments. Because the rate of principal payments on the Mortgage Loans
will depend on future events and a variety of factors (as described more fully
below), no assurance can be given as to such rate or the rate of Principal
Prepayments in particular. The Depositor is not aware of any relevant publicly
available or authoritative statistics with respect to the historical prepayment
experience of a large group of commercial and/or multifamily loans comparable to
the Mortgage Loans. See "RISK FACTORS--Prepayment and Yield Considerations"
herein.
The amounts payable with respect to the Class L-PO Certificates derive
only from principal payments on the Mortgage Loans. As a result, the yield on
the Class L-PO Certificates will be adversely affected by slower than expected
payments of principal (including prepayments, defaults and liquidations) on the
Mortgage Loans.
Balloon Payments. Most of the Mortgage Loans are Balloon Loans that will
have substantial payments (that is, Balloon Payments) due at their stated
maturities, unless previously prepaid. The ability of the borrowers to pay the
Balloon Payment at the maturity of the Balloon Loans will depend on their
ability to sell or refinance the Mortgaged Properties, which, in turn, depends
on a number of factors,
S-89
<PAGE>
many of which are beyond the control of such borrowers. Such factors include the
level of interest rates and general economic conditions at the time of sale or
refinancing and changes in federal, state or local laws, including tax laws,
environmental laws and safety standards. The Certificates are subject to the
risk of default by the borrowers in making the required Balloon Payments. If any
borrower with respect to any of such Balloon Loans is unable to make the
applicable Balloon Payment when due, the average life of the Certificates will
be longer than expected. See the Range of Maturity Years Table in "DESCRIPTION
OF THE MORTGAGE POOL--Certain Characteristics of the Mortgage Pool--Other
Information" herein for additional information regarding maturity dates of the
Mortgage Loans.
Losses and Shortfalls. The yield to holders of the Regular Certificates
will also depend on the extent to which such holders are required to bear the
effects of any losses or shortfalls on the Mortgage Loans. Shortfalls in
Available Funds resulting from shortfalls in collections of amounts payable on
the Mortgage Loans (to the extent not advanced) or additional Master Servicer or
Special Servicer compensation, interest on Advances, extraordinary Trust Fund
expenses or other similar items will generally be borne by holders of each Class
of Certificate in reverse alphabetical order of class designation to the extent
of amounts otherwise distributable to such holder; provided that any such
shortfalls will be allocated to the holders of the Class A-1 and Class A-2
Certificates on a pro-rata basis. The amount of any such shortfall generally
will be distributable to holders of such Class on subsequent Distribution Dates,
to the extent of Available Funds on such Distribution Dates. Any such shortfall
will not bear interest, however, and will therefore negatively affect the yield
to maturity of such Class of Certificates for so long as it is outstanding.
Realized Losses will be allocated, as and to the extent described herein,
to the Classes of Certificates (in reduction of the Certificate Balance of each
such Class) in reverse order of their Class designation. As a result, a loss on
any one of the Mortgage Loans could result in a significant loss, or in some
cases a complete loss, of an investors' investment in any Class of the
Subordinate Certificates. Consequently prospective investors should perform
their own analysis of the expected timing and severity of Realized Losses prior
to investing in any Subordinate Certificate. Even if losses on the Mortgage
Loans are not borne by an investor in any Class, such losses may affect the
weighted average life and yield to maturity of such investor's Certificates. The
allocation of Realized Losses to the Regular Certificates (other than the Class
X and Class L-IO Certificates) will reduce the Notional Balance of the Class X
Certificates.
Pass-Through Rate. Because the Class X Pass-Through Rate is equal to the
excess, if any of the Weighted Average Net Mortgage Rate over the Weighted
Average Pass-Through Rate, the Class X Pass-Through Rate will be sensitive to
changes in both the Weighted Average Net Mortgage Rate and the Weighted Average
Pass-Through Rate. The Weighted Average Pass-Through Rate will fluctuate based
on the relative sizes of the Certificate Balances of the Regular Certificates
(other than the Class X and Class L-IO Certificates, which do not have
Certificate Balances).
The Weighted Average Net Mortgage Rate will fluctuate over the life of the
Class X Certificates as a result of scheduled amortization, voluntary
prepayments and liquidations of Mortgage Loans. If principal payments, including
voluntary and involuntary Principal Prepayments, are made on a Mortgage Loan
with a relatively high Net Mortgage Rate at a rate faster than the rate of
principal payments on the Mortgage Pool as a whole, the Pass-Through Rates
applicable to the Certificates Class X Certificates will be adversely affected.
Accordingly, the yield on each such Class of Certificates will be sensitive to
changes in the outstanding principal balances of the Mortgage Loans as a result
of scheduled amortization, voluntary prepayments and liquidations of Mortgage
Loans.
Delay in Payment of Distributions. Because monthly distributions will not
be made to Certificateholders until, at the earliest, the [25th] day of the
month following the month in which interest
S-90
<PAGE>
accrued on the Certificates, the effective yield to the holders of the Regular
Certificates will be lower than the yield that would otherwise be produced by
the applicable Pass-Through Rate and purchase prices (assuming such prices did
not account for such delay).
Weighted Average Life
Weighted average life refers to the average amount of time that will
elapse from the date of determination to the date of distribution to the
investor of each dollar distributed in reduction of principal balance or
notional balance of such security. The weighted average life of the Regular
Certificates will be influenced by, among other things, the rate at which
principal of the Mortgage Loans is paid, which may be in the form of scheduled
amortization, Balloon Payments, prepayments or liquidations.
Prepayments on mortgage loans may be measured by a prepayment standard or
model. The model used in this Prospectus Supplement is the "Constant Prepayment
Rate" or "CPR" model. The CPR model represents an assumed constant rate of
prepayment each month, expressed as an annual rate, relative to the then
outstanding principal balance of a pool of mortgage loans for the life of such
mortgage loans. CPR of "0%" assumes that no Mortgage Loan is prepaid by a
borrower before maturity, while CPRs "2%" and "4%" assume that prepayments on
the Mortgage Loans are made by borrowers at those CPRs. CPR does not purport to
be either an historical description of the prepayment experience of any pool of
mortgage loans or a prediction of the anticipated rate of prepayment of any
mortgage loans, including the Mortgage Loans to be included in the Trust Fund.
Consequently no assurance can be given and no representation is made that (i)
prepayments of the Mortgage Loans (whether or not in a Lock-out Period or a
yield maintenance period) will conform to any particular CPR, (ii) all the
Mortgage Loans will prepay in accordance with the assumptions at the same rate,
or (iii) Mortgage Loans that are in a Lock-out Period or yield maintenance
period will not prepay as a result of involuntary liquidations upon default or
otherwise. A "yield maintenance period" is any period during which a Mortgage
Loan provides that voluntary prepayments be accompanied by a Prepayment Premium
calculated on the basis of a yield maintenance formula.
The tables set forth below have been prepared on the basis of certain
assumptions as described below regarding the characteristics of the Mortgage
Loans that are expected to be included in the Mortgage Pool as described under
"DESCRIPTION OF THE MORTGAGE POOL" herein and the performance thereof. The
tables assume, among other things, that: (i) as of the date of issuance of the
Regular Certificates, the Mortgage Loans (except as set forth herein) provide
for a Monthly Payment of principal and interest that would fully amortize the
remaining principal balance of such Mortgage Loan using the Monthly Payments in
the amounts set forth in Annex A hereto, commencing on the first day of the
month immediately following the month in which such issuance occurs, with, if
such Mortgage Loan is a Balloon Loan, the Monthly Payments in the amounts set
forth in Annex A hereto and a principal payment in the amount that would reduce
the principal balance of such Balloon Loan to zero on the maturity date set
forth in Annex A; (ii) the Mortgage Loan Seller will not repurchase any Mortgage
Loan and none of the Master Servicer, the Depositor or the holders of the Class
R-I Certificates exercises its option to purchase Mortgage Loans and thereby
cause a termination of the Trust Fund; (iii) there are no delinquencies or
Realized Losses on the Mortgage Loans; (iv) no Prepayment Premiums are paid with
respect to any Mortgage Loan; (v) payments on the Certificates will be made on
the 25th day of each month, commencing in _________________________
(notwithstanding that any such day is not a Business Day); (vi) there are no
additional ongoing Trust Fund expenses payable out of the Trust Fund other than
the Servicing Fee; (vii) the Regular Certificates will be purchased on the
Closing Date; (viii) that no defaults occur with respect to any of the Mortgage
Loans; (ix) that all of the Mortgage Loans accrue interest based upon a 360-day
year composed of twelve 30-day months; [(x) that all Mortgage Loans that have a
maturity date other than the first day of a month make their final payment on
the first day of the month following the month of maturity; (xi) that the number
of scheduled payments for each
S-91
<PAGE>
Newly Originated Mortgage Loan is equal to the actual number of payments plus
one, with the first such payment consisting of interest only and the remaining
payments consisting of principal and interest; and (xii) that with respect to
Loan #__, the stated interest rate does not adjust at any time during the term
of such Mortgage Loan.]
The actual performance of the Mortgage Loans will differ from the
assumptions used in calculating the tables set forth below, which are
hypothetical in nature and are provided only to give a general sense of how the
principal cash flows might behave under varying prepayment scenarios. Any
difference between such assumptions and the actual performance of the Mortgage
Loans, or actual prepayment or loss experience, will affect the percentages of
initial Certificate Balance outstanding over time and the weighted average lives
of the Classes of Regular Certificates.
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each Class of Regular Certificates, and
set forth the percentages of the initial Certificate Balance or Notional Balance
of each such Class of Regular Certificates that would be outstanding after each
of the Distribution Dates shown based on the assumptions described above and the
following additional assumptions for each of the designated scenarios (the
"Scenarios"). In the case of Scenario 1, it was assumed that none of the
Mortgage Loans prepay prior to their maturity date and that there are no
defaults. In the case of Scenario 2, the prepayment assumptions set forth in
Scenario 1 were assumed and it was further assumed that the Trust Fund will be
terminated pursuant to an auction on the Distribution Date occurring in
______________. In the case of Scenario 3 and Scenario 4, it was assumed that
the Mortgage Loans prepay prior to their maturity date at a rate equal to 2% CPR
and 4% CPR, respectively, and that there are no defaults and that it was further
assumed that the Trust Fund will be terminated pursuant to an auction on the
Distribution Date occurring in . See "DESCRIPTION OF THE CERTIFICATES--Auction"
herein.
S-92
<PAGE>
Percentage of Initial Certificate Balance
(or Notional Balance)
Outstanding for
Each Designated Scenario
Class A-1 Class A-2 Class B
Scenario Scenario Scenario
Distribution Date 1 2 3 4 1 2 3 4 1 2 3 4
- ----------------- - - - - - - - - - - - -
Initial Balance
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Weighted Average
Life (1)
(1) The weighted average life of each Class is determined by (i)
multiplying the amount of each distribution in reduction of the Certificate
Balance 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-93
<PAGE>
Percentage of Initial Certificate Balance
(or Notional Balance)
Outstanding for
Each Designated Scenario
Class C Class D Class E
Scenario Scenario Scenario
Distribution Date 1 2 3 4 1 2 3 4 1 2 3 4
- ----------------- - - - - - - - - - - - -
Initial Balance
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Weighted Average Life (1)
(1) The weighted average life of each Class is determined by (i)
multiplying the amount of each distribution in reduction of the Certificate
Balance 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-94
<PAGE>
Percentage of Initial Certificate Balance
(or Notional Balance)
Outstanding for
Each Designated Scenario
Class F Class G Class H
Scenario Scenario Scenario
Distribution Date 1 2 3 4 1 2 3 4 1 2 3 4
- ----------------- - - - - - - - - - - - -
Initial Balance
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Weighted Average Life (1)
(1) The weighted average life of each Class is determined by (i)
multiplying the amount of each distribution in reduction of the Certificate
Balance 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-95
<PAGE>
Percentage of Initial Certificate Balance
(or Notional Balance)
Outstanding for
Each Designated Scenario
Class J Class K Class L-PO and
Scenario Scenario Class L-IO
Scenario
Distribution Date 1 2 3 4 1 2 3 4 1 2 3 4
- ----------------- - - - - - - - - - - - -
Initial Balance
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Weighted Average Life (1)
(1) The weighted average life of each Class is determined by (i)
multiplying the amount of each distribution in reduction of the Certificate
Balance 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-96
<PAGE>
THE POOLING AND SERVICING AGREEMENT
General
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of ________________, 1998 (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)
___________.
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, each related
original recorded Assignment of Mortgage which, together with other such
Assignments of Mortgage, shows a complete chain of assignment of the related
Mortgage from the applicable Originator 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) the acknowledgment copy of each Form UCC-1 financing statement (file
stamped to show the filing or recording thereof in the applicable public filing
or recording office), if any, filed or recorded with respect to personal
property or fixtures constituting a part of the related Mortgaged Property, or a
copy thereof in the form submitted for filing or recording, together with a copy
of each Form UCC-2 or UCC-3 assignment (file stamped to show the filing or
recording thereof in the applicable public filing or recording office), if any,
of such financing statement which, together with other such assignments, shows a
complete chain of assignment of such financing statement from the applicable
Originator to the
S-97
<PAGE>
applicable Mortgage Loan Seller, or a copy thereof in the form submitted for
filing or recording, 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 or recording
information which is not yet available to the applicable Mortgage Loan Seller,
is in suitable form for filing or recording in the filing or recording 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 or specimen title insurance policy or a marked, redated and
recertified commitment for lender's title insurance policy), together with any
endorsements thereto;
(vii) if any related Assignment of Leases, Rents and Profits is separate
from the Mortgage, the original recorded Assignment of Leases, Rents and Profits
or a copy thereof certified by the related title insurance company, public
recording office, or closing agent to be in the form in which executed or
submitted for recording, each related original recorded reassignment of such
instrument, if any, which, together with other such reassignments, shows a
complete chain of assignment of such instrument from the applicable Originator
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) the original or a counterpart of each environmental warranty or
indemnity agreement, if any, with respect to such Mortgage Loan;
(ix) if any related assignment of contracts is separate from the Mortgage,
the original assignment of contracts or a counterpart thereof, and if the
assignment of contracts is not assigned under the Assignments of Mortgage
described in clause (ii) above, the related original reassignment of such
instrument to the applicable Mortgage Loan Seller or a counterpart thereof and
the related original reassignment of such instrument executed by the applicable
Mortgage Loan Seller in blank which the Trustee or its designee is authorized to
complete;
(x) with respect to the related Reserve Accounts, if any, a copy of the
original of any separate agreement with respect thereto between the related
borrower and the Originator;
(xi) the original of any other written agreement, instrument or document
securing such Mortgage Loan, including, without limitation, originals of any
guaranties with respect to such Mortgage Loan or the original letter of credit,
if any, with respect thereto, together with any and all amendments thereto,
including, without limitation, any amendment which entitles the Master Servicer
to draw upon such letter of credit on behalf of the Trustee for the benefit of
the Certificateholders, and the original of each instrument or other item of
personal property given as security for a Mortgage Loan possession of which by a
secured party is necessary to a secured party's valid, 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;
S-98
<PAGE>
(xii) with respect to the related Reserve Accounts, if any, the
acknowledgment copy of each UCC-1 financing statement (file stamped to show the
filing thereof in the applicable public filing office), if any, filed with
respect to the applicable Originator's security interest in such Reserve
Accounts and all funds contained therein, or a copy thereof in the form
submitted for filing, together with a copy of each Form UCC-2 or UCC-3
assignment (file stamped to show the filing thereof in the applicable public
filing office), if any, of such financing statement which assignment, together
will all other such assignments, shows a complete chain of assignment of such
financing statement from the applicable Originator to the applicable Mortgage
Loan Seller, or a copy thereof in the form submitted for filing, and a copy of
each Form UCC-2 or UCC-3 assignment, if any, (file stamped to show the filing
thereof in the applicable public filing office) 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, consolidation 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);
(xiv) if any document or instrument described above is signed by an
attorney in fact or similar agent on behalf of the related borrower or another
party, the original of the applicable power of attorney or a counterpart
thereof; and
(xv) 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 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
S-99
<PAGE>
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. The
Pooling and Servicing Agreement will provide, however, that neither the Master
Servicer nor the Special Servicer, nor any of their directors, officers,
employees or agents, will have any liability to the Trust Fund or the
Certificateholders for taking any action or refraining from taking an action in
good faith or for errors in judgment. The foregoing provision would not protect
the Master Servicer, the Special Servicer or such person for the breach of any
of the Master Servicer's or Special Servicer's respective representations or
warranties in the Pooling and Servicing Agreement, or against any specific
liability imposed on the Master Servicer or the Special Servicer for a breach of
the servicing standards set forth in the Pooling and Servicing Agreement, any
liability by reason of willful misfeasance, 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. 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
S-100
<PAGE>
Servicer upon such Mortgage Loan becoming a Specially Serviced Mortgage Loan.
See "--Special Servicing" herein.
Advances
Subject to the limitations described below, the Master Servicer will be
obligated to advance (each such amount, a "P&I Advance"), on the Business Day
preceding each Distribution Date (the "Remittance Date"), an amount equal to the
total or any portion of the Monthly Payment on a Mortgage Loan that was
delinquent as of the close of business on the Business Day preceding such
Remittance Date or, in the event of a default in the payment of a Balloon
Payment, the Assumed Scheduled Payment with respect to the related Balloon Loan,
unless the Master Servicer determines that any such advance would be a
nonrecoverable Advance and delivers to the Trustee an officer's certificate and
accompanying documentation related to a determination of nonrecoverability as
required by the Pooling and Servicing Agreement. In the event any Mortgage Loan
becomes a Seriously Delinquent Loan, the Special Servicer will order an Updated
Appraisal of the related Mortgaged Property and upon receipt of such Updated
Appraisal the Master Servicer will determine the amount (the "Anticipated Loss")
equal to the excess, if any, of (i) the sum of (w) the Scheduled Principal
Balance of such Mortgage Loan as of the immediately preceding Determination
Date, (x) to the extent not previously advanced by the Master Servicer, the
Trustee or the Fiscal Agent, all accrued and unpaid interest on such Mortgage
Loan at a per annum rate equal to the related Mortgage Rate, (y) all
unreimbursed Advances with respect to such Mortgage Loan with interest thereon
at the Advance Rate, and (z) to the extent not previously advanced by the Master
Servicer, the Trustee or the Fiscal Agent, all currently due but unpaid real
estate taxes and assessments, insurance premiums, and, if applicable, ground
rents and a good faith estimate of any expenses relating to uncontested
foreclosure, realization and liquidation of such Mortgaged Property, over (ii)
an amount equal to 90% of the appraised value of the related Mortgaged Property
as reflected in the Updated Appraisal thereof; provided, however, that in the
event the Updated Appraisal has not been received within 60 days after the
Special Servicer has ordered such appraisal, the Anticipated Loss will be equal
to 40% of the Scheduled Principal Balance of the Seriously Delinquent Loan;
provided, further that promptly upon its receipt of such appraisal, the Master
Servicer will recalculate the Anticipated Loss. Upon determination of the
Anticipated Loss with respect to any Seriously Delinquent Loan, the amount of
any P&I Advance required to be made with respect to such Seriously Delinquent
Loan on any Distribution Date will be an amount equal to the product of (A) the
amount of the P&I Advance that would be required to be made in respect of such
Seriously Delinquent Loan without regard to the application of this sentence,
multiplied by (B) a fraction, the numerator of which is equal to the Scheduled
Principal Balance of such Mortgage Loan as of the immediately preceding
Determination Date less the Anticipated Loss and the denominator of which is
such Scheduled Principal Balance. A "Seriously Delinquent Loan" is any Mortgage
Loan as to which an Updated Appraisal has been ordered with respect to the
related Mortgaged Property. See "--Realization Upon Mortgage Loans--Appraisals
for Specially Serviced Mortgage Loans" herein. A Mortgage Loan will cease to be
a Seriously Delinquent Loan in the event such Mortgage Loan is no longer a
Specially Serviced Mortgage Loan pursuant to the terms of the Pooling and
Servicing Agreement and as to which the related Mortgagor has made 12
consecutive timely Monthly Payments by their respective Due Dates since the date
on which such Mortgage Loan became a Seriously Delinquent Loan.
In addition to P&I Advances, the Master Servicer will also be obligated
(subject to the limitations described herein) to make cash advances ("Property
Advances," and together with P&I Advances, "Advances") to pay (i) certain costs
and expenses incurred in connection with defaulted Mortgage Loans, acquiring
title to, or management of, REO Property or the sale of defaulted Mortgage Loans
or REO Properties, (ii) delinquent real estate taxes, assessments and hazard
insurance premiums and (iii) to cover other similar costs and expenses necessary
to protect and preserve the security of the related Mortgage.
S-101
<PAGE>
If the Master Servicer fails to fulfill its obligation to make any
required Advance, the Trustee, acting in accordance with the servicing standard,
will be required to make the Advance subject to its determination of
recoverability. If the Trustee fails to make any such required Advance, the
Fiscal Agent will be required to make the Advance, subject to its determination
of recoverability. Both the Trustee and the Fiscal Agent will be entitled to
rely conclusively on any non-recoverability determination of the Master
Servicer. See "--The Trustee" and "--The Fiscal Agent" below.
The obligation of the Master Servicer, the Trustee or the Fiscal Agent, as
applicable, to make Advances with respect to any Mortgage Loan pursuant to the
Pooling and Servicing Agreement will continue through the foreclosure of such
Mortgage Loan and until the liquidation of the Mortgage Loan or related
Mortgaged Properties. Advances are intended to provide a limited amount of
liquidity, not to guarantee or insure against losses. None of the Master
Servicer, the Trustee or the Fiscal Agent will be required to make any Advance
that it determines (based on, among other things, an Updated Appraisal) in its
good faith business judgment will not be recoverable by the Master Servicer, the
Trustee or the Fiscal Agent, as applicable, out of related late payments,
Insurance Proceeds, Liquidation Proceeds and certain other collections with
respect to the Mortgage Loan as to which such Advances were made. To the extent
that any borrower is not obligated under its Mortgage Loan documents to pay or
reimburse any portion of any Advances that are outstanding with respect to the
related Mortgage Loan as a result of a modification of such Mortgage Loan by the
Special Servicer that forgives loan payments or other amounts that the Master
Servicer, the Trustee or the Fiscal Agent previously advanced, and the Master
Servicer, the Trustee or the Fiscal Agent determines that no other source of
payment or reimbursement for such Advances is available to it, such Advances
will be deemed to be nonrecoverable; provided, however, in connection with the
foregoing, the Master Servicer, the Trustee or the Fiscal Agent will provide an
officer's certificate as described below. In addition, if the Master Servicer,
the Trustee or the Fiscal Agent, as applicable, determines that any Advance
previously made will not be recoverable from the foregoing sources, then the
Master Servicer, the Trustee or the Fiscal Agent, as applicable, will be
entitled to reimburse itself for such Advance, plus interest thereon, out of
amounts on deposit in the Collection Account prior to distributions on the
Certificates. Any such judgment or determination must be evidenced by an
officer's certificate delivered to the Trustee (or, in the case of the Trustee
or the Fiscal Agent, the Depositor) setting forth such judgment or determination
of nonrecoverability and the procedure and considerations of the Master
Servicer, the Trustee or the Fiscal Agent, as applicable, forming the basis of
such determination, which will include a copy of the Updated Appraisal and any
other information or reports obtained by the Master Servicer, the Trustee or the
Fiscal Agent, such as property operating statements, rent rolls, property
inspection reports, engineering reports and other documentation which may
support such determinations.
The Master Servicer, the Trustee or the Fiscal Agent, as applicable, will
be entitled to reimbursement for any Advance equal to the amount of such Advance
from (i) any collections on or in respect of the particular Mortgage Loan or REO
Property with respect to which each such Advance was made or (ii) upon
determining that such Advance is not recoverable in the manner described in the
preceding paragraph, from any other amounts from time to time on deposit in the
Collection Account.
The Master Servicer, the Trustee or the Fiscal Agent, as applicable, will
be entitled to receive interest at a rate equal to the Prime Rate (as published
in The Wall Street Journal, or if The Wall Street Journal is no longer
published, The New York Times, from time to time), (the "Advance Rate") on its
outstanding Advances and will be authorized to pay itself such interest from
general collections with respect to all of the Mortgage Loans prior to any
payment to holders of Certificates. If the interest on such Advance is not
offset by Default Interest a shortfall will result which generally will result
in a Class Interest Shortfall for the most subordinate Class then outstanding.
S-102
<PAGE>
Accounts
Collection Account. The Master Servicer will, pursuant to the Pooling and
Servicing Agreement, establish and maintain a segregated account or accounts
(the "Collection Account") into which it will be required to deposit, within one
Business Day of receipt the following payments and collections received or made
by it on or with respect to the Mortgage Loans: (i) all payments on account of
principal on the Mortgage Loans, including the principal component of
Unscheduled Payments on the Mortgage Loans; (ii) all payments on account of
interest and Default Interest on the Mortgage Loans and the interest portion of
all Unscheduled Payments and all Prepayment Premiums; (iii) any amounts required
to be deposited by the Master Servicer in connection with losses realized on
Permitted Investments with respect to funds held in the Collection Account and
in connection with Prepayment Interest Shortfalls; (iv) (x) all Net REO Proceeds
transferred from an REO Account and (y) all Condemnation Proceeds, Insurance
Proceeds and Net Liquidation Proceeds not required to be applied to the
restoration or repair of the related Mortgaged Property; (v) any amounts
received from borrowers that represent recoveries of Property Advances; and (vi)
any other amounts required by the provisions of the Pooling and Servicing
Agreement to be deposited into the Collection Account by the Master Servicer or
the Special Servicer, including, without limitation, proceeds of any purchase or
repurchase of a Mortgage Loan as described under "DESCRIPTION OF THE MORTGAGE
POOL--Representations and Warranties; Repurchase," "THE POOLING AND SERVICING
AGREEMENT--Realization Upon Mortgage Loans" and "DESCRIPTION OF THE
CERTIFICATES--Early Termination" and "--Auction" herein.
The foregoing requirements for deposits in the Collection Account will be
exclusive, and any payments in the nature of late payment charges, late fees,
NSF check charges, assumption fees, loan modification fees, loan service
transaction fees, extension fees, demand fees, beneficiary statement charges and
similar fees need not be deposited in the Collection Account by the Master
Servicer and, to the extent permitted by applicable law, the Master Servicer or
the Special Servicer, as applicable, will be entitled to retain any such charges
and fees received with respect to the Mortgage Loans. In the event that the
Master Servicer deposits into the Collection Account any amount not required to
be deposited therein, the Master Servicer may at any time withdraw such amount
from the Collection Account.
Distribution Account. The Trustee will, pursuant to the Pooling and
Servicing Agreement, establish and maintain a segregated account or accounts
(the "Distribution Account") in the name of the Trustee for the benefit of the
holders of Certificates. With respect to each Distribution Date, the Master
Servicer will deposit in the Distribution Account, to the extent of funds on
deposit in the Collection Account, on or before the Remittance Date an aggregate
amount of immediately available funds equal to the Available Funds plus (i) any
Prepayment Premiums received by the Master Servicer during the related
Collection Period and (ii) Default Interest received with respect to a Mortgage
Loan that is in default with respect to its Balloon Payment. To the extent not
included in Available Funds, the Master Servicer will remit to the Trustee all
P&I Advances for deposit into the Distribution Account on the related Remittance
Date. See "DESCRIPTION OF THE CERTIFICATES--Distributions" herein.
The Collection Account and the Distribution Account will be held in the
name of the Trustee (or, in the case of the Collection Account, the Master
Servicer on behalf of the Trustee) on behalf of the holders of Certificates and
the Trustee (and, in the case of the Collection Account, the Master Servicer)
will be authorized to make withdrawals therefrom. Each of the Collection Account
and the Distribution Account will be either (i) a segregated account or accounts
maintained with either a federally or state-chartered depository institution or
trust company (a) the short term unsecured debt obligations of which are rated
at least "______" by _______ or the long term unsecured debt obligations of
which (or of such institution's parent holding company) are rated at least "___"
by _____ and (b) the short term unsecured debt obligations of which are rated at
least "___" by _______ and the long term unsecured debt obligations of which (or
of such institution's parent holding company) are rated at least "___" by
_______
S-103
<PAGE>
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 and subject to regulations regarding fiduciary funds or deposit
substantially similar to 12 CFR 9.10(b), 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 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.
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.
S-104
<PAGE>
If applicable law prohibits the enforcement of a "due-on-sale" clause or
the Master Servicer or Special Servicer is (i) otherwise prohibited from taking
such action as described in the preceding paragraph or (ii) determines that such
enforcement is not in the best interests of the Trust Fund and, as a
consequence, a Mortgage Loan is assumed, (x) the original borrower may be
released from liability for the unpaid principal balance of the related Mortgage
Loan and interest thereon at the applicable Mortgage Rate during the remaining
term of such Mortgage Loan, (y) the Master Servicer may accept payments in
respect of the Mortgage Loan from the new owner of the Mortgaged Property and
(z) the Master Servicer or the Special Servicer, as applicable, may enter into
an assumption agreement with a new purchaser whereby the new owner of the
Mortgaged Property will be substituted as the borrower and the original borrower
released, so long as (to the extent permitted by law) the new owner satisfies
the underwriting requirements customarily imposed by the Master Servicer or the
Special Servicer, as applicable, as a condition to its approval of a borrower on
a new mortgage loan substantially similar to such Mortgage Loan. In the event a
Mortgage Loan is assumed as described in the preceding sentences, the Trustee,
the Master Servicer and the Special Servicer, will not permit any modification
of such Mortgage Loan other than as described below under "--Amendments,
Modifications and Waivers." The Master Servicer or Special Servicer, as
applicable, will be entitled to retain as additional servicing compensation any
assumption fees paid by the original borrower or the new owner in connection
with such assumption. See "CERTAIN LEGAL ASPECTS OF THE MORTGAGE
LOANS--Enforceability of Certain Provisions--Due-on-Sale Provisions" in the
Prospectus. A new owner of the Mortgaged Property may be substituted or a junior
or senior lien allowed on the Mortgaged Property, without the consent of the
Master Servicer, the Special Servicer or the Trustee in a bankruptcy proceeding
involving the Mortgaged Property.
If any Mortgage Loan contains a provision in the nature of a
"due-on-encumbrance" clause, which by its terms (i) provides that such Mortgage
Loan will (or may at the related mortgagee's option) become due and payable upon
the creation of any lien or other encumbrance on such Mortgaged Property or (ii)
requires the consent of the related mortgagee to the creation of any such lien
or other encumbrance on such Mortgaged Property, then, for so long as such
Mortgage Loan is included in the Trust Fund, the Master Servicer or the Special
Servicer, as applicable, on behalf of the Trust Fund, will enforce such
provision and in connection therewith will (x) accelerate the payments due on
such Mortgage Loan or (y) withhold its consent to the creation of any such lien
or other encumbrance, as applicable, except, in each case, to the extent that
the Master Servicer or the Special Servicer, as applicable, acting in accordance
with the applicable servicing standard, determines that such enforcement would
not be in the best interests of the Trust Fund. Notwithstanding the foregoing,
the Master Servicer or the Special Servicer, as applicable, may forbear from
enforcing any "due-on-encumbrance" provision in connection with any junior or
senior lien on the Mortgaged Property imposed in connection with any bankruptcy
proceeding involving the Mortgaged Property.
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 least once every two years (or, if the
related Mortgage Loan has a then current principal balance greater than
$2,000,000, then at least once every year). The Master Servicer and the Special
Servicer will each prepare or cause to be prepared as soon as reasonable
possible a written report of each such inspection and will deliver a copy of
such report to the Trustee with 10 days after the preparation thereof.
Realization Upon Mortgage Loans
Appraisals for Specially Serviced Mortgage Loans. Contemporaneously with
the earliest to occur of (i) the effective date of any modification of the
stated maturity, Mortgage Rate, principal balance or amortization terms of any
Specially Serviced Mortgage Loan or other "significant" modification (as
S-105
<PAGE>
defined in Section 1001 of the Code) of any Mortgage Loan, as to which a default
has occurred or is reasonably foreseeable, (ii) the date 90 days after the
occurrence of any uncured payment delinquency, (iii) the appointment of a
receiver in respect of a Mortgaged Property or (iv) the date a Mortgaged
Property becomes an REO Property, the Special Servicer will promptly order an
Updated Appraisal of the Mortgaged Property or REO Property, as the case may be,
except to the extent such appraisal had been previously obtained within the
prior twelve months. In addition, the Special Servicer will promptly order a new
Updated Appraisal or an update from the prior Updated Appraisal in the event any
Mortgage Loan is a Seriously Delinquent Loan and such prior Updated Appraisal is
more than twelve months old. An "Updated Appraisal" is (i) with respect to any
Mortgage Loan with an outstanding principal balance in excess of $1,500,000, an
appraisal of the related Mortgaged Property conducted in accordance with MAI
standards from an independent appraiser who is a member of the Appraisal
Institute with 5 years of experience reviewing similar property and (ii) an
internal property valuation performed by the Special Servicer in accordance with
the servicing standard set forth in the Pooling and Servicing Agreement or an
appraisal performed by an independent appraiser with respect to any Mortgage
Loan with an outstanding principal balance equal to or less than $1,500,000.
Following a default in the payment of a Balloon Payment, the Special
Servicer may grant any number of successive extensions, provided, however, that
the Special Servicer may not grant any extension that extends the maturity date
of any Mortgage Loan beyond the Rated Final Distribution Date.
Standards for Conduct Generally in Effecting Foreclosure or the Sale of
Defaulted Loans. In connection with any foreclosure or other acquisition, any
costs and expenses incurred in any such proceedings will be advanced by the
Master Servicer as a Property Advance, unless the Master Servicer determines
that such Advance would constitute a nonrecoverable Advance.
If the Special Servicer elects to proceed with a non-judicial foreclosure
in accordance with the laws of the state in which the Mortgaged Property is
located, the Special Servicer will not be required to pursue a deficiency
judgment against the related borrower, or any other liable party if the laws of
the state do not permit such a deficiency judgment after a non-judicial
foreclosure or if the Special Servicer determines, in its best judgment, that
the likely recovery if a deficiency judgment is obtained will not be sufficient
to warrant the cost, time, expense and/or exposure of pursuing the deficiency
judgment and such determination is evidenced by an officer's certificate
delivered to the Trustee.
Notwithstanding any provision to the contrary, the Special Servicer will
not, on behalf of the Trust Fund, obtain title to a Mortgaged Property as a
result of or in lieu of foreclosure or otherwise, and will not otherwise acquire
possession of, or take any other action with respect to, any Mortgaged Property
if, as a result of any such action, the Trustee, for the Trust Fund or the
holders of Certificates, would be considered to hold title to, to be a
"mortgagee-in-possession" of, or to be an "owner" or "operator" of, such
Mortgaged Property within the meaning of CERCLA or any comparable law, unless
the Special Servicer has previously determined, based on an updated
environmental assessment report prepared by an independent person who regularly
conducts environmental audits, that: (i) such Mortgaged Property is in
compliance with applicable environmental laws or, if not, after consultation
with an environmental consultant, that it would be in the best economic interest
of the Trust Fund to take such actions as are necessary to bring such Mortgaged
Property in compliance therewith and (ii) there are no circumstances present at
such Mortgaged Property relating to the use, management or disposal of any
hazardous materials for which investigation, testing, monitoring, containment,
clean-up or remediation could be required under any currently effective federal,
state or local law or regulation, or that, if any such hazardous materials are
present for which such action could be required, after consultation with an
environmental consultant, it would be in the best economic interest of the Trust
Fund to take such actions with respect to the affected Mortgaged Property.
S-106
<PAGE>
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 Holders," "--Taxation of Regular Interests," "--Taxation of
the REMIC" and "--Taxation of Holders of Residual Certificates" in the
Prospectus.
The Special Servicer may offer to sell to any person any Specially
Serviced Mortgage Loan or any REO Property, if and when the Special Servicer
determines, consistent with the servicing standards set forth in the Pooling and
Servicing Agreement, that no satisfactory arrangements can be made for
collection of delinquent payments thereon and such a sale would be in the best
economic interests of the Trust Fund, but will, in any event, so offer to sell
any REO Property no later than the time determined by the Special Servicer to be
sufficient to result in the sale of such REO Property within the period
specified in the Pooling and Servicing Agreement, including extensions thereof.
The Special Servicer will give the Trustee not less than 10 Business Days' prior
written notice of its intention to sell any Specially Serviced Mortgage Loan or
REO Property, in which case the Special Servicer will accept any offer received
from
S-107
<PAGE>
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).
Amendments, Modifications and Waivers
Neither the Master Servicer nor the Special Servicer may modify, amend,
waive or otherwise consent to the change of the stated maturity date of any
Mortgage Loan, the payment of principal of, or interest or Default Interest on,
any Mortgage Loan, or any other term of a Mortgage Loan, unless (i) such
modification, amendment, waiver or consent is not a "significant modification"
under Section 1001 of the Code, (ii) to the extent such modification, amendment,
waiver or consent would constitute a "significant modification" under Section
1001 of the Code, such Mortgage Loan is in default or a default with respect
thereto is reasonably foreseeable or (iii) such modification, amendment, waiver
or consent is permitted under "--Realization Upon Mortgage Loans--Appraisals for
Specially Serviced Mortgage Loans" herein. Neither Master Servicer nor the
Special Servicer may agree to any retroactive modification, amendment, waiver or
consent.
The Trustee
________________________, a ________________________ with its principal
offices in ____________, ________________, will act as Trustee pursuant to the
Pooling and Servicing Agreement. The Trustee's corporate trust office is located
at ------------------------------------.
The Trustee may resign at any time by giving written notice to the
Depositor, the Master Servicer, the Special Servicer and the Rating Agencies.
Upon such notice of the Trustee's resignation, the Fiscal Agent will also be
deemed removed and, accordingly, the Master Servicer will appoint a successor
trustee, which appointment of successor trustee will not result, in and of
itself, in a downgrading, withdrawal or qualification of the rating then
assigned by the Rating Agencies to any Class of the Certificates as confirmed in
writing by each of the Rating Agencies, and a successor fiscal agent, which, if
the successor trustee is not rated by each Rating Agency in one of its two
highest long-term 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.
S-108
<PAGE>
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.
The "Voting Rights" assigned to each Class shall be (i) 0% in the case of
the Residual Certificates, (ii) in the case of any Class of P&I Certificates, a
percentage equal to the product of (x) [96%] so long as the Class X Notional
Balance is greater than zero and [97%] thereafter and (y) a fraction, the
numerator of which is equal to the aggregate outstanding Certificate Balance of
such Class and the denominator of which is equal to the aggregate outstanding
Certificate Balances of all such Classes of Certificates; (iii) in the case of
the Class X Certificates, [1%] so long as the Class X Notional Balance is
greater than zero, and 0% thereafter; (iv) [0.1%] in the Case of Class L-PO
Certificates; and (v) [2.9%] in the case of Class L-IO Certificates. The Voting
Rights of any Class of Certificates shall be allocated among holders of
Certificates of such Class in proportion to their respective Percentage
Interests.
Pursuant to the Pooling and Servicing Agreement, the Trustee will be
entitled to receive a monthly fee from the Master Servicer.
The Trust Fund will indemnify the Trustee, the Fiscal Agent and their
respective directors, officers, employees, agents and affiliates against any and
all losses, liabilities, damages, claims or expenses (including reasonable
attorneys' fees) arising in respect of the Pooling and Servicing Agreement or
the Certificates (but only to the extent that they are expressly reimbursable
under the Pooling and Servicing Agreement or are unanticipated expenses incurred
by the REMIC) other than those resulting from the negligence, 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.
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
S-109
<PAGE>
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
_________________________, a ___________________________________________,
will act as Fiscal Agent for the Trustee and will be obligated to make any
Advance required to be made, and not made, by the Trustee under the Pooling and
Servicing Agreement, provided that the Fiscal Agent will not be obligated to
make any Advance that it deems to be nonrecoverable. The Fiscal Agent will be
entitled to rely conclusively on any determination by the Master Servicer that
an Advance, if made, would not be recoverable. The Fiscal Agent will be entitled
to reimbursement for each Advance made by it in the same manner and to the same
extent as the Trustee and the Master Servicer. See "--Advances" herein.
In the event of the resignation or removal of the Trustee, the Fiscal
Agent will be entitled to resign. The initial Fiscal Agent is not obligated to
act in such capacity at any time that ____________________ is not the Trustee.
No resignation or removal of the Fiscal Agent will become effective until a
successor fiscal agent has assumed the Fiscal Agent's obligations and duties
under the Pooling and Servicing Agreement and it is confirmed in writing by each
of the Rating Agencies that the appointment of such successor fiscal agent will
not result, in and of itself, in a downgrading, withdrawal or qualification of
the rating then assigned by such Rating Agency to any Class of the Certificates.
Servicing Compensation and Payment of Expenses
Pursuant to the Pooling and Servicing Agreement, the Master Servicer will
be entitled to receive a monthly servicing fee (the "Servicing Fee") for each
Mortgage Loan equal the per annum rate set forth on Annex A (the "Servicing Fee
Rate") on the then outstanding principal balance of such Mortgage Loan
calculated on the basis of a 360-day year consisting of twelve 30-day months.
The Servicing Fee relating to each Mortgage Loan will be retained by the Master
Servicer from payments and collections (including Insurance Proceeds and
Liquidation Proceeds) in respect of such Mortgage Loan. The Master Servicer will
also be entitled to retain as additional servicing compensation (i) all
investment income earned on amounts on deposit in the Reserve Accounts (to the
extent consistent with applicable law and the related Mortgage Loan documents),
the Collection Account and the Distribution Account, (ii) all amounts collected
with respect to the Mortgage Loans (that are not Specially Serviced Mortgage
Loans) in the nature of late payment charges, late fees, NSF check charges
(including with respect to Specially Serviced Mortgage Loans), loan service
transaction fees, extension fees, demand fees, modification fees,
S-110
<PAGE>
assumption fees, beneficiary statement charges and similar fees and charges (but
not including any Prepayment Premiums so long as the Class X Notional Balance is
greater than zero or Default Interest), and (iii) any Prepayment Interest
Surplus (to the extent not offset against any Prepayment Interest Shortfall in
accordance with the provisions of the Pooling and Servicing Agreement).
The Master Servicer will pay all expenses incurred in connection with its
responsibilities under the Pooling and Servicing Agreement (subject to
reimbursement as described herein), including all fees of any sub-servicers
retained by it, all fees payable to the Trustee and the various expenses of the
Master Servicer specifically described herein.
Special Servicing
Midland will be the initial Special Servicer. The Special Servicer may be
removed without cause and a successor Special Servicer appointed (i) first, by
the holders of the majority of the aggregate Voting Rights of the Class L-IO,
Class L-PO, Class J and Class K Certificates (but only with the written consent
of the Special Servicer), but only until such time as Realized Losses allocated
to the Class L-PO Certificates equal or exceed 75% of the initial Certificate
Balance of such Class, and (ii) thereafter, by the holders of the majority of
the aggregate Voting Rights of the most subordinate Class of Certificates then
outstanding which has not had Realized Losses allocated to it in excess of 50%
of the initial Certificate Balance of such Class.
Notwithstanding the foregoing, the removal of the Special Servicer and the
appointment of a successor Special Servicer will not be effective until (i) the
successor Special Servicer has assumed in writing all of the responsibilities,
duties and liabilities of the Special Servicer under the Pooling and Servicing
Agreement pursuant to an agreement satisfactory to the Trustee, and (ii) each of
the Rating Agencies confirms to the Trustee in writing that such appointment and
assumption 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
Certificates.
The duties of the Special Servicer relate primarily to Specially Serviced
Mortgage Loans and to any REO Property. The Pooling and Servicing Agreement will
define a "Specially Serviced Mortgage Loan" to include any Mortgage Loan with
respect to which: (i) the related borrower is 60 or more days delinquent in the
payment of principal and interest (regardless of whether in respect thereof P&I
Advances have been reimbursed); (ii) the borrower under which has expressed to
the Master Servicer an inability to pay or a hardship in paying the Mortgage
Loan in accordance with its terms; (iii) the Master Servicer has received notice
that the borrower has become the subject of any bankruptcy, insolvency or
similar proceeding, admitted in writing the inability to pay its debts as they
come due or made an assignment for the benefit of creditors; (iv) the Master
Servicer has received notice of a foreclosure or threatened foreclosure of any
lien on the Mortgaged Property securing the Mortgage Loan; (v) a default of
which the Master Servicer has notice (other than a failure by the borrower to
pay principal or interest) and which materially and adversely affects the
interests of the Certificateholders has occurred and remained unremedied for the
applicable grace period specified in the Mortgage Loan (or, if no grace period
is specified, 60 days); provided, that a default requiring a Property Advance
will be deemed to materially and adversely affect the interests of
Certificateholders; (vi) the borrower has failed to make a Balloon Payment
(except in the case where the Master Servicer and the Special Servicer agree in
writing that such Mortgage Loan is likely to be paid in full within 30 days
after such default); or (vii) the Master Servicer proposes to commence
foreclosure or other workout arrangements; provided, however, that a Mortgage
Loan will cease to be a Specially Serviced Mortgage Loan (a) with respect to the
circumstances described in clauses (i) and (vi) above, when the borrower
thereunder has brought the Mortgage Loan current (with respect to the
circumstances described in clause (vi), pursuant to any workout recommended by
the Special Servicer) and thereafter made three consecutive full and timely
Monthly Payments, (b) with
S-111
<PAGE>
respect to the circumstances described in clauses (ii) and (iv) above, when such
circumstances cease to exist in the good faith judgment of the Special Servicer
and with respect to the circumstances described in clauses (iii) and (vii), when
such circumstances cease to exist or (c) with respect to the circumstances
described in clause (v) above, when such default is cured; provided, in any such
case, that at that time no circumstance exists (as described above) that would
cause the Mortgage Loan to continue to be characterized as a Specially Serviced
Mortgage Loan.
Pursuant to the Pooling and Servicing Agreement, the Special Servicer will
be entitled to certain fees, including a special servicing fee (the "Special
Servicing Fee") equal to 1/12th of ____% on a monthly basis of the Scheduled
Principal Balance of each related Specially Serviced Mortgage Loan. The Special
Servicer will also receive with respect to any Specially Serviced Mortgage Loan
or REO Property that is sold or transferred or otherwise liquidated (except in
connection with the repurchase of a Mortgage Loan as described under
"DESCRIPTION OF THE MORTGAGE POOL--Representations and Warranties; Repurchase"),
in addition to the Special Servicing Fee, a disposition fee (the "Disposition
Fee") equal to the product of (A) the excess, if any, of (x) the proceeds of the
sale or liquidation of any Specially Serviced Mortgage Loan or REO Property over
(y) any broker's commission and related brokerage referral fees and (B) (x)
____%, if such sale or liquidation occurs prior to 12 months following the date
on which the Mortgage Loan initially became a Specially Serviced Mortgage Loan
or (y) ___%, if such sale or liquidation occurs upon or after the expiration of
such 12-month period. Furthermore, the Special Servicer will be entitled to
receive, as additional servicing compensation, a workout fee (the "Workout Fee")
equal to the product of ___% and the amount of Net Collections received by the
Master Servicer or the Special Servicer with respect to each Corrected Mortgage
Loan. If any Corrected Mortgage Loan again becomes a Specially Serviced Mortgage
Loan, any right to the Workout Fee with respect to such Mortgage Loan earned in
connection with the initial modification, restructuring or workout thereof shall
terminate, and the Special Servicer will be entitled to a new Workout Fee for
such Mortgage Loan upon resolution or workout of the subsequent event of default
under such Mortgage Loan. If the Special Servicer is terminated for any reason
it will retain the right to receive any Workout Fees payable in respect of any
Mortgage Loans that become Corrected Mortgage Loans during the period that it
acted as Special Servicer (and the successor Special Servicer will not be
entitled to any portion of such Workout Fees), in each case until the Workout
Fees for any Mortgage Loan cease to be payable in accordance with this
paragraph. Each of the foregoing fees, along with certain expenses related to
special servicing of a Mortgage Loan, will be payable out of funds otherwise
available to pay principal and interest on the Certificates. The Special
Servicer will also be entitled to retain as additional servicing compensation
(i) all investment income earned on amounts on deposit in any REO Account and
(ii) to the extent permitted under the related Mortgage Loan, all amounts
collected with respect to the Specially Serviced Mortgage Loans in the nature of
late payment charges, late fees, assumption fees, loan modification fees,
extension fees. loan service transaction fees, beneficiary statement charges or
similar items (but not including any Default Interest or Prepayment Premiums),
in each case to the extent received with respect to any Specially Serviced
Mortgage Loan and not required to be deposited or retained in the Collection
Account pursuant to the Pooling and Servicing Agreement.
"Corrected Mortgage Loan" means any Mortgage Loan that is no longer a
Specially Serviced Mortgage Loan pursuant to the first proviso to the definition
of the term "Specially Serviced Mortgage Loan" as a result of the curing of any
event of default under such Specially Serviced Mortgage Loan through a
modification, restructuring or workout entered into by the Special Servicer.
"Net Collections" means, with respect to any Corrected Mortgage Loan, an
amount equal to all payments on account of interest and principal on such
Mortgage Loan and all Prepayment Premiums.
The Special Servicer will be required to make its servicing officers
available to representatives of a Consulting Certificateholder during normal
business hours upon reasonable notice in order to discuss
S-112
<PAGE>
matters relating to any Specially Serviced Mortgage Loan and REO Property,
except to the extent doing so is prohibited by applicable law or by any Mortgage
Loan Documents. The Special Servicer may, in its sole discretion, require that
an agreement governing the availability, use and disclosure of any information
derived pursuant to such discussions, and which may provide indemnification to
the Special Servicer for any liability or damage that may arise therefrom, be
executed by the Consulting Certificateholder.
The "Consulting Certificateholder" will be any holder of Certificates of
the most subordinate Class or the next most subordinate Class then outstanding,
which Classes have an aggregate Certificate Balance of at least $__________.
Reports to Certificateholders; Available Information
Monthly Reports. On each Distribution Date, the Trustee will forward by
mail to each Certificateholder, with copies to the Depositor, the Paying Agent,
the Underwriter, the Master Servicer and each Rating Agency, a statement as to
such distribution setting forth for each class:
(i) the Pooled Principal Distribution Amount and the amount allocable to
principal, included in Available Funds;
(ii) The Class Interest Distribution Amount distributable to such Class
and the amount of Available Funds allocable thereto, together with any Class
Interest Shortfall allocable to such Class;
(iii) The amount of any P&I Advances by the Master Servicer, the Trustee
or the Fiscal Agent included in the amounts distributed to the
Certificateholders;
(iv) The Certificate Balance of each Class of Certificates after giving
effect to the distribution of amounts in respect of the Pooled Principal
Distribution Amount on such Distribution Date;
(v) Realized Losses and their allocation to the Certificate Balance of any
Class of Certificates;
(vi) The Scheduled Principal Balance of the Mortgage Loans as of the Due
Date preceding such Distribution Date;
(vii) The number and aggregate principal balance of Mortgage Loans (A)
delinquent one month, (B) delinquent two months, (C) delinquent three or more
months, (D) as to which foreclosure proceedings have been commenced and (E) that
otherwise constitute Specially Serviced Mortgage Loans, and, with respect to
each Specially Serviced Mortgage Loan, the amount of Property Advances made
during the related Collection Period, the amount of the P&I Advances made on
such Distribution Date, the aggregate amount of Property Advances theretofore
made that remain unreimbursed and the aggregate amount of P&I Advances
theretofore made that remain unreimbursed;
(viii) With respect to any Mortgage Loan that became an REO Mortgage Loan
during the preceding calendar month, the principal balance of such Mortgage Loan
as of the date it became an REO Mortgage Loan;
(ix) As of the Due Date preceding such Distribution Date, as to any REO
Property sold during the related Collection Period, the date on which the
Special Servicer made a Final Recovery Determination and the amount of the
proceeds of such sale deposited into the Collection Account, and the aggregate
amount of REO Proceeds and Net REO Proceeds (in each case other than Liquidation
Proceeds) and other revenues collected by the Special Servicer with respect to
each REO Property during the related
S-113
<PAGE>
Collection Period and credited to the Collection Account, in each case
identifying such REO Property by name;
(x) The outstanding principal balance of each REO Mortgage Loan as of the
close of business on the immediately preceding Due Date and the appraised value
of the related REO Property per the most recent appraisal obtained;
(xi) The amount of the servicing compensation paid to the Master Servicer
with respect to such Distribution Date, and the amount of the additional
servicing compensation that was paid to the Master Servicer with respect to such
Distribution Date;
(xii) The amount of any Special Servicing Fee, Disposition Fee or Workout
Fee paid to the Special Servicer with respect to such Distribution Date; and
(xiii) (A) The amount of Prepayment Premiums, if any, received during the
related Collection Period, and (B) the amount of Default Interest received
during the related Collection Period.
In the case of information furnished pursuant to subclauses (i), (ii),
(iii) and (xiii)(A) above, the amounts will be expressed as a dollar amount in
the aggregate for all Certificates of each applicable Class and for each Class
of Certificates for a denomination of $1,000 initial Certificate Balance or
Notional Balance.
Within a reasonable period of time after the end of each calendar year,
the Trustee will furnish to each person who at any time during the calendar year
was a holder of a Certificate (except for a Residual Certificate) a statement
containing the information set forth in subclauses (i) and (ii) above,
aggregated for such calendar year or applicable portion thereof during which
such person was a Certificateholder. Such obligation of the Trustee will be
deemed to have been satisfied to the extent that it provided substantially
comparable information pursuant to any requirements of the Code as from time to
time in force.
On each Distribution Date, the Trustee will forward to each holder of a
Residual Certificate a copy of the reports forwarded to the other
Certificateholders on such Distribution Date and a statement setting forth the
amounts, if any, actually distributed with respect to the Residual Certificates
on such Distribution Date.
Within a reasonable period of time after the end of each calendar year,
the Trustee will furnish to each person who at any time during the calendar year
was a holder of a Residual Certificate a statement setting forth the amounts
actually distributed with respect to such Certificate aggregated for such
calendar year or applicable portion thereof during which such person was a
Certificateholder. Such obligation of the Trustee will be deemed to have been
satisfied to the extent that it provided substantially comparable information
pursuant to any requirements of the Code as from time to time in force.
In addition, the Trustee will forward to each Certificateholder any
additional information, if any, regarding the Mortgage Loans that the Master
Servicer or the Special Servicer, in its sole discretion, delivers to the
Trustee for distribution to the Certificateholders.
Certain information made available in the Distribution Date statements
referred to above may be obtained by calling _______________________ at
_______________ and requesting statement number _____ or such other mechanism as
the Trustee may have in place from time to time.
S-114
<PAGE>
Loan Portfolio Analysis System. The Master Servicer will collect and
maintain information regarding the Mortgage Loans in a computerized database,
which the Master Servicer currently commonly refers to as the "Loan Portfolio
Analysis System" or "LPAS." The Master Servicer currently intends to provide
access to LPAS via on-line telephonic communication to Certificateholders,
persons identified by a Certificateholder as a prospective transferee and such
other persons deemed appropriate by the Master Servicer. Information contained
in LPAS regarding the composition of the Mortgage Pool and certain other
information about the Mortgage Pool deemed appropriate by the Master Servicer
will be updated periodically. Certificateholders should contact Brad Hauger, at
telephone number (816) 435-5175, for access to LPAS.
Other Available Information. The Master Servicer or the Special Servicer,
if applicable, will promptly give notice to the Trustee, who will provide a copy
to each Certificateholder, each Rating Agency, the Depositor, the 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
S-115
<PAGE>
the Trustee and the Depositor to support the Master Servicer's determination
that any Advance was, or if made would be, a Nonrecoverable Advance, in each
case except to the extent doing so is prohibited by applicable laws or by any
documents related to a Mortgage Loan. The Master Servicer, the Special Servicer
and the Trustee will be permitted to require payment (other than from any Rating
Agency) of a sum sufficient to cover the reasonable costs and expenses incurred
by it in providing copies of or access to any of the above information.
The Master Servicer will, on behalf of the Trust Fund, prepare, sign and
file with the Commission any and all reports, statements and information
respecting the Trust Fund that the Master Servicer or the Trustee determines are
required to be filed with the Commission pursuant to Sections 13(a) or 15(d) of
the 1934 Act, each such report, statement and information to be filed on or
prior to the required filing date for such report, statement or information.
Notwithstanding the foregoing, the Depositor will file with the Commission,
within 15 days of the closing date, a Form 8-K together with the Pooling and
Servicing Agreement.
None of the Trustee, the Fiscal Agent, the Master Servicer and the Special
Servicer will be responsible for the accuracy or completeness of any information
supplied to it by a borrower or other third party for inclusion in any notice or
in any other report or information furnished or provided by the Master Servicer,
the Special Servicer or the Trustee hereunder, and the Master Servicer, the
Special Servicer, the Trustee and the Fiscal Agent will be indemnified and held
harmless by the Trust Fund against any loss, liability or expense incurred in
connection with any legal action relating to any statement or omission or
alleged statement or omission therein, including any liability related to the
inclusion of such information in any report filed with the Commission.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, two separate "real estate mortgage
investment conduit" ("REMIC") elections will be made with respect to the Trust
Fund, creating two REMICs (the "Trust 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 X, Class B, Class C, Class D, Class E, Class F, Class G,
Class H, Class J, Class K, Class L-PO and Class L-IO Certificates will be, or
will represent ownership of, REMIC "regular interests" (the "Regular
Certificates") and (b) the Class R-I Certificates and the Class R-II
Certificates, respectively, will be the sole "residual interest" in the related
REMIC.
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 X, Class F, Class
G, Class H, Class J, Class K, Class L-PO and Class L-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 X
and Class L-IO Certificates constitute interest only Classes and the Class L-PO
Certificates constitute a principal only Class. These Certificates, together
with the Class F, Class G, Class H, Class J and Class K Certificates, are
expected to be deemed to have been issued with OID. The Trustee intends to treat
the Class X and Class L-IO Certificates as having no "qualified stated
interest." Accordingly, the Class X and Class L-IO Certificates will be
considered to be issued with OID in an amount equal to the excess of all
distributions of interest expected to be received thereon over their respective
issue prices (including accrued interest, if any, unless the holder elects on
its federal income tax return to exclude such amount from the issue price and
S-116
<PAGE>
to recover it on the first Distribution Date). In addition, the Class L-PO
Certificates will be issued with OID in an amount equal to the excess of the
initial principal balance thereof over their issue price. Any "negative" amounts
of OID on the Class X or Class L-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,
certain holders of a Class X or Class L-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" and "--Losses" 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 % CPR and that the Trust Fund will be
terminated on the Distribution Date occurring in pursuant to the auction
termination procedure described herein. No representation is made as to whether
the Mortgage Loans will prepay at that rate or any other rate or whether the
Trust Fund will be terminated on such date. If it were ultimately determined
that market discount, OID and premium should be amortized over the longer term
of the Mortgage Loans disregarding the assumed termination of the Trust Fund in
, the Class , Class , Class , and Class Certificates would recognize less
original issue discount in the years prior to and including and the Class R-I
and R-II Certificateholders would realize greater excess inclusion income in
such years. 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.
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)(5)(B) of
the Code, and interest (including OID, if any) on the 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 the REMIC are mortgages secured by residential property
or otherwise are described in Section 7701(a)(19)(c) of the Code. See "MATERIAL
FEDERAL INCOME TAX CONSEQUENCES--Taxation of the REMIC and its Holders" in the
Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Taxation of the REMIC" in the Prospectus.
DUE TO THE COMPLEXITY OF THESE RULES AND THE CURRENT UNCERTAINTY AS TO THE
MANNER OF THEIR APPLICATION TO THE TRUST FUND AND CERTIFICATEHOLDERS, IT IS
PARTICULARLY IMPORTANT THAT POTENTIAL INVESTORS CONSULT THEIR OWN TAX ADVISORS
REGARDING THE TAX
S-117
<PAGE>
TREATMENT OF THEIR ACQUISITION, OWNERSHIP AND DISPOSITION OF THE CERTIFICATES.
ERISA CONSIDERATIONS
General
The Subordinate Certificates may not be purchased by or transferred to (A)
an employee benefit plan or other retirement arrangement, including an
individual retirement account or a Keogh plan, which is subject to the fiduciary
responsibility provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or Section 4975 of the Code, or a governmental plan
subject to any federal, state or local law ("Similar Law") that is, to a
material extent, similar to the foregoing provisions of ERISA or the Code
("Plans"), (B) a collective investment fund in which such Plans are invested,
(C) other persons acting on behalf of any such Plan or using the assets of any
such Plan or any entity whose underlying assets include plan assets by reason of
a Plan's investment in the entity (within the meaning of Department of Labor
Regulations Section 2510.3-101) or (D) an insurance company that is using assets
of any insurance company separate account or general account in which the assets
of such Plans are invested (or which are deemed pursuant to ERISA or any Similar
Law to include assets of such Plans) other than an insurance company using the
assets of its general account under circumstances whereby such purchase and the
subsequent holding of such Certificates would not constitute or result in a
prohibited transaction within the meaning of Section 406 or 407 of ERISA,
Section 4975 of the Code or a materially similar characterization under any
Similar Law. Each prospective transferee of a Subordinate Certificate will be
required to deliver to the Depositor, the Certificate Registrar and the Trustee,
(i) a transferee representation letter, substantially in the form of Exhibit D-2
to the Pooling and Servicing Agreement, stating that such prospective transferee
is not a person referred to in clause (A), (B), (C) or (D) above, or (ii) an
opinion of counsel which establishes to the satisfaction of the Depositor, the
Trustee and the Certificate Registrar that the purchase or holding of such
Certificate will not result in the assets of the Trust Fund being deemed to be
"plan assets" and subject to the fiduciary responsibility or prohibited
transaction provision of ERISA, the Code or any Similar Law, and will not
constitute or result in a prohibited transaction within the meaning of Section
406 or 407 of ERISA, Section 4975 of the Code or any Similar Law, and will not
subject the Master Servicer, the Special Servicer, the Depositor, the Trustee or
the Certificate Registrar to any obligation or liability (including obligations
or liabilities under ERISA or Section 4975 of the Code), which opinion of
counsel will not be an expense of the Trustee, the Trust Fund, the Master
Servicer, the Special Servicer, the Certificate Registrar or the Depositor.
To the extent any Subordinate Certificate is in book-entry form, the
holder of the beneficial interest in such Certificate and any transferee thereof
shall be deemed to have represented that it is not a person referred to in
Clauses (A), (B), (C) or (D) above.
None of the Residual Certificates may be purchased by or transferred to a
Plan. Accordingly, the following discussion does not purport to discuss the
considerations under ERISA or Code Section 4975 with respect to the purchase,
holding or disposition of the Subordinate Certificates, or Residual
Certificates.
ERISA and the Code impose certain duties and restrictions on Plans and
certain persons who perform services for Plans. For example, unless exempted,
investment by a Plan in the Certificates may constitute or give rise to a
prohibited transaction under ERISA or the Code. There are certain exemptions
issued by the United States Department of Labor (the "Department") that may be
applicable to an investment by a Plan in the Offered Certificates which are
Senior Certificates, including the individual administrative exemption described
below.
S-118
<PAGE>
Before purchasing any Offered Certificates which are Senior Certificates,
a Plan fiduciary should consult with its counsel and determine whether there
exists any prohibition to such purchase under the requirements of ERISA, whether
the individual administrative exemption (as described below) applies, including
whether the appropriate conditions set forth therein would be met, or whether
any statutory, class or other individual prohibited transaction exemption is
applicable.
Certain Requirements Under ERISA
General. In accordance with ERISA's general fiduciary standards, before
investing in a Senior Certificate a Plan fiduciary should determine whether to
do so is permitted under the governing Plan instruments and is appropriate for
the Plan in view of its overall investment policy and the composition and
diversification of its portfolio. A Plan fiduciary should especially consider
the ERISA requirement of investment prudence and the sensitivity of the return
on the Certificates to the rate of principal repayments (including voluntary
prepayments by the borrowers and involuntary liquidations) on the Mortgage
Loans, as discussed in "YIELD AND MATURITY CONSIDERATIONS" herein.
Parties in Interest/Disqualified Persons. Other provisions of ERISA (and
corresponding provisions of the Code) prohibit certain transactions involving
the assets of a Plan and persons who have certain specified relationships to the
Plan (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code). The Depositor, the
Underwriters, the Master Servicer, the Special Servicer or the Trustee or
certain affiliates thereof might be considered or might become "parties in
interest" or "disqualified persons" with respect to a Plan. If so, the
acquisition or holding of Certificates by or on behalf of such Plan could be
considered to give rise to a "prohibited transaction" within the meaning of
ERISA and the Code unless the administrative exemption described below or some
other exemption is available. Special caution should be exercised before the
assets of a Plan are used to purchase a Certificate if, with respect to such
assets, the Depositor, the Underwriter, the Master Servicer, the Special
Servicer or the Trustee or an affiliate thereof either: (i) has discretionary
authority or control with respect to the investment or management of such assets
of such Plan, or (ii) has authority or responsibility to give, or regularly
gives, investment advice with respect to such assets pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such assets and that such advice will be based on the
particular needs of the Plan.
The Department has published final regulations (the "Regulations")
concerning whether a Plan's assets would be deemed to include an interest in the
underlying assets of an entity (such as the Trust Fund) for purposes of the
reporting and disclosure and general fiduciary responsibility provisions of
ERISA, as well as for the prohibited transaction provisions of ERISA and the
Code, if the Plan acquires an "equity interest" (such as a Senior Certificate)
in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be considered merely to include its interest in the
Certificates instead of being deemed to include an interest in the underlying
assets of a Trust Fund. However, the Depositor cannot predict in advance, nor
can there be any continuing assurance whether such exceptions may be met,
because of the factual nature of certain of the rules set forth in the
Regulations. For example, one of the exceptions in the Regulations states that
the underlying assets of an entity will not be considered "plan assets" if less
than 25% of the value of any class of equity interests is held by "benefit plan
investors," which are defined as Plans, individual retirement accounts and
employee benefit plans not subject to ERISA (for example, governmental plans and
church plans), but this exception is tested immediately after each acquisition
of an equity interest in the entity whether upon initial issuance or in the
secondary market.
S-119
<PAGE>
Administrative Exemptions
Individual Administrative Exemptions. The Department has granted to
____________________ ("________________") an individual administrative exemption
(Prohibited Transaction Exemption ______, _____ Fed. Reg. ______ (______, 19__),
referred to herein as the "Exemption," for certain mortgage-backed and asset
backed certificates underwritten in whole or in part by _______________. The
Exemption might be applicable to the initial purchase, the holding and the
subsequent resale by a Plan of certain certificates, such as the Senior
Certificates underwritten by the Underwriter, representing interests in
pass-through trusts that consist of certain receivables, loans and other
obligations, provided that the conditions and requirements of the Exemption are
satisfied. The loans described in the Exemption include mortgage loans such as
the Mortgage Loans.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of certificates by a Plan is on terms (including the
price for the certificates) that are at least as favorable to the Plan as they
would be in an arm's length transaction with an unrelated party;
(2) The rights and interests evidenced by certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust fund;
(3) The certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from any of the following: S&P, Moody's, Duff & Phelps or Fitch;
(4) The trustee must not be an affiliate of any of the following: the
Depositor, the Underwriter, the Master Servicer, the Special Servicer (if any),
any obligor with respect to the Mortgage Loans included in the Trust Fund
constituting more than 5% of the aggregate unamortized balance of the assets in
the Trust Fund, or any affiliate of such parties (the "Restricted Group");
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of certificates represents not more than
reasonable compensation for underwriting the certificates. The sum of all
payments made to and retained by the depositor pursuant to the assignment of the
mortgage loans to the trust fund represents not more than the fair market value
of such mortgage loans. The sum of all payments made to and retained by the
master servicer and any other servicer represents not more than reasonable
compensation for such person's services under the pooling and servicing
agreement and reimbursement of such person's reasonable expenses in connection
therewith; and
(6) The Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the Commission under the 1933 Act.
The trust fund must also meet the following requirements:
(a) the corpus of the trust fund must consist solely of assets of the type
that have been included in other investment pools;
(b) certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch or Duff &
Phelps for at least one year prior to the Plan's acquisition of the certificates
pursuant to the Exemption; and
S-120
<PAGE>
(c) certificates evidencing interests in such other investment pools must
have been purchased by investors other than Plans for at least one year prior to
any Plan's acquisition of the certificates pursuant to the Exemption.
If the conditions of the Exemption are met, the acquisition, holding and
resale of the Senior Certificates by Plans would be exempt from the prohibited
transaction provisions of ERISA and the Code (regardless of whether a Plan's
assets would be considered to include an ownership interest in the Mortgage
Loans in the Mortgage Pool).
Moreover, the Exemption can provide relief from certain
self-dealing/conflict-of-interest prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables, loans or
obligations held in the trust provided that, among other requirements, (i) in
the case of an acquisition in connection with the initial issuance of
certificates, at least 50% of each class of certificates in which Plans have
invested is acquired by persons independent of the Restricted Group and at least
50% of the aggregate interest in the trust is acquired by persons independent of
the Restricted Group; (ii) such fiduciary (or its affiliate) is an obligor with
respect to 5% or less of the fair market value of the obligations contained in
the trust; (iii) the Plan's investment in certificates of any class does not
exceed 25% of all of the certificates of that class outstanding at the time of
the acquisitions; and (iv) immediately after the acquisition no more than 25% of
the assets of the Plan with respect to which such person is a fiduciary are
invested in certificates representing an interest in one or more trusts
containing assets sold or served by the same entity.
The Exemption does not apply to the purchasing or holding of the Senior
Certificates by Plans sponsored by the Trustee or any member of the Restricted
Group, i.e., the Depositor, the Underwriter, the Master Servicer, the Special
Servicer, any obligor with respect to Mortgage Loans included in the Trust Fund
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the Trust Fund or any affiliate of such parties.
THE CHARACTERISTICS OF THE SUBORDINATE CERTIFICATES AND THE RESIDUAL
CERTIFICATES DO NOT MEET THE REQUIREMENTS OF THE EXEMPTION. ACCORDINGLY, THE
SUBORDINATE CERTIFICATES AND THE RESIDUAL CERTIFICATES MAY NOT BE PURCHASED BY
OR TRANSFERRED TO A PLAN OR PERSON ACTING ON BEHALF OF ANY PLAN OR USING THE
ASSETS OF ANY SUCH PLAN, OTHER THAN AN INSURANCE COMPANY USING ASSETS OF ITS
GENERAL ACCOUNT UNDER CIRCUMSTANCES IN WHICH SUCH PURCHASE OR TRANSFER WOULD NOT
CONSTITUTE OR RESULT IN A PROHIBITED TRANSACTION.
Before purchasing a Senior Certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided by
the Exemption or the availability of any other prohibited transaction
exemptions, and whether the conditions of any such exemption will be applicable
to the Senior Certificates.
Any fiduciary of a Plan (including an entity that is deemed to hold Plan
assets for purposes of ERISA and the Code) considering whether to purchase
Senior Certificates should also carefully review with its own legal advisors the
applicability of the fiduciary duty and prohibited transaction provisions of
ERISA and the Code to such investment.
A governmental plan as defined in Section 3(32) of if ERISA or a church
plan (if no election has been made under Section 410(d) of the Code) are not
subject to ERISA or Code Section 4975. However, a governmental plan or a church
plan may be subject to a Similar Law. Additionally, any such plan which is
qualified under Section 401(a) of the Code is subject to the prohibited
transaction rules set forth in
S-121
<PAGE>
Section 503 of the Code. A fiduciary of a governmental plan should make its own
determination as to the need for and the availability of any exemptive relief
under any Similar Law or Section 503 of the Code.
The sale of the Senior Certificates to a Plan is in no respect a
representation by the Depositor, the Underwriter, the Trustee or any other
member of the Restricted Group that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan or that this investment is appropriate for Plans generally or any
particular Plan.
Unrelated Business Taxable Income; Residual Certificates
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of ERISA Plans, may give rise to "unrelated
business taxable income" as described in Code Sections 511-515 and 860E.
Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a "Disqualified
Organization," which term as defined above includes certain tax-exempt entities
not subject to Code Section 511 including certain governmental plans, as
discussed above under the caption "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in
the Prospectus.
LEGAL INVESTMENT
The Certificates will not constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"). The
appropriate characterization of the Certificates under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase the Certificates, may be subject to significant interpretive
uncertainties.
The Depositor makes no representations as to the proper characterization
of the Certificates for legal investment purposes, financial institution
regulatory purposes or other purposes or as to the ability of particular
investors to purchase the Certificates under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Certificates
constitute a legal investment or are subject to investment, capital or other
restrictions.
PLAN OF DISTRIBUTION
_______________________ (the "Underwriter") has agreed, pursuant to an
Underwriting Agreement dated ____________________, 1998 (the "Underwriting
Agreement") to purchase from the Depositor the Offered Certificates.
The Offered Certificates will be offered by the Underwriter in negotiated
transactions or otherwise, on varying terms (which may include the sale of
separate financial instruments by the Underwriter or an affiliate) and at
varying prices, in each case to be determined at the time of sale. The
Underwriter may effect such transactions by selling such Offered Certificates to
or through dealers, and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter or
purchasers of the Offered Certificates for whom they may act as agent. Any
dealers that participate with the Underwriter in the distribution of the Offered
Certificates purchased by the Underwriter may be deemed to be underwriters, and
any discounts or commissions
S-122
<PAGE>
received by them or the Underwriter and any profit on the resale of Offered
Certificates by them or the Underwriter may be deemed to be underwriting
discounts or commissions under the 1933 Act.
The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent and the Underwriter
generally will be obligated to purchase all of the Offered Certificates if any
are purchased. The Depositor has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the 1933 Act, or contribute to
payments that the Underwriters may be required to make in respect thereof.
The Depositor also has been advised by the Underwriter that it currently
expects to make a market in the Offered Certificates, however, it has no
obligation to do so. Any market making may be discontinued at any time, and
there can be no assurance that an active public market for the Offered
Certificates will develop. For further information regarding any offer or sale
of the Offered Certificates pursuant to this Prospectus Supplement and the
Prospectus, see "PLAN OF DISTRIBUTION" in the Prospectus.
USE OF PROCEEDS
The net proceeds from the sale of 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 Underwriters by ____________________.
S-123
<PAGE>
RATINGS
It is a condition to the initial issuance of the Certificates that the
Certificates have the following ratings:
CLASS ______ _______
A-1
A-2
X
B
C
D
E
F
G
H
J
K
L-PO
L-IO
R-I
R-II
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 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 X 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 X 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
"___" and "___" ratings received on the Class X Certificates, scheduled
S-124
<PAGE>
payments on the Mortgage Loan. The Class X 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 X Notional Balance, but only the obligation to
pay interest timely on the Class X Notional Balance as so reduced from time to
time. Accordingly, the ratings of the Class X 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-125
<PAGE>
INDEX OF DEFINITIONS
1933 Act........................................S-iii
Advance Rate....................................S-102
Advances........................................S-101
Annual Debt Service..............................S-57
Anticipated Loss................................S-101
Appraised LTV....................................S-57
Appraised Value..................................S-57
Assumed Maturity Date............................S-ii
Assumed Scheduled Payment........................S-78
Auction Agent....................................S-83
Auction Closing Date.............................S-83
Auction Fees.....................................S-83
Auction Valuation Date......................S-7, S-83
Available Funds..................................S-73
Balloon Amount...................................S-57
Balloon Balance..................................S-57
Balloon Loans....................................S-44
Balloon LTV......................................S-57
Balloon Payment..................................S-44
Bankruptcy Code..................................S-31
Base Interest Fraction...........................S-79
Beneficial Owners................................S-84
Book-Entry Certificate...........................S-84
Business Day......................................S-3
Cash Flow..................................S-55, S-57
Casualty.........................................S-48
Certificate Registrar............................S-87
Certificates.................................S-i, S-2
Class Interest Distribution Amount...............S-75
Class Interest Shortfall.........................S-77
Class L-IO Notional Balance......................S-73
Class X Notional Balance.........................S-73
Class X Pass-Through Rate........................S-76
CMBS Portfolio...................................S-69
Code........................................S-9, S-31
Collection Account..............................S-103
Collection Period................................S-75
Commission......................................S-iii
Condemnation.....................................S-49
Condemnation Proceeds............................S-74
Congregate Care Loan.............................S-36
Congregate Care Property.........................S-36
Constant Prepayment Rate.........................S-91
Consulting Certificateholder....................S-113
Corrected Mortgage Loan.........................S-112
CPR..............................................S-91
Cross-Collateralized Loans.................S-30, S-55
Cut-off Date Principal Balance.............S-13, S-36
Debt Service Coverage Ratio......................S-57
Default Interest...........................S-48, S-75
Default Rate.....................................S-75
Definitive Certificate...........................S-84
Delivery Date....................................S-ii
Department......................................S-118
Depositor........................................S-12
Depository........................................S-4
Determination Date...............................S-75
Disposition Fee.................................S-112
Distribution Account............................S-103
Distribution Date................................S-73
DSCR.......................................S-13, S-57
DTC.........................................S-ii, S-4
Due Date..........................................S-4
Effective Age....................................S-58
Eligible Bank...................................S-104
Environmental Consultant.........................S-43
ERISA.....................................S-10, S-118
Exemption.......................................S-120
Factory Outlet Loan..............................S-36
Factory Outlet Property..........................S-36
Final Recovery Determination.....................S-80
Fiscal Agent......................................S-2
Fitch............................................S-72
Form 8-K.........................................S-63
Hotel Loan.......................................S-36
Hotel Property...................................S-36
Indirect Participants............................S-85
Industrial Loan..................................S-36
Industrial Property..............................S-36
Industrial/Warehouse Loan........................S-36
Industrial/Warehouse Property....................S-36
Initial Pool Balance.............................S-36
Insurance Proceeds...............................S-74
Interest Accrual Period..........................S-77
Interested Person...............................S-108
Investor..........................................S-5
IRS..............................................S-51
Liquidation Proceeds.............................S-74
Loan Portfolio Analysis System..................S-115
Loan Purchase Closing Date.......................S-38
Loan-to-Value Ratio..............................S-57
Lockout Period...................................S-44
LPAS............................................S-115
LTV..............................................S-57
Master Servicer...................................S-2
Master Servicer Mortgage File....................S-99
Midland..........................................S-12
Midland Mortgage Loan Purchase Agreement.........S-38
Midland Mortgage Loans...........................S-38
Mini Warehouse Loan..............................S-36
Mini Warehouse Property..........................S-36
Minimum Auction Price............................S-83
Mixed Use Loan...................................S-36
Mixed Use Property...............................S-36
Mobile Home Park Loan............................S-36
Mobile Home Park Property........................S-36
Monthly Payment..................................S-74
Monthly Payments.................................S-50
S-126
<PAGE>
Mortgage.........................................S-36
Mortgage File....................................S-99
Mortgage Loan Purchase Agreement.................S-38
Mortgage Loan Seller.............................S-12
Mortgage Loans...................................S-12
Mortgage Pool....................................S-12
Mortgage Rate....................................S-44
Mortgaged Property.........................S-12, S-36
Mortgages........................................S-36
Multifamily Loan.................................S-36
Multifamily Property.............................S-36
Net Collections.................................S-112
Net Mortgage Rate................................S-77
Net Operating Income.......................S-55, S-56
Net REO Proceeds.................................S-75
Newly Originated Loans...........................S-44
NOI..............................................S-56
Note.............................................S-36
Notes............................................S-36
Notional Balances................................S-73
Occupancy Date...................................S-58
Occupancy Percentage.............................S-58
Occupancy Rate...................................S-57
Offered Certificates..............................S-i
Office Loan......................................S-36
Office Property..................................S-36
Office/R&D Loan..................................S-36
Office/R&D Property..............................S-36
Office/Retail Loan...............................S-36
Office/Retail Property...........................S-36
Office/Warehouse Loan............................S-36
Office/Warehouse Property........................S-36
OID.............................................S-116
Originator.......................................S-37
Originators......................................S-37
P&I Advance................................S-6, S-101
Participants.....................................S-84
Pass-Through Rate................................S-76
Paying Agent.....................................S-85
Percentage Interest..............................S-73
Permitted Encumbrances...........................S-64
Permitted Investments...........................S-104
Plans.....................................S-10, S-118
Pooled Principal Distribution Amount.............S-77
Pooling and Servicing Agreement.............S-2, S-97
Prepayment Interest Shortfall....................S-76
Prepayment Interest Surplus......................S-76
Prepayment Premium...............................S-44
Prepayment Premiums..............................S-75
Principal Prepayments............................S-75
Private Certificates..............................S-2
Property Advances...............................S-101
Property Age.....................................S-58
Qualified Substitute Mortgage Loan...............S-32
Rated Final Distribution Date....................S-ii
Rating Agencies..................................S-11
Realized Loss....................................S-80
Record Date......................................S-73
Regular Certificates.........................S-i, S-8
Regulations.....................................S-119
Remaining Amortization Term......................S-58
Remaining Term to Maturity.......................S-58
REMIC...........................................S-116
REMIC I...........................................S-8
REMIC II..........................................S-8
Remittance Date.................................S-101
REO Account......................................S-72
REO Mortgage Loan................................S-78
REO Property.....................................S-72
Repurchase Price.................................S-67
Reserve Accounts.................................S-50
Residual Certificates.............................S-i
Restricted Group................................S-120
Retail, Anchored Loan............................S-36
Retail, Anchored Property........................S-36
Retail, Factory Outlet Loan......................S-36
Retail, Single Tenant Loan.......................S-36
Retail, Single Tenant Property...................S-36
Retail, Unanchored Loan..........................S-36
Retail, Unanchored Property......................S-36
RTC Portfolio....................................S-70
S&P..............................................S-72
Scenarios........................................S-92
Scheduled Final Distribution Date..........S-ii, S-81
Scheduled Principal Balance......................S-80
Section 42 Mortgage Loans........................S-50
Senior Certificates...............................S-7
Senior Principal Distribution Cross-Over Date....S-79
Seriously Delinquent Loan.......................S-101
Servicing Fee...................................S-110
Servicing Fee Rate..............................S-110
Similar Law.....................................S-118
SMMEA...........................................S-122
Special Servicer..................................S-2
Special Servicing Fee...........................S-112
Specially Serviced Mortgage Loan................S-111
Subordinate Certificates..........................S-7
Tax Credit Period..........................S-32, S-51
Tax Credit Project.........................S-31, S-51
Tax Credits......................................S-31
Title Policy.....................................S-64
Trust Fund.......................................S-12
Trust REMICs....................................S-116
Trustee...........................................S-2
Trustee Mortgage File............................S-97
Underwriter...............................S-ii, S-122
Underwriting Agreement..........................S-122
Underwritten Cash Flow...........................S-57
Underwritten DSCR................................S-57
Underwritten NOI.................................S-57
Unscheduled Payments.............................S-74
Updated Appraisal...............................S-106
S-127
<PAGE>
Voting Rights...................................S-109
Weighted Average Maturity........................S-58
Weighted Average Net Mortgage Rate...............S-77
Weighted Average Pass-Through Rate...............S-77
Workout Fee.....................................S-112
Year Renovated...................................S-58
Yield Maintenance Charges........................S-79
Yield Maintenance Period.........................S-44
Zoning Laws......................................S-29
S-128
<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 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
Collateral Description:
o Property Type
o Property Address
o Number of Units/Square Feet
o Year Property Built
o Year Property Renovated
o Borrower's Ownership Interest in Property
o Loan Number
Tenant Data:
o Largest Tenant
o Square Feet Leased
o Percentage of Property Leased
o Lease Expiration Date
Collateral Value:
o Appraised Value
o Appraisal Date
o Appraisal Loan-to-Value Ratio
o Balloon Loan-to-Value Ratio
o Current Occupancy of Property as of specific date
Collateral Operating Performance:
o Underwritten Net Operating Income
S-129
<PAGE>
o Underwritten Cash Flow
o Annual Debt Service
o Underwritten Debt Service Coverage Ratio
o 1996 Net Operating Income
o 1996 Cash Flow
o 1997 Net Operating Income
o 1997 Cash Flow
o Yield to Date Net Operating Income
o Yield to Date Cash Flow
o Yield to Date as of specific date
o Yield to Date Period (in months)
Prepayment Premium Schedule after Prepayment Lockout Period and Prepayment
Yield
Maintenance Period:
o Prepayment Yield Maintenance Period (in months)
o Prepayment Premium
o First Period (in months)
o Prepayment Premium Rate for First Period
o Second Period (in months)
o Prepayment Premium Rate for Second Period
o Third Period (in months)
o Prepayment Premium Rate for Third Period
o Fourth Period (in months)
o Prepayment Premium Rate for Fourth Period
o Fifth Period (in months)
o Prepayment Premium Rate for Fifth Period
o Total Penalty Period (in months)
S-130
<PAGE>
VERSION 1: GENERAL COMMERCIAL AND MULTIFAMILY
Commercial Mortgage Acceptance Corp.
Depositor
Commercial Mortgage Pass-Through Certificates
(Issuable in Series)
Commercial Mortgage Acceptance Corp. (the "Depositor") from time to time
will offer Commercial 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 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 _______________.
<PAGE>
(cover page continued)
In addition, rights of the holders of certain Classes to receive principal
and interest may be subordinated to those of other Classes. Each Trust Fund will
consist of a pool (the "Mortgage Pool") of one or more mortgage loans secured by
first or junior liens on fee simple or leasehold interests in commercial real
estate properties, multifamily residential properties and/or mixed-use
properties and related property and interests, conveyed to such Trust Fund by
the Depositor, and other assets, including any Credit Enhancement described in
the related Prospectus Supplement. See "DESCRIPTION OF THE
CERTIFICATES--General" herein. The percentage of any mixed-use property used for
commercial purposes will be set forth in the Prospectus Supplement. Multifamily
properties (consisting of apartments, congregate care facilities and/or mobile
home parks) and general commercial properties (consisting of retail properties,
including shopping centers, office buildings, mini-warehouses, warehouses,
industrial properties and/or other similar types of properties) will represent
security for a material concentration of the Mortgage Loans in any Trust Fund,
based on principal balance at the time such Trust Fund is formed. See
"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, Inc. and/or
unaffiliated entities. See "RISK FACTORS." Information regarding each Series of
Certificates, including interest and principal payment provisions for each
Class, as well as information regarding the size, composition and other
characteristics of the Mortgage Pool relating to such Series, will be furnished
in the related Prospectus Supplement. The Mortgage Loans will be master serviced
by Midland Loan Services, Inc.
The Depositor, as specified in the related Prospectus Supplement, may
elect to treat all or a specified portion of the collateral securing any Series
of Certificates as a "real estate mortgage investment conduit" (a "REMIC"), or
an election may be made to treat the arrangement by which a Series of
Certificates is issued as a REMIC. If such election is made, each Class of
Certificates of a Series will be either Regular Certificates or Residual
Certificates, as specified in the related Prospectus Supplement. If no such
election is made, the Trust Fund, as specified in the related Prospectus
Supplement, will be classified as a grantor trust for federal income tax
purposes. See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES" herein.
With respect to each Series, all of the Offered Certificates will be rated
in one of the four highest ratings categories by one or more nationally
recognized statistical rating organizations. There will have been no public
market for the Certificates of any Series prior to the offering thereof. No
assurance can be given that such a secondary market will develop as a result of
such offering or, if it does develop, that it will continue. The Depositor does
not intend to make an application to list any Series of Certificates on a
national securities exchange or quote any Series of Certificates in an automated
quotation system of a registered securities association.
ii
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to each Series of Certificates will,
among other things, set forth with respect to such Series of Certificates: (i)
the identity of each Class within such Series; (ii) the initial aggregate
principal amount, the interest rate (the "Pass-Through Rate") (or the method for
determining it) and the authorized denominations of each Class of Certificates
of such Series; (iii) certain information concerning the Mortgage Loans relating
to such Series, including the principal amount, type and characteristics of such
Mortgage Loans on the date of issue of such Series of Certificates; (iv) the
circumstances, if any, under which the Certificates of such Series are subject
to redemption prior to maturity; (v) the final scheduled distribution date of
each Class of Certificates of such Series; (vi) the method used to calculate the
aggregate amount of principal available and required to be applied to the
Certificates of such Series on each Distribution Date; (vii) the order of the
application of principal and interest payments to each Class of Certificates of
such Series and the allocation of principal to be so applied; (viii) the extent
of subordination of any Subordinate Certificates; (ix) the principal amount of
each Class of Certificates of such Series that would be outstanding on specified
Distribution Dates, if the Mortgage Loans relating to such Series were prepaid
at various assumed rates; (x) the Distribution Dates for each Class of
Certificates of such Series; (xi) relevant financial information with respect to
the mortgagor(s) and the Mortgaged Properties underlying the Mortgage Loans
relating to such Series, if applicable; (xii) information with respect to the
terms of the Subordinate Certificates or Residual Certificates, if any, of such
Series; (xiii) additional information with respect to the Credit Enhancement, if
any, relating to such Series; (xiv) additional information with respect to the
plan of distribution of such Series; and (xv) whether the Certificates of such
Series will be registered in the name of the nominee of The Depository Trust
Company or another depository.
ADDITIONAL INFORMATION
This Prospectus contains, and the Prospectus Supplement for each Series of
Certificates will contain, a summary of the material terms of the documents
referred to herein and therein, but neither contains nor will contain all of the
information set forth in the Registration Statement (the "Registration
Statement") of which this Prospectus and the related Prospectus Supplement is a
part. For further information, reference is made to such Registration Statement
and the exhibits thereto which the Depositor has filed with the Securities and
Exchange Commission (the "Commission"), under the Securities Act of 1933, as
amended (the "1933 Act"). Statements contained in this Prospectus and any
Prospectus Supplement as to the contents of any contract or other document
referred to are summaries and in each instance reference is made to the copy of
the contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of the Registration Statement may be obtained from the
Commission, upon payment of the prescribed charges, or may be examined free of
charge at the Commission's offices. Reports and other information filed with the
Commission can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Regional Offices of the Commission at Seven
World Trade Center, 13th Floor, New York, New York 10048; and Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of the Agreement pursuant to which a Series of Certificates is issued
will be provided to each person to whom a Prospectus and the related Prospectus
Supplement are delivered, upon written or oral request directed to: Commercial
Mortgage Acceptance Corp., 201 West 10th Street, 6th Floor, Kansas City,
Missouri 64105, Attention: Clarence Krantz, telephone number (816) 435-5000. The
Commission maintains an Internet Web site that contains reports, proxy
information statements and other information regarding registrants that file
electronically with the Commission. The address of such Internet Web site is
http://www.sec.gov.
iii
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to the Trust Fund for each Series, there are incorporated
herein by reference all documents and reports filed or caused to be filed by the
Depositor with respect to such Trust Fund pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended (the "1934 Act"),
after the date of this Prospectus and prior to the termination of the offering
of the Offered Certificates evidencing an interest in such Trust Fund. The
Depositor will provide or cause to be provided without charge to each person to
whom this Prospectus is delivered in connection with the offering of one or more
Classes of Certificates, upon request, a copy of any or all such documents or
reports incorporated herein by reference, in each case to the extent such
documents or reports relate to one or more of such Classes of such Certificates,
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). The Depositor has determined that
its financial statements are not material to the offering of any of the Offered
Certificates. See "FINANCIAL INFORMATION." Requests to the Depositor should be
directed to: Commercial Mortgage Acceptance Corp., 210 West 10th Street, 6th
Floor, Kansas City, Missouri 64105, Attention: Clarence Krantz, telephone number
(816) 435-5000.
REPORTS
In connection with each distribution and annually, Certificateholders will
be furnished with statements containing information with respect to principal
and interest payments and the related Trust Fund, as described herein and in the
applicable Prospectus Supplement for such Series. Any financial information
contained in such reports most likely will not have been examined or reported
upon by an independent public accountant. See "DESCRIPTION OF THE
CERTIFICATES--Reports to Certificateholders." The Master Servicer for each
Series will furnish periodic statements setting forth certain specified
information relating to the Mortgage Loans to the related Trustee, and, in
addition, annually will furnish such Trustee with a statement from a firm of
independent public accountants with respect to the examination of certain
documents and records relating to the servicing of the Mortgage Loans in the
related Trust Fund. See "SERVICING OF THE MORTGAGE LOANS--Evidence of
Compliance." Copies of the monthly and annual statements provided by the Master
Servicer to the Trustee will be furnished to Certificateholders of each Series
upon request addressed to the Trustee for the related Trust Fund.
The Depositor intends to apply for relief from the reporting requirements
of Sections 13, 15(d) and 16(a) of the 1934 Act. In lieu of filing the periodic
reports required by those sections, the Master Servicer, on behalf of the
related Trust Fund, will file with the Commission on Form 8-K the monthly
reports and information set forth in the related Prospectus Supplement. See "THE
POOLING AND SERVICING AGREEMENT--Reports to Certificateholders; Available
Information" in the related Prospectus Supplement. The Depositor does not intend
to file periodic reports under the 1934 Act with respect to the related Trust
Fund for any Series of Certificates following the completion of the reporting
period required by Rule 15d-1 under the 1934 Act.
iv
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT.......................iii
ADDITIONAL INFORMATION......................iii
INCORPORATION OF CERTAIN
INFORMATION BY REFERENCE....................iv
REPORTS......................................iv
SUMMARY OF PROSPECTUS.........................1
RISK FACTORS..................................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
Risks Associated with Lending on Income
Producing Properties....................7
Potential Conflicts of Interest............8
Certain Tax Considerations of Variable
Rate Certificates.......................9
Limited Nature of Credit Ratings...........9
Potential Inability to Verify
Underwriting Standards.................10
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..............11
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...............................13
Due-on-Sale Clauses and Assignments of
Leases and Rents.......................13
Environmental Risks.......................13
Certain Federal Tax Considerations
Regarding Residual Certificates........14
ERISA Considerations......................14
Special Hazard Losses.....................15
Control; Decisions by Certificateholders..15
Book-Entry Registration...................15
THE DEPOSITOR................................15
THE MASTER SERVICER..........................16
USE OF PROCEEDS..............................16
DESCRIPTION OF THE CERTIFICATES..............16
General...................................17
Distributions on Certificates.............18
Accounts..................................18
Amendment.................................20
Termination...............................21
Reports to Certificateholders.............22
The Trustee...............................22
THE MORTGAGE POOLS...........................22
General...................................22
Assignment of Mortgage Loans..............24
Mortgage Underwriting Standards and
Procedures.............................25
Representations and Warranties............26
SERVICING OF THE MORTGAGE LOANS..............27
General...................................27
Collections and Other Servicing
Procedures.............................27
Insurance.................................28
Fidelity Bonds and Errors and Omissions
Insurance..............................30
Servicing Compensation and Payment of
Expenses...............................30
Advances..................................31
Modifications, Waivers and Amendments.....31
Evidence of Compliance....................31
v
<PAGE>
Certain Matters With Respect to the
Master Servicer, the Special Servicer,
the Trustee and the Depositor..........32
Events of Default.........................33
Rights Upon Event of Default..............34
CREDIT ENHANCEMENT...........................35
General...................................35
Subordinate Certificates..................35
Reserve Funds.............................36
Cross-Support Features....................37
Certificate Guarantee Insurance...........37
Limited Guarantee.........................37
Letter of Credit..........................37
Pool Insurance Policies; Special Hazard
Insurance Policies.....................37
Surety Bonds..............................38
Fraud Coverage............................38
Mortgagor Bankruptcy Bond.................38
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS..38
General...................................39
Types of Mortgage Instruments.............39
Personalty................................40
Installment Contracts.....................40
Junior Mortgages; Rights of Senior
Mortgagees or Beneficiaries............40
Foreclosure...............................42
Environmental Risks.......................48
Enforceability of Certain Provisions......51
Soldiers' and Sailors' Relief Act.........53
Applicability of Usury Laws...............53
Alternative Mortgage Instruments..........54
Leases and Rents..........................54
Secondary Financing; Due-on-Encumbrance
Provisions.............................55
Certain Laws and Regulations..............55
Type of Mortgaged Property................56
Criminal Forfeitures......................56
Americans With Disabilities Act...........56
MATERIAL FEDERAL INCOME TAX CONSEQUENCES.....57
General...................................57
Federal Income Tax Consequences For REMIC
Certificates...........................58
General...................................58
Qualification as a REMIC..................58
Taxation of REMIC Regular Certificates....61
Taxation of the REMIC.....................68
Taxation of Holders of Residual
Certificates...........................70
Reporting Requirements and Backup
Withholding............................75
Tax Treatment of Foreign Investors........76
Administrative Matters....................77
Federal Income Tax Consequences For
Certificates As To Which No REMIC
Election Is Made.......................78
Tax Status as a Grantor Trust.............78
Tax Status of Certificates................79
Pass-Through Certificates.................79
Stripped Certificates.....................80
Sale of Certificates......................82
Reporting Requirements and Backup
Withholding............................82
Treatment of Foreign Investors............83
STATE TAX CONSIDERATIONS.....................83
ERISA CONSIDERATIONS.........................83
Prohibited Transactions...................84
Unrelated Business Taxable Income-
Residual Interests......................85
LEGAL INVESTMENT.............................86
PLAN OF DISTRIBUTION.........................86
LEGAL MATTERS................................87
FINANCIAL INFORMATION........................87
RATING.......................................87
vi
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each Series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such Series. An Index of
Definitions is included at the end of this Prospectus.
Title of
Certificates........Commercial Mortgage Pass-Through Certificates, issuable in
Series Certificates (the "Certificates").
Depositor...........Commercial Mortgage Acceptance Corp., a wholly-owned
subsidiary of Midland Loan Services, Inc. See "THE
DEPOSITOR."
Master Servicer.....Midland Loan Services, Inc., a wholly-owned subsidiary of
PNC Bank, National Association. See "SERVICING OF THE
MORTGAGE LOANS--General."
Special Servicer....The special servicer (the "Special Servicer"), if any, for
each Series of Certificates, which may be an affiliate of
the Depositor, will be named, or the circumstances in
accordance with which a Special Servicer will be appointed,
will be described in the related Prospectus Supplement. See
"SERVICING OF THE MORTGAGE LOANS--General."
Trustee.............The trustee (the "Trustee") for each Series of Certificates
will be named in the related Prospectus Supplement. See
"DESCRIPTION OF THE CERTIFICATES--The Trustee."
The Trust Fund......Each Series of Certificates will represent in the aggregate
the entire beneficial ownership interest in a Trust Fund
consisting primarily of the following:
A. Mortgage Pool..The primary assets of each Trust Fund will consist of a pool
of mortgage loans (the "Mortgage Pool") secured by first or
junior mortgages, deeds of trust or similar security
instruments (each, a "Mortgage") on, or installment
contracts ("Installment Contracts") for the sale of, fee
simple or leasehold interests in commercial real estate
property, multifamily residential property and/or mixed-use
property, and related property and interests (each such
interest or property, as the case may be, a "Mortgaged
Property"). Multifamily properties (consisting of
apartments, congregate care facilities and/or mobile home
parks) and general commercial properties (consisting of
retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial
properties and/or other similar types of properties) will
represent security for a material concentration of the
Mortgage Loans in any Trust Fund, based on principal balance
at the time such Trust Fund is formed. Each such mortgage
loan or Installment Contract 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
1
<PAGE>
other person. The Mortgage Loans will have the additional
characteristics described under "THE MORTGAGE POOLS" herein
and "DESCRIPTION OF THE MORTGAGE POOL" in the related
Prospectus Supplement. All Mortgage Loans will have been
purchased 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......The Master Servicer generally will be required to establish
and maintain one or more accounts (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.
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
2
<PAGE>
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. 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.
3
<PAGE>
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............With respect to each Series of Certificates, the related
Prospectus Supplement will set forth the obligations 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 "SERVICING OF THE MORTGAGE
LOANS--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."
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."
4
<PAGE>
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 (each, a "Plan")
should carefully review with its legal advisors whether the
purchase or holding of Senior Certificates may give rise to
a transaction that is prohibited or is not otherwise
permissible either under ERISA or Section 4975 of the Code.
Subordinate Certificates may not be purchased by or
transferred to a Plan. 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
6
<PAGE>
Loans were made as scheduled. Thus, the prepayment experience on the Mortgage
Loans may affect the average life of each Class of related Certificates. The
rate of principal payments on pools of mortgage loans varies between pools and
from time to time is influenced by a variety of economic, demographic,
geographic, social, tax, legal and other factors, as well as Acts of God.
Accordingly, there can be no assurance as to the rate of prepayment on the
Mortgage Loans in any Trust Fund or that the rate of payments will conform to
any 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."
Risks Associated with Lending on Income Producing Properties
Mortgage loans made with respect to multifamily or commercial properties
may entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with single-family
properties. For example, the ability of a mortgagor to repay a loan secured by
an income-producing property typically is dependent primarily upon the
successful operation of such property rather than any independent income or
assets of the mortgagor; thus, the value of an income-producing property is
directly related to the net operating income derived from such property. In
contrast, the ability of a mortgagor to repay a single-family loan typically is
dependent primarily upon the mortgagor's household income, rather than the
capacity of the property to produce income; thus, other than in geographical
areas where employment is dependent upon a particular employer or an industry,
the mortgagor's income tends not to reflect directly the value of such property.
A decline in the net operating income of an income-producing property will
likely affect both the performance of the related loan as well as the
liquidation value of such property, whereas a decline in the income of a
mortgagor on a single-family property will likely affect the performance of the
related loan but may not affect the liquidation value of such property.
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
7
<PAGE>
loans both because the Mortgage Loans in a Trust Fund will generally consist of
a smaller number of loans than would a single-family pool of comparable
aggregate unpaid principal balance and because of the higher principal balance
of individual Mortgage Loans.
The performance of a mortgage loan secured by an income-producing property
leased by the mortgagor to tenants as well as the liquidation value of such
property may be dependent upon the businesses operated by such tenants in
connection with such property, the creditworthiness of such tenants or both; the
risks associated with such loans may be offset by the number of tenants or, if
applicable, a diversity of types of businesses operated by such tenants. A
number of the Mortgage Loans may be secured by liens on owner-occupied Mortgaged
Properties or on Mortgaged Properties leased to a single tenant. Accordingly, a
decline in the financial condition of the borrower or single tenant, as
applicable, may have a disproportionately greater effect on the net operating
income from such Mortgaged Properties than would be the case with respect to
Mortgaged Properties with multiple tenants. Furthermore, the value of any
mortgaged property may be adversely affected by risks generally incident to
interests in real property, including changes in general or local economic
conditions and/or specific industry segments; declines in real estate values;
declines in rental or occupancy rates; increases in interest rates, real estate
tax rates and other operating expenses; changes in governmental rules,
regulations and fiscal policies, including environmental legislation; natural
disasters; and other factors beyond the control of the Master Servicer or the
Special Servicer, if any.
Additional risk may be presented by the type and use of a particular
mortgaged property. For instance, mortgaged properties that operate as
hospitals, nursing homes or convalescent homes may present special risks to
mortgagees due to the significant governmental regulation of the ownership,
operation, maintenance, control and financing of health care institutions.
Mortgages encumbering mortgaged properties that are owned by the mortgagor under
a condominium form of ownership are subject to the declaration, by-laws and
other rules and regulations of the condominium association. Hotel and motel
properties are often operated pursuant to franchise, management or operating
agreements that may be terminable by the franchiser or operator. Moreover, the
transferability of a hotel's operating, liquor and other licenses upon a
transfer of the hotel, whether through purchase or foreclosure, is subject to
local law requirements. In addition, mortgaged properties that are multifamily
residential properties or cooperatively owned multifamily properties may be
subject to rent control laws, which could impact the future cash flows of such
properties. Any such risks will be more fully described in the related
Prospectus Supplement under the captions "RISK FACTORS" and "DESCRIPTION OF THE
MORTGAGE POOL."
If applicable, certain legal aspects of the Mortgage Loans for a Series of
Certificates may be described in the related Prospectus Supplement. See also
"CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS."
Potential Conflicts of Interest
The Special Servicer, if any, for a Series of Certificates, will have
considerable latitude in determining whether to liquidate or modify defaulted
Mortgage Loans. See "SERVICING OF THE MORTGAGE LOANS--Modifications, Waivers and
Amendments". If the Special Servicer or anyone else who purchases Mortgage Loans
and has the power to appoint the Special Servicer, investors in the Offered
Certificates should consider that, although the Special Servicer will be
obligated to act in accordance with the terms of the related 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.
8
<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 Certificates 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 would be
controlling if the IRS were to assert a different method for accruing income.
See "MATERIAL FEDERAL INCOME TAX CONSEQUENCES--Federal Income Tax Consequences
For REMIC Certificates--Taxation of REMIC Regular Certificates--Interest
Weighted Certificates" and "--Taxation of REMIC Regular Certificates--Variable
Rate Regular Certificates."
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, 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."
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".
9
<PAGE>
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.
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
10
<PAGE>
stated maturity. Mortgage loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to refinance the loan or to sell the related
mortgaged property in a timely manner. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage rates at the time of sale or refinancing, the
mortgagor's equity in the related mortgaged property, the financial condition
and operating history of the mortgagor and the related mortgaged property, tax
laws, rent control laws (with respect to certain multifamily properties and
mobile home parks), reimbursement rates (with respect to certain hospitals,
nursing homes and congregate care facilities), renewability of operating
licenses, prevailing general economic conditions and the availability of credit
for commercial or multifamily, as the case may be, real properties generally.
Neither the Depositor or any affiliate will be required to refinance any
Mortgage Loan.
Extensions and Modifications of Defaulted Mortgage Loans; Additional Servicing
Fees
In order to maximize recoveries on defaulted Mortgage Loans, a Master
Servicer or Special Servicer, if any, will be permitted (within the parameters
specified in the related Prospectus Supplement) to extend and modify Mortgage
Loans that are in default or as to which a payment default is reasonably
foreseeable, including in particular with respect to balloon payments. In
addition, a Master Servicer or a Special Servicer, if any, may receive workout
fees, management fees, liquidation fees or other similar fees based on receipts
from or proceeds of such Mortgage Loans. Although a Master Servicer or Special
Servicer, if any, generally will be required to determine that any such
extension or modification is reasonably likely to produce a greater recovery
amount than liquidation, there can be no assurance that such flexibility with
respect to extensions 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
11
<PAGE>
subordination is intended to reduce the risk to holders of Senior Certificates
of delinquent distributions or ultimate losses, the amount of subordination will
be limited and may decline or be reduced to zero under certain circumstances. In
addition, if principal payments on one or more Classes of Certificates of a
Series are made in a specified order of priority, any limits with respect to the
aggregate amount of claims under any related Credit Enhancement may be exhausted
before the principal of the lower priority Classes of Certificates of such
Series has been repaid. As a result, the impact of significant losses and
shortfalls on the Mortgaged Properties may fall primarily upon those Classes of
Certificates having a lower priority of payment. Moreover, if a form of Credit
Enhancement covers more than one Series of Certificates, holders of Certificates
of one Series will be subject to the risk that such Credit Enhancement will be
exhausted by the claims of the holders of Certificates of one or more other
Series.
The amount, type and nature of Credit Enhancement, if any, established with
respect to a Series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating Classes of the Certificates of such
Series. Such criteria are sometimes based upon an actuarial analysis of the
behavior of mortgage loans in a larger group. Such analysis is often the basis
upon which each Rating Agency determines the amount of Credit Enhancement
required with respect to each such Class. There can be no assurance that the
historical data supporting any such actuarial analysis will accurately reflect
future experience nor any assurance that the data derived from a large pool of
mortgage loans accurately predicts the delinquency, foreclosure or loss
experience of any particular pool of Mortgage Loans. No assurance can be given
with respect to any Mortgage Loan that the appraised value of the related
Mortgaged Property has remained or will remain at its level as of the
origination date of such Mortgage Loan. Moreover, there is no assurance that
appreciation of real estate values generally will limit loss experiences on
commercial or multifamily properties. If the commercial or multifamily
residential real estate markets should experience an overall decline in property
values such that the outstanding principal balances of the Mortgage Loans in a
particular Trust Fund and any secondary financing on the related Mortgaged
Properties become equal to or greater than the value of the Mortgaged
Properties, the rates of delinquencies, foreclosures and losses could be higher
than those now generally experienced by institutional lenders for similar
mortgage loans. In addition, 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 Credit 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.
12
<PAGE>
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--Federal Income Tax Consequences For REMIC Certificates--Taxation
of REMIC Regular Certificates--Subordinate Certificates--Effects of Defaults,
Delinquencies and Losses" 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."
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
13
<PAGE>
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."
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--Federal Income Tax Consequences For REMIC Certificates--Taxation
of Holders of Residual Certificates." Accordingly, under certain circumstances,
holders of Offered Certificates that constitute Residual Certificates may have
taxable income and tax liabilities arising from such investment during a taxable
year in excess of the cash received during such period. The requirement that
holders of Residual Certificates report their pro rata share of the taxable
income and net loss of the REMIC will continue until the Certificate balances of
all Classes of Certificates of the related Series have been reduced to zero,
even though holders of Residual Certificates have received full payment of their
stated interest and principal. A portion (or, in certain circumstances, all) of
such Certificateholder's share of the REMIC taxable income may be treated as
"excess inclusion" income to such holder that (i) generally, will not be subject
to offset by losses from other activities, (ii) for a tax-exempt holder, will be
treated as unrelated business taxable income and (iii) for a foreign holder,
will not qualify for exemption from withholding tax. Individual holders of
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, Residual Certificates are subject
to certain restrictions on transfer. In particular, the transfer of a Residual
Interest to certain "Disqualified Organizations" is prohibited. If transfer
occurs in violation of such prohibition, a tax is imposed on the transfer. In
addition, the transfer of a "noneconomic residuary interest" by a Residual
Certificateholder will be disregarded under certain circumstances with the
transferor remaining liable for any taxable income derived from the Residual
Interest by the transferee Residual Certificateholder. See "MATERIAL FEDERAL
INCOME TAX CONSEQUENCES--Federal Income Tax Consequences For REMIC
Certificates--Taxation of Holders of Residual Certificates--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.
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."
14
<PAGE>
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 use its best efforts in accordance with the servicing standard 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."
THE DEPOSITOR
Commercial Mortgage Acceptance Corp. was incorporated in the State of
Missouri on September 17, 1996. The Depositor is a wholly owned, limited purpose
finance subsidiary of Midland Loan Services, Inc. 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.
15
<PAGE>
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., was organized under the laws of the State of
Missouri in 1992 as a limited partnership. On April 3, 1998, substantially all
of the assets of Midland Loan Services, L.P., were acquired by Midland Loan
Services, Inc. ("Midland"), a newly formed, wholly-owned subsidiary of PNC Bank,
National Association. 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 delinquency experience of the Master Servicer (and
for periods prior to April 3, 1998, of the Master Servicer's predecessor in
interest) as of the end of its three most recent fiscal years and the most
recent calendar quarter for which such information is available on the portfolio
of loans relating to commercial mortgage pass-through certificates master
serviced by it will be summarized in each Prospectus Supplement. There can be no
assurance that such experience will be representative of the results that may be
experienced with respect to any particular Mortgage Pool.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Offered Certificates to purchase the Mortgage Loans
relating to such Series, to repay any indebtedness that has been incurred to
obtain funds to acquire Mortgage Loans, to obtain Credit Enhancement, if any,
for the Series and to pay costs of structuring, issuing and underwriting the
Certificates. The maturity and interest rate of such indebtedness, if any, will
be set forth in "USE OF PROCEEDS" in the related Prospectus Supplement.
DESCRIPTION OF THE CERTIFICATES*
The Certificates of each Series will be issued pursuant to a separate
Pooling and Servicing Agreement (the "Agreement") to be entered into among the
Depositor, the Master Servicer, the Special Servicer, if any, and the Trustee
for that Series and any other parties described in the applicable Prospectus
Supplement, substantially in the form filed as an exhibit to the Registration
Statement of
- ----------------------
* 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>
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.
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 Mortgaged Property acquired on behalf of
the Trust Fund through foreclosure or deed-in-lien of foreclosure (upon
acquisition, 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 each
related 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
17
<PAGE>
return their purchase prices under rapid prepayment scenarios; and (iii) the
degree to which an investor's yield is sensitive to principal prepayments.
The Offered Certificates of each Series will be freely transferable and
exchangeable at the office specified in the related Agreement and Prospectus
Supplement; provided, however, that certain Classes of Certificates may be
subject to transfer restrictions described in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, the Certificates may be
transferable only on the books of The Depository Trust Company or another
depository identified in such Prospectus Supplement.
Distributions on Certificates
Distributions of principal and interest on the Certificates of each Series
will be made to the registered holders thereof ("Certificateholders") by the
Trustee (or such other paying agent as may be identified in the related
Prospectus Supplement) on the day (the "Distribution Date") specified in the
related Prospectus Supplement, beginning in the period specified in the related
Prospectus Supplement following the establishment of the related Trust Fund.
Distributions for each Series will be made by check mailed to the address of the
person entitled thereto as it appears on the certificate register for such
Series maintained by the Trustee or by wire transfer if so specified in the
related Prospectus Supplement. The final distribution in retirement of the
Certificates of each Series will be made only upon presentation and surrender of
the Certificates at the office or agency specified in the notice to the
Certificateholders of such final distribution. In addition, the Prospectus
Supplement relating to each Series will set forth the applicable due period,
prepayment period, record date, Cut-off Date and determination date in respect
of each Series of Certificates.
With respect to each Series of Certificates on each Distribution Date, the
Trustee (or such other paying agent as may be identified in the applicable
Prospectus Supplement) will distribute to the Certificateholders the amounts
described in the related Prospectus Supplement that are due to be paid on such
Distribution Date. In general, such amounts will include previously
undistributed payments of principal (including principal prepayments, if any)
and interest on the Mortgage Loans received by the Master Servicer or the
Special Servicer, if any, after a date specified in the related Prospectus
Supplement (the "Cut-off Date") and prior to the day preceding each Distribution
Date specified in the related Prospectus Supplement.
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 one or more accounts
(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
18
<PAGE>
Servicer, the Special Servicer, if any, the Trustee and the Depositor for
certain expenses and provide indemnification to the Depositor, the Master
Servicer and the Special Servicer, if any, as described in the Agreement.
"Property Protection Expenses" comprise certain costs and expenses incurred in
connection with defaulted Mortgage Loans, acquiring title to, or management of,
REO Property or the sale of defaulted Mortgage Loans or REO Properties, as more
fully described in the related Agreement. The applicable Prospectus Supplement
may provide for additional circumstances in which the Master Servicer will be
entitled to make withdrawals from the Collection Account.
The amount at any time credited to the Collection Account or the
Distribution Account may be invested in Permitted Investments that are payable
on demand or in general mature or are subject to withdrawal or redemption on or
before the business day preceding the next succeeding Master Servicer Remittance
Date, in the case of the Collection Account, or the business day preceding the
next succeeding Distribution Date, in the case of the Distribution Account. The
Master Servicer will be required to remit amounts on deposit in the Collection
Account that are required for distribution to Certificateholders to the
Distribution Account on or before the business day preceding the related
Distribution Date (the "Master Servicer Remittance Date"). The income from the
investment of funds in the Collection Account and the Distribution Account in
Permitted Investments will constitute additional servicing compensation for the
Master Servicer, and the risk of loss of funds in the Collection Account and the
Distribution Account resulting from such investments will be borne by the Master
Servicer. The amount of each such loss will be required to be deposited by the
Master Servicer in the Collection Account or the Distribution Account, as the
case may be, promptly as realized.
It is expected that the Agreement for each Series of Certificates will
provide that an account (the "REO Account") will be established and maintained
in order to be used in connection with REO Properties and, if specified in the
related Prospectus Supplement, certain other Mortgaged Properties. To the extent
set forth in the Agreement, certain withdrawals from the REO Account will be
made to, among other things, (i) make remittances to the Collection Account as
required by the Agreement; (ii) pay taxes, assessments, insurance premiums,
other amounts necessary for the proper operation, management and maintenance of
the REO Properties and such 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
19
<PAGE>
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) shares of taxable money market funds or mutual funds that seek to
maintain a constant net 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;
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
20
<PAGE>
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.
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, without the consent of the holders of all Certificates
representing all of the Voting Rights of the Class or Classes affected thereby
(unless such amendment is permitted pursuant to the preceding paragraph) to make
an advance.
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 (paid for as an expense of the Trust Fund), 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.
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 the 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.
21
<PAGE>
Reports to Certificateholders
Concurrently with each distribution for each Series, the Trustee (or such
other paying agent as may be identified in the applicable Prospectus Supplement)
will forward to each Certificateholder a statement setting forth such
information relating to such distribution as is specified in the Agreement and
described in the applicable Prospectus Supplement.
The Trustee
The Depositor will select a bank or trust company to act as trustee (the
"Trustee") under the Agreement for each Series and the Trustee will be
identified, and its obligations under that Agreement will be described, in the
applicable Prospectus Supplement. The Rating Agencies rating Certificates of a
Series may require the appointment of a fiscal agent to guarantee certain
obligations of the Trustee. Such fiscal agent will be a party to the Agreement.
In such event, the fiscal agent will be identified, and its obligations under
the Agreement will be described, in the applicable Prospectus Supplement. See
"SERVICING OF THE MORTGAGE LOANS--Certain Matters with Respect to the Master
Servicer, the Special Servicer, the Trustee and the Depositor."
THE MORTGAGE POOLS
General
Each Mortgage Pool will consist of mortgage loans secured by first or
junior mortgages, deeds of trust or similar security instruments (each, a
"Mortgage") on, or installment contracts ("Installment Contracts") for the sale
of, fee simple or leasehold interests in commercial real estate property,
multifamily residential property, and/or mixed-use property, and related
property and interests (each such interest or property, as the case may be, a
"Mortgaged Property"). Multifamily properties (consisting of apartments,
congregate care facilities and/or mobile home parks) and general commercial
properties (consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties) will represent security for a material
concentration of the Mortgage Loans in any Trust Fund, based on principal
balance at the time such Trust Fund is formed. See "CERTAIN LEGAL ASPECTS OF THE
MORTGAGE LOANS--General," "--Types of Mortgage Instruments," "--Installment
Contracts" and "--Junior Mortgages; Rights of Senior Mortgagees or
Beneficiaries" for more detailed information regarding the characteristics of
such types of mortgage loans. A Mortgage Pool will not include securities of the
type listed in the definition of Permitted Investments. Each such mortgage loan
or Installment Contract is herein referred to as a "Mortgage Loan."
All Mortgage Loans will be of one or more of the following types:
1. Mortgage Loans with fixed interest rates;
2. Mortgage Loans with adjustable interest rates;
3. Mortgage Loans whose principal balances fully amortize over their
remaining terms to maturity;
4. Mortgage Loans whose principal balances do not fully amortize, but
instead provide for a substantial principal payment at the stated
maturity of the loan;
22
<PAGE>
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 on 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.
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
23
<PAGE>
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 (other than payments of principal and interest due on or prior to
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 each
property securing the Note.
In addition, the Depositor will, as to each Mortgage Loan, deliver to the
Trustee: (i) the Note, endorsed to the order of the Trustee without recourse;
(ii) the Mortgage and an executed assignment thereof in favor of the Trustee or
otherwise as required by the Agreement; (iii) any assumption, modification or
substitution agreements relating to the Mortgage Loan; (iv) a mortgagee's title
insurance policy (or owner's policy in the case of an Installment Contract),
together with its endorsements, or an attorney's opinion of title issued as of
the date of origination of the Mortgage Loan; (v) if the security agreement
and/or assignment of leases, rents and profits is separate from the Mortgage, an
executed assignment of such security agreement and/or 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
24
<PAGE>
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 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 of 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
for appraisers established by or acceptable to the loan originator. 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 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
25
<PAGE>
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 no scheduled payment of principal and interest under any Mortgage Loan was
30 days or more past due as of the related Cut-off Date. 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 85 days following discovery of the breach or the
Seller's receipt of notice of such breach, such Seller generally will be
obligated to substitute a similar replacement mortgage loan for such Mortgage
Loan, if so provided in the related Prospectus Supplement, or 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 at the
applicable rate (in the absence of a default) to, but not including, the date of
repurchase, (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 the rate specified in the related Agreement, (d) the
amount of any unpaid servicing compensation (other than servicing fees) 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
26
<PAGE>
for the applicable Agreement. This repurchase obligation, and substitution
obligation, if applicable, will generally constitute the sole remedy or remedies
available to the Trustee for the benefit of 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 Trustee or the Certificateholders.
No assurance can be given that a Seller will carry out its repurchase obligation
with respect to the Mortgage Loans.
If specified in the related Prospectus Supplement, the Seller may deliver
to the Trustee, within a specified number of days following the issuance of a
Series of Certificates, Mortgage Loans in substitution for any one or more of
the Mortgage Loans initially included in the Trust Fund (i) which do not conform
in one or more respects to the description thereof contained in the related
Prospectus Supplement, (ii) as to which a breach of a representation or warranty
is discovered, which breach materially and adversely affects the interests of
the Certificateholders, or (iii) as to which a document in the related Mortgage
Loan File is defective in any material respect. The related Prospectus
Supplement will describe any required characteristics of any such substituted
Mortgage Loans.
SERVICING OF THE MORTGAGE LOANS
General
The servicer of the Mortgage Loans (the "Master Servicer") will be Midland
Loan Services, Inc., the parent of the Depositor and a wholly-owned subsidiary
of PNC Bank, National Association. 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 the Master Servicer or 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
27
<PAGE>
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 one or more escrow accounts (each, an "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 and (vi) to remove amounts not required to be deposited therein.
The related Prospectus Supplement may provide for other permitted withdrawals
from the Escrow Account. The Master Servicer will be entitled to all income on
the funds in the Escrow Account invested in Permitted Investments not required
to be paid to mortgagors by the terms of the related Mortgage Loan documents or
by applicable law. The Master Servicer will be responsible for the
administration of the Escrow Account.
Insurance
The Agreement for each Series will require that the Master Servicer use
its best efforts to cause 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 cause 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 cause 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
28
<PAGE>
be payable out of amounts on deposit in the related REO Account or will be
advanced by the Master Servicer. The Special Servicer 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 Special Servicer
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, as applicable, 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 advanced by the Master Servicer.
Alternatively, the Master Servicer or Special Servicer, as applicable, 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, as applicable, will be obligated to deposit in the Collection Account
all sums that would have been deposited therein but for such clause to the
extent any such deductible exceeds the deductible limitation that pertained to
the related Mortgage Loan, or in the absence of any such deductible limitation,
the deductible limitation that is consistent with the servicing standard under
the related Agreement.
In general, the standard form of fire and hazard extended coverage
insurance policy will cover physical damage to, or destruction of, the
improvements on the Mortgaged Property caused by fire, lightning, explosion,
smoke, windstorm, hail, riot, strike and civil commotion, subject to the
conditions and exclusions particularized in each policy. Since the standard
hazard insurance policies relating to the Mortgage Loans will be underwritten by
different insurers and will cover Mortgaged Properties located in various
states, such policies will not contain identical terms and conditions. The most
significant terms thereof, however, generally will be determined by state law
and conditions. Most such policies typically will not cover any physical damage
resulting from war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reaction, wet or dry rot, vermin, rodents, insects or
domestic animals, theft and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive. Any losses incurred with respect to Mortgage Loans due to
uninsured risks (including earthquakes, mudflows and floods) or insufficient
hazard insurance proceeds could affect distributions to the Certificateholders.
The standard hazard insurance policies covering Mortgaged Properties
securing Mortgage Loans typically will contain a "coinsurance" clause which, in
effect, will require the insured at all times to carry insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the
dwellings, structures and other improvements on the Mortgaged Property in order
to recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause will provide that the insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
structures and other improvements damaged or destroyed and (ii) such proportion
of the loss, without deduction for depreciation, as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
dwellings, structures and other improvements.
The Prospectus Supplement may describe other provisions concerning the
insurance policies required to be maintained under the related Agreement.
29
<PAGE>
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.
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 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.
30
<PAGE>
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 statement of a firm of independent certified public accountants to the effect
that such firm has examined certain documents and records relating to the
servicing of the Mortgage Loans under the related Agreement or the servicing of
mortgage loans similar to the Mortgage Loans under substantially similar
agreements for the preceding twelve (12) months and that the assertion of
management of the Master Servicer or Special Servicer, as applicable, that it
maintained an effective internal control system over the servicing of such
mortgage loans is fairly stated in all material respects, based upon established
criteria, which statement meets the standards applicable to accountant's reports
intended for general distribution. 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.
31
<PAGE>
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 director,
officer, employee or agent of the Depositor, the Master Servicer or the Special
Servicer, if any, 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 director,
officer, employee or agent of the Depositor, the Master Servicer, the Special
Servicer, if any, 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 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 or
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, and in addition to the transactions permitted pursuant to the
preceding paragraph, the Master Servicer or the Special Servicer, if any, may
assign its rights and delegate its duties and
32
<PAGE>
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 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
33
<PAGE>
insolvency or inability to pay its obligations; or (v) any failure by the Master
Servicer or the Special Servicer, as applicable, 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 Agreement for the applicable Series may specify
that the Special Servicer is entitled under certain circumstances to continue to
receive workout fees and other similar fees after it is terminated.
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.
34
<PAGE>
The Trustee will have no obligation to institute, conduct or defend any
litigation under the Agreement or in relation thereto at the request, order or
direction of any of the holders of Certificates, unless such holders of
Certificates have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
CREDIT ENHANCEMENT
General
If specified in the related Prospectus Supplement for any Series, credit
enhancement may be provided with respect to one or more Classes thereof or the
related Mortgage Loans ("Credit Enhancement"). Credit Enhancement may be in the
form of a letter of credit, the subordination of one or more Classes of the
Certificates of such Series, the establishment of one or more reserve funds,
surety bonds, certificate guarantee insurance, the use of cross-support
features, limited guarantees or another method of Credit Enhancement described
in the related Prospectus Supplement, or any combination of the foregoing.
It is unlikely that Credit Enhancement will provide protection against all
risks of loss or guarantee repayment of the entire principal balance of the
Certificates and interest thereon. If losses occur that exceed the amount
covered by Credit Enhancement or that are not covered by Credit Enhancement,
Certificateholders will bear their allocable share of deficiencies. See "RISK
FACTORS--Credit Enhancement Limitations."
If Credit Enhancement is provided with respect to a Series, or the related
Mortgage Loans, the applicable Prospectus Supplement will include a description
of (a) the amount payable under such Credit Enhancement, (b) any conditions to
payment thereunder not otherwise described herein, (c) the conditions (if any)
under which the amount payable under such Credit Enhancement may be reduced and
under which such Credit Enhancement may be terminated or replaced and (d) the
material provisions of any agreement relating to such Credit Enhancement.
Additionally, the applicable Prospectus Supplement will set forth certain
information with respect to the issuer of any third-party Credit Enhancement,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, the jurisdiction of organization and the
jurisdictions under which it is chartered or licensed to do business, (iii) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets and its
stockholders' or policyholders' surplus, if applicable, as of the date specified
in such Prospectus Supplement. If the holders of any Certificates of any Series
will be materially dependent upon the issuer of any third party Credit
Enhancement for timely payment of interest and/or principal on their
Certificates, the Depositor will file a current report on Form 8-K within 15
days after the initial issuance of such Certificates, which will include any
material information regarding such issuer, including audited financial
statements to the extent required.
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
35
<PAGE>
reduced to zero before any losses are allocated to Senior Certificates. The
Agreement may require a trustee that is not the Trustee to be appointed to act
on behalf of holders of Subordinate Certificates.
A Series may include one or more Classes of Subordinate Certificates
entitled to receive cash flows remaining after distributions are made to all
other Classes designated as being senior thereto. Such right to receive payments
will effectively be subordinate to the rights of holders of such senior
designated Classes of Certificates. A Series may also include one or more
Classes of Subordinate Certificates that will be allocated losses prior to any
losses being allocated to Classes of Subordinate Certificates designated as
being senior thereto. If so specified in the related Prospectus Supplement, the
subordination of a Class may apply only in the event of (or may be limited to)
certain types of losses not covered by insurance policies or other Credit
Enhancement, such as losses arising from damage to property securing a Mortgage
Loan not covered by standard hazard insurance policies.
The related Prospectus Supplement will describe any such subordination in
greater detail and set forth information concerning, among other things, to the
extent applicable, (i) the amount of subordination of a Class or Classes of
Subordinate Certificates in a Series, (ii) the circumstances in which such
subordination will be applicable, (iii) the manner, if any, in which the amount
of subordination will decrease over time, (iv) the manner of funding any related
reserve fund, (v) the conditions under which amounts in any applicable reserve
fund will be used to make distributions to holders of Senior Certificates and/or
to holders of Subordinate Certificates or be released from the applicable Trust
Fund and (vi) if one or more Classes of Subordinate Certificates of a Series are
Offered Certificates, the sensitivity of distributions on such Certificates
based on certain prepayment assumptions. See "RISK FACTORS--Risks to
Subordinated Certificateholders; Lower Payment Priority" 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
36
<PAGE>
payable to the Master Servicer as additional servicing compensation, and any
loss resulting from such investment will be borne by the Master Servicer. The
Reserve Fund, if any, for a Series will be a part of the Trust Fund only if the
related Prospectus Supplement so specifies. If the Reserve Fund is not a part of
the Trust Fund, the right of the Trustee to make draws on the Reserve Fund will
be an asset of the Trust Fund.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purpose for which funds in the Reserve Fund may be applied to
make distributions to Certificateholders and use of investment earnings, if any,
from the Reserve Fund.
Cross-Support Features
If the Mortgage Pool for a Series is divided into separate Mortgage Loan
Groups, each securing a separate Class or Classes of a Series, Credit
Enhancement may be provided by a cross-support feature that requires that
distributions be made on Senior Certificates secured by one Mortgage Loan Group
prior to distributions on Subordinate Certificates secured by another Mortgage
Loan Group within the Trust Fund. The related Prospectus Supplement for a Series
that includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
Certificate Guarantee Insurance
If so specified in the related Prospectus Supplement, certificate
guarantee insurance, if any, with respect to a Series of Certificates will be
provided by one or more insurance companies. Such certificate guarantee
insurance will guarantee, with respect to one or more Classes of Certificates of
the applicable Series, timely distributions of interest and full distributions
of principal on the basis of a schedule of principal distributions set forth in
or determined in the manner specified in the related Prospectus Supplement. If
so specified in the related Prospectus Supplement, the certificate guarantee
insurance will also guarantee against any payment made to a Certificateholder
that is subsequently recovered as a "voidable preference" payment under the
Bankruptcy Code. A copy of the certificate guarantee insurance for a Series, if
any, will be filed with the Commission as an exhibit to the Form 8-K to be filed
with the Commission within 15 days of issuance of the Certificates of the
applicable Series.
Limited Guarantee
If so specified in the Prospectus Supplement with respect to a Series of
Certificates, Credit Enhancement may be provided in the form of a limited
guarantee issued by a guarantor named therein.
Letter of Credit
Alternative Credit Enhancement with respect to one or more Classes of
Certificates of a Series of Certificates may be provided by the issuance of a
letter of credit by the bank or financial institution specified in the
applicable Prospectus Supplement. The coverage, amount and frequency of any
reduction in coverage provided by a letter of credit issued with respect to one
or more Classes of Certificates of a Series will be set forth in the Prospectus
Supplement relating to such Series.
Pool Insurance Policies; Special Hazard Insurance Policies
If so specified in the Prospectus Supplement relating to a Series of
Certificates, the Depositor will obtain a pool insurance policy for the Mortgage
Loans in the related Trust Fund. The pool insurance
37
<PAGE>
policy will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default to the extent a related Mortgage
Loan is not covered by any primary mortgage insurance policy. The amount and
terms of any such coverage will be set forth in the Prospectus Supplement.
If so specified in the applicable Prospectus Supplement, for each Series
of Certificates as to which a pool insurance policy is provided, the Depositor
will also obtain a special hazard insurance policy for the related Trust Fund in
the amount set forth in such Prospectus Supplement. The special hazard insurance
policy will, subject to the limitations described in the applicable Prospectus
Supplement, protect against loss by reason of damage to Mortgaged Properties
caused by certain hazards not insured against under the standard form of hazard
insurance policy for the respective states in which the Mortgaged Properties are
located. The amount and terms of any such coverage will be set forth in the
Prospectus Supplement.
Surety Bonds
If so specified in the Prospectus Supplement relating to a Series of
Certificates, Credit Enhancement with respect to one or more Classes of
Certificates of a Series may be provided by the issuance of a surety bond issued
by a financial guarantee insurance company specified in the applicable
Prospectus Supplement. The coverage, amount and frequency or any reduction in
coverage provided by a surety bond will be set forth in the Prospectus
Supplement relating to such Series.
Fraud Coverage
If so specified in the applicable Prospectus Supplement, losses resulting
from fraud, dishonesty or misrepresentation in connection with the origination
or sale of the Mortgage Loans may be covered to a limited extent by (i)
representations and warranties to the effect that no such fraud, dishonesty or
misrepresentation had occurred, (ii) a Reserve Fund, (iii) a letter of credit or
(iv) some other method. The amount and terms of any such coverage will be set
forth in the Prospectus Supplement.
Mortgagor Bankruptcy Bond
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.
38
<PAGE>
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 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.
39
<PAGE>
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.
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
40
<PAGE>
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 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
41
<PAGE>
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,
42
<PAGE>
may, during a reinstatement period, cure the default by paying the entire amount
in arrears, plus, in certain states, certain allowed costs and expenses incurred
by the mortgagee in connection with the default; and (iv) the method
(publication, posting, recording, etc.), timing, content, location and other
particulars as to any required public notices of the trustee's sale. A notice of
sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without regard to the acceleration of the indebtedness), plus the lender's
costs and expenses (in some states, limited to reasonable costs and expenses)
incurred in enforcing the obligation. Generally, state law controls the amount
of foreclosure expenses and costs, including attorneys' fees which may be
recovered by a mortgagee. In other states, the mortgagor or the junior
lienholder is not provided a period to reinstate the loan, but has only the
right to pay off the entire debt to prevent the foreclosure sale. Foreclosure of
a deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the mortgagee or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Limitations on Mortgagee's Rights. In case of foreclosure under a mortgage
or a deed of trust, the sale by the referee or other designated official or the
trustee is often a public sale. Because of the difficulty a potential buyer at
any foreclosure sale might have in determining the exact status of title to the
mortgaged property, the potential existence of redemption rights (see "--Rights
of Redemption" below) and because the physical condition and financial
performance of the mortgaged property may have deteriorated during the
foreclosure proceedings and/or for a variety of other reasons, a third party may
be unwilling to purchase the property at the foreclosure sale. Some states
require that the mortgagee disclose all known facts materially affecting the
value of the mortgaged property to potential bidders at a trustee's sale. Such
disclosure may have an adverse affect on the trustee's ability to sell the
mortgaged property or the sale price thereof. Potential buyers may be reluctant
to purchase property at a foreclosure sale as a result of the 1980 decision of
the 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
43
<PAGE>
hospitals may be particularly significant, because of the expertise, knowledge
and, with respect to nursing or convalescent homes or hospitals, regulatory
compliance required to run such operations and the effect that foreclosure and a
change in ownership may have on the public's and the industry's (including
franchisors') perception of the quality of such operations. The mortgagee will
commonly obtain the services of a real estate broker and pay the broker's
commission in connection with the sale of the property. Depending upon market
conditions, the ultimate proceeds of the sale of the property may not equal the
mortgagee's investment in the property. Moreover, a mortgagee commonly incurs
substantial legal fees and court costs in acquiring a mortgaged property through
contested foreclosure and/or bankruptcy proceedings. In addition, a mortgagee
may be responsible under federal or state law for the cost of cleaning up a
mortgaged property that is environmentally contaminated. See "--Environmental
Risks" below. There may also be state transfer taxes due and payable upon
obtaining such properties at foreclosure and such taxes could be substantial. As
a result, a mortgagee could realize an overall loss on a mortgage loan even if
the related mortgaged property is sold at foreclosure or resold after it is
acquired through foreclosure for an amount equal to the full outstanding
principal amount of the mortgage loan, plus accrued interest.
The holder of a junior mortgage that forecloses on a mortgaged property
does so subject to senior mortgages and any other prior liens, and may be
obliged to keep senior mortgage loans current in order to avoid foreclosure of
its interest in the property. In addition, if the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause contained in a
senior mortgage, the junior mortgagee could be required to pay the full amount
of the senior mortgage indebtedness or face foreclosure.
Courts may also apply general equitable principles in connection with
foreclosure proceedings to limit a mortgagee's remedies. These equitable
principles are generally designed to relieve the mortgagor from the legal effect
of his defaults under the loan documents to the extent such effect is determined
to be harsh or unfair. Examples of judicial remedies that have been fashioned
include requiring mortgagees to undertake affirmative and expensive actions to
determine the causes of the mortgagor's default and the likelihood that the
mortgagor will be able to reinstate the loan, requiring the mortgagees to
reinstate loans or recast payment schedules in order to accommodate mortgagors
who are suffering from temporary financial disability, and limiting the rights
of mortgagees to foreclose if the default under the mortgage instrument is not
monetary, such as the mortgagor's failing to maintain the property adequately or
executing a second mortgage affecting the property. Finally, some courts have
been faced with the issue of whether federal or state constitutional 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
44
<PAGE>
of the foreclosing mortgagee may redeem the property by paying the entire debt
with interest. In addition, in some states, when a foreclosure action has been
commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated. Equity of redemption is generally a common-law (non-statutory) right
that only exists prior to completion of the foreclosure sale, is not waivable by
the mortgagor and must be exercised prior to foreclosure sale.
In contrast to the doctrine of equity of redemption, in some states, the
mortgagor and foreclosed junior lienors are given a statutory period after the
completion of a foreclosure in which to redeem the property from the foreclosure
sale by payment of a redemption price. Some states require the payment of the
entire principal balance of the loan, accrued interest and expenses of
foreclosure, others require the payment of the foreclosure sale price, while
other states require the payment of only a portion of the sums due. The effect
of a statutory right of redemption is to diminish the ability of the mortgagee
to sell the foreclosed property. The exercise of a statutory right of redemption
may defeat the title of any purchaser at a foreclosure sale or any purchaser
from the mortgagee subsequent to a foreclosure sale. Consequently, the practical
effect of the redemption right is often to force the mortgagee to retain the
property and pay the expenses of ownership until the redemption period has run.
Whether the mortgagee has any rights to recover these expenses from a mortgagor
who redeems the property depends on the applicable state statute. Certain states
permit a mortgagee to invalidate an attempted exercise of a statutory redemption
right by waiving its right to any deficiency judgment. In some states, there is
no right to redeem property after a trustee's sale under a deed of trust.
Under the REMIC Regulations currently in effect, property acquired by
foreclosure generally must not be held for more than three years following the
year in which the property is acquired. 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
three 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
45
<PAGE>
prevent a mortgagee from obtaining a large deficiency judgment against the
former mortgagor as a result of low bids, or the absence of bids, at the
judicial sale.
Cross-Collateralization. Certain of the Mortgage Loans may be secured by
more than one mortgage covering properties located in more than one state.
Because of various state laws governing foreclosure or the exercise of a power
of sale and because, in general, foreclosure actions are brought in state court
and the courts of one state cannot exercise jurisdiction over property in
another state, it may be necessary upon a default under such a loan to foreclose
on the related mortgages in a particular order rather than simultaneously in
order to ensure that the lien of the mortgages is not impaired or released.
Leasehold Risks. Certain of the Mortgage Loans may be secured by a
mortgage encumbering the mortgagor's leasehold interest under a ground lease.
Leasehold mortgages are subject to certain risks not associated with mortgages
encumbering a fee ownership interest in the mortgaged property. The most
significant of these risks is that the ground lease creating the leasehold
estate could terminate, thereby depriving the leasehold mortgagee of its
security. The ground lease may terminate if, among other reasons, the ground
lessee breaches or defaults in its obligations under the ground lease or there
is a bankruptcy of the ground lessee or the ground lessor. Examples of
protective provisions that may be included in the related ground lease, or a
separate agreement between the ground lessee, the ground lessor and the
mortgagee, in order to minimize such risk are the right of the mortgagee to
receive notices from the ground lessor of any defaults by the mortgagor; the
right to cure such defaults, with adequate cure periods; if a default is not
susceptible of cure by the mortgagee, the right to acquire the leasehold estate
through foreclosure or otherwise prior to any termination of the ground lease;
the ability of the ground lease to be assigned to and by the mortgagee or a
purchaser at a foreclosure sale and for a release of the assigning ground
lessee's liabilities thereunder; the right of the mortgagee to enter into a
ground lease with the ground lessor on the same terms and conditions as the old
ground lease in the event of a termination thereof; and provisions for
disposition of any insurance proceeds or condemnation awards payable upon a
casualty to, or condemnation of, the mortgaged property. In addition to the
foregoing protections, the leasehold mortgage may prohibit the ground lessee
from treating the ground lease as terminated in the event of the ground lessor's
bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor, and may assign to the mortgagee the debtor-ground lessee's
right to reject a lease pursuant to Section 365 of the Bankruptcy Code, although
the enforceability of such assignment has not been established. An additional
manner in which to obtain protection against the termination of the ground lease
is to have the ground lessor enter into a mortgage encumbering the fee estate in
addition to the mortgage encumbering the leasehold interest under the ground
lease. Additional protection is afforded to the mortgagee, because if the ground
lease is terminated, the mortgagee may nonetheless possess rights contained in
the fee mortgage. Without the protections described in this paragraph, a
leasehold mortgagee may be more likely to lose the collateral securing its
leasehold mortgage. No assurance can be given that any or all of the above
described provisions will be obtained in connection with any particular Mortgage
Loan.
Bankruptcy Laws. Mortgagors often file bankruptcy to delay or prevent
exercise of remedies under loan documents. Numerous statutory and common law
provisions, including the Bankruptcy Code and state laws affording relief to
debtors, may interfere with and delay the ability of a mortgagee to obtain
payment of the loan, to realize upon collateral and/or to enforce a deficiency
judgment. For example, under the 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
46
<PAGE>
"substantive consolidation" by an affiliate of such mortgagor becoming a debtor
under the Bankruptcy Code. Additionally, the filing of a petition in bankruptcy
by or on behalf of a junior lienor or junior mortgagee may stay the senior
mortgagee from taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the mortgagee are met, the amount and terms of a mortgage or deed
of trust secured by property of the debtor may be modified under certain
circumstances. The outstanding amount of the loan secured by the real property
may be reduced to the then current value of the property (with a corresponding
partial reduction of the amount of the mortgagee's security interest), thus
leaving the mortgagee a general unsecured creditor for the difference between
such value and the outstanding balance of the loan. Other modifications may
include the reduction in the amount of each scheduled payment, which reduction
may result from a reduction in the rate of interest and/or the alteration of the
repayment schedule (with or without affecting the unpaid principal balance of
the loan) and/or an extension (or acceleration) of the final maturity date. Some
bankruptcy courts have approved plans, based on the particular facts of the
reorganization case before them, that effected the curing of a mortgage loan
default by paying arrearages over a number of years. A bankruptcy court may also
permit a debtor to de-accelerate a secured loan and to reinstate the loan even
though the mortgagee had accelerated such loan and final judgment of foreclosure
had been entered in state court (provided no sale of the property had yet
occurred) prior to the filing of the debtor's petition, even if the full amount
due under the original loan is never repaid. Other types of significant
modifications to the terms of the mortgage may be acceptable to the bankruptcy
court, often depending on the particular facts and circumstances of the specific
case.
Federal bankruptcy law may also interfere with or affect the ability of a
mortgagee to enforce an assignment of rents and leases or a security interest in
hotel or nursing home revenues related to the mortgaged property. In connection
with a bankruptcy proceeding involving a mortgagor, Section 362 of the
Bankruptcy Code automatically stays any attempts by the mortgagee to enforce any
such assignment or security interest. The legal proceedings necessary to resolve
such a situation can be time-consuming and may result in significant delays in
the receipt of the rents or hotel or nursing home revenues. Rents or hotel or
nursing home revenues may also be lost (i) if the assignment or security
interest is not fully documented or perfected under state law prior to
commencement of the bankruptcy proceeding; (ii) to the extent such rents or
hotel or nursing home revenues are used by the mortgagor to maintain the
mortgaged property or for other court authorized expenses; (iii) to the extent
other collateral may be substituted therefor; and (iv) if the bankruptcy court
determines that it is necessary or appropriate "based on the equities of the
case."
To the extent a mortgagor's ability to make payment on a mortgage loan is
dependent on payments under a lease of the related property, such ability may be
impaired by the commencement of a bankruptcy proceeding relating to the lessee
under such lease. Under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a lessee results in an automatic stay barring the
commencement or continuation of any state court proceeding for past due rent,
for accelerated rent, for damages or for a summary eviction order with respect
to a default under the lease that occurred prior to the filing of the lessee's
petition.
In addition, the Bankruptcy Code generally provides that a bankruptcy
trustee or debtor in possession may, subject to approval of the bankruptcy
court, either (i) assume the lease and retain it or assign it to a third party
or (ii) reject the lease. If the lease is assumed, the bankruptcy trustee or
debtor in possession (or assignee, if applicable) must cure any defaults under
the lease, compensate the lessor for its losses and provide the lessor with
"adequate assurance" of future performance. Such remedies may be insufficient,
however, as the lessor may be forced to continue under the lease with a lessee
that is a poor credit risk or an unfamiliar tenant if the lease was assigned,
and any assurances provided to the lessor may, in fact, be inadequate.
Furthermore, there may be a significant period of time between the date that a
47
<PAGE>
lessee files a bankruptcy petition and the date that the lease is assumed or
rejected. Although the lessee is obligated to make all lease payments currently
with respect to the post-petition period, there is a risk that such payments
will not be made due to the lessee's poor financial condition. If the lease is
rejected, the lessor will be treated as an unsecured creditor with respect to
its claim for damages for termination of the lease, and the lessor must relet
the mortgaged property before the flow of lease payments will recommence. In
addition, pursuant to Section 502(b)(6) of the Bankruptcy Code, a lessor's
damages for lease rejection are limited.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery, as a preferential transfer, of certain payments made by the mortgagor
under the related Mortgage Loan to the Trust Fund. Payments on long-term debt
may be protected from recovery as preferences if they are payments in the
ordinary course of business made on debts incurred in the ordinary course of
business. Whether any particular payment would be protected depends upon the
facts specific to a particular transaction. If a Mortgage Loan includes any
guaranty, and the guaranty waives any rights of subrogation or contribution,
then certain payments by the mortgagor to the Trust Fund also may be avoided and
recovered as fraudulent conveyances.
A trustee in bankruptcy or a debtor in possession or various creditors who
extend credit after a case is filed, in some cases, may be entitled to collect
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the mortgagee. In certain circumstances, a trustee in bankruptcy or
debtor in possession may have the power to grant liens senior to or pari passu
with the lien of a mortgage, and analogous state statutes and general principles
of equity may also provide a mortgagor with means to halt a foreclosure
proceeding or sale and enforce a restructuring of a mortgage loan on terms a
mortgagee would not otherwise accept.
A trustee in bankruptcy or a debtor in possession, in some cases, also may
be entitled to subordinate the lien created by the mortgage loan to other liens
or the claims of general unsecured creditors. Generally, this requires proof of
"unequitable conduct" by the mortgagee. However, various courts have expanded
the grounds for equitable subordination to apply to various non-pecuniary claims
for such items as penalties and fines. A court may find that any prepayment
charge, various late payment charges and other claims by mortgagees may be
subject to equitable subordination on these grounds.
A trustee in bankruptcy or a debtor in possession, in some cases, also may
be entitled to avoid all or part of any claim or lien by the mortgagee if and to
the extent a judgment creditor, or a bona fide purchaser of 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
48
<PAGE>
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 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
49
<PAGE>
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.
"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
50
<PAGE>
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.
Under the Residential Lead-Based Paint Hazard Reduction Act of 1992 (the
"Lead Paint Act"), owners of residential housing constructed prior to 1978 are
required 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. In addition, the ingestion of
lead-based paint chips or dust particles by children can result in lead
poisoning, and the owner of a property where such circumstances exist may be
held liable for such injuries. Finally, federal law mandates that detailed
worker safety standards must be complied with where construction, alteration,
repair or renovation of structures that contain lead, or materials that contain
lead, is contemplated.
Underground storage tanks ("USTs") are, and in the past have been,
frequently located at properties used for industrial, retail and other business
purposes. Federal law, as well as the laws of most states, currently require
USTs used for the storage of fuel or hazardous substances and waste to meet
certain standards designed to prevent releases from the USTs into the
environment. USTs installed prior to the implementation of these standards, or
that otherwise do not meet these standards, are potential sources of
contamination to the soil and groundwater. Land owners may be liable for the
costs of investigating and remediating soil and groundwater contamination that
may emanate from leaking USTs.
Enforceability of Certain Provisions
Default Interest; Late Charges; and Prepayment Fees. Some of the Mortgage
Loans may contain provisions requiring the mortgagor to pay late charges or
additional interest if required payments are not timely made, and in some
circumstances, may prohibit payments for a specified period and/or condition
prepayments upon the mortgagor's payment of prepayment fees or yield maintenance
penalties. In certain states there may be limitations upon the enforceability of
such provisions, and no assurance can be given
51
<PAGE>
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.
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
52
<PAGE>
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
53
<PAGE>
mortgagor and any penalty owed by the mortgagee. A second type of statute is
more severe. A violation of this type of usury law results in the invalidation
of the transaction, thereby permitting the mortgagor to have the recorded
mortgage or deed of trust cancelled without any payment and prohibiting the
mortgagee from foreclosing.
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ("Title V"), provides that state usury limitations do
not apply to certain types of residential (including multifamily, but not other
commercial) first mortgage loans originated by certain lenders after March 31,
1980. A similar federal statute was in effect with respect to mortgage loans
made during the first three months of 1980. The statute authorized any state to
reimpose interest rate limits by adopting, before April 1, 1983, a law or
constitutional provision that expressly rejects application of the federal law.
In addition, even where Title V is not so rejected, any state is authorized by
law to adopt a provision limiting discount points or other charges on mortgage
loans covered by Title V. Certain states have taken action to reimpose interest
rate limits and/or to limit discount points or other charges.
Alternative Mortgage Instruments
Alternative mortgage instruments, including adjustable rate mortgage
loans, originated by non-federally chartered lenders have historically been
subjected to a variety of restrictions. Such restrictions differed from state to
state, resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially with
respect to residential (including multifamily, but not other commercial)
mortgage loans as a result of the enactment of Title VIII of the Garn-St.
Germain Act ("Title VIII"). Title VIII provides that, notwithstanding any state
law to the contrary: (i) state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; (ii) state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration (the "NCUA") with respect to
origination of alternative mortgage instruments by federal credit unions; and
(iii) all other non-federally chartered housing creditors, including
state-chartered savings and loan associations, state-chartered savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board
(now the Office of Thrift Supervision) with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII authorized any state to reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action. A mortgagee's failure to comply with the applicable federal
regulations in connection with the origination of an alternative mortgage
instrument could subject such mortgage loan to state restrictions that would not
otherwise be applicable.
Leases and Rents
Some of the Mortgage Loans may be secured by an assignment of leases and
rents, either through assignment provisions incorporated in the mortgage,
through a separate assignment document or both. Under an assignment of leases
and rents, the mortgagor typically assigns to the mortgagee the mortgagor's
right, title and interest as landlord under each lease and the income derived
therefrom, while retaining a revocable license to collect the rents for so long
as there is no default under the mortgage loan documentation. In the event of
such a default, the license terminates and the mortgagee may be entitled to
collect rents. A mortgagee's failure to perfect properly its interest in rents
may result in the loss of a substantial pool of funds that could otherwise serve
as a source of repayment for the loan. Some state laws may require that in
addition to recording properly the assignment of leases and rents, the mortgagee
must also take possession of the property and/or obtain judicial appointment of
a receiver before such
54
<PAGE>
mortgagee is entitled to collect rents. Although mortgagees actually taking
possession of the property may become entitled to collect the rents therefrom,
such mortgagees may also incur potentially substantial risks attendant to such
possession, including liability for environmental clean-up costs and other risks
inherent to property ownership and operation. In addition, if a bankruptcy or
similar proceeding is commenced by or in respect of the mortgagor, the
mortgagee's ability to collect the rents may also be adversely affected.
Secondary Financing; Due-on-Encumbrance Provisions
Some of the Mortgage Loans may not restrict secondary financing, thereby
permitting the mortgagor to use the Mortgaged Property as security for one or
more additional loans. Some of the Mortgage Loans may preclude secondary
financing (often by permitting the senior mortgagee to accelerate the maturity
of its loan if the mortgagor further encumbers the Mortgaged Property) or may
require the consent of the senior mortgagee; however, such provisions may be
unenforceable in certain jurisdictions under certain circumstances. The
Agreement for each Series will generally provide that if any Mortgage Loan
contains a provision in the nature of a "due-on-encumbrance" clause, which by
its terms: (i) provides that such Mortgage Loan will (or may at the mortgagee's
option) become due and payable upon the creation of any lien or other
encumbrance on the related Mortgaged Property; or (ii) requires the consent of
the related mortgagee to the creation of any such lien or other encumbrance on
the related Mortgaged Property; then for so long as such Mortgage Loan is
included in a given Trust Fund, the Master Servicer or, if such Mortgage Loan is
a Specially Serviced Mortgage Loan, the Special Servicer, if any, on behalf of
such Trust Fund, will exercise (or decline to exercise) any right it may have as
the mortgagee of record with respect to such Mortgage Loan to (x) accelerate the
payments thereon or (y) withhold its consent to the creation of any such lien or
other encumbrance, in a manner consistent with the servicing standard set forth
in the Agreement.
If a mortgagor encumbers a mortgaged property with one or more junior
liens, the senior mortgagee is subjected to additional risk, such as the
following. First, the mortgagor may have difficulty servicing and repaying
multiple loans. In addition, if the junior loan permits recourse to the
mortgagor and the senior loan does not, a mortgagor may be more likely to repay
sums due on the junior loan than those due on the senior loan. Second, acts of
the senior mortgagee that prejudice the junior mortgagee or impair the junior
mortgagee's security may create a superior equity in favor of the junior
mortgagee. For example, if the mortgagor and the senior mortgagee agree to an
increase in the principal amount of, or the interest rate payable on, the senior
loan, the senior mortgagee may lose its priority to the extent an existing
junior mortgagee is prejudiced or the mortgagor is additionally burdened. Third,
if the mortgagor defaults on the 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.
55
<PAGE>
The Internal Revenue Code of 1986, as amended, provides priority to
certain tax liens over the lien of a mortgage. In addition, substantive
requirements are imposed on mortgagees in connection with the origination and
servicing of mortgage loans by numerous federal and some state consumer
protection laws. These laws include the federal Truth-in-Lending Act, Real
Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair Credit
Billing Act, Fair Credit Reporting Act, and related statutes. These federal laws
impose specific statutory liabilities upon lenders who originate mortgage loans
and who fail to comply with the provisions of the law. In some cases, this
liability may affect assignees of the mortgage loans.
Type of Mortgaged Property
A mortgagee may be subject to additional risk depending upon the type and
use of the mortgaged property in question. For instance, mortgaged properties
that are hospitals, nursing homes or convalescent homes may present special
risks to mortgagees in large part due to significant governmental regulation of
the ownership, operation, maintenance, control and financing of health care
institutions. Mortgages encumbering mortgaged properties that are owned by the
mortgagor under a condominium form of ownership are subject to the declaration,
by-laws and other rules and regulations of the condominium association.
Mortgaged properties that are hotels or motels may present additional risks to
mortgagees in that: (i) such properties are typically operated pursuant to
franchise, management and operating agreements that may be terminable by the
franchisor, manager or operator; and (ii) the transferability of operating,
liquor and other licenses to the entity acquiring such properties either through
purchase or foreclosure is subject to the vagaries of local law requirements. In
addition, mortgaged properties that are multifamily residential properties or
cooperatively owned multifamily properties may be subject to rent control laws,
which could impact the future cash flows of such properties. See "RISK
FACTORS--Risks Associated with Lending on Income Producing Properties."
Criminal Forfeitures
Various federal and state laws (collectively, the "Forfeiture Laws")
provide for the civil or criminal forfeiture of certain property (including real
estate) used or intended to be used to commit or facilitate the commission of a
violation of certain laws (typically criminal laws), or purchased with the
proceeds of such violations. Even though the Forfeiture Laws were originally
intended as tools to fight organized crime and drug related crimes, the current
climate appears to be to expand the scope of such laws. Certain of the
Forfeiture Laws (i.e., the Racketeer Influenced and Corrupt Organizations law
and the Comprehensive Crime Control Act of 1984) provide for notice, opportunity
to be heard and for certain defenses for "innocent lienholders." However, given
the uncertain scope of the Forfeiture Laws and their relationship to existing
constitutional protections afforded property owners, no assurance can be made
that enforcement of a Forfeiture Law with respect to any Mortgaged Property
would not deprive the Trust Fund of its security for the related Mortgage Loan.
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
56
<PAGE>
mortgagor in its capacity as owner or landlord, the ADA may also impose such
requirements on a foreclosing mortgagee who succeeds to the interest of the
mortgagor as owner or landlord. Furthermore, since the "readily achievable"
standard may vary depending on the financial condition of the owner or landlord,
a foreclosing mortgagee who is financially more capable than the mortgagor of
complying with the requirements of the ADA may be subject to more stringent
requirements than those to which the mortgagor is subject.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates. This discussion was prepared by Morrison & Hecker L.L.P., counsel
to the Depositor ("Counsel") and, to the extent it expresses opinions or
conclusions as to federal income tax law, represents the opinion of Counsel as
to such matters. The discussion below is based upon the Internal Revenue Code of
1986, as amended (the "Code"), the regulations promulgated thereunder,
including, where applicable, proposed regulations, and the administrative
rulings and court decisions all as in effect and existing on the date hereof
and, all of which are subject to change, possibly on a retroactive basis, or
possible differing interpretations. This discussion is directed primarily to
investors who will hold Certificates as "capital assets" (generally, property
held for investment) within the meaning of Section 1221 of the Code. The
discussion below does not purport to address all federal income tax consequences
that may be applicable to particular categories or classes of investors some of
which (such as banks, insurance companies and foreign investors) may be subject
to special rules under the federal income tax laws. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Certificates. See "STATE TAX CONSIDERATIONS."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
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.
The Prospectus Supplement for each series of Certificates will indicate
whether a REMIC election (or elections) will be made for the related Trust and,
if such an election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. The applicable Prospectus Supplement will
also specify if a REMIC election will not be made for a portion of the Trust
Fund. If so specified, such portion may be treated as a grantor trust for
federal income tax purposes. See "--Federal Income Tax Consequences For
Certificates As To Which No REMIC Election Is Made." For purposes of this tax
discussion, references to a "Certificateholder" or a "holder" are to the
beneficial owner of a Certificate.
57
<PAGE>
Federal Income Tax Consequences
For REMIC Certificates
General
The following discussion addresses securities ("REMIC Certificates")
representing interests in a Trust, or a portion thereof, which the Trustee will
covenant to elect to have treated as a REMIC under Sections 860A through 860G
(the "REMIC Provisions") of the Code.
An election to be treated as a REMIC for federal income tax purposes may
be made for a Trust Fund relating to a Series of Certificates. Such an election
will generally be made if the related Trust Fund would not qualify as a grantor
trust under subpart E, Part I of Subchapter J of the Code. In such a case,
Morrison & Hecker L.L.P., counsel to the Depositor, will deliver its opinion to
the effect that the Trust Fund issuing Certificates of that Series will be
treated as one or more REMICs for federal income tax purposes provided that the
provisions of the applicable Agreement are complied with and the statutory and
regulatory requirements concerning REMICs are satisfied, and the Certificates
offered thereby will be considered to be "Regular Interests" or "Residual
Interests" in the REMICs, as specified in the related Prospectus Supplement.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations, which are effective
with respect to debt instruments issued on or after April 4, 1994, do not
adequately address certain issues relevant to, and in some instances provide
that they are not applicable to, securities such as the Certificates.
Qualification as a REMIC
In order for the Trust Fund to qualify as a REMIC, there must be ongoing
compliance on the part of the Trust Fund with the requirements set forth in the
Code. The Trust Fund must fulfill an asset test, which requires that no more
than a de minimus portion of its assets, as of the close of the third calendar
month beginning after the "Startup Day" (which for purposes of this discussion
is the date of issuance of the Certificates) and at all times thereafter, may
consist of assets other than "qualified mortgages" and "permitted investments."
The REMIC Regulations provide a "safe harbor" pursuant to which the de minimus
requirement is met if at all times the aggregate adjusted basis of the
nonqualified assets is less than one percent of the aggregate adjusted basis of
all the REMIC's assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de minimus amount of
nonqualified assets. A REMIC also must provide "reasonable arrangements" to
prevent its residual interest from being held by "disqualified organizations"
and applicable tax information to transferors or agents that violate this
requirement. Accordingly, the Agreement for each Series will contain provisions
to assure that the asset and reasonable arrangements tests will be met at all
times that the Certificates are outstanding. See "--Taxation of Holders of
Residual Certificates--Restrictions on Ownership and Transfer of Residual
Certificates."
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, (i) 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); or (ii)
58
<PAGE>
substantially all the proceeds of the Mortgage Loan or the underlying mortgage
loan were used to acquire, improve or protect an interest in real property that,
at the origination date, was the only security for the Mortgage Loan or
underlying mortgage loan. If the Mortgage Loan has been substantially modified
other than in connection with a default or reasonably foreseeable default, it
must meet the loan-to-value test in (i) of the preceding sentence as of the date
of the last such modification or at closing. A qualified mortgage includes a
qualified replacement mortgage, which is any property that would have been
treated as a qualified mortgage if it were transferred to the REMIC pool on the
Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
"defective obligation" within a two-year period thereafter. A "defective
obligation" includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary representation
or warranty made at the time of transfer to the REMIC pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a
mortgage that was not in fact principally secured by real property (but only if
such mortgage is disposed of within 90 days of discovery). A Mortgage Loan that
is "defective" as described in clause (iv) that is not sold or, if within two
years of the Startup Day, exchanged, within 90 days of discovery, 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 three years after the year in which such property is acquired, 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.
59
<PAGE>
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. Section 860D(b)(2) of the
Code provides that if (i) an entity ceases to be a REMIC, (ii) the Secretary of
the Treasury determines that such cessation was inadvertent, (iii) no later than
a reasonable time after the discovery of the event resulting in such cessation,
steps are taken so that such entity is once more a REMIC, and (iv) such entity,
and each person holding an interest in such entity at any time during a period
specified, agrees to make such adjustments as may be required by the Secretary
of the Treasury with respect to such period, then, notwithstanding such
terminating event, the entity will be treated as continuing to be a REMIC or
such cessation will be disregarded, whichever the Secretary of the Treasury
determines to be appropriate. Although the Code authorizes the Treasury
Department to issue regulations providing relief in the event of an inadvertent
termination of REMIC status, no such regulations have been issued. Any such
relief, moreover, may be accompanied by sanctions, such as the imposition of a
corporate tax on all or a portion of the Trust Fund's income for the period in
which the requirements for such status are not satisfied.
Status of REMIC Certificates. If a REMIC election is made with respect to
a Series of Certificates, (i) 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)(i)-(x) (except that if the underlying mortgage loans are not
residential mortgage loans, the Certificates will not so qualify)); and (ii)
Certificates held by a real estate investment trust will constitute "real estate
assets" within the meaning of Code Section 856(c)(4)(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) or (ii) above, then a Certificate will
qualify for the corresponding tax treatment in (i) or (ii) 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.
Holders of Certificates should be aware that (i) Certificates held by a
regulated investment company will not constitute "government securities" within
the meaning of Code Section 851(b)(4)(A)(i); and Certificates held by a real
estate investment trust will not constitute "Government Securities" within the
meaning of Code Section 856(c)(4)(A). REMIC Certificates held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(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.
60
<PAGE>
The Tiered REMICs will be treated as one REMIC solely for purposes of
determining whether the Certificates will be "real estate assets" within the
meaning of Section 856(c)(4)(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.
Taxation of REMIC Regular Certificates
Interest and Acquisition Discount. Certificates representing Regular
Interests in a REMIC ("Regular Certificates") are generally taxable to
Certificateholders in the same manner as evidences of indebtedness issued by the
REMIC. Stated interest on the Regular Certificates will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Certificateholder's normal accounting method. Reports will be made
annually to the IRS and to holders of Regular Certificates that are not excepted
from the reporting requirements regarding amounts treated as interest (including
accrual of original issue discount) on Regular Certificates.
Certificates on which interest is not paid currently ("Compound Interest
Certificates") will, and certain of the other Certificates constituting Regular
Interests may be issued with original issue discount ("OID") within the meaning
of Code Section 1273. Rules governing OID are set forth in Sections 1271-1275 of
the Code and the OID Regulations. Although Section 1272(a)(6) of 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. Further, the application of the OID Regulations to the
Regular Certificates remains unclear in other respects because the OID
Regulations either do not address, or are subject to varying interpretations
with regard to, several relevant issues.
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."
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 this 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.
61
<PAGE>
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
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
Certificates." 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
62
<PAGE>
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, if any,
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
(including actual prepayments) that have occurred before the end of the accrual
period; and (iii) the assumption that the remaining payments (including actual
prepayments) will be made in accordance with the original Prepayment Assumption.
The effect of this method will be to increase (or decrease) the portion of OID
required to be included in income by a Certificateholder taking into account
whether prepayments with respect to the Mortgage Loans are accruing faster
(slower) than the Prepayment Assumption. Although OID will be reported to
Certificateholders based on the Prepayment Assumption, there is no assurance
that Mortgage Loans will be prepaid at that rate and no representation is made
to Certificateholders that Mortgage Loans will be prepaid at that rate or at any
other rate.
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.
Certain Classes of Certificates may represent more than one Class of
Regular Interests. The Trustee intends, based on the OID 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 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
63
<PAGE>
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 Certificates (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 Certificates." Because of uncertainty in the law, Counsel to the
Depositor will not render any opinion on these issues.
Variable Rate Regular Certificates. 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 OID 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 floating rate is a qualified floating rate if
variations in the rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds, where such rate is subject to a
fixed multiple that is greater than 0.65, but not more than 1.35. Such rate may
also be increased or decreased by a fixed spread or subject to a fixed cap or
floor, or a cap or floor that is not reasonably expected as of the issue date to
affect the yield of the instrument significantly. An objective rate (other than
a qualified floating rate) is a rate that is determined using a single fixed
formula and that is based on objective financial or economic information,
provided that such information is not (i) within the control of the issuer or a
related party or (ii) unique to the circumstances of the issuer or a related
party. A qualified inverse floating rate is an objective rate equal to a fixed
rate reduced by a qualified floating rate, the variations in which can
reasonably be expected to inversely reflect contemporaneous variations in the
cost of newly borrowed funds (disregarding permissible rate caps, floors,
governors and similar restrictions such as are described above).
Purchasers of Regular Certificates bearing a variable rate of interest
should be aware that there is uncertainty concerning the application of Code
Section 1272(a)(6) and the OID Regulations to such Certificates. In the absence
of other authority, the Depositor intends to be guided by the provisions of the
OID 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
64
<PAGE>
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 OID 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 OID Regulations governing variable rate debt instruments, it may be subject
to the provisions of the OID 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.
Constant Yield Election for Interest. Under the OID 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." The election to accrue interest, discount and premium on a
constant yield method is irrevocable without the consent of the IRS. A holder of
a Regular Certificate should consult its tax adviser before making this
election.
Market Discount. 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 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
65
<PAGE>
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.
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.
Premium. 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. The Certificateholder
may elect under Code Section 171 to amortize such premium as an offset to
interest income on such Certificate (and not as a separate deduction item) on a
constant yield method. See "--Constant Yield Election for Interest."
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.
Final Treasury regulations were issued in December 1997 which address the
amortization of bond premiums (the "Premium Regulations"). The preamble to the
Premium Regulations indicate that they do not apply to Regular Interests in a
REMIC or any pool of debt instruments the yield on which may be affected by
prepayments. The Premium Regulations describe the yield method of amortizing
premium and provide that a bond holder may offset the premium against
corresponding interest income only as that income is taken into account under
the bond holder's method of accounting. For instruments that may be called or
prepaid prior to maturity, a bond 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 holder's yield. A holder of a debt instrument may elect to
amortize bond premium under the Premium Regulations for the taxable year
containing the effective date, with the election applying to all the holder's
debt instruments held on the first day of the taxable year. Because the Premium
Regulations are specifically not applicable to Regular Certificates purchasers
who pay a premium for their Regular Certificates should consult their tax
advisors regarding any election to amortize premium and the method to be
employed.
Subordinate Certificates--Effects of Defaults, Delinquencies and Losses. 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
66
<PAGE>
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, and to the extent the bad debt rules of
Section 166 of the Code apply, it appears a Certificateholder that is a
corporation or otherwise holds such Certificates in connection with a trade or
business should generally be allowed to deduct as an ordinary loss any loss
sustained on account of partial or complete worthlessness of a Regular
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 Regular Certificate. A
noncorporate Certificateholder alternatively, depending on the factual
circumstances, may be allowed a capital 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.
Allocation of Expenses in a Single Class REMIC. As a general rule, all of
the servicing, administrative and other non-interest 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 and a matching amount of additional
income will be allocated, under temporary Treasury regulations, among the
holders of REMIC Regular Certificates and the holders of REMIC Residual
Certificates on a daily basis in proportion to the relative amounts of income
accruing to each Certificateholder on that day. 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. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related REMIC Residual Certificates in their
entirety and not to holders of the related REMIC Regular Certificates. If the
REMIC is considered to be a "single-class REMIC" and a Regular Interest
Certificateholder 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 1998, estimated to be $124,500, or
$62,250, 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) (the "Applicable Amount") 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 these deductions may have a significant adverse
impact on the yield of the Regular Certificate to such a holder.
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
67
<PAGE>
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.
Gain from the disposition of a Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent of the excess, if
any, of (i) the amount that would have been includible in the holder's income if
the yield on such Regular Certificate had equaled 110% of the applicable federal
rate (as defined in Code Section 1274(d)) 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. 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,
an 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. A sale of a
REMIC Regular Certificate will be part of a "conversion transaction" if
substantially all of the holder's expected return is attributable to the time
value of the holder's net investment, and (i) the holder entered the contract to
sell the REMIC Regular Certificate substantially contemporaneously with
acquiring the REMIC Regular Certificate, (ii) the REMIC Regular Certificate is
part of a straddle, (iii) the REMIC Regular Certificate is marketed or sold as
producing capital gains, or (iv) other transactions to be specified in Treasury
regulations that have not yet been issued.
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 marginal
tax rate on both ordinary income and long-term capital gains of corporate
taxpayers is 35% subject to certain higher marginal tax rates which phase out
the benefits of the guaranteed corporate tax rate structure. Net capital gain
realized on a capital asset which is sold after being held by 12 months or less
is 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 is 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 is subject to tax at
20%, assuming that the taxpayer is otherwise in a rate bracket equal to or
greater than 20%.
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 REMIC Regular Certificates" 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). The "daily portions"
of REMIC taxable income or net loss will be includible as ordinary income or
loss in determining the federal taxable income of holders of Residual
Certificates. See "--Taxation of Holders
68
<PAGE>
of Residual Certificates." 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.
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 to 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 REMIC Regular Certificates"
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. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell REMIC pool property to prevent a default on Regular
Certificates as a result of a default on qualified mortgages or to facilitate a
clean-up call (generally, an optional termination to save administrative costs
when no more than a small percentage of the Certificates is outstanding). 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.
Net Income from Foreclosure Property. 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. Generally, property acquired by deed in lieu of foreclosure
would be treated as "foreclosure property" for a period ending with the third
calendar year following the year of acquisition of such property, with a
possible extension. "Net income from foreclosure property" generally means gain
from the sale of a foreclosure property that is inventory property and gross
income
69
<PAGE>
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 Certificate holders within the 90-day period.
Taxation of Holders of Residual Certificates
The holder of a Certificate representing a residual interest (a "Residual
Certificate") will take into account the "daily portion" of the taxable income
or net loss of the REMIC for each day during the taxable year on which such
holder held the Residual Certificate. The daily portion is determined by
allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Certificates in
proportion to their respective holdings on such day. For this purpose, the
taxable income or net loss of the REMIC, in general, will be allocated to each
day in the calendar quarter ratably using such reasonable convention as set
forth in the Prospectus Supplement including, as applicable, 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 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 will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the Applicable Amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. The amount of
additional taxable income reportable by Certificateholders that are subject to
the limitations of either Section 67 or Section 68 of the Code may be
substantial. 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. 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. 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 "--Federal Income
Tax Consequences For Certificates As To Which No Remic Election Is
Made--Stripped Certificates--Discount or Premium on Stripped Certificates."
Accordingly, such Certificates may not be appropriate investments for
individuals, estates or trusts, or pass-through entities beneficially owned by
70
<PAGE>
one or more individuals, estates or trusts. Such prospective investors should
consult with their tax advisors prior to making an investment in such
Certificates.
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 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.
Basis. 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. However, 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 previously under "--Taxation of Holders of Residual
Certificates," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. 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. The preamble to the REMIC Regulations
states that the Service may provide future guidance on the proper tax treatment
of payments made by a transferor of such a residual interest to induce the
transferee to acquire the interest, and Residual Certificateholders should
consult their own tax advisors in this regard.
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
71
<PAGE>
termination of the REMIC, unless future Treasury regulations provide for
periodic adjustments to the REMIC income otherwise reportable by such holder.
The REMIC Regulations do not currently so provide. See "--Sale or Exchange"
below regarding possible treatment of a loss upon termination of the REMIC as a
capital loss.
Limitation on Losses. The amount of the REMIC's net loss that a
Certificateholder may take into account currently is limited to the holder's
adjusted basis at the end of the calendar quarter in which such loss arises. A
holder's basis in a Residual Certificate will initially equal such holder's
purchase price, and will subsequently be increased by the amount of the REMIC's
taxable income allocated to the holder, and decreased (but not below zero) by
the amount of distributions made and the amount of the REMIC's net loss
allocated to the holder. Any disallowed loss may be carried forward
indefinitely, but may be used only to offset income of the REMIC generated by
the same REMIC. The ability of Residual Interest Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
such holders should consult their tax advisers.
Distributions. Distributions on a Residual Certificate, if any, will
generally not result in any additional taxable income or loss to a holder of a
Residual Certificate. If the amount of such distribution exceeds a holder's
adjusted basis in the Residual Certificate, however, the holder will recognize
gain (treated as gain from the sale of the Residual Certificate) to the extent
of such excess. If the Residual Certificate is property held for investment,
such gain will generally be capital in nature.
Limitations on Offset or Exemption of REMIC Income: Excess Inclusions and
UBTI. 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 taxable income ("UBTI") imposed by Code Section 511,
such as a pension fund or other exempt organization, such Residual Interest
Certificateholder's excess inclusion income will be treated as unrelated
business taxable income of such Certificateholder. In addition, under Treasury
regulations yet to be issued, if a real estate investment trust, a regulated
investment company, a common trust fund or certain cooperatives were to own a
Residual Certificate, a portion of dividends (or other distributions) paid by
the real estate investment trust (or other entity) would be treated as excess
inclusion income. If a Residual Certificate is owned by a foreign person, excess
inclusion income is subject to tax at a rate of 30%, which rate may not be
reduced by treaty and is not eligible for treatment as "portfolio interest." See
"--Tax Treatment of Foreign Investors--Residual Certificates." 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. Accordingly, the portion of the REMIC pool's taxable
income that will be treated as excess inclusions will be a larger portion of
such income as the adjusted issue price of the Residual Certificates diminishes.
For this purpose, the long-term applicable
72
<PAGE>
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 minimum taxable income ("AMTI") of a Residual
Certificate holder. 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 for a taxable year cannot be less than excess inclusion income for
the year. Finally, any AMTI net operating loss deduction is computed without
regard to excess inclusions. These changes are effective for tax years beginning
after December 31, 1986, unless a Residual Certificate holder 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."
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.
Restrictions on Ownership and Transfer of Residual Certificates. As a
condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a Residual Interest by any "Disqualified Organization."
"Disqualified Organizations" include the United States, any state or political
subdivision thereof, any foreign government, any international organization, or
any agency or instrumentality of any of the foregoing (provided, that such term
does not include an instrumentality if all of its activities are subject to tax
and a majority of its board of directors is not selected by any such
governmental entity.), 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
73
<PAGE>
time of the transfer pursuant to Code Section 860E(e)(2) equal to the product of
(i) the present value (discounted using the "applicable federal rate" for
obligations whose term ends on the close of the last quarter in which excess
inclusions are expected to accrue with respect to the Residual Certificate) of
the total anticipated excess inclusions with respect to such Residual
Certificate for periods after the transfer and (ii) the highest marginal federal
income tax rate applicable to corporations. In addition, if a Disqualified
Organization is the record holder of an interest in a pass-through entity
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company or any person holding as nominee) that owns a
Residual Certificate, the pass-through entity will be required to pay tax equal
to its product of (i) the amount of excess inclusion income of the REMIC for
such taxable year allocable to the interest held by such Disqualified
Organization; multiplied by (ii) the highest marginal federal income tax rate
imposed on corporations by Code Section 11(b)(1).
Such a tax generally would be imposed on the transferor of the Residual
Certificate, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. A transferor of a Residual Certificate
would in no event, however, be liable for such tax with respect to a transfer if
the transferee furnishes to the transferor an affidavit that the transferee is
not a Disqualified Organization and, as of the time of the transfer, the
transferor does not have actual knowledge that such affidavit is false. The tax
also may be waived by the Treasury Department if the Disqualified Organization
promptly disposes of the Residual Certificate and the transferor pays income tax
at the highest corporate rate on the excess inclusion for the period the
Residual Certificate is actually held by the Disqualified Organization.
In addition, if a "Pass-Through Entity" has excess inclusion income with
respect to a Residual Certificate during a taxable year and a Disqualified
Organization is the record holder of an equity interest in such entity, then a
tax is imposed on such entity equal to the product of (i) the amount of excess
inclusions that are allocable to the interest in the Pass-Through Entity during
the period such interest is held by such Disqualified Organization and (ii) the
highest marginal federal corporate income tax rate. Such tax would be deductible
from the ordinary gross income of the Pass-Through Entity for the taxable year.
The Pass-Through Entity would not be liable for such tax if it has received an
affidavit from such record holder that (i) states under penalty of perjury that
it is not a Disqualified Organization or (ii) furnishes a social security number
and states under penalties of perjury that the social security number is that of
the transferee, provided that during the period such person is the record holder
of the Residual Certificate, the Pass-Through Entity does not have actual
knowledge that such affidavit is false.
Noneconomic Residual Interests. Under the REMIC Regulations, if a Residual
Certificate is a "noneconomic residual interest," as described below, a transfer
of a Residual Certificate to a non-U.S. 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
74
<PAGE>
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 as they come due in the
future; and (ii) the transferee represents to the transferor that it understands
that, as the holder of the noneconomic residual interest, the transferee may
incur tax liabilities in excess of any cash flows generated by the residual
interest and that the transferee intends to pay taxes associated with holding of
residual interest as they become due. The Agreement will require the transferee
of a Residual Certificate to state as part of the affidavit described above
under the heading "--Disqualified Organizations" that such transferee (i) has
historically paid its debts as they come due, (ii) intends to continue to pay
its debts as they come due in the future, (iii) understands that, as the holder
of a noneconomic residual interest, it may incur tax liabilities in excess of
any cash flows generated by the Residual Certificate, and (iv) intends to pay
any and all taxes associated with holding the Residual Certificate as they
become due. The transferor must have no reason to believe that such statement is
untrue. A similar type of limitation exists with respect to certain transfers of
Residual Interests by foreign persons to U.S. 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 taxpayer 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.
Reporting Requirements and 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 Non-U.S.
Persons. 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
75
<PAGE>
would be allowed as a credit against such Certificateholders, 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
(each, a "Non-U.S. Person") 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 Non-U.S.
Person, 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 Non-U.S. Persons. Holders of Certificates, including
"stripped certificates" (i.e., Certificates that separate ownership of principal
payments and interest payments on the Mortgage Loans), however, may be subject
to withholding to the extent that the Mortgage Loans were originated on or
before July 18, 1984.
Interest and OID of Certificateholders who are foreign persons are not
subject to withholding if they are effectively connected with a United States
business conducted by the Certificateholder. They will, however, generally be
subject to United States federal income tax at regular rates.
Residual Certificates. Payments to holders of Residual Certificates who
are foreign persons will generally be treated as interest and be subject to
United States withholding tax at 30% or any lower applicable treaty rate.
Holders should assume that such income does not qualify for exemption from
United States withholding tax as portfolio interest. If the amounts paid to
Residual Certificateholders who are Non-U.S. Persons are effectively connected
with the conduct of a trade or business within the United States by such
Non-U.S. Person, 30% (or lower treaty rate) withholding will not apply. Instead,
the amounts paid to such Non-U.S. Persons 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 "--Taxation of Holders of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income: Excess Inclusions". 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 Non-U.S. Persons 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 Non-U.S.
Person transfers a Residual Certificate to a U.S. Person, and if the transfer
has the effect of allowing
76
<PAGE>
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 "--Taxation of Holders of Residual Certificates--Limitations on Offset or
Exemption of REMIC Income: 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.
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 "--Taxation of the REMIC--Calculation of REMIC Income" above)
allocable to such holders. Furthermore, under such regulations, information must
be furnished quarterly to Residual Certificateholders, furnished annually to
holders of Regular Certificates, and filed annually with the IRS concerning the
percentage of the REMIC's assets meeting the qualified asset tests described
above under "--Qualification as a REMIC--Status of REMIC Certificates."
The holder of the largest percentage interest of the Residual Certificates
will be designated as and will act as the "tax matters person" with respect to
the REMIC in all respects. In general, the Trustee will act as attorney in fact
and agent for the tax matters person and, subject to certain notice requirements
and various restrictions and limitations, generally will have the authority to
act on behalf of the REMIC and the Residual Interest Certificateholders in
connection with the administrative and judicial review of items
77
<PAGE>
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.
Federal Income Tax Consequences For Certificates
As To Which No REMIC Election Is Made
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. Under such circumstances 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
78
<PAGE>
minimum tax liability. In addition, Section 68 of the Code provides that the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the Applicable Amount 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.
Tax Status of Certificates
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, "real estate assets" within the meaning of Section
856(c)(6)(B) of the Code, "loans secured by an interest in real property" within
the meaning of Section 7701(a)(19)(C) of the Code provided that the real
property securing the loan is of the type specified in such Code Section;
"obligation(s) principally secured by an interest in real property" within the
meaning of Section 860G(a)(3)(A) 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.
Pass-Through 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
79
<PAGE>
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 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.
Stripped Certificates
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
80
<PAGE>
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.
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 OID 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
81
<PAGE>
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 OID
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.
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. Except as subsequently discussed, 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.
Certain financial institutions subject to the provisions of Code Section
582(c), which recognize gain on the sale of a certificate will be taxable at
ordinary income rates on such gain. In addition, gain on the sale of a Standard
Certificate will be treated as ordinary income (i) if a Pass-Through Certificate
is held as part of a "conversion transaction" as defined in Code Section
1258(c), up to the amount of interest that would have accrued on the
Pass-Through Certificateholder's applicable Federal rate in effect at the time
the taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates.
Capital gains of certain non-corporate taxpayers generally area subject to a
lower maximum tax rate (28%) than ordinary income of such taxpayers (39.6%) for
property held for more than one year but not more than 18 months, and a still
lower maximum rate (20%) for property held for more than 18 months. The maximum
tax rate for corporations is the same with respect to both ordinary income and
capital gains.
Reporting Requirements and Backup Withholding
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Pass-Through Certificateholder or Stripped
Certificateholder at any time during such year, such information (prepared on
the basis described above) as the Trustee deems to be necessary or desirable to
82
<PAGE>
enable such Certificateholders to prepare their federal income tax returns. Such
information will include the amount or original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issued discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder that purchased at the issue price. In particular, in the case
of Stripped Certificates, unless provided otherwise in the applicable Prospectus
Supplement, such reporting will be based upon a representative initial offering
price of such class of Stripped Certificates. The Trustee will also file such
original issue discount information with the Service. If a Certificateholder
fails to supply an accurate taxpayer identification number or if the Secretary
of the Treasury determines that a Certificateholder has not reported all
interest and dividend income required to be shown on his federal income tax
return, 31% backup withholding may be required in respect of any reportable
payments, as described above under "Material Federal Income Tax
Consequences--Federal Income Tax Consequences For REMIC Certificates--Reporting
Requirements and Backup Withholding".
Treatment of Foreign Investors
To the extent that a Certificate evidences ownership in Mortgage Loans
that are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Pass-Through Certificateholder or Stripped
Certificateholder on original issue discount recognized by the Pass-Through
Certificateholder or Stripped Certificateholders on the sale or exchange of such
a Certificate also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
"--Federal Income Tax Consequences for REMIC Certificates--Tax Treatment
of Foreign Investors--Regular 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.
However, a governmental plan or a church plan may be subject to similar
restrictions under other applicable federal
83
<PAGE>
and state law ("Similar 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. A fiduciary of a governmental plan or a church plan should make its
own determination as to the need for or availability of any exemptive relief
under Similar Law or Section 503 of the Code.
Investments by ERISA Plans are subject to ERISA's general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that investments be made in accordance with
the documents governing the ERISA Plan. Before investing in a Senior
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 Senior 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 Senior 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
84
<PAGE>
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 and church plans), but this exemption is tested immediately
after each acquisition of an equity interest in the entity whether upon initial
issuance or in the secondary market.
Pursuant to the Regulations, if the assets of the Trust Fund were deemed
to be "plan assets" by reason of the investment of assets of a Plan in any
Certificates, the "plan assets" of such Plan would include an undivided interest
in the Mortgage Loans, the mortgages underlying the Mortgage Loans and any other
assets held in the Trust Fund. Therefore, because the Mortgage Loans and other
assets held in the Trust Fund may be deemed to be "plan assets" of each Plan
that purchases Certificates, in the absence of an exemption, the purchase, sale
or holding of Certificates of any Series or Class by or with "plan assets" of a
Plan may result in a prohibited transaction and the imposition of civil
penalties or excise taxes. Depending on the relevant facts and circumstances,
certain prohibited transaction exemptions may apply to the purchase, sale or
holding of Certificates of any Series or Class by a Plan, for example,
Prohibited Transaction Class Exemption ("PTCE") 95-60, which exempts certain
transactions between insurance company general accounts and parties in interest;
PTCE 91-38, which exempts certain transactions between bank collective
investment funds and parties in interest; PTCE 90-1, which exempts certain
transactions between insurance company pooled separate accounts and parties in
interest; or PTCE 84-14, which exempts certain transactions effected on behalf
of a plan by a "qualified professional asset manager." There can be no assurance
that any of these exemptions will apply with respect to any Plan's investment in
any Certificates or, even if an exemption were deemed to apply, that any
exemption would apply to all prohibited transactions that may occur in
connection with such investment. Also, the Department has issued individual
administrative exemptions from application of certain prohibited transaction
restrictions of ERISA and the Code to most underwriters of mortgage-backed
securities (each, an "Underwriter's Exemption"). Such an Underwriter's Exemption
can only apply to mortgage-backed securities which, among other conditions, are
sold in an offering with respect to which such an underwriter serves as the sole
or a managing underwriter, or as a selling or placement agent. If such an
Underwriter's Exemption might be applicable to a Series of Certificates, such as
Senior Certificates, the related Prospectus Supplement will refer to such
possibility. Further, the related Prospectus Supplement may provide that certain
Classes or Series of Certificates, such as Subordinate 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 or, in the case of governmental plans or church plans, Similar Law 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
85
<PAGE>
governmental plans, as discussed above under "MATERIAL FEDERAL INCOME TAX
CONSEQUENCES--Federal Income Tax Consequences For REMIC Certificates--Taxation
of Holders of Residual Certificates" and "--Federal Income Tax Consequences for
REMIC Certificates--Taxation of Holders of Residual Certificates--Restrictions
on Ownership and Transfer of Residual Certificates."
Due to the complexity of these rules and the penalties imposed upon
persons involved in prohibited transactions, it is particularly important that
individuals responsible for investment decisions with respect to ERISA Plans and
Code Plans consult with their counsel regarding the consequences under ERISA
and/or the Code of their acquisition and ownership of Certificates.
The sale of Certificates to a Plan is in no respect a representation by
the Depositor, the applicable underwriter or any other service provider with
respect to the Certificates, such as the Trustee, the Master Servicer and the
Special Servicer, if any, that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
The related Prospectus Supplement will indicate whether the Offered
Certificates will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 (the "Enhancement Act"). It is
anticipated that the Offered Certificates generally will not constitute
"mortgage related securities" for purposes of the Enhancement Act.
All depository institutions considering an investment in the Certificates
should review the Supervisory Policy Statement on Securities Activities dated
January 28, 1992 (the "Policy Statement") of the Federal Financial Institutions
Examination Council (to the extent adopted by their respective regulators),
which in relevant part prohibits depository institutions from investing in
certain "high-risk" mortgage securities, except under limited circumstances, and
sets forth certain investment practices deemed to be unsuitable for regulated
institutions.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, "prudent investor" provisions, percentage-of-assets limits, provisions that
may restrict or prohibit investment in securities that are not "interest
bearing" or "income-paying," and provisions that may restrict or prohibit
investments in securities that are issued in book-entry form.
The appropriate characterization of the Certificates under various legal
investment restrictions, and thus the ability of investors subject to these
restrictions to purchase Certificates, may be subject to significant
interpretive uncertainties. All investors whose investment authority is subject
to legal restrictions should consult their own legal advisers to determine
whether, and to what extent, the Certificates will constitute legal investments
for them.
PLAN OF DISTRIBUTION
The Depositor may sell the Certificates offered hereby in Series either
directly or through underwriters. The related Prospectus Supplement or
Prospectus Supplements for each Series will describe the terms of the offering
for that Series and will state the public offering or purchase price of each
Class of Certificates of such Series, or the method by which such price is to be
determined, and the net proceeds to the Depositor from such sale.
86
<PAGE>
If the sale of any Certificates is made pursuant to an underwriting
agreement pursuant to which one or more underwriters agree to act in such
capacity, such Certificates will be acquired by such underwriters for their own
account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices to be determined at the time of sale or at the time of commitment
therefor. Firm commitment underwriting and public reoffering by underwriters may
be done through underwriting syndicates or through one or more firms acting
alone. The specific managing underwriter or underwriters, if any, with respect
to the offer and sale of a particular Series of Certificates will be set forth
on the cover of the Prospectus Supplement related to such Series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement. The Prospectus Supplement will describe any discounts and
commissions to be allowed or paid by the Depositor to the underwriters, any
other items constituting underwriting compensation and any discounts and
commissions to be allowed or paid to the dealers. The obligations of the
underwriters will be subject to certain conditions precedent. The underwriters
with respect to a sale of any Class of Certificates will generally be obligated
to purchase all such Certificates if any are purchased. Pursuant to each such
underwriting agreement, the Depositor will indemnify the related underwriters
against certain civil liabilities, including liabilities under the 1933 Act.
If any Certificates are offered other than through underwriters pursuant
to such underwriting agreements, the related Prospectus Supplement or Prospectus
Supplements will contain information regarding the terms of such offering and
any agreements to be entered into in connection with such offering.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be "underwriters" within the
meaning of the 1933 Act in connection with reoffers and sales by them of
Certificates. Certificateholders should consult with their legal advisors in
this regard prior to any such reoffer and sale.
LEGAL MATTERS
Certain legal matters relating to the Certificates offered hereby will be
passed upon for the Depositor by Morrison & Hecker L.L.P., Kansas City,
Missouri, and for the Underwriters as specified in the related Prospectus
Supplement.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related Series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any Class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in one
of the four highest categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by Certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result,
87
<PAGE>
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.
88
<PAGE>
INDEX OF DEFINITIONS
1933 Act..........................................iii
1934 Act...........................................iv
1986 Act...........................................66
ACMs...............................................51
ADA................................................56
Agreement.......................................3, 16
AMTI...............................................73
Applicable Amount..................................67
Bankruptcy Code....................................43
Cash Flow Bond Method..............................81
CERCLA.........................................13, 49
Certificateholders.................................18
Certificates.....................................i, 1
Classes.............................................i
Closing Date.......................................24
Code............................................5, 57
Code Plans.........................................83
Collection Account..............................2, 18
Commission........................................iii
Compound Interest Certificates.....................61
Counsel............................................57
Credit Enhancement..............................3, 35
Cut-off Date....................................4, 18
Department.........................................84
Depositor...........................................i
Disqualified Organizations.....................14, 73
Distribution Account............................2, 18
Distribution Date...............................3, 18
Enhancement Act....................................86
EPA................................................51
ERISA...........................................5, 83
ERISA Plans........................................83
Escrow Account.....................................28
Escrow Payments....................................28
Event of Default...................................33
Fannie Mae.........................................19
FHA................................................25
FHLMC..............................................19
Forfeiture Laws....................................56
Form 8-K...........................................24
Garn-St. Germain Act...............................52
Hazardous Materials................................50
HUD................................................25
Installment Contracts...........................1, 22
Interest Weighted Certificate..................63, 81
IRS................................................59
Lead Paint Act.....................................51
Lender Liability Act...............................49
Master Servicer....................................27
Master Servicer Remittance Date....................19
Midland............................................16
mid-term capital gain..............................68
Mortgage........................................1, 22
Mortgage Loan...................................1, 22
Mortgage Loan File.................................24
Mortgage Loan Groups...............................24
Mortgage Loan Schedule.............................24
Mortgage Loans.....................................ii
Mortgage Pool...................................ii, 1
Mortgaged Property..............................1, 22
Multiple Variable Rate.............................64
NCUA...............................................54
Negative Adjustment................................81
noncontingent bond method..........................81
Non-U.S. Person....................................76
Note...............................................23
Offered Certificates................................i
OID................................................61
OID Regulations....................................58
Pass-Through Certificates..........................78
Pass-Through Rate.................................iii
Permitted Investments..............................19
Plan................................................5
Plans..............................................83
Policy Statement...................................86
Premium Regulations................................66
Prepayment Assumption..........................61, 63
Property Protection Expenses.......................19
PTCE...............................................85
Rating Agency...................................5, 17
Ratio Strip Certificates...........................80
Registration Statement............................iii
Regular Certificates............................5, 61
Regular Interests...................................5
Regulations........................................84
Relief Act.........................................53
REMIC..............................................ii
REMIC Certificates.................................58
REMIC Provisions...................................58
REMIC Regulations..................................58
REO Account........................................19
REO Property.......................................17
Reserve Account....................................17
Reserve Fund.......................................36
Residual Certificate...............................70
Residual Certificates...............................5
Residual Interests..................................5
S&P................................................20
Securities Act of 1933............................iii
Seller.............................................26
Senior Certificates................................35
Series..............................................i
Servicing Fee..................................30, 78
Similar Law........................................84
Simple Interest Loans..............................23
Single Variable Rate...............................62
Special Servicer....................................1
Special Servicing Fee..............................30
Specially Serviced Mortgage Loans..................27
Startup Day....................................58, 69
Stripped Certificates..............................78
Subordinate Certificates...........................35
Tax Reform Act of 1986.........................63, 66
Tiered REMICs......................................60
TIN................................................75
Title V............................................54
89
<PAGE>
Title VIII.........................................54
Trust Fund......................................i, 17
Trustee.........................................1, 22
U.S. Person........................................73
UBTI...............................................72
UCC................................................40
Underwriter's Exemption............................85
USTs...............................................51
Voting Rights......................................15
90
<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 $ (Approximate)
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 COMMERCIAL MORTGAGE
made hereunder shall, under any circumstances, create ACCEPTANCE CORP.
an implication that the information herein is correct Depositor
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
MIDLAND LOAN SERVICES, INC.
PROSPECTUS SUPPLEMENT Servicer
Available Information.............................iii
Summary of Prospectus Supplement..................S-1
Risk Factors.....................................S-19
Description of the Mortgage Pool.................S-36
Midland Loan Services, Inc.......................S-68
Description of the Certificates................. S-72 Class ___, Class ___,
Yield and Maturity Considerations................S-87 Class ___, Class ___
The Pooling and Servicing Agreement..............S-97
Material Federal Income Tax Consequences....... S-116
ERISA Considerations........................... S-118
Legal Investment............................... S-122
Plan of Distribution........................... S-122
Use of Proceeds.................................S-123
Legal Matters.................................. S-123 Commercial Mortgage
Ratings........................................ S-124 Pass-Through Certificates
Index of Definitions............................S-126 Series 1998-___
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 PROSPECTUS SUPPLEMENT
The Depositor......................................15 _____________________
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.................................35
Certain Legal Aspects of the Mortgage Loans........38
Material Federal Income Tax Consequences...........57
State Tax Considerations...........................83
ERISA Considerations...............................83
Legal Investment...................................86
Plan of Distribution...............................86
Legal Matters......................................87
Financial Information..............................87
Rating.............................................87
Index of Definitions...............................88
=====================================================
<PAGE>
VERSION 2: MULTIFAMILY, GENERAL COMMERCIAL AND HOTELS
Replace the first paragraph of the cover page of the prospectus with the
following:
Commercial Mortgage Acceptance Corp. (the "Depositor") from time to
time will offer Commercial 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 Mortgage Pass-Through Certificates of
such Series, are collectively referred to herein as the "Certificates."
The Certificates of each Series will evidence beneficial ownership
interests in a trust fund (the "Trust Fund") to be established by the
Depositor. The Certificates of a Series may be divided into two or more
"Classes," which may have different interest rates and which may receive
principal payments in differing proportions and at different times. In
addition, rights of the holders of certain Classes to receive principal
and interest may be subordinated to those of other Classes. Each Trust
Fund will consist of a pool (the "Mortgage Pool") of one or more mortgage
loans secured by first or junior liens on fee simple or leasehold
interests in commercial real estate properties, multifamily residential
properties and/or mixed-use properties and related property and interests,
conveyed to such Trust Fund by the Depositor, and other assets, including
any Credit Enhancement described in the related Prospectus Supplement. See
"DESCRIPTION OF THE CERTIFICATES--General" herein. The percentage of any
mixed-use residential/commercial property used for commercial purposes
will be set forth in the Prospectus Supplement. Multifamily properties
(consisting of apartments, congregate care facilities and/or mobile home
parks), general commercial properties (consisting of retail properties,
including shopping centers, office buildings, mini-warehouses, warehouses,
industrial properties and/or other similar types of properties) and hotels
will represent security for a material concentration of the Mortgage Loans
in any Trust Fund, based on principal balance at the time such Trust Fund
is formed. See "DESCRIPTION OF THE MORTGAGE POOL" in the Prospectus
Supplement. If so specified in the related Prospectus Supplement, the
Mortgage Pool may also include installment contracts for the sale of such
types of properties. Such mortgage loans and installment contracts are
hereinafter referred to as the "Mortgage Loans." The Mortgage Loans will
have fixed or adjustable interest rates. Some Mortgage Loans will fully
amortize over their remaining terms to maturity and others will provide
for balloon payments at maturity. The Mortgage Loans will provide for
recourse against only the Mortgaged Properties or provide for recourse
against the other assets of the obligors thereunder. The Mortgage Loans
will be newly originated or seasoned, and will be acquired by the
Depositor either directly or through one or more affiliates. The Mortgage
Loans may be originated by affiliated entities, including Midland Loan
Services, Inc. and unaffiliated entities. See "RISK FACTORS--Potential
Inability to Verify Underwriting Standards." 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, Inc.
In "Summary of the Prospectus--The Trust Fund--A. Mortgage Pool," replace the
second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of
V2-i
<PAGE>
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.
In "Risk Factors" insert the following after the section entitled "Risks
Associated with Lending on Income Producing Properties":
Risks Particular to Hotel Properties
The Mortgaged Properties securing the Mortgage Loans for any Trust
Fund will contain a material concentration of hotel properties. Hotel
properties may involve different types of hotels, including full service
hotels, limited service hotels, hotels associated with national franchise
chains, hotels associated with regional franchise chains and hotels that
are not affiliated with any franchise chain but may have their own brand
identity.
These Mortgaged Properties will be subject to operating risks common
to the hotel industry. These risks include, among other things,
competition from other hotels, increases in operating costs (which
increases may not necessarily be offset by increased room rates),
dependence on business and commercial travelers and tourism, increases in
energy costs and other expenses of travel, strikes, relocation of highways
and the construction of additional highways. A hotel's location, quality
and franchise affiliation can also affect its economic performance.
Adverse economic conditions, either local, regional or national, may limit
the amount that can be charged for a room and may result in a reduction in
occupancy levels. In addition, as hotel revenues are primarily generated
by room occupancy and such occupancy is usually for short periods of time,
hotel revenues may be more sensitive to general economic conditions and
competition than other income producing properties. This daily
mark-to-market also accentuates the highs and lows of economic cycles.
Additionally, the revenues of certain hotels, particularly those located
in regions whose economy depends upon tourism, may be highly seasonal in
nature, and this seasonality can be expected to cause periodic
fluctuations in room and other revenues, occupancy levels, room rates and
operating expenses. Since limited service hotels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of such hotels could occur in any given region, which would
likely adversely affect occupancy and daily room rates.
To meet competition in the industry and to maintain economic values,
continuing expenditures must be made for modernizing, refurbishing and
maintaining existing facilities prior to the expiration of their
anticipated useful lives. As a result of relatively high operating costs
due to more frequent improvements and renovations than other types of
income producing properties, relatively small decreases in hotel revenues
can cause significant stress on a hotel's cash flow.
The viability of any hotel property that is a franchise of a national
or regional hotel chain depends in part on the continued existence and
financial strength of the franchisor, the public perception of such hotel
chain and the duration of the franchise licensing agreement. The
continuation of the franchise is subject to specified operating standards
and other terms and conditions. The franchisor periodically inspects its
licensed properties to confirm adherence to its operating standards. The
failure of a hotel to maintain such standards or adhere to such other
terms and conditions could result in the loss or cancellation of the
franchise licenses. It is possible that the franchisor could condition the
continuation of a franchise license on the completion of capital
improvements or the making of certain capital expenditures that the
related borrower determines are too expensive or are otherwise unwarranted
in light of general economic conditions or the operating results or
prospects of the affected hotels. In that event, the related
V2-ii
<PAGE>
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 the franchise license by the hotel property would be
required. Conversely, a lender may be unable to remove a franchisor that
it desires to replace following a foreclosure.
In "The Mortgage Pools--General," replace the second sentence with the
following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties) and hotels will represent security for a
material concentration of the Mortgage Loans in any Trust Fund, based on
principal balance at the time such Trust Fund is formed.
V2-iii
<PAGE>
VERSION 3: MULTIFAMILY, GENERAL COMMERCIAL AND NURSING HOMES
Replace the first paragraph of the cover page of the prospectus with the
following:
Commercial Mortgage Acceptance Corp. (the "Depositor") from time to
time will offer Commercial 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 Mortgage Pass-Through Certificates of
such Series, are collectively referred to herein as the "Certificates."
The Certificates of each Series will evidence beneficial ownership
interests in a trust fund (the "Trust Fund") to be established by the
Depositor. The Certificates of a Series may be divided into two or more
"Classes," which may have different interest rates and which may receive
principal payments in differing proportions and at different times. In
addition, rights of the holders of certain Classes to receive principal
and interest may be subordinated to those of other Classes. Each Trust
Fund will consist of a pool (the "Mortgage Pool") of one or more mortgage
loans secured by first or junior liens on fee simple or leasehold
interests in commercial real estate properties, multifamily residential
properties and/or mixed-use properties and related property and interests,
conveyed to such Trust Fund by the Depositor, and other assets, including
any Credit Enhancement described in the related Prospectus Supplement. See
"DESCRIPTION OF THE CERTIFICATES--General" herein. The percentage of any
mixed-use residential/commercial property used for commercial purposes
will be set forth in the Prospectus Supplement. Multifamily properties
(consisting of apartments, congregate care facilities and/or mobile home
parks), general commercial properties (consisting of retail properties,
including shopping centers, office buildings, mini-warehouses, warehouses,
industrial properties and/or other similar types of properties) and
nursing homes will represent security for a material concentration of the
Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed. See "DESCRIPTION OF THE MORTGAGE POOL" in the
Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Mortgage Pool may also include installment contracts for
the sale of such types of properties. Such mortgage loans and installment
contracts are hereinafter referred to as the "Mortgage Loans." The
Mortgage Loans will have fixed or adjustable interest rates. Some Mortgage
Loans will fully amortize over their remaining terms to maturity and
others will provide for balloon payments at maturity. The Mortgage Loans
will provide for recourse against only the Mortgaged Properties or provide
for recourse against the other assets of the obligors thereunder. The
Mortgage Loans will be newly originated or seasoned, and will be acquired
by the Depositor either directly or through one or more affiliates. The
Mortgage Loans may be originated by affiliated entities, including Midland
Loan Services, Inc. and unaffiliated entities. See "RISK
FACTORS--Potential Inability to Verify Underwriting Standards."
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, Inc.
In "Summary of the Prospectus--The Trust Fund--A. Mortgage Pool," replace the
second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties) and nursing homes will represent security for
a material concentration of the
V3-i
<PAGE>
Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
In "Risk Factors" insert the following after the section entitled "Risks
Associated with Lending on Income Producing Properties":
Risks Particular to Nursing Homes
The Mortgaged Properties securing the Mortgage Loans for any Trust
Fund will contain a material concentration of nursing home properties.
Nursing homes provide long term around-the-clock residential health care
services to residents who require a lower level of care than that provided
by an acute care hospital, but a higher level of care than that provided
in a non-institutional home-like setting.
Nursing homes may receive a substantial portion of their revenues
from government reimbursement programs, primarily Medicaid and Medicare.
Medicaid and Medicare are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings, policy
interpretations, delays by fiscal intermediaries and government funding
restrictions, all of which can adversely affect revenues from operation.
Moreover, governmental payors have employed cost-containment measures that
limit payments to health care providers and from time to time Congress has
considered various proposals for national health care reform that could
further limit these payments. Accordingly, there can be no assurance that
payments under government reimbursement programs will, in the future, be
sufficient to fully reimburse the cost of caring for program
beneficiaries. If such payments are insufficient, net operating income of
those nursing homes that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their
obligations under any Mortgage Loans secured thereby, could be adversely
affected.
Moreover, nursing homes are generally subject to federal and state
laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies
and additions to facilities and services and, to the extent they are
dependent on patients whose fees are reimbursed by private insurers, to
the reimbursement policies of such insurers. In addition, facilities where
such care or other medical services are provided are subject to periodic
inspection by governmental authorities to determine compliance with
various standards necessary to continued licensing under state law and
continued participation in the Medicaid and Medicare reimbursement
programs. The failure of an operator to maintain or renew any required
license or regulatory approval could prevent it from continuing operations
at a nursing home or, if applicable, bar it from participation in
government reimbursement programs. Any or all of the foregoing factors can
increase the cost of operation, limit growth and in extreme cases, require
or result in suspension or cessation of operations.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements are generally not permitted to be made to any
person other than the provider who actually furnished the related medical
goods and services. Accordingly, in the event of foreclosure on a
Mortgaged Property that is operated as a nursing home, none of the
Trustee, the Master Servicer (or the Special Servicer, if applicable) or a
subsequent lessee or operator of the Mortgaged Property would generally be
entitled to obtain from federal or state governments any outstanding
reimbursement payments relating to services furnished at the respective
Mortgaged Properties prior to such foreclosure. Furthermore, in the event
of foreclosure, there can be no assurance that the Trustee, the Master
Servicer (or the Special Servicer, if applicable) or purchaser in a
foreclosure sale would be entitled to the rights under any required
licenses and
V3-ii
<PAGE>
regulatory approvals and such party may have to apply in its own right for
such licenses and approvals. There can be no assurance that a new license
could be obtained or that a new approval would be granted. In addition,
nursing homes are generally "special purpose" properties that could not be
readily converted to general residential, retail or office use, and
transfers of nursing homes are subject to regulatory approvals under
state, and in some cases federal, law not required for transfers of other
types of commercial operations and other types of real estate, all of
which may adversely affect the liquidation value of the related Mortgaged
Property.
Government regulation applying specifically to nursing homes includes
health planning legislation, enacted by most states, intended, at least in
part, to regulate the supply of nursing beds. The most common method of
control is the requirement that a state authority first make a
determination of need, evidenced by its issuance of a Certificate of Need
("CON"), before a long-term care provider can establish a new facility,
add beds to an existing facility or, in some states, take certain other
actions (for example, acquire major medical equipment, make major capital
expenditures, add services, refinance long-term debt, or transfer
ownership of a facility). States also regulate nursing bed supply in other
ways. For example, some states have imposed moratoria on the licensing of
new beds or on the certification of new Medicaid beds, or have discouraged
the construction of new nursing facilities by limiting Medicaid
reimbursements allocable to the cost of new construction and equipment. In
general, a CON is site specific and operator specific, and cannot be
transferred to another site or to another operator without the approval of
the appropriate state agency. Accordingly, if a Mortgage Loan secured by a
lien on such a Mortgaged Property were foreclosed upon, the purchaser at
foreclosure might be required to obtain a new CON or an appropriate
exemption. In addition, compliance by a purchaser with applicable
regulations may in any case require the engagement of a new operator and
the issuance of a new operating license. Upon a foreclosure, a state
regulatory agency may be willing to expedite any necessary review and
approval process to avoid interruption of care to a facility's residents,
but there can be no assurance that any will do so or that any necessary
licenses or approvals will be issued.
Further government regulation applicable to nursing homes is found in
the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care
providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products or services. Violation of these restrictions can result in
license revocation, civil and criminal penalties and exclusion from
participation in Medicare or Medicaid programs. The state law restrictions
in this area vary considerably from state to state. Moreover, the federal
anti-kickback law includes broad language that potentially could be
applied to a wide range of referral arrangements, and regulations designed
to create "safe harbors" under the law provide only limited guidance.
Accordingly, there can be no assurance that such laws will be interpreted
in a manner consistent with the practices of the owners or operators of
the nursing homes included in the Mortgage Pool for any Trust Fund that
are subject to such laws.
The operators of nursing homes are likely to compete on a local and
regional basis with others that operate similar facilities. Some of their
competitors may be better capitalized, may offer services not offered by
such operators or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues
and other sources not available to such operators. The successful
operation of a nursing home will generally depend upon the number of
competing facilities in the local market, as well as upon other factors
such as its age, appearance, reputation and management, the types of
services it provides and, where applicable, the quality of care and the
cost of that care. The inability of a nursing home to flourish in a
competitive market may increase the likelihood of foreclosure on
V3-iii
<PAGE>
the related Mortgage Loan, possibly affecting the yield on one or more
Classes of the related Series of Offered Certificates.
In "The Mortgage Pools--General," replace the second sentence with the
following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties) and nursing homes will represent security for
a material concentration of the Mortgage Loans in any Trust Fund, based on
principal balance at the time such Trust Fund is formed.
V3-iv
<PAGE>
VERSION 4: MULTIFAMILY, GENERAL COMMERCIAL, HOTELS AND NURSING HOMES
Replace the first paragraph of the cover page of the prospectus with the
following:
Commercial Mortgage Acceptance Corp. (the "Depositor") from time to
time will offer Commercial 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 Mortgage Pass-Through Certificates of
such Series, are collectively referred to herein as the "Certificates."
The Certificates of each Series will evidence beneficial ownership
interests in a trust fund (the "Trust Fund") to be established by the
Depositor. The Certificates of a Series may be divided into two or more
"Classes," which may have different interest rates and which may receive
principal payments in differing proportions and at different times. In
addition, rights of the holders of certain Classes to receive principal
and interest may be subordinated to those of other Classes. Each Trust
Fund will consist of a pool (the "Mortgage Pool") of one or more mortgage
loans secured by first or junior liens on fee simple or leasehold
interests in commercial real estate properties, multifamily residential
properties and/or mixed-use properties and related property and interests,
conveyed to such Trust Fund by the Depositor, and other assets, including
any Credit Enhancement described in the related Prospectus Supplement. See
"DESCRIPTION OF THE CERTIFICATES--General" herein. The percentage of any
mixed-use residential/commercial property used for commercial purposes
will be set forth in the Prospectus Supplement. Multifamily properties
(consisting of apartments, congregate care facilities and/or mobile home
parks), general commercial properties (consisting of retail properties,
including shopping centers, office buildings, mini-warehouses, warehouses,
industrial properties and/or other similar types of properties), hotels
and nursing homes will represent security for a material concentration of
the Mortgage Loans in any Trust Fund, based on principal balance at the
time such Trust Fund is formed. See "DESCRIPTION OF THE MORTGAGE POOL" in
the Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Mortgage Pool may also include installment contracts for
the sale of such types of properties. Such mortgage loans and installment
contracts are hereinafter referred to as the "Mortgage Loans." The
Mortgage Loans will have fixed or adjustable interest rates. Some Mortgage
Loans will fully amortize over their remaining terms to maturity and
others will provide for balloon payments at maturity. The Mortgage Loans
will provide for recourse against only the Mortgaged Properties or provide
for recourse against the other assets of the obligors thereunder. The
Mortgage Loans will be newly originated or seasoned, and will be acquired
by the Depositor either directly or through one or more affiliates. The
Mortgage Loans may be originated by affiliated entities, including Midland
Loan Services, Inc. and unaffiliated entities. See "RISK
FACTORS--Potential Inability to Verify Underwriting Standards."
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, Inc.
In "Summary of the Prospectus--The Trust Fund--A. Mortgage Pool," replace the
second sentence with the following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties), hotels and nursing homes will represent
security for a material concentration of the
V4-i
<PAGE>
Mortgage Loans in any Trust Fund, based on principal balance at the time
such Trust Fund is formed.
In "Risk Factors" insert the following after the section entitled "Risks
Associated with Lending on Income Producing Properties":
Risks Particular to Nursing Homes
The Mortgaged Properties securing the Mortgage Loans for any Trust
Fund will contain a material concentration of nursing home properties.
Nursing homes provide long term around-the-clock residential health care
services to residents who require a lower level of care than that provided
by an acute care hospital, but a higher level of care than that provided
in a non-institutional home-like setting.
Nursing homes may receive a substantial portion of their revenues
from government reimbursement programs, primarily Medicaid and Medicare.
Medicaid and Medicare are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings, policy
interpretations, delays by fiscal intermediaries and government funding
restrictions, all of which can adversely affect revenues from operation.
Moreover, governmental payors have employed cost-containment measures that
limit payments to health care providers and from time to time Congress has
considered various proposals for national health care reform that could
further limit these payments. Accordingly, there can be no assurance that
payments under government reimbursement programs will, in the future, be
sufficient to fully reimburse the cost of caring for program
beneficiaries. If such payments are insufficient, net operating income of
those nursing homes that receive revenues from those sources, and
consequently the ability of the related borrowers to meet their
obligations under any Mortgage Loans secured thereby, could be adversely
affected.
Moreover, nursing homes are generally subject to federal and state
laws that relate to the adequacy of medical care, distribution of
pharmaceuticals, rate setting, equipment, personnel, operating policies
and additions to facilities and services and, to the extent they are
dependent on patients whose fees are reimbursed by private insurers, to
the reimbursement policies of such insurers. In addition, facilities where
such care or other medical services are provided are subject to periodic
inspection by governmental authorities to determine compliance with
various standards necessary to continued licensing under state law and
continued participation in the Medicaid and Medicare reimbursement
programs. The failure of an operator to maintain or renew any required
license or regulatory approval could prevent it from continuing operations
at a nursing home or, if applicable, bar it from participation in
government reimbursement programs. Any or all of the foregoing factors can
increase the cost of operation, limit growth and in extreme cases, require
or result in suspension or cessation of operations.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements are generally not permitted to be made to any
person other than the provider who actually furnished the related medical
goods and services. Accordingly, in the event of foreclosure on a
Mortgaged Property that is operated as a nursing home, none of the
Trustee, the Master Servicer (or the Special Servicer, if applicable) or a
subsequent lessee or operator of the Mortgaged Property would generally be
entitled to obtain from federal or state governments any outstanding
reimbursement payments relating to services furnished at the respective
Mortgaged Properties prior to such foreclosure. Furthermore, in the event
of foreclosure, there can be no assurance that the Trustee, the Master
Servicer (or the Special Servicer, if applicable) or purchaser in a
foreclosure sale would be entitled to the rights under any required
licenses and
V4-ii
<PAGE>
regulatory approvals and such party may have to apply in its own right for
such licenses and approvals. There can be no assurance that a new license
could be obtained or that a new approval would be granted. In addition,
nursing homes are generally "special purpose" properties that could not be
readily converted to general residential, retail or office use, and
transfers of nursing homes are subject to regulatory approvals under
state, and in some cases federal, law not required for transfers of other
types of commercial operations and other types of real estate, all of
which may adversely affect the liquidation value of the related Mortgaged
Property.
Government regulation applying specifically to nursing homes includes
health planning legislation, enacted by most states, intended, at least in
part, to regulate the supply of nursing beds. The most common method of
control is the requirement that a state authority first make a
determination of need, evidenced by its issuance of a Certificate of Need
("CON"), before a long-term care provider can establish a new facility,
add beds to an existing facility or, in some states, take certain other
actions (for example, acquire major medical equipment, make major capital
expenditures, add services, refinance long-term debt, or transfer
ownership of a facility). States also regulate nursing bed supply in other
ways. For example, some states have imposed moratoria on the licensing of
new beds or on the certification of new Medicaid beds, or have discouraged
the construction of new nursing facilities by limiting Medicaid
reimbursements allocable to the cost of new construction and equipment. In
general, a CON is site specific and operator specific, and cannot be
transferred to another site or to another operator without the approval of
the appropriate state agency. Accordingly, if a Mortgage Loan secured by a
lien on such a Mortgaged Property were foreclosed upon, the purchaser at
foreclosure might be required to obtain a new CON or an appropriate
exemption. In addition, compliance by a purchaser with applicable
regulations may in any case require the engagement of a new operator and
the issuance of a new operating license. Upon a foreclosure, a state
regulatory agency may be willing to expedite any necessary review and
approval process to avoid interruption of care to a facility's residents,
but there can be no assurance that any will do so or that any necessary
licenses or approvals will be issued.
Further government regulation applicable to nursing homes is found in
the form of federal and state "fraud and abuse" laws that generally
prohibit payment or fee-splitting arrangements between health care
providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products or services. Violation of these restrictions can result in
license revocation, civil and criminal penalties and exclusion from
participation in Medicare or Medicaid programs. The state law restrictions
in this area vary considerably from state to state. Moreover, the federal
anti-kickback law includes broad language that potentially could be
applied to a wide range of referral arrangements, and regulations designed
to create "safe harbors" under the law provide only limited guidance.
Accordingly, there can be no assurance that such laws will be interpreted
in a manner consistent with the practices of the owners or operators of
the nursing homes included in the Mortgage Pool for any Trust Fund that
are subject to such laws.
The operators of nursing homes are likely to compete on a local and
regional basis with others that operate similar facilities. Some of their
competitors may be better capitalized, may offer services not offered by
such operators or may be owned by non-profit organizations or government
agencies supported by endowments, charitable contributions, tax revenues
and other sources not available to such operators. The successful
operation of a nursing home will generally depend upon the number of
competing facilities in the local market, as well as upon other factors
such as its age, appearance, reputation and management, the types of
services it provides and, where applicable, the quality of care and the
cost of that care. The inability of a nursing home to flourish in a
competitive market may increase the likelihood of foreclosure on
V4-iii
<PAGE>
the related Mortgage Loan, possibly affecting the yield on one or more
Classes of the related Series of Offered Certificates.
Risks Particular to Hotel Properties
The Mortgaged Properties securing the Mortgage Loans for any Trust
Fund will contain a material concentration of hotel properties. Hotel
properties may involve different types of hotels, including full service
hotels, limited service hotels, hotels associated with national franchise
chains, hotels associated with regional franchise chains and hotels that
are not affiliated with any franchise chain but may have their own brand
identity.
These Mortgaged Properties will be subject to operating risks common
to the hotel industry. These risks include, among other things,
competition from other hotels, increases in operating costs (which
increases may not necessarily be offset by increased room rates),
dependence on business and commercial travelers and tourism, increases in
energy costs and other expenses of travel, strikes, relocation of highways
and the construction of additional highways. A hotel's location, quality
and franchise affiliation can also affect its economic performance.
Adverse economic conditions, either local, regional or national, may limit
the amount that can be charged for a room and may result in a reduction in
occupancy levels. In addition, as hotel revenues are primarily generated
by room occupancy and such occupancy is usually for short periods of time,
hotel revenues may be more sensitive to general economic conditions and
competition than other income producing properties.
This daily mark-to-market also accentuates the highs and lows of
economic cycles. Additionally, the revenues of certain hotels,
particularly those located in regions whose economy depends upon tourism,
may be highly seasonal in nature, and this seasonality can be expected to
cause periodic fluctuations in room and other revenues, occupancy levels,
room rates and operating expenses. Since limited service hotels are
relatively quick and inexpensive to construct and may quickly reflect a
positive value, an over-building of such hotels could occur in any given
region, which would likely adversely affect occupancy and daily room
rates.
To meet competition in the industry and to maintain economic values,
continuing expenditures must be made for modernizing, refurbishing and
maintaining existing facilities prior to the expiration of their
anticipated useful lives. As a result of relatively high operating costs
due to more frequent improvements and renovations than other types of
income producing properties, relatively small decreases in hotel revenues
can cause significant stress on a hotel's cash flow.
The viability of any hotel property that is a franchise of a national
or regional hotel chain depends in part on the continued existence and
financial strength of the franchisor, the public perception of such hotel
chain and the duration of the franchise licensing agreement. The
continuation of the franchise is subject to specified operating standards
and other terms and conditions. The franchisor periodically inspects its
licensed properties to confirm adherence to its operating standards. The
failure of a hotel to maintain such standards or adhere to such other
terms and conditions could result in the loss or cancellation of the
franchise licenses. It is possible that the franchisor could condition the
continuation of a franchise license on the completion of capital
improvements or the making of certain capital expenditures that the
related borrower determines are too expensive or are otherwise unwarranted
in light of general economic conditions or the operating results or
prospects of the affected hotels. In that event, the related borrower may
elect to allow the franchise license to lapse. In any case, if the
franchise is terminated, the related borrower may seek to obtain a
suitable replacement franchise or to operate
V4-iv
<PAGE>
such hotel property independent of a franchise license. The loss of a
franchise license could have a material adverse effect upon the operations
or the underlying value of the hotel covered by the franchise because of
the loss of associated name recognition, marketing support and
decentralized reservation systems provided by the franchisor.
Because of the expertise and knowledge required to run hotel
operations, foreclosure and a change in ownership (and consequently of
management) may have an especially adverse effect on the perception of the
public and the industry (including franchisors) concerning the quality of
a hotel's operations. In the event of a foreclosure on a hotel property,
it is unlikely that the Trustee, the Master Servicer (or Special Servicer,
if applicable) or the purchaser of such hotel property may be entitled to
the rights under any operating, liquor and other licenses for such hotel
property, and such party would be required to apply in its own right for
such licenses. There can be no assurance that new licenses could be
obtained or that they could be obtained promptly. The transferability of
franchise license agreements may be restricted and, in the event of a
foreclosure on any such hotel property, the consent of the franchisor for
the continued use the franchise license by the hotel property would be
required. Conversely, a lender may be unable to remove a franchisor that
it desires to replace following a foreclosure.
In "The Mortgage Pools--General," replace the second sentence with the
following:
Multifamily properties (consisting of apartments, congregate care
facilities and/or mobile home parks), general commercial properties
(consisting of retail properties, including shopping centers, office
buildings, mini-warehouses, warehouses, industrial properties and/or other
similar types of properties), hotels and nursing homes will represent
security for a material concentration of the Mortgage Loans in any Trust
Fund, based on principal balance at the time such Trust Fund is formed.
V4-v
<PAGE>
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution*
The expenses expected to be incurred in connection with the issuance
and distribution of the securities being registered, other than underwriting
compensation, are as set forth below. All such expenses, except for the SEC
registration and filing fees, are estimated:
SEC Registration Fee....................................$ 442,500.00
NASD Filing Fee...................................................N/A
Legal Fees and Expenses.................................$ 260,000.00
Accounting Fees and Expenses............................$ 70,000.00
Trustee's Fees and Expenses (including counsel fees)....$ 60,000.00
Blue Sky Qualification Fees and Expenses................$ 5,000.00
Printing and Engraving Fees.............................$ 90,000.00
Rating Agency Fees......................................$3,000,000.00
Miscellaneous...........................................$ 100,000.00
-------------
Total...................................................$2,120,000.00
=============
*All amounts except the SEC Registration Fee are estimates of expenses
incurred or to be incurred in connection with the issuance and
distribution of a series of Certificates in an aggregate principal amount
assumed for these purposes to be one-half of the $3,000,000,000
of Certificates registered hereby. Accordingly, one-half of the SEC
Registration Fee paid upon the filing of the Registration Statement
is included in the table above.
Item 15. Indemnification of Directors and Officers
Section 355 of the General and Business Corporation Law of Missouri
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses, costs and fees (including attorney's fees), judgements, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if the person indemnified acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. If the person indemnified is not wholly successful in such action,
suit or proceeding, but is successful, on the merits or otherwise, in one or
more but less than all claims, issues or matters in such proceeding, he or she
may be indemnified against expenses actually and reasonably incurred in
connection with each successfully resolved claim, issue or matter. In the case
of an action or suit by or in the right of the corporation, no indemnification
may be made in respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 355 provides that to the extent a director, officer, employee or agent
of a corporation has been successful in the defense of any action, suit or
proceeding referred to above or in the defense of any claim, issue or matter
therein, he or she shall be indemnified against expenses (including attorney's
fees) actually and reasonably incurred by him or her in connection therewith.
II-1
<PAGE>
Section 355 of the General and Business Corporation Law of Missouri
further provides that a corporation may give any further indemnity, in addition
to the indemnity set forth above to any person who is or was a director,
officer, employee or agent, or to any person who is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, provided
such further indemnity is either (i) authorized, directed, or provided for in
the articles of incorporation of the corporation or any duly adopted amendment
thereof or (ii) is authorized, directed, or provided for in any bylaw or
agreement of the corporation which has been adopted by a vote of the
shareholders of the corporation, and provided further that no such indemnity
shall indemnify any person from or on account of such person's conduct which was
finally adjudged to have been knowingly fraudulent, deliberately dishonest or
willful misconduct. The Articles of Incorporation of the Registrant contain a
provision requiring the Registrant to indemnify each such person to the extent
his or her conduct is not adjudged to have been knowingly fraudulent,
deliberately dishonest or willful misconduct.
The Registrant is authorized to purchase liability insurance for its
directors and officers if it has not currently obtained such a policy.
Reference is made to the form of Underwriting Agreement filed as Exhibit
1.1 hereto for provisions relating to the indemnification of directors, officers
and controlling persons against certain liabilities including liabilities under
the Securities Act of 1933, as amended. Pursuant to the Underwriting Agreement,
the Underwriter will indemnify and hold harmless the Registrant and each person,
if any, who controls the Registrant within the meaning of Section 15 of the
Securities Act of 1933, as amended, or Section 20 of the Securities Act of 1934,
as amended, against any and all losses, claims, damages or liabilities, joint or
several, to which they may become liable under the Securities Act of 1933, as
amended, the Securities Act of 1934, as amended, or other federal or state law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the prospectus or prospectus supplement or in any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in light of the
circumstances under which they were made, but only with reference to written
information furnished to the Registrant by or on behalf of the Underwriter
(including in electronic media) specifically for use in connection with the
preparation of the documents referred to in the foregoing indemnity.
Unless otherwise specified, the Agreement relating to each Series will
provide that neither the Registrant nor any director, officer, employee or agent
of the Registrant will be liable to the Trust Fund or the Certificateholders for
any action taken, or for refraining from the taking of any action, in good faith
pursuant to the Agreement, or for errors in judgment, provided, however, that
neither the Registrant nor any such person will be protected against liability
for a breach of its representations and warranties under the Agreement or that
would otherwise be imposed by reason of willful misfeasance, bad faith, fraud,
misrepresentation or negligence in the performance of its duties or by reason of
negligent disregard of its obligations and duties thereunder. The Agreement
relating to each Series will further provide that the Registrant and any
director, officer, employee or agent of the Registrant will be entitled to
indemnification by the Trust Fund for any loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Certificates,
other than loss, liability or expense incurred by reason of its respective
willful misfeasance, bad faith, fraud, misrepresentation or negligence in the
performance of duties thereunder or by reason of negligent disregard of its
respective obligations and duties thereunder.
II-2
<PAGE>
Item 16. Exhibits and Financial Statements
(a) Exhibit
1.1** Form of Underwriting Agreement. (Exhibit 1.1 to Registrant's Form
S-3 Registration Statement filed May 4, 1998)
4.1** Form of Pooling and Servicing Agreement. (Exhibit 4.1 to
Registrant's Form S-3 Registration Statment file May 4, 1998)
5.1* Opinion of Morrison & Hecker L.L.P. as to legality (including
consent of such firm).
8.1* Opinion of Morrison & Hecker L.L.P. as to certain tax matters
(including consent of such firm).
24.1* Consent of Morrison & Hecker L.L.P. (included in Exhibits 5.1 and
8.1).
25.1* Power of Attorney (included on signature page).
- ------------------
* Filed herewith.
** Incorporated by reference as indicated.
(b) Financial Statements
All financial statements, schedules and historical financial
information have been omitted as they are not applicable.
Item 17. Undertakings
A. Undertaking pursuant to Rule 415.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum
aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement; and
II-3
<PAGE>
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant
pursuant to section 13 or section 15(d) of the Securities Exchange Act of
1934 that are incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933 each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
B. Undertaking Concerning Filings Incorporating
Subsequent Exchange Act Documents by Reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
C. Undertaking in Respect of Indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 (including that the security rating
requirement will be met by the time of sale of any securities registered
hereunder) and has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Kansas
City, State of Missouri, on the 5th day of August, 1998.
COMMERCIAL MORTGAGE ACCEPTANCE CORP.
By: /s/ Clarence A. Krantz
Clarence A. Krantz, Executive Vice President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Alan L. Atterbury, Leon E. Bergman and Clarence
A. Krantz, his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign and file (i) any or all amendments (including
post-effective amendments) to this Registration Statement and any and all other
documents in connection therewith, with all exhibits thereto, and (ii) a
registration statement, and any and all amendments thereto, relating to any
offering covered hereby filed pursuant to Rule 462(b) under the Securities Act,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as might or could be done in person, hereby ratifying
and confirming all that said attorney-in-fact and agent or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and as of the dates indicated.
Signature Position Date
/s/ Alan L. Atterbury Director and President August 5, 1998
Alan L. Atterbury (Principal Executive Officer) -----------
/s/ Leon E. Bergman Chief Financial Officer August 5, 1998
Leon E. Bergman (Principal Financial and -----------
Accounting Officer)
/s/ Clarence A. Krantz Director August 5, 1998
Clarence A. Krantz -----------
/s/ William V. Morgan Director August 5, 1998
William V. Morgan -----------
S-1
MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City,
Missouri 64108-4606
Telephone (816)
691-2600
Telefax (816) 474-4208
August 5, 1998
Commercial Mortgage Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
Re: Mortgage Pass-Through Certificates
Ladies and Gentlemen:
We have acted as your counsel in connection with the preparation of a
Registration Statement on Form S-3 (Registration Statement No. 333-______) (the
"Registration Statement") to be filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"). The
Registration Statement covers Mortgage Pass-Through Certificates
("Certificates") to be sold by Commercial Mortgage Acceptance Corp. ("Seller")
in one or more series (each, a "Series") of Certificates. Each Series of
Certificates will be issued under a pooling and servicing agreement ("Pooling
and Servicing Agreement") between Seller and a servicer (the "Servicer"), a
trustee (the "Trustee") and possibly a special servicer (the "Special Servicer")
and a fiscal agent (the "Fiscal Agent") to be identified in the Prospectus
Supplement for such Series of Certificates. A form of Pooling and Servicing
Agreement is included as an exhibit to the Registration Statement. Capitalized
terms used and not otherwise defined herein have the respective meanings given
them in the Registration Statement or the Accord identified in the following
paragraph.
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991). As a consequence, it is subject to a number of qualifications,
exceptions, definitions, limitations on coverage and other limitations, all as
more particularly described in the Accord, and this Opinion Letter should be
read in conjunction therewith. The opinions expressed herein are given only with
respect to the present status of the substantive laws of the state of Missouri
(not including the choice-of-law rules under Missouri law). We express no
opinion as to any matter arising under the laws of any other jurisdiction.
In rendering the opinions set forth below, we have examined and relied on
the following: (1) the Registration Statement and the Prospectus and the form of
Prospectus Supplement included therein; (2) the form of the Pooling and
Servicing Agreement included as an exhibit to the Registration Statement; and
(3) such other documents, materials, and authorities as we have deemed necessary
in order to enable us to render our opinions set forth below.
Washington, D.C. / Phoenix, Arizona / Overland Park, Kansas / Wichita, Kansas
<PAGE>
Commercial Mortgage Acceptance Corp.
August 5, 1998
Page 2
Based on and subject to the foregoing and other qualifications set forth
below, we are of the opinion that:
1. When a Pooling and Servicing Agreement for a Series of Certificates has
been duly and validly authorized, executed and delivered by the Seller, the
Servicer, the Trustee and, if applicable, the Special Servicer and the Fiscal
Agent, such Pooling and Servicing Agreement will constitute a valid and legally
binding agreement of Seller, enforceable against Seller in accordance with its
terms.
2. When (a) a Pooling and Servicing Agreement for a Series of Certificates
has been duly and validly authorized, executed and delivered by the Seller, the
Servicer, the Trustee and, if applicable, the Special Servicer and the Fiscal
Agent, (b) the Mortgage Loans and other consideration constituting the Trust
Fund for the Series have been deposited with the Trustee, (c) the Certificates
of such Series have been duly executed, authenticated, delivered and sold as
contemplated in the Registration Statement and (d) the consideration for the
sale of such Certificates has been fully paid to the Seller, such Certificates
will be legally and validly issued, fully paid and nonassessable, and the duly
registered holders of such Certificates will be entitled to the benefits of such
Pooling and Servicing Agreement.
The General Qualifications apply to the opinions set forth in paragraphs 1
and 2 above, and in addition, such opinions are subject to the qualification
that certain remedial, waiver and other similar provisions of a Pooling and
Servicing Agreement for a Series of Certificates or of the Certificates of such
Series may be rendered unenforceable or limited by applicable laws, regulations
or judicial decisions, but such laws, regulations and judicial decisions will
not render such Pooling and Servicing Agreement or such Certificates invalid as
a whole and will not make the remedies available thereunder inadequate for the
practical realization of the principal benefits intended to be provided thereby,
except for the economic consequences of any judicial, administrative or other
delay or procedure which may be imposed by applicable law.
We hereby consent to the filing of this letter as an Exhibit to the
Registration Statement and to the reference to this firm under the heading
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
We also consent to the incorporation by reference of this letter in a
registration statement, if any, relating to the Registration Statement filed by
the Company pursuant to Rule 462(b) of the Securities Act of 1933, as amended
(the "Act"). This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Act.
Very truly yours,
MORRISON & HECKER L.L.P.
/s/ Morrison & Hecker L.L.P.
MORRISON & HECKER L.L.P.
ATTORNEYS AT LAW
2600 Grand Avenue
Kansas City,
Missouri 64108-4606
Telephone (816)
691-2600
Telefax (816) 474-4208
August 5, 1998
Commercial Mortgage Acceptance Corp.
210 West 10th Street
6th Floor
Kansas City, Missouri 64105
Re: Mortgage Pass-Through Certificates
Ladies and Gentlemen:
We have acted as your counsel in connection with the proposed issuance of
Mortgage Pass-Through Certificates pursuant to the Registration Statement on
Form S-3 (Registration No. 333-__________) (the "Registration Statement") and
the Prospectus and form of Prospectus Supplement forming a part thereof
(collectively the "Prospectus") filed with the Securities and Exchange
Commission pursuant to the Securities Act of 1933, as amended (the "Act"). The
Registration Statement covers Mortgage Pass-Through Certificates
("Certificates") to be sold by Commercial Mortgage Acceptance Corp. ("Seller")
in one or more series (each, a "Series") of Certificates. Each series of
Certificates will be more particularly described in a supplement to the
Prospectus (each a "Supplement"). Each Series of Certificates will be issued
under a pooling and servicing agreement ("Pooling and Servicing Agreement")
between the Seller, a master servicer, a trustee and possibly a special servicer
and a fiscal agent to be identified in the Supplement for such Series of
Certificates. Capitalized terms used and not otherwise defined herein have the
respective meanings given them in the Registration Statement.
In rendering the opinion set forth below, we have examined and relied on
the following: (1) the Registration Statement and the Prospectus and (2) such
other documents, materials, and authorities as we have deemed necessary or
advisable in order to enable us to render our opinion set forth below. Each
Supplement and Pooling and Servicing Agreement pertaining to a specific series
is to be completed subsequent to the date of this opinion. Accordingly, we have
not examined any Supplement or Pooling or Servicing Agreement relating to any
series to be issued, and our opinion does not address their contents except as
and to the extent that the provisions of same may be described in the
Prospectus. We understand that each Supplement will contain a discussion of any
material federal income tax consequences pertaining to the Series to be offered
thereunder which are not addressed in the Prospectus.
The opinion set forth in this letter is based upon the applicable
provisions of the Internal Revenue Code of 1986, as amended, Treasury
regulations promulgated and proposed thereunder, current positions of the
Internal Revenue Service (the "IRS") contained in published Revenue
Washington, D.C. / Phoenix, Arizona / Overland Park, Kansas / Wichita, Kansas
<PAGE>
Commercial Mortgage Acceptance Corp.
August 5, 1998
Page 2
Rulings and Revenue Procedures, current administrative positions of the IRS and
existing judicial decisions. This opinion is subject to the explanations and
qualifications set forth under the caption "Material Federal Income Tax
Consequences" in the Prospectus. No tax rulings will be sought from the IRS with
respect to any of the matters discussed herein.
Based upon the foregoing, we are of the opinion that, although it does not
discus all federal income tax consequences that may be applicable to the
individual circumstances of particular investors (some of which may be subject
to special treatment under the Internal Revenue Code of 1986), the description
set forth under the caption "Material Federal Income Tax Consequences" in the
Prospectus included as a part of the Registration Statement correctly describes
the material aspects of the federal income tax treatment of an investment in the
Certificates commonly applicable to investors that are U.S. Persons (as defined
in the Prospectus), as of the date hereof, and, where expressly indicated
therein, to investors that are not U.S. Persons. There can be no assurance,
however, that the tax conclusions presented therein will not be successfully
challenged by the IRS, or significantly altered by new legislation, changes in
IRS positions or judicial decisions, any of which challenges or alterations may
be applied retroactively with respect to completed transactions. We note,
however, that the form of Prospectus Supplement filed herewith does not relate
to a specific transaction. As the Registration Statement contemplates multiple
Series of Certificates with numerous different characteristics, the particular
characteristics of a Series of Certificates must be considered in evaluating
whether such opinion would be relevant under the circumstances. Accordingly, the
above-referenced description of the selected Federal income tax consequences
may, under certain circumstances, require modification when an actual
transaction is undertaken.
This opinion is based on the facts and circumstances set forth in the
Prospectus and the form of Prospectus Supplement and in the other documents
reviewed by us. Our opinion as to the matters set forth herein could change with
respect to a particular Series of Certificates as a result of changes in facts
and circumstances, changes in the terms of the documents reviewed by us, or
changes in the law subsequent to the date hereof. Consequently, we express no
such opinion with respect to any particular Series of Certificates.
We hereby consent to the filing of this letter as an exhibit to the
Registration Statement and to the references to our firm under the heading
"MATERIAL FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus and the Prospectus
Supplement.We also consent to the incorporation by reference of this letter in a
registration statement, if any, relating to the Registration Statement filed by
the Company pursuant to Rule 462(b) of the Securities Act of 1933, as amended
(the "Act"). This consent is not to be construed as an admission that we are a
person whose consent is required to be filed with the Registration Statement
under the provisions of the Act.
Very truly yours,
MORRISON & HECKER L.L.P.
/s/ Morrison & Hecker L.L.P.
