As filed with the Securities Exchange Commission on March 3, 2000
Registration No. 333-95447
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
PNC 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)
PNC Mortgage Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
(816) 435-5000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Douglas D. Danforth, Jr.
PNC 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:
Patrick J. Respeliers
Stephen W. Grow
Morrison & Hecker L.L.P.
2600 Grand Avenue
Kansas City, Missouri 64108
(816) 691-2600
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. [_]
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CALCULATION OF REGISTRATION FEE
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<S> <C> <C> <C> <C>
Proposed Maximum Proposed Maximum
Title of Securities Amount to be Offering Price Per Aggregate Offering Amount of Registration
to be Registered Registered (1) Security (2) Price (2) Fee
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Mortgage Pass Through
Certificates $1,827,599,959 100% $1,827,599,959 $482,486 (3)
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(1) Or, if any of the securities registered hereunder are interest only
securities, such greater amount as shall result in net proceeds of
$1,827,599,959 to the registrant. This Registration Statement also
registers an indeterminate amount of the securities which may be sold by
PNC Capital Markets, Inc. in market making transactions.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) $1,827,599,959 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the registrant under Registration Statement No.
333-60749 and not previously sold are consolidated in this Registration
Statement pursuant to Rule 429. The Registration Fee has been previously
paid by the registrant under the foregoing Registration Statement in
connection with such unsold amount of Mortgage Pass-Through Certificates.
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, including market-making transactions and (ii) a form of prospectus
supplement to be used for transactions involving mortgage loans secured by
multifamily and commercial properties, including market-making transactions.
<PAGE>
SUBJECT TO COMPLETION, DATED MARCH 3, 2000
Prospectus
PNC Commercial Mortgage Acceptance Corp.,
Depositor
Mortgage Pass-Through Certificates
(issuable in series)
The information in this prospectus is not complete and may be changed.
We may not sell these securities until the resignation statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Our name is PNC Commercial Mortgage Acceptance Corp. and we intend to
offer commercial mortgage pass-through certificates from time to time. These
offers may be made through one or more different methods, including offerings
through underwriters. See "Method of Distribution."
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The Offered Certificates: The Trust Assets:
The offered certificates The assets of each trust
will be issuable in series. Each will include:
series of offered certificates
will: o mortgage loans secured by
first and junior liens on, or
o have its own series security interests in,
designation, various interests in
o consist of one or more commercial and multifamily
classes with various payment real properties,
characteristics, o mortgage-backed securities
o evidence beneficial that directly or indirectly
ownership interests in a trust evidence interests in, or are
established by us, and directly or indirectly
o be payable solely out of secured by, such types of
trust assets. mortgage loans,
o direct obligations of the
We do not currently intend United States or other
to list the offered certificates governmental agencies, or
of any series on any national o some combination of such
securities exchange or the Nasdaq types of mortgage loans,
stock market. mortgage-backed securities
and government securities.
Trust assets may also include
letters of credit, surety bonds,
insurance policies, guarantees, reserve
funds, guaranteed investment contracts,
interest rate or currency exchange
agreements, interest rate cap or floor
agreements, or other similar instruments
and agreements.
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In connection with each offering, we will prepare a supplement to this
prospectus in order to describe in more detail the particular certificates being
offered and the related trust assets. In that document, we will also state the
price to the public for each class of offered certificates or explain the method
for determining such price. In addition, in that document, we will identify the
applicable lead or managing underwriter(s), if any, and the relevant
underwriting arrangements. You may not purchase the offered certificates of any
series unless you have also received the prospectus supplement for that series.
You should carefully consider the risk factors beginning on page 6 in this
prospectus, as well as those set forth in the related prospectus supplement,
prior to investing.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the offered certificates or passed
upon the adequacy or accuracy of this prospectus. Any representation to the
contrary is a criminal
offense.
The date of this Prospectus is ____________, _____.
<PAGE>
Important Notice About The Information Presented In This Prospectus
When deciding whether to invest in any of the offered certificates, you
should only rely on the information contained in this prospectus and the related
prospectus supplement. We have not authorized any dealer, salesman or other
person to give any information or to make any representation that is different.
In addition, information in this prospectus or any related prospectus supplement
is current only as of the date on its cover. By delivery of this prospectus and
any related prospectus supplement, we are not offering to sell any securities,
and are not soliciting an offer to buy any securities, in any state where the
offer and sale is not permitted.
TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT THE INFORMATION
PRESENTED IN THIS PROSPECTUS...............1
SUMMARY OF PROSPECTUS..........................1
RISK FACTORS...................................6
DESCRIPTION OF THE TRUST ASSETS...............29
YIELD AND MATURITY CONSIDERATIONS.............34
PNC COMMERCIAL MORTGAGE CORP..................38
DESCRIPTION OF THE CERTIFICATES...............39
DESCRIPTION OF THE GOVERNING DOCUMENTS........45
DESCRIPTION OF CREDIT SUPPORT.................57
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS.......59
FEDERAL INCOME TAX CONSEQUENCES...............68
STATE AND OTHER TAX CONSEQUENCES..............99
LEGAL INVESTMENT.............................102
USE OF PROCEEDS..............................104
METHOD OF DISTRIBUTION.......................104
WHERE YOU CAN FIND MORE INFORMATION..........105
LEGAL MATTERS................................105
FINANCIAL INFORMATION........................105
RATING.......................................107
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SUMMARY OF PROSPECTUS
This summary contains selected information from this prospectus. It does
not contain all of the information you need to consider in making your
investment decision. To understand all of the terms of a particular offering of
certificates, you should read carefully this prospectus and the related
prospectus supplement in full.
Who We Are
PNC Commercial Mortgage Acceptance Corp. is a Missouri corporation and a
wholly owned subsidiary of Midland Loan Services, Inc. Our principal offices
are located at:
210 West 10th Street
6th Floor
Kansas City, Missouri 64105
Our main telephone number is (816) 435-5000. See "PNC Commercial
Mortgage Acceptance Corp."
The Securities Being Offered
The securities that will be offered pursuant to this prospectus and the
related prospectus supplements consist of mortgage pass-through certificates.
These certificates will be issued in series, and each series will, in turn,
consist of one or more classes. Each class of offered certificates must, at the
time of issuance, be assigned an investment grade rating by at least one
nationally recognized statistical rating organization. Typically, the four
highest rating categories, within which there may be sub-categories or
gradations to indicate relative standing, signify investment grade. See
"Rating."
Each series of offered certificates will evidence beneficial ownership
interests in a trust established by us and containing the assets described in
this prospectus and the related prospectus supplement.
The Offered Certificates may be Issued with Other Certificates
We may not publicly offer all the mortgage pass-through certificates
evidencing interests in a particular trust. We may elect to:
o retain some of those certificates;
o place some privately with institutional investors; or
o deliver some to the applicable seller as partial consideration for the
related mortgage assets.
In addition, some of those certificates may not satisfy the rating
requirement described above for offered certificates.
The Governing Documents
In general, a pooling and servicing agreement or other similar agreement
or collection of agreements will govern--
o the creation of and transfer of assets to each trust;
o the issuance of the related series of certificates; and
o the servicing and administration of the trust assets.
The parties to the governing document(s) will always include a trustee and
us. We will be responsible for establishing the trust relating to each series of
offered certificates. In addition, we will transfer or arrange for the transfer
of the initial trust assets to that trust. In general, the trustee will be
responsible for, among other things, making payments and preparing and
disseminating certain reports to the holders of the offered and non-offered
certificates.
If the trust assets include mortgage loans, the parties to the governing
document(s) will also include--
o a master servicer that will generally be responsible for performing customary
servicing duties with respect to those mortgage loans that are not defaulted,
non-performing or otherwise problematic in any material respect; and
o a special servicer that will generally be responsible for servicing and
administering mortgage loans that are defaulted, non-performing or otherwise
problematic in any material respect and real estate assets acquired in
respect of defaulted mortgage loans.
The same person or entity, or affiliated entities, may act as both master
servicer and special servicer for any trust.
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If the trust assets include mortgage-backed securities, the parties to the
governing document(s) may also include a manager that will be responsible for
performing various administrative duties with respect to the mortgage-backed
securities. If the related trustee assumes these duties, however, there will be
no manager.
In the related prospectus supplement, we will identify the trustee and any
master servicer, special servicer or manager for each trust and will describe
their respective duties in further detail.
See "Description of the Governing Documents."
Certain Characteristics of the Mortgage Assets
The trust assets with respect to any series of offered certificates will,
in general, include mortgage loans. Each mortgage loan to be included in a trust
will constitute the obligation of one or more persons to repay a debt. Each
mortgage loan will be secured by a first or junior lien on, or security interest
in, the ownership, leasehold or other interest(s) of the related borrower or
another person in one or more commercial or multifamily real properties. In
particular, those properties may include:
o rental or cooperatively-owned buildings with multiple dwelling units;
o retail properties related to the sale of consumer goods and other
products, or related to providing entertainment, recreational or personal
services, to the general public;
o office buildings;
o hospitality properties;
o casino properties;
o health care-related facilities;
o industrial facilities;
o warehouse facilities, mini-warehouse facilities and self-storage
facilities;
o restaurants, taverns and other establishments involved in the food and
beverage industry;
o manufactured housing communities, mobile home parks and recreational
vehicle parks;
o recreational and resort properties;
o arenas and stadiums;
o churches and other religious facilities;
o parking lots and garages;
o mixed use properties;
o other income-producing properties; and
o unimproved land that is zoned for multifamily residential or commercial
use.
The mortgage loans to be included in a trust may have a variety of payment
terms. For example, a mortgage loan:
o may provide for the accrual of interest at a mortgage interest rate that is
fixed over its term, that resets on one or more specified dates or that
otherwise adjusts from time to time;
o may provide for the accrual of interest at a mortgage interest rate that may
be converted at the borrower's election from an adjustable to a fixed
interest rate or from a fixed to an adjustable interest rate;
o may provide for no accrual of interest;
o may provide for level payments to stated maturity, for payments that reset in
amount on one or more specified dates or for payments that otherwise adjust
from time to time to accommodate changes in the interest rate or to reflect
the occurrence of certain events;
o may be fully amortizing or, alternatively, may be partially amortizing or
non-amortizing, with a substantial payment of principal due on its stated
maturity date;
o may permit the negative amortization or deferral of accrued interest;
o may prohibit some or all voluntary prepayments or require payment of a
premium, fee or charge in connection with those prepayments; and/or
o may provide for payments of principal, interest or both, on due dates
that occur monthly, bimonthly, quarterly, semi-annually, annually or at some
other interval.
Any mortgage loan may have two or more component parts, each having
characteristics that are otherwise described in this prospectus as being
attributable to separate and distinct mortgage loans.
We do not originate mortgage loans. However, Midland Loan Services, Inc.
or one of our other affiliates may originate some of the mortgage loans
underlying the offered certificates. Unless we expressly state otherwise in the
related prospectus supplement, the repayment of any of the mortgage loans to be
included in a trust will not be guaranteed or insured by us, any of our
affiliates, any governmental agency or instrumentality or any other person.
See "Description of the Trust Assets--Mortgage Loans."
The trust assets with respect to any series of offered certificates may
also include mortgage participations, mortgage pass-through certificates,
collateralized mortgage obligations and other mortgage-backed securities, that
evidence an interest
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in, or are secured by a pledge of, one or more mortgage loans of the
type described above. See "Description of the Trust Assets--Mortgage-Backed
Securities."
We will describe the specific characteristics of the mortgage assets
underlying a series of offered certificates in the related prospectus
supplement.
In general, the total outstanding principal balance of the mortgage assets
transferred by us to any particular trust will equal or exceed the initial total
outstanding principal balance of the related series of certificates. In the
event that the total outstanding principal balance of the related mortgage
assets initially delivered by us to the related trustee is less than the initial
total outstanding principal balance of any series of certificates, we may
deposit or arrange for the deposit of cash or liquid investments on an interim
basis with the related trustee to cover the shortfall. For 90 days following the
date of initial issuance of that series of certificates, we will be entitled to
obtain a release of the deposited cash or investments if we deliver or arrange
for delivery of a corresponding amount of mortgage assets. If we fail, however,
to deliver mortgage assets sufficient to make up the entire shortfall, any of
the cash or, following liquidation, investments remaining on deposit with the
related trustee will be used by the related trustee to pay down the principal
balance of the related series of certificates, as described in the related
prospectus supplement.
Certain Characteristics of the Offered Certificates
An offered certificate may entitle the holder to receive:
o a stated principal amount;
o interest on a principal balance or notional amount, at a fixed, variable
or adjustable pass-through rate;
o specified, fixed or variable portions of the interest, principal or
other amounts received on the related mortgage assets;
o payments of principal, with disproportionate, nominal or no
distributions of interest;
o payments of interest, with disproportionate, nominal or no distributions
of principal;
o payments of interest or principal that commence only as of a specified date
or only after the occurrence of certain events, such as the payment in full
of the interest and principal outstanding on one or more other classes of
certificates of the same series;
o payments of principal to be made, from time to time or for designated
periods, at a rate that is faster (and, in some cases, substantially faster)
or slower (and, in some cases, substantially slower) than the rate at which
payments or other collections of principal are received on the related
mortgage assets;
o payments of principal to be made based on a specified principal payment
schedule or other methodology, which payments may be limited to the amount of
available funds; or
o payments of all or part of the prepayment or repayment premiums, fees and
charges, equity participation payments or other similar items received on the
related mortgage assets.
Any class of offered certificates may be senior or subordinate to one or
more other classes of certificates of the same series, including a non-offered
class of certificates of that series, for purposes of some or all payments,
allocations of losses or both.
A class of offered certificates may have two or more component parts, each
having characteristics that are otherwise described in this prospectus as being
attributable to separate and distinct classes.
We will describe the specific characteristics of each class of offered
certificates in the related prospectus supplement. See "Description of the
Certificates."
The Trust will Include Collection and Distribution Accounts
The master servicer must establish and maintain one or more collection
accounts for deposit of all payments and collections received or advanced on the
Mortgage Loans. The trustee must establish a distribution account for deposit of
amounts from the collection account to be used for distributions of principal
and interest to certificate holders.
Credit Support and Interest Rate Protection for the Offered Certificates
Some classes of offered certificates may be protected in full or in part
against certain defaults and losses on the related mortgage assets through the
subordination of one or more other classes of certificates of the same series or
by other types of credit support. The other types of credit support may include
a letter of credit, a surety bond, an insurance policy, a guarantee or a reserve
fund. We will describe the credit support, if any, for each class
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of offered certificates in the related prospectus supplement.
The assets of any particular trust may also include any of the following
agreements:
o guaranteed investment contracts pursuant to which moneys held in the funds
and accounts established for the related series of certificates will be
invested at a specified rate;
o interest rate exchange agreements, interest rate cap or floor agreements, or
other agreements and arrangements designed to reduce the effects of interest
rate fluctuations on the related mortgage assets or on one or more classes of
offered certificates of the related series; or
o if any of the mortgage assets are payable in a foreign currency, foreign
currency exchange agreements or other agreements and arrangements designed to
reduce the effects of foreign currency fluctuations on the related mortgage
assets or one or more classes of offered certificates of the related series.
We will describe the types of reinvestment and interest rate protection,
if any, for each class of offered certificates in the related prospectus
supplement.
See "Risk Factors," "Description of the Trust Funds" and "Description of
Credit Support."
Advances to Cover Delinquent Payments of Principal and Interest on the
Mortgage Assets.
If the related trust assets include mortgage loans, the master servicer,
the trustee, any provider of credit support and any other specified person may
be obligated to make, or may have the option of making, certain advances with
respect to delinquent scheduled payments of principal, interest or both on the
mortgage loans. Any party making advances will be entitled to reimbursement from
subsequent recoveries on the related mortgage loan and as otherwise described in
this prospectus or the related prospectus supplement. That party may also be
entitled to receive interest on its advances for a specified period. See
"Description of the Certificates--Advances in Respect of Delinquencies."
If the related trust assets include mortgage-backed securities, we will
describe in the related prospectus supplement any comparable advancing
obligation in respect of those mortgage-backed securities or the underlying
mortgage loans.
Optional Termination
We will describe in the related prospectus supplement any circumstances in
which a specified party is permitted or obligated to purchase or sell any of the
mortgage assets underlying a series of offered certificates. In particular, a
master servicer, special servicer or other designated party may be permitted or
obligated to purchase or sell:
o all the mortgage assets in any particular trust, which would cause a
termination of the trust; or
o that portion of the mortgage assets in any particular trust as is necessary
or sufficient to retire one or more classes of offered certificates of the
related series.
See "Description of the Certificates--Termination."
Federal Income Tax Consequences
Any class of offered certificates will constitute or evidence ownership of
either:
o "regular interests" or "residual interests" in a "real estate mortgage
investment conduit" under Sections 860A through 860G of the Internal Revenue
Code of 1986; or
o "regular interests" or "residual interests" in a "financial asset
securitization investment trust" under Section 860L(a) of the Internal
Revenue Code of 1986; or
o interests in a grantor trust under Subpart E of Part I of Subchapter J of the
Internal Revenue Code of 1986.
See "Federal Income Tax Consequences."
ERISA Considerations
If you are a fiduciary of an employee benefit plan or other retirement
plan or arrangement, you should review with your legal advisor whether the
purchase or holding of offered certificates could give rise to a transaction
that is prohibited or is not otherwise permissible under applicable law. See
"ERISA Considerations."
Legal Investment
If your investment authority is subject to legal restrictions, you should
consult your legal advisor to determine whether and to what extent the offered
certificates constitute a legal investment for you. We will specify in the
related prospectus
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supplement which classes of the offered certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984...See "Legal Investment."
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RISK FACTORS
You should consider the following factors, as well as the factors set
forth under "Risk Factors" in the related prospectus supplement, in deciding
whether to purchase offered certificates.
A Number of Factors that Affect the Liquidity of Your Certificates May Have
an Adverse Effect on the Value of Your Certificates
The offered certificates may have limited or no liquidity. We cannot
assure you that a secondary market for your certificates will develop. There
will be no obligation on the part of anyone to establish a secondary market.
Even if a secondary market does develop for your certificates, it may provide
you with less liquidity than you anticipated and it may not continue for the
life of your certificates.
We will describe in the related prospectus supplement the information that
will be available to you with respect to your certificates. The limited nature
of such information may adversely affect the liquidity of your certificates.
We do not currently intend to list the offered certificates on any
national securities exchange or the Nasdaq stock market.
Lack of liquidity will impair your ability to sell your certificates and
may prevent you from doing so at a time when you may want or need to sell your
certificates. This lack of liquidity could adversely affect the market value of
your certificates. We do not expect that you will have any redemption rights
with respect to your certificates.
If you decide to sell your certificates, you may have to sell them at a
discount from the price you paid for reasons unrelated to the performance of
your certificates or the related mortgage assets. Pricing information regarding
your certificates may not be generally available on an ongoing basis.
The Market Value of Your Certificates Will be Sensitive to Fluctuations in
Prevailing Interest Rates and Spreads
The market value of your certificates will be sensitive to fluctuations in
current interest rates. However, a change in the market value of your
certificates as a result of an upward or downward movement in current interest
rates may not equal the change in the market value of your certificates as a
result of an equal but opposite movement in interest rates.
Investor perceptions regarding the quality of commercial mortgage-backed
securities generally as an investment relative to alternative investments such
as U.S. treasury securities will affect the market value of your certificates.
That market value will decline if potential investors prefer the safety of
investments such as U.S. treasury securities. This may occur regardless of the
performance of your certificates or the related mortgage assets.
Payments on Your Certificates Will be Made Solely From the Limited Assets of
the Related Trust
Your certificates do not represent obligations of any person or entity and
do not represent a claim against any assets other than those of the related
trust. Unless we expressly state otherwise in the related prospectus supplement,
neither we, nor any of our affiliates nor any governmental agency or
instrumentality or other person will guarantee or insure payment on your
certificates. If the related trust assets are insufficient to make payments on
your certificates, you will bear the resulting loss. Any advances made by a
master servicer or other party with respect to the mortgage assets underlying
your certificates are intended solely to provide liquidity and not credit
support. The party making those advances will have a right to reimbursement,
probably with interest, which is senior to your right to receive payment on your
certificates.
Any Credit Support for Your Certificates May be Insufficient to Protect You
Against all Potential Losses
The Amount of Credit Support Will be Limited
The rating agencies that assign ratings to your certificates will
establish the amount of credit support, if any, for your certificates based on,
among other things, an assumed level of defaults, delinquencies and losses with
respect to the related mortgage assets. Actual losses may, however, exceed the
assumed levels. See "Description of the Certificates--Allocation of Losses and
Shortfalls" and "Description of Credit Support." If actual losses on the related
mortgage assets exceed the assumed
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levels, you may be required to bear the additional losses.
Credit Support May Not Cover All Types of Losses
The credit support, if any, for your certificates may not cover all of
your potential losses. For example, certain forms of credit support may not
cover or may provide limited protection against losses that you may suffer by
reason of fraud or negligence or as a result of certain uninsured casualties at
the real properties securing the related mortgage loans. You may be required to
bear any losses that are not covered by the credit support.
Disproportionate Benefits to Certain Classes and Series
If a form of credit support covers multiple classes or series and losses
exceed the amount of the credit support, it is possible that the holders of
offered certificates of another series or class will be disproportionately
benefited by this credit support to your detriment.
The Investment Performance of Your Certificates Will Depend Upon Payments,
Defaults and Losses on the Underlying Mortgage Loans
The Terms of the Underlying Mortgage Loans Will Affect Payments on Your
Certificates
Each of the mortgage loans underlying the offered certificates will
specify the terms on which the related borrower must repay the outstanding
principal amount of the loan. The rate, timing and amount of scheduled payments
of principal may vary significantly from mortgage loan to mortgage loan. The
rate at which the underlying mortgage loans amortize will directly affect the
rate at which the principal balance or notional amount of your certificates is
paid down or otherwise reduced.
In addition, any mortgage loan underlying the offered certificates may
permit the related borrower to prepay the loan during some or all of the loan
term. In general, a borrower will be more likely to prepay its mortgage loan
when it has an economic incentive to do so, such as obtaining a larger loan on
the same underlying real property or a lower or otherwise more advantageous
interest rate through refinancing. If a mortgage loan includes some form of
prepayment restriction, the likelihood of prepayment should be less. These
restrictions may include:
o an absolute or partial prohibition against voluntary prepayments during
some or all of the loan term; or
o a requirement that voluntary prepayments be accompanied by some form of
prepayment premium, fee or charge during some or all of the loan term.
In many cases, a mortgage loan will have no restrictions on the
application of insurance proceeds or condemnation proceeds as a prepayment of
principal.
The amount, rate and timing of payments and other collections on the
mortgage loans will, to some degree, be unpredictable because of borrower
defaults and because of casualties and condemnations with respect to the
underlying real properties.
The investment performance of your certificates may vary materially and
adversely from your expectations due to:
o the rate of prepayments and other unscheduled collections of principal on the
underlying mortgage loans being faster or slower than you anticipated, or
o the rate of defaults on the underlying mortgage loans being faster, or the
severity of losses on the underlying mortgage loans being greater, than you
anticipated.
The actual yield to you, as a holder of an offered certificate, may not
equal the yield you anticipated at the time of your purchase, and the total
return on investment that you expected may not be realized. In deciding whether
to purchase any offered certificates, you should make an independent decision as
to the appropriate prepayment, default and loss assumptions to be used. If the
trust assets underlying your certificates include mortgage-backed securities,
the terms of those securities may lessen or enhance the effects to you that may
result from prepayments, defaults and losses on the mortgage loans underlying
those securities.
Prepayments on the Underlying Mortgage Loans Will Affect the Average Life of
Your Certificates
Payments of principal and/or interest on your certificates will depend
upon, among other things, the rate and timing of payments on the related
mortgage assets. Prepayments on the underlying mortgage loans may result in a
faster rate of principal payments on your certificates, which would result in
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a shorter average life for your certificates, than if these prepayments
had not occurred. The rate and timing of principal prepayments on pools of
mortgage loans varies among pools and is influenced by a variety of economic,
demographic, geographic, social, tax and legal factors. Accordingly, neither you
nor we can predict the rate and timing of principal prepayments on the mortgage
loans directly or indirectly underlying your certificates. As a result,
repayment of your certificates could occur significantly earlier or later, and
the average life of your certificates could be significantly shorter or longer,
than you expected.
The extent to which prepayments on the underlying mortgage loans
ultimately affect the average life of your certificates depends on the terms and
provisions of your certificates. A class of offered certificates may entitle the
holders to a pro rata share of any prepayments on the related mortgage loans, to
all or a disproportionately large share of those prepayments, or to none or a
disproportionately small share of those prepayments. If you are entitled to a
disproportionately large share of any prepayments on the underlying mortgage
loans, your certificates may be retired at an earlier date. If, however, you are
only entitled to a small share of the prepayments on the underlying mortgage
loans, the average life of your certificates may be extended. Your entitlement
to receive payments, including prepayments, of principal of the underlying
mortgage loans may:
o vary based on the occurrence of certain events, such as the retirement of one
or more other classes of certificates of the same series; or
o be subject to certain contingencies, such as prepayment and default rates
with respect to the underlying mortgage loans.
We will describe the terms and provisions of your certificates more fully
in the related prospectus supplement.
Prepayments on the Underlying Mortgage Loans Will Affect the Yield on Your
Certificates
If you purchase your certificates at a discount or premium, the yield on
your certificates will be sensitive to prepayments on the mortgage loans. If you
purchase your certificates at a discount, you should consider the risk that a
slower than anticipated rate of principal payments on the underlying mortgage
loans could result in your actual yield being lower than your anticipated yield.
Alternatively, if you purchase your certificates at a premium, you should
consider the risk that a faster than anticipated rate of principal payments on
the underlying mortgage loans could result in your actual yield being lower than
your anticipated yield. The potential effect that prepayments may have on the
yield of your certificates will increase as the discount deepens or the premium
increases. If the amount of interest payable on your certificates is
disproportionately large, as compared to the amount of principal payable on your
certificates, you may fail to recover your original investment under some
prepayment scenarios.
Delinquencies, Defaults and Losses on the Underlying Mortgage Loans May
Affect the Amount and Timing of Payments on Your Certificates
The rate and timing of delinquencies and defaults, and the severity of
losses, on the underlying mortgage loans will affect the amount and timing of
payments on the related series of offered certificates to the extent that their
effects are not offset by delinquency advances or some form of credit support.
Unless otherwise covered by delinquency advances or some form of credit
support, defaults on the underlying mortgage loans may delay payments on the
related series of offered certificates while the defaulted mortgage loans are
worked-out or liquidated. However, liquidations of defaulted mortgage loans
prior to maturity could affect the yield and average life of an offered
certificate in a manner similar to a voluntary prepayment.
If you calculate your anticipated yield to maturity based on an assumed
rate of default and amount of losses on the underlying mortgage loans that is
lower than the default rate and amount of losses actually experienced, then, to
the extent that you are required to bear the additional losses, your actual
yield to maturity will be lower than you calculated and could, under certain
scenarios, be negative. Furthermore, the timing of losses on the underlying
mortgage loans can affect your yield. In general, the earlier you bear any loss
on an underlying mortgage loan, the greater the negative effect on your yield.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends Upon
the Performance and Value of the Underlying Real Property and the Related
Borrower's Ability to Refinance the Property" below.
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An Increased Risk of Default Is Associated With Balloon Payments
Any of the mortgage loans underlying your certificates may be
non-amortizing or only partially amortizing. The borrowers under those mortgage
loans are required to make substantial payments of principal and interest (that
is, balloon payments) on the maturity dates of the loans. The ability of a
borrower to make a balloon payment generally depends upon the borrower's ability
to refinance or sell the real property securing the loan. The ability of the
borrower to refinance or sell the property will be affected by a number of
factors, including:
o the fair market value and condition of the underlying real property;
o the prevailing level of interest rates;
o the borrower's equity in the underlying real property;
o the borrower's financial condition;
o the operating history of the underlying real property;
o changes in zoning and tax laws;
o changes in competition in the relevant area;
o changes in rental rates in the relevant area;
o changes in governmental regulation and fiscal policy;
o prevailing general and regional economic conditions;
o the state of the fixed income and mortgage markets; and
o the availability of credit for multifamily rental or commercial
properties.
See "--Repayment of a Commercial or Multifamily Mortgage Loan Depends Upon
the Performance and Value of the Underlying Real Property and the Related
Borrower's Ability to Refinance the Property" below.
Neither we nor any of our affiliates have an obligation to refinance any
mortgage loan underlying your certificates.
The related master servicer or special servicer may, within prescribed
limits, extend and modify mortgage loans underlying your certificates that are
in default or as to which a payment default is imminent in order to maximize
recoveries on those loans. The related master servicer or special servicer is
only required to determine that any extension or modification is reasonably
likely to produce a greater recovery than a liquidation of the real property
securing the defaulted loan. The decision of the master servicer or special
servicer to extend or modify a mortgage loan may not in fact produce a greater
recovery.
Repayment of a Commercial or Multifamily Mortgage Loan Depends Upon the
Performance and Value of the Underlying Real Property and the Related
Borrower's Ability to Refinance the Property
Most of the Mortgage Loans Underlying Your Certificates Will be Nonrecourse
Loans to Entities
You should consider all of the mortgage loans underlying your certificates
to be non-recourse loans. This means that, in the event of a default, recourse
will be limited to the related real property or properties securing the
defaulted mortgage loan. In those cases where recourse to a borrower or
guarantor is permitted by the loan documents, we generally will not undertake
any evaluation of the financial condition of the borrower or guarantor. Unlike
individuals, entities formed to acquire real property generally do not have
personal assets and creditworthiness at stake. A borrower's sophistication can
lead to protracted litigation or bankruptcy in default situations.
Consequently, full and timely payment on each mortgage loan underlying
your certificates will depend on one or more of the following:
o the sufficiency of the net operating income of the applicable real
property;
o the market value of the applicable real property at or prior to
maturity; and
o the ability of the related borrower to refinance or sell the applicable
real property.
In general, the value of a multifamily or commercial property will depend
on its ability to generate net operating income. The ability of an owner to
finance a multifamily or commercial property will depend, in large part, on the
property's value and ability to generate net operating income.
Unless we state otherwise in the related prospectus supplement, none of
the mortgage loans underlying your certificates will be insured or guaranteed by
us, any of our affiliates or any governmental entity or private mortgage
insurer.
The risks associated with lending on multifamily and commercial properties
are inherently different from those associated with lending on the
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security of single-family residential properties. This is because
multifamily rental and commercial real estate lending involves larger loans and,
as described above, repayment is dependent upon the successful operation and
value of the related real estate project.
We May Not Know What Underwriting Standards the Originator of a Mortgage Loan
Applied
The originators of the mortgage loans may have used underwriting criteria
that differ from the criteria which our affiliates use, and in some cases we may
be unable to verify the criteria that the originator used. Loans may have been
originated over long periods of time using varying underwriting standards that
we cannot now confirm. We will not generally reunderwrite mortgage loans
acquired for inclusion in a trust. Instead, we will rely upon representations
and warranties by the seller of the mortgage loan and the seller's obligation to
repurchase the loan if a representation or warranty was not true when made.
Many Risk Factors are Common to Most or All Multifamily and Commercial
Properties
The following factors, among others, will affect the ability of a
multifamily or commercial property to generate net operating income and,
accordingly, its value:
o the age, design and construction quality of the property;
o perceptions regarding the safety, convenience and attractiveness of the
property;
o the characteristics of the neighborhood where the property is located;
o the proximity and attractiveness of competing properties;
o the existence and construction of competing properties;
o the adequacy of the property's management and maintenance;
o national, regional or local economic conditions, including plant
closings, industry slowdowns and unemployment rates;
o local real estate conditions, including an increase in or oversupply of
comparable commercial or residential space;
o demographic factors;
o customer tastes and preferences;
o retroactive changes in building codes; and
o changes in governmental rules, regulations and fiscal policies, including
environmental legislation.
Particular factors that may adversely affect the ability of a multifamily
or commercial property to generate net operating income include:
o an increase in interest rates, real estate taxes and other operating
expenses;
o an increase in the capital expenditures needed to maintain the property
or make improvements;
o a decline in the financial condition of a major tenant and, in
particular, a sole tenant or anchor tenant;
o an increase in vacancy rates;
o a decline in rental rates as leases are renewed or replaced; and
o natural disasters and civil disturbances such as earthquakes,
hurricanes, floods, eruptions or riots.
The volatility of net operating income generated by a multifamily or
commercial property over time will be influenced by many of the foregoing
factors, as well as by:
o the length of tenant leases;
o the creditworthiness of tenants;
o the rental rates at which leases are renewed or replaced;
o the percentage of total property expenses in relation to revenue;
o the ratio of fixed operating expenses to those that vary with revenues; and
o the level of capital expenditures required to maintain the property and to
maintain or replace tenants.
Therefore, commercial and multifamily properties with short-term or less
creditworthy sources of revenue and/or relatively high operating costs, such as
those operated as hospitality and self-storage properties, can be expected to
have more volatile cash flows than commercial and multifamily properties with
medium- to long-term leases from creditworthy tenants and/or relatively low
operating costs. A decline in the real estate market will tend to have a more
immediate effect on the net operating income of commercial and multifamily
properties with short-term revenue sources and may lead to higher rates of
delinquency or defaults on the mortgage loans secured by those properties.
The Successful Operation of a Multifamily or Commercial Property Depends on
Tenants
Generally, multifamily and commercial properties are subject to leases.
The owner of a
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multifamily or commercial property typically uses lease or rental payments
for the following purposes:
o to pay for maintenance and other operating expenses associated with the
property;
o to fund repairs, replacements and capital improvements at the property;
and
o to service mortgage loans secured by, and any other debt obligations
associated with operating, the property.
Factors that may adversely affect the ability of a multifamily or
commercial property to generate net operating income from lease and rental
payments include:
o an increase in vacancy rates, which may result from tenants deciding not to
renew an existing lease or discontinuing operations;
o an increase in tenant payment defaults;
o a decline in rental rates as leases are entered into, renewed or
extended at lower rates;
o an increase in the capital expenditures needed to maintain the property
or to make improvements; and
o a decline in the financial condition of a major or sole tenant.
Various factors that will affect the operation and value of a commercial
property include:
o the business operated by the tenants;
o the creditworthiness of the tenants; and
o the number of tenants.
Dependence on a Single Tenant or a Small Number of Tenants Makes a Property
Riskier Collateral
In those cases where an income-producing property is leased to a single
tenant or is primarily leased to one or a small number of major tenants, a
deterioration in the financial condition or a change in the plan of operations
of any such tenant can have particularly significant effects on the net
operating income generated by the property. If a single or major tenant defaults
under its lease or fails to renew its lease, the resulting adverse financial
effect on the operation of the property will be substantially more severe than
would be the case for a property occupied by a large number of less significant
tenants.
An income-producing property operated for retail, office or industrial
purposes also may be adversely affected by a decline in a particular business or
industry if a concentration of tenants at the property is engaged in that
business or industry.
Tenant Bankruptcy Adversely Affects Property Performance
The bankruptcy or insolvency of a major tenant, or a number of smaller
tenants, at a commercial property may adversely affect the income produced by
the property. Under the U.S. bankruptcy code, a tenant has the option of
assuming or rejecting any unexpired lease. If the tenant rejects the lease, the
landlord's claim for breach of the lease would be a general unsecured claim
against the tenant unless there is collateral securing the claim. The claim
would be limited to:
o the unpaid rent under the lease for the periods prior to the bankruptcy
petition or any earlier surrender of the leased premises, plus
o an amount equal to the rent under the lease for the greater of one year or
15% (but not more than 3 years) of the remaining lease term.
The Success of an Income-Producing Property Depends on Reletting Vacant Spaces
The operations at an income-producing property will be adversely affected
if the owner or property manager is unable to renew leases or relet space on
comparable terms when existing leases expire or become defaulted. Even if
vacated space is successfully relet, the costs associated with reletting can be
substantial and could reduce cash flow from the property. Moreover, if a tenant
defaults in its lease obligations, the landlord may incur substantial costs and
experience significant delays associated with enforcing its rights and
protecting its investment, including costs incurred in renovating and reletting
the property.
If a property has multiple tenants, re-leasing expenditures may be more
frequent than in the case of a property with fewer tenants, which would reduce
the cash flow generated by the multi-tenanted property. Multi-tenanted
properties may also experience higher continuing vacancy rates and greater
volatility in rental income and expenses.
Property Value May Be Adversely Affected Even When Current Operating Income
Is Not
Various factors may affect the value of multifamily and commercial
properties without
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affecting their current net operating income, including:
o changes in interest rates;
o the availability of refinancing sources;
o changes in governmental regulations, licensing or fiscal policy;
o changes in zoning or tax laws; and
o potential environmental or other legal liabilities.
Property Management May Affect Property Operations and Value
The operation of an income-producing property will depend upon the
property manager's performance and viability. The property manager generally is
responsible for:
o responding to changes in the local market;
o planning and implementing the rental structure, including staggering
durations of leases and establishing levels of rent payments;
o operating the property and providing building services;
o managing operating expenses; and
o ensuring that maintenance and capital improvements are carried out in a
timely fashion.
Income-producing properties that derive revenues primarily from short-term
rental commitments, such as hospitality or self-storage properties, generally
require more intensive management than properties leased to tenants under
long-term leases.
By controlling costs, providing appropriate and efficient services to
tenants and maintaining improvements in good condition, a property manager can
maintain or improve occupancy rates, business and cash flow, reduce operating
and repair costs and preserve building value. However, management errors can, in
some cases, impair the long-term viability of an income-producing property.
Maintaining a Property in Good Condition is Expensive
An owner may expend a substantial amount to maintain, renovate or
refurbish a commercial or multifamily property. The effects of poor construction
quality will increase over time in the form of increased maintenance and capital
improvements. Even superior construction will deteriorate over time if
management does not schedule and perform adequate maintenance in a timely
fashion.
Competition Will Adversely Affect the Profitability and Value of an
Income-Producing Property
Some income-producing properties are located in highly competitive areas.
Comparable income-producing properties located in the same area compete on the
basis of a number of factors including:
o rental rates;
o location;
o type of business or services and amenities offered; and
o nature and condition of the particular property.
The profitability and value of an income-producing property may be
adversely affected by a comparable property that:
o offers lower rents;
o has lower operating costs;
o offers a more favorable location; or
o offers better facilities.
Costs of renovating, refurbishing or expanding an income-producing
property in order to remain competitive can be substantial.
The Types and Concentrations of Income-Producing Properties Underlying the
Mortgage Loans in a Trust Will Subject Your Certificates to Special Risks
The mortgage loans underlying a series of offered certificates may be
secured by numerous types of multifamily and commercial properties. The adequacy
of an income-producing property as security for a mortgage loan depends in large
part on its value and ability to generate net operating income. The following is
a discussion of some of the various factors that may affect the value and
operations of the listed types of multifamily and commercial properties. The
effect of these factors upon your certificates will be dependent upon the
relative amounts of each particular property type included in a trust.
Multifamily Rental Properties
Factors affecting the value and operation of a multifamily rental property
include:
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o the physical attributes of the property, such as its age, appearance,
amenities and construction quality;
o the types of services offered at the property;
o the location of the property;
o the characteristics of the surrounding neighborhood, which may change
over time;
o the rents charged for dwelling units at the property relative to the
rents charged for comparable units at competing properties;
o the ability of management to provide adequate maintenance and insurance;
o the property's reputation;
o the level of mortgage interest rates, which may encourage tenants to
purchase rather than lease housing;
o the existence or construction of competing or alternative residential
properties, including other apartment buildings and complexes, manufactured
housing communities, mobile home parks and single-family housing;
o the ability of management to respond to competition;
o the tenant mix and whether the property is primarily occupied by workers
from a particular company or type of business, personnel from a local
military base or students;
o adverse local, regional or national economic conditions, which may limit the
amount that may be charged for rents and may result in a reduction in timely
rent payments or a reduction in occupancy levels;
o state and local regulations, which may affect the property owner's ability to
increase rent to the market rent for an equivalent apartment;
o the extent to which the property is subject to land use restrictive covenants
or contractual covenants that require that units be rented to low income
tenants;
o the extent to which the cost of operating the property, including the cost of
utilities and the cost of required capital expenditures, may increase; and
o the extent to which increases in operating costs may be passed through
to tenants.
Because units in a multifamily rental property are leased to individuals,
usually for no more than a year, the property is likely to respond relatively
quickly to a downturn in the local economy or to the closing of a major employer
in the area.
Certain states regulate the relationship of an owner and its tenants at a
multifamily rental property. Among other things, these states may:
o require written leases;
o require good cause for eviction;
o require disclosure of fees;
o prohibit unreasonable rules;
o prohibit retaliatory evictions;
o prohibit restrictions on a resident's choice of unit vendors;
o limit the basis on which a landlord may increase rent; or
o prohibit a landlord from terminating a tenancy solely by reason of the
sale of the owner's building.
Apartment building owners have been the subject of suits under state
"Unfair and Deceptive Practices Acts" and other general consumer protection
statutes for coercive, abusive or unconscionable leasing and sales practices.
Some counties and municipalities also impose rent control regulations on
apartment buildings. These regulations may limit rent increases to:
o fixed percentages;
o percentages of increases in the consumer price index;
o increases set or approved by a governmental agency; or
o increases determined through mediation or binding arbitration.
In many cases, the rent control laws do not provide for decontrol of
rental rates upon vacancy of individual units. Any limitations on a landlord's
ability to raise rents at a multifamily rental property may impair the
landlord's ability to repay a mortgage loan secured by the property or to meet
operating costs.
Some multifamily rental properties are subject to land use restrictive
covenants or contractual covenants in favor of federal or state housing
agencies. These covenants generally require that a minimum number or percentage
of units be rented to tenants who have incomes that are substantially lower than
median incomes in the area or region. These covenants may limit the potential
rental rates that an owner can charge at a multifamily rental property, the
potential tenant base for the property or both. An owner may subject a
multifamily rental property to these covenants in exchange for tax credits or
rent subsidies. When the credits or subsidies cease, net operating income will
decline.
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Some mortgage loans underlying the offered certificates will be secured by
the related borrower's interest in multiple units in a residential condominium
project and the related voting rights in the owners' association for the
project. Due to the nature of condominiums, a default on any of those mortgage
loans will not allow the holder of the mortgage loan the same flexibility in
realizing on its real property collateral as is generally available with respect
to multifamily rental properties that are not condominiums. The rights of other
unit owners, the governing documents of the owners' association and the state
and local laws applicable to condominiums must be considered and respected.
Consequently, servicing and realizing upon the collateral for those mortgage
loans could subject the lender to greater delay, expense and risk than a loan
secured by a multifamily rental property that is not a condominium.
Cooperatively-Owned Apartment Buildings
Some multifamily properties are owned or leased by cooperative
corporations. In general, each shareholder in the corporation is entitled to
occupy a particular apartment unit pursuant to a long-term proprietary lease or
occupancy agreement.
A cooperative corporation is directly responsible for building maintenance
and payment of real estate taxes and hazard and liability insurance premiums. A
cooperative corporation's ability to meet debt service obligations on a mortgage
loan secured by, and to pay all other operating expenses of, the cooperatively
owned property depends primarily upon the receipt of:
o maintenance payments from the tenant/shareholders, and
o any rental income from units or commercial space that the cooperative
corporation might control.
A cooperative corporation may have to impose special assessments on the
tenant/shareholders in order to pay unanticipated expenditures. Accordingly, a
cooperative corporation is highly dependent on the financial well being of its
tenant/shareholders.
In a typical cooperative conversion plan, the owner of a rental apartment
building contracts to sell the building to a newly formed cooperative
corporation. The owner or sponsor allocates shares to each apartment unit, and
the current tenants have a certain period to subscribe at prices discounted from
the prices to be offered to the public after this period. As part of the
consideration for the sale, the owner or sponsor receives all the unsold shares
of the cooperative corporation. In general, the sponsor controls the
corporation's board of directors and management for a limited period of time. If
the sponsor holds the shares allocated to a large number of apartment units, the
lender on a mortgage loan secured by a cooperatively owned property may be
adversely affected by a decline in the creditworthiness of the sponsor.
Many cooperative conversion plans are "non-eviction" plans. Under a
non-eviction plan, a tenant at the time of conversion who chooses not to
purchase shares is entitled to reside in the unit as a subtenant of the owner of
the shares allocated to the apartment unit. Any applicable rent control or rent
stabilization laws would continue to be applicable to the sub-tenancy. In
addition, the subtenant may be entitled to renew its lease for an indefinite
number of years with continued protection from rent increases above those
permitted by any applicable rent control and rent stabilization laws. The
owner/shareholder is responsible for the maintenance payments to the cooperative
corporation without regard to whether it receives rent from the subtenant or
whether the rent payments are lower than maintenance payments on the unit. Newly
formed cooperative corporations typically have the greatest concentration of
non-tenant/shareholders.
Retail Properties
The term "retail property" encompasses a broad range of properties at
which businesses sell consumer goods and other products and provide various
entertainment, recreational or personal services to the general public. Some
examples of retail properties include:
o shopping centers;
o factory outlet centers;
o malls;
o automotive sales and service centers;
o consumer oriented businesses;
o department stores;
o grocery stores;
o convenience stores;
o specialty shops;
o gas stations;
o movie theaters;
o fitness centers;
o bowling alleys;
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o salons; and
o dry cleaners.
Unless owner occupied, retail properties generally derive all or a
substantial percentage of their income from lease payments from commercial
tenants. Therefore, it is important for the owner of a retail property to
attract and keep tenants, particularly significant tenants, that are able to
meet their lease obligations. In order to attract tenants, the owner of a retail
property may be required:
o to lower rents;
o to grant a potential tenant a "free rent" or reduced rent period;
o to improve the condition of the property generally; or
o to make at its own expense, or grant a rent abatement to cover, tenant
improvements for a potential tenant.
A prospective tenant will also be interested in the number and type of
customers that it will be able to attract at a particular retail property. The
ability of a tenant at a particular retail property to attract customers will be
affected by a number of factors related to the property and the surrounding
area, including:
o competition from other retail properties;
o perceptions regarding the safety, convenience and attractiveness of the
property;
o perceptions regarding the safety of the surrounding area;
o demographics of the surrounding area;
o the strength and stability of the local, regional and national economies;
o traffic patterns and access to major thoroughfares;
o the visibility of the property;
o availability of parking;
o the particular mixture of the goods and services offered at the property;
o customer tastes, preferences and spending patterns; and
o the drawing power of other tenants.
The success of a retail property is often dependent on the success of its
tenants' businesses. A significant component of the total rent paid by tenants
of retail properties is often tied to a percentage of gross sales or revenues.
Declines in sales or revenues of the tenants will likely cause a corresponding
decline in percentage rents and/or impair the tenants' ability to pay their rent
or other occupancy costs. A default by a tenant under its lease could result in
delays and costs in enforcing the landlord's rights. A decline in the local
economy and reduced consumer spending would directly and adversely affect retail
properties.
Repayment of a mortgage loan secured by a retail property will be affected
by the expiration of space leases at the property and the ability of the
borrower to renew or relet the space on comparable terms. Even if vacant space
is successfully relet, the costs associated with reletting, including tenant
improvements, leasing commissions and free rent, may be substantial and could
reduce cash flow from a retail property.
The presence or absence of an anchor tenant in a multi-tenanted retail
property can be important. Anchor tenants play a key role in generating customer
traffic and making the center desirable for other tenants. An "anchor tenant"
is, in general, a retail tenant whose space is substantially larger in size than
that of other tenants at the same retail property and whose operation is vital
in attracting customers to the property. At some retail properties, the anchor
tenant owns the space it occupies. In those cases where the property owner does
not control the space occupied by the anchor tenant, the property owner may not
be able to take actions with respect to the space that it otherwise typically
would take, such as granting concessions to retain an anchor tenant or removing
an ineffective anchor tenant. In some cases, an anchor tenant may cease to
operate at the property, even though it continues to own or pay rent on the
vacant space. If an anchor tenant ceases operations at a retail property, other
tenants at the property may be entitled to terminate their leases prior to the
scheduled termination date or to pay rent at a reduced rate for the remaining
term of the lease.
Various factors will adversely affect the economic performance of an
"anchored" retail property, including:
o an anchor tenant's failure to renew its lease;
o termination of an anchor tenant's lease;
o the bankruptcy or economic decline of an anchor tenant or a self-owned
anchor;
o the cessation of the business of a self-owned anchor or of an anchor
tenant, even if it continues to own the property or pay rent; or
o a loss of an anchor tenant's ability to attract shoppers.
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Retail properties may also face competition from sources outside a given
real estate market or with lower operating costs. For example, all of the
following compete with more traditional department stores and specialty shops
for consumer dollars:
o factory outlet centers;
o discount shopping centers and clubs;
o catalogue retailers;
o television shopping networks and programs;
o internet web sites; and
o telemarketing.
Similarly, home movie rentals and pay-per-view movies provide alternate
sources of entertainment to movie theaters. Continued growth of these
alternative retail outlets, which are often characterized by lower operating
costs, and entertainment sources could adversely affect the rents collectible at
retail properties.
Gas stations, automotive sales and service centers and dry cleaners also
pose unique environmental risks because of the nature of their businesses.
Office Properties
Factors affecting the value and operation of an office property include:
o the number and quality of the tenants, particularly significant tenants,
at the property;
o the physical attributes of the building in relation to competing
buildings;
o the location of the property with respect to the central business
district or population centers;
o demographic trends within the metropolitan area to move away from or
towards the central business district;
o social trends combined with space management trends, which may change towards
options such as telecommuting or "hoteling" to satisfy space needs;
o tax incentives offered to businesses or property owners by cities or
suburbs adjacent to or near where the building is located;
o local competitive conditions, such as the supply of office space or the
existence or construction of new competitive office buildings;
o the quality and philosophy of building management;
o access to mass transportation; and
o changes in zoning laws.
An economic decline in a tenant's business may adversely affect an office
property. The risk of such an economic decline 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.
Office properties are also subject to competition with other office
properties in the same market. Competitive factors affecting an office property
include:
o rental rates;
o the building's age, condition and design, including floor sizes and
layout;
o access to public transportation and availability of parking; and
o amenities offered to its tenants, including sophisticated building
systems, such as fiber optic cables, satellite communications or other base
building technological features.
The cost of refitting office space for a new tenant is often higher than
for other property types.
The success of an office property also depends on the local economy.
Factors influencing a company's decision to locate in a given area include:
o the cost and quality of labor;
o tax incentives; and
o quality of life matters, such as schools and cultural amenities.
The strength and stability of the local or regional economy will affect an
office property's ability to attract stable tenants on a consistent basis. A
central business district may have a substantially different economy from that
of a suburb.
Hospitality Properties
Hospitality properties may involve different types of hotels and motels,
including:
o full service hotels;
o resort hotels with many amenities;
o limited service hotels;
o hotels and motels associated with national or regional franchise chains;
o hotels that are not affiliated with any franchise chain but may have
their own brand identity; and
o other lodging facilities.
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Factors affecting the economic performance of a hospitality property
include:
o the location of the property and its proximity to major population
centers or attractions;
o the seasonal nature of business at the property;
o the level of room rates relative to those charged by competitors;
o quality and perception of the franchise affiliation;
o economic conditions, either local, regional or national, which may limit
the amount that can be charged for a room and may result in a reduction in
occupancy levels;
o the existence or construction of competing hospitality properties;
o nature and quality of the services and facilities;
o financial strength and capabilities of the owner and operator;
o the need for continuing expenditures for modernizing, refurbishing and
maintaining existing facilities;
o increases in operating costs, which may not be offset by increased room
rates;
o the property's dependence on business and commercial travelers and
tourism; and
o changes in travel patterns caused by changes in access, energy prices, labor
strikes, relocation of highways, the reconstruction of additional highways or
other factors.
Because limited service hotels and motels are relatively quick and
inexpensive to construct and may quickly reflect a positive value, an
over-building of these hotels and motels could occur in any given region, which
would likely adversely affect occupancy and daily room rates. Further, because
rooms at hospitality properties are generally rented for short periods of time,
hospitality properties tend to be more sensitive to adverse economic conditions
and competition than many other types of commercial properties. Additionally,
the revenues of certain hospitality properties, particularly those located in
regions whose economies depend upon tourism, may be highly seasonal in nature.
Hospitality properties may be operated pursuant to franchise agreements.
The continuation of a franchise 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 hospitality property to maintain those standards or adhere to
those 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 owner of the hospitality
property determines are too expensive or are otherwise unwarranted in light of
the operating results or prospects of the property. In that event, the owner of
the hospitality property may elect to allow the franchise license to lapse. In
any case, if the franchise is terminated, the owner of the hospitality property
may seek to obtain a suitable replacement franchise or to operate the property
independently of a franchise license. The loss of a franchise license could have
a material adverse effect upon the operations or value of the hospitality
property, because of the loss of associated name recognition, marketing support
and centralized reservation systems provided by the franchisor.
The viability of any hospitality property that is a franchise of a
national or a regional hotel or motel chain is dependent upon:
o the continued existence and financial strength of the franchisor;
o the public perception of the franchise service mark; and
o the duration of the franchise licensing agreement.
A franchisor may restrict the transferability of its franchise license
agreements. In this case, the lender must obtain the consent of the franchisor
for the continued use of the franchise license by the hospitality property
following a foreclosure. Conversely, a lender may be unable to remove a
franchisor that it desires to replace following a foreclosure. Further, in the
event of a foreclosure on a hospitality property, the lender or other purchaser
of the hospitality property may not be entitled to the rights under any
associated liquor license. That party would be required to apply for its own
liquor license. There can be no assurance that a new license could be obtained
or that it could be obtained promptly.
Casino Properties
Factors affecting the economic performance of a casino property include:
o location, including proximity to or easy access from major population
centers;
o appearance;
o economic conditions, either local, regional or national, which may limit
the amount of
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disposable income that potential patrons may have for gambling;
o the existence or construction of competing casinos;
o dependence on tourism; and
o local or state governmental regulation.
Competition among major casinos may involve attracting patrons by
providing alternate forms of entertainment, such as performers and sporting
events, and offering low-priced or free food and lodging. In addition, casino
owners may expend substantial sums to modernize, refurbish and maintain existing
facilities.
Because of their dependence on disposable income of patrons, casino
properties are likely to respond quickly to a downturn in the economy.
To avoid criminal influence, the ownership and operation of casino
properties is often subject to local or state governmental regulation. A
government agency or authority may have jurisdiction over or influence with
respect to the foreclosure of a casino property and/or the bankruptcy of its
owner or operator. In some jurisdictions, it may be necessary to receive
governmental approval before foreclosing, which could result in substantial
delays to a lender. Gaming licenses are not transferable, including in
connection with a foreclosure. We can not assure you that a lender or another
purchaser in foreclosure or otherwise will be able to obtain the requisite
approvals to continue operating the foreclosed property as a casino.
Any given state or municipality that currently allows legalized gambling
could pass legislation banning it.
The loss of a gaming license for any reason would have a material adverse
effect on the value of a casino property.
Health Care-Related Properties
Health-care related properties include:
o hospitals;
o skilled nursing facilities;
o nursing homes;
o congregate care facilities; and
o in some cases, assisted living centers and housing for seniors.
Health care-related facilities, particularly nursing homes, may receive a
substantial portion of their revenues from government reimbursement programs,
primarily Medicaid and Medicare. Medicaid and Medicare are subject to:
o statutory and regulatory changes;
o retroactive rate adjustments;
o administrative rulings;
o policy interpretations;
o delays by fiscal intermediaries; and
o government funding restrictions.
All of the foregoing can adversely affect the operating revenues of a
health care-related facility. Moreover, governmental payors have employed
cost-containment measures that limit payments to health care providers. In
addition, there are currently under consideration various proposals for national
health care relief that could further limit these payments.
Providers of long-term nursing care and other medical services are highly
regulated by federal, state and local law. They are subject to numerous factors
that can increase the cost of operation, limit growth and, in extreme cases,
require or result in suspension or cessation of operations, including:
o federal and state licensing requirements;
o facility inspections;
o rate setting;
o reimbursement policies; and
o laws relating to the adequacy of medical care, distribution of
pharmaceuticals, use of equipment, personnel operating policies and
maintenance of and additions to facilities and services.
Under applicable federal and state laws and regulations, Medicare and
Medicaid reimbursements generally may not be made to any person other than the
provider who actually furnished the related material goods and services.
Accordingly, if a lender forecloses on a health care-related facility, neither
the lender nor a subsequent lessee or operator of the property would generally
be entitled to obtain from federal or state governments any outstanding
reimbursement payments relating to services furnished at the property prior to
the foreclosure. Furthermore, in the event of foreclosure, there can be no
assurance that a lender or other purchaser in a foreclosure sale would be
entitled to the rights under any required licenses and regulatory approvals. The
lender or other purchaser may have to apply for its
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own licenses and approvals. There can be no assurance that a new license could
be obtained or that a new approval would be granted.
Health care-related facilities are generally "special purpose" properties
that could not be readily converted to general residential, retail or office
use. This will adversely affect their liquidation value. Furthermore, transfers
of health care-related facilities are subject to regulatory approvals under
state, and in some cases federal, law that are not required for transfers of
most other types of commercial properties.
Industrial Properties
Industrial properties may be adversely affected by reduced demand for
industrial space occasioned by a decline in a particular industry segment and/or
by a general slowdown in the economy. In addition, an industrial property that
suited the particular needs of its original tenant may be difficult to relet to
another tenant or may become functionally obsolete relative to newer properties.
The value and operation of an industrial property depends on:
o location of the property, the desirability of which in a particular
instance may depend on:
(1) availability of labor services;
(2) proximity to supply sources and customers; and
(3) accessibility to various modes of transportation and shipping, including
railways, roadways, airline terminals and ports;
o building design of the property, the desirability of which in a
particular instance may depend on:
(1) ceiling heights;
(2) column spacing;
(3) number and depth of loading bays;
(4) divisibility;
(5) floor loading capacities;
(6) truck turning radius;
(7) overall functionality; and
(8) adaptability of the property, because industrial tenants often need
space that is acceptable for highly specialized activities; and
o the quality and creditworthiness of individual tenants, because
industrial properties frequently have higher tenant concentrations.
Industrial properties are generally "special purpose" properties that an
owner could not readily convert to general residential, retail or office use.
This will adversely affect their liquidation value.
Industrial properties may also pose unique environmental risks depending
upon the nature of the business conducted at the property.
Warehouse, Mini-Warehouse and Self-Storage Facilities
Warehouse, mini-warehouse and self-storage properties are considered
vulnerable to competition because both acquisition costs and break-even
occupancy are relatively low. In addition, an owner would incur substantial
capital expenditures to convert a warehouse, mini-warehouse or self-storage
property to an alternative use. These factors will materially impair the
liquidation value of the property if its operation for storage purposes becomes
unprofitable due to decreased demand, competition, age of improvements or other
factors.
Successful operation of a warehouse, mini-warehouse or self-store property
depends on:
o building design;
o location and visibility;
o tenant privacy;
o efficient access to the property;
o proximity to potential users, including apartment complexes or
commercial users;
o services provided at the property, such as security;
o age and appearance of the improvements; and
o quality of management.
Warehouse properties may pose environmental risks depending upon the
nature of the business conducted in the warehouse.
Restaurants and Taverns
Factors affecting the economic viability of individual restaurants,
taverns and other establishments that are part of the food and beverage service
industry include:
o competition from facilities having businesses similar to a particular
restaurant or tavern;
o perceptions by prospective customers of safety, convenience, services
and attractiveness;
o the cost, quality and availability of food and beverage products;
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o negative publicity, resulting from instances of food contamination,
food-borne illness, crime and similar events;
o changes in demographics, consumer habits and traffic patterns;
o the ability to provide or contract for capable management; and
o retroactive changes to building codes, similar ordinances and other
legal requirements.
Adverse economic conditions, whether local, regional or national, may
limit the amount that may be charged for food and beverages and the extent to
which potential customers dine out. Because of the nature of the business,
restaurants and taverns tend to respond to adverse economic conditions more
quickly than do many other types of commercial properties. Furthermore, the
transferability of any operating, liquor and other licenses to an entity
acquiring a bar or restaurant, either through purchase or foreclosure, is
subject to local law requirements.
The food and beverage service industry is highly competitive. The
principal means of competition are:
o segment;
o product;
o price;
o value;
o quality;
o service;
o convenience;
o location; and
o the nature and condition of the restaurant facility.
A restaurant or tavern operator competes with the operators of comparable
establishments in the area in which its restaurant or tavern is located. Other
restaurants could have:
o lower operating costs;
o more favorable locations;
o more effective marketing;
o more efficient operations; or
o better facilities.
The location and condition of a particular restaurant or tavern will
affect the number of customers and, to a certain extent, the prices that the
operator may charge. The characteristics of an area or neighborhood in which a
restaurant or tavern is located may change over time or in relation to competing
facilities. Also, the cleanliness and maintenance at a restaurant or tavern will
affect its appeal to customers. In the case of a regionally- or nationally-known
chain restaurant, there may be costly expenditures for renovation, refurbishment
or expansion, regardless of its condition.
Factors affecting the success of a regionally- or nationally-known chain
restaurant include:
o actions and omissions of any franchisor, including management practices that
adversely affect the nature of the business or that require renovation,
refurbishment, expansion or other expenditures;
o the degree of support the franchisor provides or arranges, including its
franchisee organizations and third-party providers of products or services;
and
o the bankruptcy or business discontinuation of the franchisor or any of
its franchisee organizations or third-party providers.
Chain restaurants may be operated under franchise agreements, and these
agreements typically do not contain provisions protective of lenders. A
franchisor typically may terminate a borrower's rights as a franchisee without
informing the lender, and the borrower may be precluded from competing with the
franchisor upon termination. In addition, a lender that acquires title to a
restaurant site through foreclosure or similar proceedings may be restricted in
the use of the site or may be unable to succeed to the rights of the franchisee
under the related franchise agreement. The transferability of a franchise may be
subject to other restrictions. Also, federal and state franchise regulations may
impose additional risk, including the risk that the transfer of a franchise
acquired through foreclosure or similar proceedings may require registration
with governmental authorities or disclosure to prospective transferees.
Manufactured Housing Communities, Mobile Home Parks and Recreational Vehicle
Parks
Manufactured housing communities and mobile home parks consist of land
that is divided into "spaces" or "home sites" that are primarily leased to
owners of the individual mobile homes or other housing units. The homeowner
often invests in site-specific improvements such as carports, steps, fencing,
skirts around the base of the home, and landscaping. The landowner typically
provides private roads within the park, common facilities and, in many cases,
utilities. Due to relocation costs and, in some cases, demand for home sites,
the value of a
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mobile home or other housing unit in place in a manufactured housing community
or mobile home park is generally higher, and can be significantly higher, than
the value of the same unit not placed in a manufactured housing community or
mobile home park. As a result, a well-operated manufactured housing community or
mobile home park that has achieved stabilized occupancy is typically able to
maintain occupancy at or near that level. For the same reason, a lender that
provided financing for the home of a tenant who defaulted on his or her space
rent generally has an incentive to keep rental payments current until the home
can be resold in place, rather than to allow the unit to be removed from the
park. In general, the individual mobile homes and other housing units will not
constitute collateral for a mortgage loan underlying a series of certificates.
Recreational vehicle parks lease spaces primarily or exclusively for motor
homes, travel trailers and portable truck campers, primarily designed for
recreational, camping or travel use. In general, parks that lease recreational
vehicle spaces have a less stable tenant population than parks occupied
predominantly by mobile homes. However, it is not unusual for the owner of a
recreational vehicle to leave the vehicle at the park on a year-round basis or
to use the vehicle as low cost housing and reside in the park indefinitely.
Factors that affect the successful operation of a manufactured housing
community, mobile home park or recreational vehicle park include:
o the number of comparable competing properties in the local market;
o the age, appearance and reputation of the property;
o the quality of management; and
o the types of facilities and services it provides.
Manufactured housing communities and mobile home parks also compete
against alternative forms of residential housing, including multifamily rental
properties, cooperatively owned apartment buildings, condominium complexes and
single-family residential developments. Recreational vehicle parks also compete
against alternative forms of recreation and short-term lodging, such as staying
at a hotel at the beach.
Manufactured housing communities, mobile home parks and recreational
vehicle parks are "special purpose" properties that the operator cannot readily
convert to general residential, retail or office use. This will adversely affect
the liquidation value of the property if its current operations become
unprofitable due to competition, age of the improvements or other factors.
Certain states regulate the relationship of an owner of a manufactured
housing community or mobile home park and its tenants in a manner similar to the
way they regulate the relationship between a landlord and tenant at a
multifamily rental property. Some states also regulate changes in the use of a
manufactured housing community or mobile home park and require that the owner
give written notice to its tenants a substantial period of time prior to the
projected change.
In addition to state regulation of the landlord-tenant relationship,
numerous counties and municipalities impose rent control on manufactured housing
communities and mobile home parks. These ordinances may limit rent increases to:
o fixed percentages;
o percentages tied to the consumer price index;
o increases set or approved by a governmental agency; or
o increases determined through mediation or binding arbitration.
In many cases, the rent control laws either do not permit vacancy
decontrol or permit vacancy decontrol only in the relatively rare event that the
mobile home or manufactured housing unit is removed from the home site. Local
authority to impose rent control on manufactured housing communities and mobile
home parks is pre-empted by state law in certain states and rent control is not
imposed at the state level in those states. In some states, however, local rent
control ordinances are not pre-empted for tenants having short-term or
month-to-month leases, and properties there may be subject to various forms of
rent control with respect to those tenants.
Recreational and Resort Properties
Security for a mortgage loan may include a golf course, marina, ski
resort, amusement park or other property used for recreational purposes or as a
resort. Factors affecting the economic performance of a property of this type
include:
o the location and appearance of the property;
o the appeal of the recreational activities offered;
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o the existence or construction of competing properties, whether or not
they offer the same activities;
o the need to make capital expenditures to maintain, refurbish, improve and/or
expand facilities in order to attract potential patrons;
o geographic location and dependence on tourism;
o changes in travel patterns caused by changes in energy prices, strikes,
location of highways, construction of additional highways and similar
factors;
o seasonality of the business, which may cause periodic fluctuations in
operating revenues and expenses;
o sensitivity to weather and climate changes; and
o local, regional and national economic conditions.
Statutes and government regulations that govern the use of, and
construction on, rivers, lakes and other waterways will affect a marina or other
recreational or resort property located next to water.
Because of the nature of the business, recreational and resort properties
tend to respond to adverse economic conditions more quickly than other types of
commercial properties.
Recreational and resort properties are generally "special purpose"
properties that the owner cannot readily convert to alternative uses. This
will adversely affect their liquidation value.
Arenas and Stadiums
The success of an arena or stadium generally depends on its ability to
attract patrons to a variety of events, including:
o sporting events;
o musical events;
o theatrical events;
o animal shows; and/or
o circuses.
The ability to attract patrons is dependent on such factors as:
o the appeal of the particular event;
o the cost of admission;
o perceptions by prospective patrons of the safety, convenience, services
and attractiveness of the arena or stadium;
o perceptions by prospective patrons of the safety of the surrounding
area; and
o the alternative forms of entertainment available in the particular
locale.
In some cases, an arena's or stadium's success will depend on its ability
to attract and keep a sporting team as a tenant. An arena or stadium may become
unprofitable, or unacceptable to a sporting team, due to decreased attendance,
competition and age of improvements. Often, substantial expenditures must be
made to modernize, refurbish and/or maintain existing facilities.
Arenas and stadiums are "special purpose" properties that the owner cannot
readily convert to alternative uses. The "special purpose" nature of these
facilities will adversely affect their liquidation value.
Churches and Other Religious Facilities
Churches and other religious facilities generally depend on charitable
donations to meet expenses and pay for maintenance and capital expenditures.
Several social, political and economic factors affect attendance at a religious
facility and the willingness of attendees to make donations. Local, regional or
national economic conditions may also adversely affect donations. Religious
facilities are "special purpose" properties that the owner cannot readily
convert to alternative uses. The "special purpose" nature of these facilities
will adversely affect their liquidation value.
Parking Lots and Garages
The primary source of income for parking lots and garages is the rental
fees charged for parking spaces. Factors affecting the success of a parking lot
or garage include:
o the number of rentable parking spaces and rates charged;
o the location of the lot or garage and, in particular, its proximity to
places where large numbers of people work, shop or live;
o the amount of alternative parking spaces in the area;
o the availability of mass transit; and
o the perceptions of the safety, convenience and services of the lot or
garage.
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Unimproved Land
The value of unimproved land is largely a function of its potential use.
The land's potential use may depend on:
o its location;
o its size;
o the surrounding neighborhood; and
o local zoning laws.
Borrower Concentration Within a Trust Exposes Investors to Greater Risk of
Default and Loss
A particular borrower or group of related borrowers may be associated with
multiple real properties securing the mortgage loans in any particular trust.
The bankruptcy or insolvency of, or other financial problems with respect to,
that borrower or group of borrowers could have an adverse effect on the
operation of all of the related real properties and on the ability of those
properties to produce sufficient cash flow to make required payments on the
related mortgage loans. For example, if a borrower or group of related borrowers
that owns or controls several real properties experiences financial difficulty
at one of those properties, it could defer maintenance at another of those
properties in order to satisfy current expenses with respect to the first
property. That borrower or group of related borrowers could also attempt to
avert foreclosure by filing a bankruptcy petition that might have the effect of
interrupting debt service payments on all the related mortgage loans for an
indefinite period. In addition, multiple real properties owned by the same
borrower or related borrowers are likely to have common management. This would
increase the risk that financial or other difficulties experienced by the
property manager could have a greater impact on the lender, including one of the
trusts, holding the related loans.
Loan Concentration Within a Trust Exposes Investors to Greater Risk of
Default and Loss
Any of the mortgage loans in one of the trusts may be substantially larger
than the other loans in that trust. In general, the inclusion in a trust of one
or more mortgage loans that have outstanding principal balances that are
substantially larger than the other mortgage loans in the trust can result in
losses that are more severe, relative to the size of the related mortgage pool,
than would be the case if the total balance of that pool were distributed more
evenly.
Geographic Concentration Within a Trust Exposes Investors to Greater Risk of
Default and Loss
If a concentration of mortgage loans in any of the trusts is secured by
real properties in a particular locale, state or region, the holders of the
related offered certificates will have a greater exposure to:
o any adverse economic developments that occur in the locale, state or
region where the properties are located;
o changes in the real estate market where the properties are located;
o changes in governmental rules and fiscal policies in the governmental
jurisdiction where the properties are located; and
o acts of nature, including floods, tornadoes and earthquakes, in the
areas where properties are located.
Changes in Pool Composition Will Change the Nature of Your Investment
The mortgage loans underlying any series of offered certificates will
amortize at different rates and mature on different dates. In addition, some of
those mortgage loans may be prepaid or liquidated. As a result, the relative
composition of the mortgage pool will change over time.
If you purchase certificates with a pass-through rate that is equal to or
calculated based upon a weighted average of interest rates on the underlying
mortgage loans, your pass-through rate will be affected, and may decline, as the
relative composition of the mortgage pool changes.
In addition, as payments and other collections of principal are received
with respect to the underlying mortgage loans, the remaining mortgage pool
backing your certificates may exhibit an increased concentration with respect to
property type, number and affiliation of borrowers and geographic location.
Subordinate Debt Increases the Likelihood of a Borrower Default
Most mortgage loans included in one of the trusts will either:
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o prohibit the related borrower from encumbering the related real property
with additional secured debt; or
o require the consent of the holder of the mortgage loan prior to so
encumbering the property.
However, a lender may be unaware of a violation of this prohibition until
the borrower otherwise defaults on the mortgage loan. You should be aware that a
lender, such as one of the trusts, may not realistically be able to prevent a
borrower from incurring subordinate debt.
The existence of any secured subordinated indebtedness increases the
difficulty of refinancing a mortgage loan backing your certificates at the
loan's maturity. In addition, the related borrower may have difficulty repaying
multiple loans. Moreover, the filing of a petition in bankruptcy by, or on
behalf of, a junior lienholder may prevent the senior lienholder from taking
action to foreclose its lien. See "Certain Legal Aspects of Mortgage
Loans--Subordinate Financing".
Borrower Bankruptcy May Adversely Affect Payment on Your Certificates
Under the U.S. bankruptcy code, the filing of a petition in bankruptcy by
or against a borrower will stay the sale of a real property owned by that
borrower, as well as the commencement or continuation of a foreclosure action.
In addition, if a court determines that the value of a real property is less
than the principal balance of the mortgage loan it secures, the court may reduce
the amount of secured indebtedness to the then-value of the property. Such an
action would make the lender a general unsecured creditor for the difference
between the then-value of the property and the amount of its outstanding
mortgage indebtedness. A bankruptcy court also may:
o grant a debtor a reasonable time to cure a payment default on a mortgage
loan;
o reduce monthly payments due under a mortgage loan;
o change the rate of interest due on a mortgage loan; or
o otherwise alter the mortgage loan's repayment schedule.
Additionally, the borrower, as debtor-in-possession, or its bankruptcy
trustee has certain special powers to avoid, subordinate or disallow debts. In
certain circumstances, the claims of a secured lender, such as one of the
trusts, may be subordinated to financing obtained by a debtor-in-possession
subsequent to its bankruptcy.
Under the U.S. bankruptcy code, a lender will be stayed from enforcing a
borrower's assignment of rents and leases. The U.S. bankruptcy code also may
interfere with a lender's ability to enforce lockbox requirements. The legal
proceedings necessary to resolve these issues can be time consuming and may
significantly delay the receipt of rents. Rents also may escape an assignment to
the extent they are used by a borrower to maintain its property or for other
court authorized expenses.
As a result of the foregoing, the related trust's recovery with respect to
borrowers in bankruptcy proceedings may be significantly delayed, and the total
amount ultimately collected may be substantially less than the amount owed.
Environmental Liabilities Will Adversely Affect the Value and Operation of
Contaminated Property and May Deter a Lender from Foreclosing
We can give you no assurance as to any environmental testing conducted at
the related real properties in connection with the origination of the mortgage
loans underlying your certificates:
o that the environmental testing identified all adverse environmental
conditions and risks at the related real properties;
o that the results of the environmental testing were accurately evaluated
in all cases;
o that the related borrowers have implemented or will implement all operations
and maintenance plans and other remedial actions recommended by an
environmental consultant that conducted the testing at the related real
properties; or
o that any recommended remedial action will fully remediate or otherwise
address all the identified adverse environmental conditions and risks.
In addition, tenants, such as gasoline stations or dry cleaners, or
conditions or operations in the vicinity of the property, such as leaking
underground storage tanks at another property nearby, could adversely affect the
current environmental condition of a real property securing a mortgage loan
underlying your certificates.
Various environmental laws may make a current or previous owner or
operator of real property liable for the costs of removal or remediation of
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hazardous or toxic substances on, under or adjacent to the property. Those
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. For example,
certain laws impose liability for release of asbestos containing materials into
the air or require the removal or containment of the materials. The owner's
liability for any required remediation generally is unlimited and could exceed
the value of the property and/or the total assets of the owner. In addition, the
presence of hazardous or toxic substances, or the failure to remediate the
adverse environmental condition, may adversely affect the owner's or operator's
ability to use the affected property. In certain states, contamination of a
property may give rise to a lien on the property to ensure the costs of cleanup.
In some of those states, this lien has priority over the lien of an existing
mortgage. In addition, third parties may seek recovery from owners or operators
of real property for personal injury associated with exposure to hazardous
substances, including asbestos and lead-based paint. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may be liable for the
costs of removal or remediation of the substances at the disposal or treatment
facility.
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, commonly referred to as "CERCLA", together with certain
other federal and state laws, provide that a secured lender, such as one of the
trusts, may be liable as an "owner" or "operator" of the real property,
regardless of whether the borrower or a previous owner caused the environmental
damage, if:
o agents or employees of the lender are deemed to have participated in the
management of the borrower, or
o under certain conditions, the lender actually takes possession of a
borrower's property or control of its day-to-day operations, including
through the appointment of a receiver or foreclosure.
Although recently enacted legislation clarifies the activities in which a
lender may engage without becoming subject to liability under CERCLA and similar
federal laws, that legislation has no applicability to state environmental laws.
Moreover, future laws, ordinances or regulations could impose material
environmental liability.
Federal law requires owners of residential housing constructed prior to
1978 to disclose to potential residents or purchasers:
o any condition on the property that causes exposure to lead-based paint,
and
o the potential hazards to pregnant women and young children, including that
the ingestion of lead-based paint chips and/or the inhalation of dust
particles from lead-based paint by children can cause permanent injury, even
at low levels of exposure.
Property owners may be liable for injuries to their tenants or third
parties resulting from exposure under various laws that impose affirmative
obligations on property owners of residential housing containing lead-based
paint.
Some Provisions in the Mortgage Loans Underlying Your Certificates May Be
Challenged as Being Unenforceable
Cross-Collateralization Arrangements
It may be possible to challenge cross-collateralization arrangements
involving more than one borrower as a fraudulent conveyance, even if the
borrowers are related. If one of those borrowers were to become a debtor in a
bankruptcy case, creditors of the bankrupt party or the representative of the
bankruptcy estate of the bankrupt party could seek to have the bankruptcy court
avoid any lien granted by the bankrupt party to secure repayment of another
borrower's loan. In order to do so, the court would have to determine that:
o the bankrupt party was--
1) insolvent at the time of granting the lien,
2) rendered insolvent by the granting of the lien,
3) left with inadequate capital, or
4) not able to pay its debts as they matured; and
o the bankrupt party did not receive fair consideration or reasonably
equivalent value for pledging its property to secure the debt of the other
borrower.
If the court were to conclude that the granting of the lien was an
avoidable fraudulent conveyance, it could nullify the lien or mortgage effecting
the cross-collateralization. The court could also allow the bankrupt party to
recover payments it made pursuant to the avoided cross-collateralization.
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Prepayment Premiums, Fees and Charges
Under the laws of a number of states, the enforceability of any mortgage
loan provisions that require payment of a prepayment premium, fee or charge upon
a voluntary and/or an involuntary prepayment is unclear. If those provisions
were unenforceable in connection with an involuntary prepayment, borrowers would
have an incentive to default in order to prepay their loans.
Due-on-sale and Debt Acceleration Clauses
Many of the mortgage loans underlying the offered certificates will
contain a due-on-sale clause. This clause permits the lender, with some
exceptions, to accelerate the maturity of the mortgage loan upon the sale,
transfer or conveyance of:
o the related real property; or
o an ownership interest in the related borrower.
All of the mortgage loans will include some form of debt-acceleration
clause, which permits the lender to accelerate the debt upon specified monetary
or non-monetary defaults by the related borrower. The courts of all states will
enforce acceleration clauses in the event of a material payment default. The
equity courts of any state, however, may refuse to allow the foreclosure of a
mortgage or deed of trust or to permit the acceleration of the indebtedness if:
o the default is deemed to be immaterial;
o the exercise of these remedies would be inequitable or unjust; or
o the circumstances would render the acceleration unconscionable.
Assignments of Leases
Many of the mortgage loans underlying the offered certificates will also
be secured by an assignment of leases and rents. The related borrower will
assign its interest in the leases on the related real property and the income
from those leases to the lender as additional security for the related mortgage
loan. Generally, the borrower may continue to collect rents until the borrower
defaults. In some cases, state law may require that the lender take possession
of the property, obtain a judicial appointment of a receiver or take some other
similar action before becoming entitled to collect the rents. In addition, the
commencement of bankruptcy or similar proceedings by or in respect of the
borrower will adversely affect the lender's ability to collect the rents. See
"Certain Legal Aspects of Mortgage Loans--Bankruptcy Laws."
Defeasance
A mortgage loan underlying a series of offered certificates may, during
specified periods and subject to certain conditions, permit the related borrower
to pledge to the holder of the mortgage loan a specified amount of direct,
non-callable United States government securities in exchange for releasing the
lien on the underlying real property. The cash amount which a borrower must
expend to purchase the required United States government securities may exceed
the principal balance of the mortgage loan. There can be no assurance that a
court would not interpret that excess amount as a form of prepayment premium or
would not take it into account for usury purposes. In some states, some forms of
prepayment premiums are unenforceable. If the payment of that excess amount were
held to be unenforceable, the remaining portion of the cash amount to be
delivered may be insufficient to purchase the requisite amount of United States
government securities.
Lack of Insurance Coverage Exposes a Trust to Risk for Certain Special Hazard
Losses
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of a property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in the related
policy. The specific forms of policy vary from state to state. Most insurance
policies do not cover any physical damage resulting from:
o war;
o revolution;
o governmental actions;
o floods and other water-related causes;
o earth movement, including earthquakes; landslides and mudflows;
o wet or dry rot;
o vermin;
o domestic animals; and
o certain other kinds of risks.
Unless the related mortgage loan documents specifically require the
borrower to insure against physical damage arising from these causes, and the
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borrower does so, the resulting losses may be borne by you as a holder of
offered certificates.
Mortgage Loans Secured by Mortgages On Ground Leases Create Risks not Present
when Lending on a Fee Ownership Interest in a Real Property
In order to secure a mortgage loan, a borrower may grant a lien on its
leasehold interest in a real property as tenant under a ground lease. If the
ground lease does not provide for notice to a lender of a default by the
borrower under the lease, and a reasonable opportunity for the lender to cure
the default, the lender may be unable to prevent termination of the lease and
may lose its collateral.
In addition, upon the bankruptcy of a landlord or a tenant under a ground
lease, the debtor entity has the right to assume or reject the ground lease. If
a debtor landlord rejects the lease, the tenant has the right to remain in
possession of its leased premises at the rent reserved in the lease for the
term, including renewals. If a debtor tenant rejects any or all of its leases,
the tenant's lender may not be able to succeed to the tenant's position under
the lease unless the landlord has specifically granted the lender that right. If
both the landlord and the tenant are involved in bankruptcy proceedings, it is
possible that the trustee for your certificates could be deprived of its
security interest in the leasehold estate, notwithstanding lender protection
provisions contained in the lease or mortgage loan documents.
Changes in Zoning Laws May Adversely Affect the Use or Value of a Real
Property
Due to changes in zoning requirements after an income-producing property
was built, a property may not comply with current zoning laws, including
density, use, parking and set back requirements. Accordingly, the property may
be a "permitted non-conforming structure" or the operation of the property may
be a "permitted non-conforming use". This means that the owner is not required
to alter the property's structure or use to comply with the new law, but the
owner may be limited in its ability to rebuild the premises "as is" in the event
of a substantial casualty loss. This may adversely affect the cash flow
available following the casualty. If a substantial casualty were to occur,
insurance proceeds may not be sufficient to pay a mortgage loan secured by the
property in full. In addition, if the property were repaired or restored in
conformity with the current law, its value or revenue-producing potential may be
less than before the casualty.
Compliance With the Americans With Disabilities Act of 1990 May be Expensive
Under the Americans With Disabilities Act of 1990, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. If a property does not currently comply with
that law, the owner of the property may be required to incur significant costs
in order to bring the property into compliance. In addition, noncompliance could
result in the imposition of fines by the federal government or an award or
damages to private litigants.
Litigation may Adversely Affect a Borrower's Ability to Repay its Mortgage
Loan
A borrower may be a defendant in litigation arising out of, among other
things, the following:
o breach of contract involving a tenant, a supplier or other party;
o negligence resulting in a personal injury; or
o responsibility for an environmental problem.
Litigation will divert the borrower's attention from operating its
property. If the litigation were decided adversely to the borrower, the award to
the plaintiff may adversely affect the borrower's ability to repay a mortgage
loan secured by the property.
"Residual Interests" in a "Real Estate Mortgage Investment Conduit" Have
Adverse Tax Consequences
Inclusion of Taxable Income in Excess of Cash Received
If you own a certificate that is a "residual interest" in a "real estate
mortgage investment conduit" or "REMIC", you will have to report on your income
tax return as ordinary income your pro rata share of the taxable income of the
REMIC, regardless of the amount or timing of your possible receipt of any cash
on the certificate. As a result, your certificate may have "phantom income"
early in the term of the REMIC, because the taxable income from the certificate
may exceed the amount of cash you actually receive. Although you will have a
corresponding amount of tax losses later in the term of the REMIC, the present
value of the "phantom income" may significantly exceed the present value of the
tax losses. Therefore, the after-tax yield on any "residual interest"
certificate may be significantly
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less than that of a corporate bond or other instrument having similar cash flow
characteristics. In fact, certain offered certificates which are "residual
interests" may have a negative value.
You must report your share of the taxable income and net loss of the REMIC
until all the certificates in the related series have a principal balance of
zero. See "Federal Income Tax Consequences--REMICs".
Some Taxable Income of a "Residual Interest" can not be Offset under the Tax
Code
A portion of the taxable income from a "residual interest" certificate may
be treated as "excess inclusion" under the Internal Revenue Code of 1986. You
will have to pay tax on the "excess inclusion" regardless of whether you have
other credits, deductions or losses. In particular, the tax on "excess
inclusion":
o generally will not be reduced by losses from other activities;
o for a tax-exempt holder, will be treated as unrelated business taxable
income; and
o for a foreign holder, will not qualify for any exemption from
withholding tax.
Certain Entities Should not Invest in Certificates which are "Residual
Interests"
The fees and non-interest expenses of a REMIC will be allocated pro rata
to certificates that are "residual interests" of the REMIC. However, individuals
will only be able to deduct these expenses as miscellaneous itemized deductions,
which are subject to numerous restrictions and limitations under the Internal
Revenue Code of 1986. Therefore, the certificates that are "residual interests"
generally are not appropriate investments for:
o individuals;
o estates;
o trusts beneficially owned by any individual or estate; and
o pass-through entities having any individual, estate or trust as a
shareholder, member or partner.
In addition, the "residual interest" certificates are subject to numerous
transfer restrictions. These restrictions reduce your ability to liquidate a
"residual interest" certificate. For example, unless we indicate otherwise in
the related prospectus supplement, you will not be able to transfer a "residual
interest" certificate to a non-U.S. person under the Internal Revenue Code of
1986.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates".
Problems With Book-Entry Registration
Your certificates may be issued in book-entry form through the facilities
of The Depository Trust Company. As a result:
o you will be able to exercise your rights as a certificateholder only
indirectly through DTC and its participating organizations;
o you may have only limited access to information regarding your
certificates;
o you may suffer delays in the receipt of payments on your certificates;
and
o your ability to pledge or otherwise take action with respect to your
certificates may be limited due to the lack of a physical certificate
evidencing your ownership of those certificates.
See "Description of the Certificates--Book-Entry Registration and
Definitive Certificates."
Potential Conflicts of Interest Can Affect a Person's Performance
The master servicer or special servicer for any of the trusts, or any of
their respective affiliates, may purchase certificates evidencing interests in
that trust.
In addition, the master servicer or special servicer for any of the
trusts, or any of their respective affiliates, may have interests in, or other
financial relationships with, borrowers under the related mortgage loans.
In servicing the mortgage loans in any of the trusts, the related master
servicer and special servicer will each be required to observe the terms of the
governing document(s) for the related series of offered certificates and, in
particular, to act in accordance with the servicing standard described in the
related prospectus supplement. You should consider, however, that either of
these parties, if it or an affiliate owns certificates, or has financial
interests in or other financial dealings with any of the related borrowers, may
have interests when dealing with the mortgage loans that are in conflict with
your
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interests. For example, if the related special servicer owns any certificates,
it could seek to mitigate the potential loss on its certificates from a troubled
mortgage loan by delaying enforcement in the hope of realizing greater proceeds
in the future. However, this action by a special servicer could result in a
lower recovery to the related trust than would have been the case if the special
servicer had not delayed in taking enforcement action.
Furthermore, the master servicer or special servicer for any of the trusts
may service existing and new loans for third parties, including portfolios of
loans similar to the mortgage loans included in that trust. The properties
securing these other loans may be in the same markets as and compete with the
properties securing mortgage loans in that trust. Accordingly, that master
servicer or special servicer may be acting on behalf of parties with conflicting
interests.
The Rating on a Class of Certificates Reflects only the Rating Agency's
Assessment of the Likelihood That Certificate Holders Will Receive Payments
to Which They Are Legally Entitled.
Ratings on mortgage pass-through certificates reflect no assessment of the
likelihood of principal prepayments by borrowers or of the degree to which the
prepayments might differ from those originally anticipated. As a result, if you
purchase any offered certificates, you might suffer a lower than anticipated
yield. For example, if you purchase interest only certificates, you might, in
certain cases, fail to recoup your initial investment even though you receive
all payments to which you are entitled. Ratings also do not evaluate the price
of the certificates or the suitability of the certificates as an investment for
you.
You Should Not Place Undue Reliance Upon Forward-Looking Statements
This prospectus and the related prospectus supplement contain
forward-looking statements that involve risks and uncertainties. Actual events
could differ from those anticipated in these forward-looking statements because
of a variety of factors, including the risks described in the "Risk Factors"
sections and elsewhere in this prospectus or the related prospectus supplement.
You should make your own estimate of future events that you consider material
before you invest.
DESCRIPTION OF THE TRUST ASSETS
We will be responsible for establishing the trust underlying each series
of offered certificates. The assets of the trust will primarily consist of:
o various types of multifamily and/or commercial mortgage loans;
o mortgage participations, pass-through certificates, collateralized
mortgage obligations or other mortgage-backed securities that directly or
indirectly evidence interests in, or are secured by pledges of, one or more
of various types of multifamily and/or commercial mortgage loans;
o direct obligations of the United States or other governmental agencies;
or
o a combination of mortgage loans, mortgage-backed securities or government
securities of the types described above.
We do not originate mortgage loans. Accordingly, we must acquire each of
the mortgage loans to be included in one of the trusts from the originator or a
subsequent assignee. In some cases, that originator or subsequent assignee will
be Midland Loan Services, Inc. or another of our affiliates.
Unless we indicate otherwise in the related prospectus supplement, neither
we nor any of our affiliates nor any governmental agency or instrumentality or
other person will guarantee or insure any of those mortgage assets.
Mortgage Loans
Each mortgage loan underlying the offered certificates will constitute the
obligation of one or more persons to repay a debt. A promissory note or bond
will evidence that obligation. That obligation will be secured by a mortgage,
deed of trust or other security instrument that creates a first or junior lien
on, or security interest in, one or more of the following types of real
property:
o rental or cooperatively-owned buildings with multiple dwelling units;
o retail properties related to the sale of consumer goods and other
products to the general public, such as shopping centers, malls, factory
outlet centers, automotive sales centers, department stores and other retail
stores, grocery stores,
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specialty shops, convenience stores and gas stations;
o retail properties related to providing entertainment, recreational and
personal services to the general public, such as movie theaters, fitness
centers, bowling alleys, salons, dry cleaners and automotive service centers;
o office properties;
o hospitality properties, such as hotels, motels and other lodging
facilities;
o casino properties;
o health care-related properties, such as hospitals, skilled nursing
facilities, nursing homes, congregate care facilities and, in some cases,
assisted living centers and senior housing;
o industrial properties;
o warehouse facilities, mini-warehouse facilities and self-storage
facilities;
o restaurants, taverns and other establishments involved in the food and
beverage industry;
o manufactured housing communities, mobile home parks and recreational
vehicle parks;
o recreational and resort properties, such as recreational vehicle parks, golf
courses, marinas, ski resorts and amusement parks;
o arenas and stadiums;
o churches and other religious facilities;
o parking lots and garages;
o mixed use properties; and
o unimproved land zoned for multifamily residential or commercial use.
A mortgage loan may encumber the following types of real property
interests:
o a fee interest or estate, which consists of ownership of the property
for an indefinite period;
o an estate for years, which consists of ownership of the property for a
specified period of years;
o a leasehold interest or estate, which consists of a right to occupy and use
the property for a specified period of years, subject to the terms and
conditions of a lease;
o shares in a cooperative corporation that owns the property; or
o any other real estate interest under applicable local law.
Any of these real property interests may be subject to deed restrictions,
easements, rights of way and other matters of public record. Zoning laws and
other legal restrictions may apply to the use of any particular real property
and the improvements constructed on it.
If indicated in the related prospectus supplement, a junior lien on the
real property may secure one or more of the mortgage loans underlying a series
of offered certificates. However, the trust may not include the loan or loans
secured by the more senior liens on that property. The primary risk to the
holder of a mortgage loan secured by a junior lien on a real property is the
possibility that the foreclosure proceeds remaining after payment of the loans
secured by more senior liens will be insufficient to pay the junior loan in
full. In a foreclosure proceeding, the sale proceeds are applied:
o first to the payment of court costs and fees in connection with the
foreclosure;
o second to the payment of real estate taxes; and
o third to the payment of all principal, interest, prepayment or
acceleration penalties, if any, and all other amounts owing to the holder
of the senior loans.
The claims of the holders of the senior loans must be satisfied in full before
the holder of the junior loan receives any payments on the junior loan. If a
lender forecloses on a junior loan, it does so subject to any related senior
loans.
If indicated in the related prospectus supplement, the mortgage loans
underlying a series of offered certificates may be delinquent as of the date the
certificates are initially issued. In those cases, we will describe in the
related prospectus supplement the period of the delinquency, any forbearance
arrangement then in effect, the condition of the related real property and the
ability of the related real property to generate income to service the mortgage
debt. However, we will not transfer to a trust any mortgage loan if we know, at
the time of transfer, that the loan is:
o more than 90 days delinquent in any scheduled principal or interest
payment; or
o in foreclosure.
Default and Loss Considerations with Respect to the Mortgage Loans
Mortgage loans secured by liens on income-producing properties differ
substantially from mortgage loans secured by owner-occupied single-family homes.
The repayment of a loan secured by a lien on an income-producing property
typically
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depends upon the successful operation of the property and its ability to
generate income sufficient to make payments on the loan. This is particularly
true because most or all of the mortgage loans underlying the offered
certificates will be non-recourse loans.
The debt service coverage ratio of a multifamily or commercial mortgage
loan is a measure of the likelihood of default on the loan. In general, the
"debt service coverage ratio" of a multifamily or commercial mortgage loan at
any given time is the ratio of:
o the amount of income derived or expected to be derived from the related real
property for a twelve-month period that is available to pay debt service, to
o the annualized scheduled payments of principal and/or interest on the
mortgage loan and any other senior loans that are secured by the related real
property.
The amount described in clause (a) of the preceding sentence is often a
highly subjective number based on several assumptions and adjustments to
revenues and expenses for the property. We will provide a more detailed
discussion of its calculation in the related prospectus supplement.
The cash flow generated by a multifamily or commercial property will
generally fluctuate over time and may or may not suffice to make the mortgage
loan payments, cover operating expenses and fund capital improvements. The
condition of the local real estate market and/or area economy may affect
operating revenues of a non-owner occupied, income-producing property. Changes
in market and business conditions tend to affect properties leased, occupied or
used on a short-term basis (such as certain health care-related facilities,
hotels and motels, recreational vehicle parks, and mini-warehouse and
self-storage facilities) more rapidly than properties typically leased for
longer periods (such as warehouses, retail stores, office buildings and
industrial facilities).
Some commercial properties may be owner-occupied or leased to a small
number of tenants. The operating revenues of these properties may depend
substantially on the financial condition of the borrower or one or a few
tenants. Mortgage loans secured by liens on owner-occupied and single-tenant
properties may pose a greater likelihood of default and loss than loans secured
by liens on multifamily properties or on multi-tenant commercial properties.
Increased property operating expenses can increase the likelihood of a
default on a loan secured by the property. Increases in property operating
expenses may result from:
o increases in energy costs and labor costs;
o increases in interest rates and real estate tax rates; and
o changes in governmental rules, regulations and fiscal policies.
Some "net leases" of commercial properties may obligate the lessee, rather
than the borrower/landlord, to pay operating expenses. However, a net lease will
yield stable net operating income to the borrower/landlord only if the lessee
can pay both increased operating expenses and rent payments.
Lenders also look to the loan-to-value ratio of a mortgage loan as a
factor in evaluating the likelihood of loss if a property is liquidated
following a default. In general, the "loan-to-value ratio" of a multifamily or
commercial mortgage loan at any given time is the ratio, expressed as a
percentage, of:
o the then outstanding principal balance of the mortgage loan and any other
senior loans that are secured by the related real property, to
o the estimated value of the related real property based on an appraisal, a
cash flow analysis, a recent sales price or another method.
A low loan-to-value ratio means the borrower has a large amount of its own
equity in the property that secures its loan. In these circumstances:
o the borrower has a greater financial incentive to perform under the
mortgage loan in order to protect its equity, and
o the lender has greater protection against loss on liquidation following
a default.
Loan-to-value ratios are not necessarily an accurate measure of the
likelihood of loss in a pool of multifamily and commercial mortgage loans. For
example, estimated property value at the time the loan was originated may exceed
the value of the property when the offered certificates are issued. Property
values fluctuate. Even current appraisals are not necessarily reliable estimates
of value. Appraised values of income-producing properties are generally based
on:
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o the market comparison method, which takes into account the recent resale
value of comparable properties at the date of the appraisal;
o the cost replacement method, which takes into account the cost of
replacing the property at such date;
o the income capitalization method, which takes into account the
property's projected net cash flow; or
o some combination of these methods.
Each of these appraisal methods presents analytical difficulties:
o it is often difficult to find truly comparable properties that have
recently been sold;
o the replacement cost of a property may have little to do with its
current market value; and
o income capitalization is inherently based on inexact projections of income
and expense and selection of a capitalization rate and discount rate.
If different appraisal methods yield significantly different results, an
accurate determination of value and, correspondingly, a reliable analysis of the
likelihood of default and loss, is even more difficult.
A property's performance will affect its value. As a result, if a
multifamily or commercial mortgage loan defaults because the income generated by
the related property is insufficient to pay operating costs and expenses as well
as debt service, then the value of the property will decline and a liquidation
loss may occur.
We believe that the foregoing considerations are important factors that
generally distinguish mortgage loans secured by liens on income-producing real
estate from single-family mortgage loans. However, the originators of the
mortgage loans underlying the offered certificates may not have considered all
these factors for the loans they originated.
See "Risk Factors-Repayment of a Commercial or Multifamily Mortgage Loan
Depends Upon the Performance and Value of the Underlying Real Property and
the Related Borrower's Ability to Refinance the Property."
Payment Provisions of the Mortgage Loans
Except as described in the related prospectus supplement, each of the
mortgage loans included in one of the trusts will have the following features:
o an original term to maturity of not more than approximately 40 years; and
o scheduled payments of principal, interest or both, to be made on
specified dates, that occur monthly, bimonthly quarterly, semi-annually,
annually or at some other interval.
A mortgage loan included in one of the trusts may also:
o provide for the accrual of interest at a mortgage interest rate that is fixed
over its term, that resets on one or more specified dates or that otherwise
adjusts from time to time;
o provide for the accrual of interest at a mortgage interest rate that may be
converted at the borrower's election from an adjustable to a fixed interest
rate or from a fixed to an adjustable interest rate;
o provide for no accrual of interest;
o provide for level payments to stated maturity, for payments that reset in
amount on one or more specified dates or for payments that otherwise adjust
from time to time to accommodate changes in the interest rate or to reflect
the occurrence of certain events;
o be fully amortizing or partially amortizing or non-amortizing, with a
substantial payment of principal due on its stated maturity date;
o permit the negative amortization or deferral of accrued interest; and/or
o prohibit some or all voluntary prepayments or require payment of a
premium, fee or charge in connection with those prepayments.
Mortgage Loan Information in Prospectus Supplements
In general, the prospectus supplement will provide the following
information about the mortgage loans in each trust:
o the total outstanding principal balance and the largest, smallest and
average outstanding principal balances;
o the type or types of property that provide security for repayment;
o the earliest and latest origination date and maturity date;
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o the original and remaining terms to maturity, or the range thereof, and
the weighted average original and remaining terms to maturity;
o loan-to-value ratios either at origination or at a more recent date, or the
range thereof, and the weighted average of those loan-to-value ratios;
o the mortgage interest rates, or the range thereof, and the weighted
average mortgage interest rate;
o if any mortgage loans have adjustable mortgage interest rates, the index or
indices upon which the adjustments are based, the adjustment dates, the range
of gross margins and the weighted average gross margin, and any limits on
mortgage interest rate adjustments at the time of any adjustment and over the
life of the loan;
o information on the payment characteristics, including applicable
prepayment restrictions;
o debt service coverage ratios either at origination or at a more recent date,
or the range thereof, and the weighted average of those debt service coverage
ratios; and
o the geographic distribution of the properties securing the mortgage
loans on a state-by-state basis.
If we are unable to provide the specific information described above at
the time a series of offered certificates is initially offered, we will provide:
o more general information in the related prospectus supplement; and
o specific information in a Current Report on Form 8-K filed with the SEC
within 15 days after the issuance of the certificates.
If a trust includes any mortgage loan, or group of related mortgage loans,
that represent a material concentration of credit risk, we will include in the
related prospectus supplement financial statements or other financial
information on the related real property or properties.
Mortgage-Backed Securities
The mortgage backed-securities underlying a series of offered certificates
may include:
o mortgage participations, mortgage pass-through certificates, collateralized
mortgage obligations or other mortgage-backed securities that are not insured
or guaranteed by any governmental agency or instrumentality; or
o certificates issued and/or insured or guaranteed by the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Governmental National Mortgage Association, the Federal Agricultural Mortgage
Corporation or another federal or state governmental agency or
instrumentality.
In addition, each of those mortgage-backed securities will directly or
indirectly evidence an interest in, or be secured by a pledge of, multifamily
and/or commercial mortgage loans.
We will describe in the related prospectus supplement characteristics of
the mortgage-backed securities included in a trust, including the following
information:
o the initial and outstanding principal amount(s) and type of the
securities;
o the original and remaining term(s) to stated maturity of the securities;
o the pass-through or bond rate(s) of the securities or the formula for
determining these rate(s);
o the payment characteristics of the securities;
o the identity of the issuer(s), servicer(s) and trustee(s) for the
securities;
o a description of the related credit support, if any;
o the type(s) of mortgage loans underlying the securities;
o the circumstances under which the underlying mortgage loans, or the
securities themselves, may be purchased prior to maturity;
o the terms and conditions for substituting mortgage loans backing the
securities; and
o the characteristics of any agreements or instruments providing interest
rate protection to the securities.
In our reports filed under the Exchange Act of 1934, we will provide the
same information about mortgage-backed securities included in a trust as is
provided by the issuer of the security:
o in its own reports filed under the Securities Exchange Act of 1934, if
the security was publicly offered; or
o in whatever reports the issuer of the security provides to the related
trustee, if the security was privately issued.
The prospectus supplement for a series will contain the disclosure
concerning the mortgage-backed securities described in the preceding paragraph
and, in particular, will disclose the underlying mortgage loans appropriately in
light of
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the percentage of the aggregate principal balance of all assets represented by
the principal balance of the mortgage-backed securities.
Government Securities
The prospectus supplement for a series of certificates evidencing
interests in assets of a trust fund that include government securities will
specify, to the extent available:
o the aggregate approximate initial and outstanding principal amounts or
notional amounts, as applicable, and types of the government securities to be
included in the trust fund;
o the original and remaining terms to stated maturity of the government
securities;
o whether the government securities are entitled only to interest
payments, only to principal payments or to both;
o the interest rates of the government securities or the formula to
determine the rates, if any;
o the applicable payment provisions for the government securities; and
o to what extent, if any, the obligation evidenced by the related series
of certificates is backed by the full faith and credit of the United States.
Undelivered Mortgage Assets
In general, the total outstanding principal balance of the mortgage assets
transferred by us to any particular trust will equal or exceed the initial total
outstanding principal balance of the related series of certificates. If we
initially deliver to the trustee mortgage assets with total outstanding
principal balances less than the initial total outstanding principal balance of
any series of certificates, we may cover the shortfall by depositing or
arranging to deposit with the related trustee cash or liquid investments on an
interim basis. For 90 days following the date of initial issuance of that series
of certificates, we will be entitled to obtain a release of the deposited cash
or investments if we deliver or arrange for delivery of a corresponding amount
of mortgage assets. However, If we fail to deliver mortgage assets sufficient to
make up the entire shortfall, the related trustee will liquidate the investments
and use the cash and proceeds of the liquidation to pay down the total principal
balance of the related series of certificates, as described in the related
prospectus supplement.
YIELD AND MATURITY CONSIDERATIONS
The yield on your certificates will depend on:
o the price you paid for your certificates;
o the pass-through rate on your certificates;
o the amount and timing of payments on your certificates.
The following discussion contemplates a trust established by us that
consists primarily of mortgage loans. If one of the trusts also includes a
mortgage-backed security, the payment terms of that security will lessen or
enhance the effects that the characteristics and behavior of mortgage loans
backing that security can have on the yield to maturity and/or weighted average
life of a class of offered certificates. If one of the trusts includes a
mortgage-backed security or government security, we will discuss in the related
prospectus supplement the effect, if any, that these securities may have on the
yield to maturity and weighted average lives of the related offered
certificates.
Pass-Through Rate
A class of interest-bearing offered certificates may have a fixed,
variable or adjustable pass-through rate. We will specify in the related
prospectus supplement the pass-through rate for each class of interest-bearing
offered certificates or, if the pass-through rate is variable or adjustable, the
method of determining the pass-through rate.
Payment Delays
There will be a delay between the date on which payments on the underlying
mortgage loans are due and the date on which those payments are passed through
to you and other investors. That delay will reduce the yield that would
otherwise be produced if mortgage loan payments were passed through on your
certificates on the same date that the payments were due.
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Yield and Prepayment Considerations
The yield to maturity on your certificates will be affected by the rate of
principal payments on the mortgage loans and the allocation of those principal
payments to reduce the principal balance or notional amount of your
certificates. The rate of principal payments will be affected by the following:
o the amortization schedules of the mortgage loans, which may change from time
to time to reflect, among other things, changes in mortgage interest rates or
partial prepayments of principal;
o the dates on which any balloon payments are due; and
o the rate of principal prepayments on the mortgage loans, including
voluntary prepayments by borrowers and involuntary prepayments resulting from
liquidations, casualties or purchases of mortgage loans.
Because the rate of principal prepayments will depend on future events and
a variety of factors, we cannot give you any assurance as to what that rate will
be.
The yield to maturity of your certificates may vary from your anticipated
yield depending upon:
o whether you purchased your certificates at a discount or premium and, if
so, the extent of that discount or premium; and
o when, and to what degree, payments of principal on the underlying mortgage
loans reduce the principal balance or notional amount of your certificates.
If you purchase your certificates at a discount, you should consider the
risk that a slower than anticipated rate of principal payments on the underlying
mortgage loans could result in an actual yield to you that is lower than your
anticipated yield. If you purchase your certificates at a premium, you should
consider the risk that a faster than anticipated rate of principal payments on
the underlying mortgage loans could result in an actual yield to you that is
lower than your anticipated yield.
If your certificates entitle you to payments of interest, with
disproportionate, nominal or no payments of principal, you should consider that
your yield will be extremely sensitive to prepayments on the underlying mortgage
loans and, under some prepayment scenarios, may be negative.
If a class of offered certificates accrues interest on a notional amount,
that notional amount will, in general, either:
(a) be based on the principal balances of some or all of the mortgage
assets in the related trust; or
(b) be equal to the total principal balance of one or more of the other
classes of certificates of the same series.
Accordingly, the yield on that class of certificates will be inversely
related to, as applicable, the rate at which payments and other collections of
principal are received on the mortgage assets referred to in clause (a) above or
payments are made in reduction of the total principal balance of the class or
classes of certificates referred to in clause (b) above.
Several factors may influence repayments of principal on the mortgage
loans, including:
o the availability of mortgage credit;
o the relative economic vitality of the area in which the related real
properties are located;
o the quality of management of the related real properties;
o the servicing of the mortgage loans;
o possible changes in tax laws; and
o the availability of other investment opportunities.
In general, those factors which increase the attractiveness of selling or
refinancing a multifamily or commercial property that secures a mortgage loan,
as well as those factors which increase the likelihood of default under the
mortgage loan, would be expected to cause the rate of prepayment to accelerate.
In contrast, those factors having an opposite effect would be expected to cause
the rate of prepayment to slow.
The existence and enforceability of prepayment restrictions, such as
prepayment lock-out periods and requirements that voluntary principal
prepayments be accompanied by prepayment premiums, fees or charges, could also
effect the rate of principal payments on the mortgage loans. If enforceable,
those provisions could either bar or discourage a borrower from voluntarily
prepaying its mortgage loan, which could slow the rate of prepayments.
Prevailing market interest rates for mortgage loans of a comparable type,
term and risk level, may also affect the rate of prepayment. As prevailing
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market interest rates decline, a borrower may have an increased incentive
to refinance its mortgage loan. Even in the case of adjustable rate mortgage
loans, as prevailing market interest rates decline, the related borrowers may
have an increased incentive to refinance in order to:
o convert to a fixed rate loan and thereby "lock in" that rate; or
o take advantage of a different index, margin or rate cap or floor on
another adjustable rate mortgage loan.
Subject to prevailing market interest rates and economic conditions
generally, a borrower may sell a real property in order to:
o realize its equity in the property;
o meet cash flow needs; or
o make other investments.
Federal and state tax laws, which are subject to change, may motivate
borrowers to sell their properties prior to the exhaustion of tax depreciation
benefits. We make no representation as to:
o the particular factors that will affect prepayments of, or losses on, the
mortgage loans underlying any series of offered certificates;
o the relative importance of those factors;
o the percentage of the principal balance of those mortgage loans that
will be paid or incur a loss as of any date; or
o the overall rate of prepayments or losses on those mortgage loans.
Weighted Average Life and Maturity
The rate at which principal payments are received or losses are realized
on the mortgage loans underlying any series of offered certificates will affect
the ultimate maturity and the weighted average life of one or more classes of
the offered certificates of that related series. In general, weighted average
life refers to the average amount of time that will elapse from the date of
issuance of an instrument until each dollar allocable as principal of the
instrument is repaid to the investor.
The weighted average life and maturity of a class of offered certificates
will be influenced by the rate at which principal on the underlying mortgage
loans is paid to that class, whether in the form of scheduled amortization or
prepayments, including voluntary prepayments by borrowers and involuntary
prepayments resulting from liquidations, casualties or condemnations and
purchases of mortgage loans out of the related trust.
Prepayment rates on loans are commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate or "CPR" prepayment
model or the Standard Prepayment Assumption or "SPA" prepayment model. CPR
represents an assumed constant rate of prepayment each month (expressed as an
annual percentage) relative to the then outstanding principal balance of a pool
of mortgage loans for the life of the loans. SPA represents an assumed variable
rate of prepayment each month (expressed as an annual percentage) relative to
the then outstanding principal balance of a pool of mortgage loans, with
different prepayment assumptions often expressed as percentages of SPA. For
example, a prepayment assumption of 100% of SPA might assume prepayment rates of
0.2% per annum of the then outstanding principal balance of those loans in the
first month of the life of the loans and an additional 0.2% per annum in each
month thereafter until the thirtieth month. Beginning in the thirtieth month,
and in each month thereafter during the life of the loans, 100% of SPA would
assume a constant prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption is a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any particular pool of mortgage loans.
Moreover, the CPR and SPA models were developed based upon historical prepayment
experience for single-family mortgage loans. It is unlikely that the prepayment
experience of the mortgage loans underlying any series of offered certificates
will conform to any particular level of CPR or SPA.
In the prospectus supplement for a series of offered certificates, we will
include tables, if applicable, setting forth the projected weighted average life
of each class of those offered certificates with a total principal balance, and
the percentage of the initial total certificate principal balance of each class
that would be outstanding on specified dates, based on the assumptions stated in
that prospectus supplement, including assumptions regarding prepayments on the
underlying mortgage loans. Those tables and assumptions illustrate the
sensitivity of the weighted average lives of the certificates to various assumed
prepayment rates and are not intended to predict, or to provide information that
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will enable you to predict, the actual weighted average lives of your
certificates.
Other Factors Affecting Yield, Weighted Average Life and Maturity
Balloon Payments; Extensions of Maturity
Some or all of the mortgage loans underlying a series of offered
certificates may require the borrower to make a balloon payment at maturity. A
borrower's ability to make a balloon payment typically will depend upon its
ability either to:
o refinance the loan; or
o to sell the related real property.
If a borrower is unable to refinance or sell the property, the borrower might
default on the mortgage loan unless the maturity of the mortgage loan is
extended in connection with a workout. If a borrower defaults, recovery of
proceeds may be delayed by bankruptcy proceedings or adverse economic conditions
in the market where the property is located.
In order to minimize losses on defaulted mortgage loans, the related
master servicer or special servicer may be authorized within prescribed limits
to modify mortgage loans that are in default or as to which a payment default is
reasonably foreseeable. Any defaulted balloon payment or modification that
extends the maturity of a mortgage loan may delay payments of principal on your
certificates and extend the weighted average life of your certificates.
Negative Amortization
Mortgage loans that permit negative amortization to occur can affect the
weighted average life of a class of certificates. Negative amortization loans
require current interest payments at a rate lower than the rate at which
interest is accruing on the mortgage loan. The unpaid portion of the current
interest is added to the related principal balance. Negative amortization most
commonly occurs on adjustable rate mortgage loans that:
o limit the amount by which the scheduled payment may adjust in response
to a change in the mortgage interest rate;
o provide that the scheduled payment will adjust less frequently than the
mortgage interest rate; or
o provide for constant scheduled payments regardless of adjustments to the
mortgage interest rate.
Negative amortization on loans in a trust may cause negative amortization
on the offered certificates. We will describe in the related prospectus
supplement, if applicable, how this negative amortization will be allocated
among the classes of a series of offered certificates.
The portion of any mortgage loan negative amortization allocated to a
class of offered certificates may result in a deferral of some or all of the
interest payable on those certificates. Deferred interest may be added to the
aggregate principal balance of a class of offered certificates. During a period
of increasing interest rates, an adjustable rate mortgage loan that permits
negative amortization would be expected to not amortize or to amortize at a
slower rate than if interest rates were declining or remaining constant. This
slower rate of mortgage loan amortization would cause a slower rate of
amortization for one or more classes of certificates of the related series. This
would increase the weighted average lives of those classes of certificates to
which mortgage loan negative amortization is allocated or that bear the effects
of a slower rate of amortization of the underlying mortgage loans.
During a period of declining interest rates, the scheduled payment on an
adjustable rate mortgage loan may exceed the amount necessary to amortize the
loan fully over its remaining amortization schedule and pay interest at the then
applicable mortgage interest rate. The result is the accelerated amortization of
the mortgage loan. The acceleration in amortization of a mortgage loan will
shorten the weighted average lives of those classes of certificates that entitle
their holders to a portion of the principal payments on the mortgage loan.
The extent to which the inclusion in a trust of mortgage loans that permit
negative amortization will affect the yield on your certificates will depend
upon:
o whether you purchase your certificates at a premium or a discount; and
o whether the payment characteristics of the underlying mortgage loans
delay or accelerate the payments of principal on, or in reduction of the
notional amount of, your certificates.
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See "-Yield and Prepayment Considerations".
Foreclosures and Payment Plans
The weighted average life of and yield on your certificates will be
affected by:
o the number of foreclosures with respect to the underlying mortgage
loans; and
o the principal amount of the foreclosed mortgage loans in relation to the
principal amount of those mortgage loans that are repaid in accordance with
their terms.
Servicing decisions made with respect to mortgage loans, including the use
of payment plans prior to a demand for acceleration and the restructuring of
mortgage loans in bankruptcy proceedings or otherwise, may also affect the
payment patterns of particular mortgage loans and the weighted average life of
and yield on your certificates.
Losses and Shortfalls on the Mortgage Assets
The yield on your certificates will directly depend on the extent to which
you are required to bear the effects of any losses or shortfalls in collections
on the underlying mortgage loans and the timing of those losses and shortfalls.
In general, the earlier that you bear any loss or shortfall, the greater the
negative effect on the yield of your certificates.
The amount of any losses or shortfalls in collections on the mortgage
assets in any of the trusts will, to the extent not covered or offset by draws
on any reserve fund or under any instrument of credit support, be allocated
among the various classes of certificates of the related series in the priority
and manner, and subject to the limitations, that we specify in the related
prospectus supplement. As described in the related prospectus supplement, those
allocations may be effected by:
o a reduction in the entitlements to interest and/or the total principal
balances of one or more classes of certificates; and/or
o the establishment of a priority of payments among classes of
certificates.
If you purchase subordinated certificates, the yield to maturity on those
certificates may be extremely sensitive to losses and shortfalls in collections
on the underlying mortgage loans.
Additional Certificate Amortization
If your certificates have a principal balance, then they entitle you to a
specified portion of the principal payments received on the underlying mortgage
loans. They may also entitle you to payments of principal from the following
sources:
o amounts attributable to interest accrued but not currently payable on
one or more other classes of certificates;
o interest received or advanced on the underlying mortgage assets that is in
excess of the interest currently accrued on the certificates of the
applicable series;
o prepayment premiums, fees and charges, payments from equity participations or
any other amounts received on the underlying mortgage assets that do not
constitute interest or principal; or
o any other amounts described in the related prospectus supplement.
The amortization of your certificates out of the sources described in the
prior paragraph would shorten their weighted average life and, if your
certificates were purchased at a premium, reduce their yield to maturity.
PNC COMMERCIAL MORTGAGE ACCEPTANCE CORP.
We were incorporated in the State of Missouri on September 17, 1996. We
are a wholly-owned subsidiary of Midland Loan Services, Inc., a Delaware
corporation. We were organized, among other things, for the purposes of issuing
debt securities and establishing trusts, selling beneficial interests therein
and acquiring and selling mortgage assets to those trusts. Our principal
executive offices are located at:
210 West 10th Street
6th Floor
Kansas City, Missouri 64105
Our telephone number is (816) 435-5000. We do not have, and we do not
expect to have, any significant assets.
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DESCRIPTION OF THE CERTIFICATES
Each series of offered certificates, together with any non-offered
certificates of the same series, will represent the entire beneficial ownership
interest in a trust established by us. Each series of offered certificates will
consist of one or more classes. Any non-offered certificates of that series will
likewise consist of one or more classes.
A "series" of certificates are all those certificates that:
o have the same series designation;
o were issued pursuant to the same governing documents; and
o represent beneficial ownership interests in the same trust.
A "class" of certificates are all those certificates of a particular
series that:
o have the same class designation; and
o have the same payment terms.
The respective classes of offered and non-offered certificates of any
series may have a variety of payment terms. An offered certificate may entitle
the holder to receive:
o a stated principal amount, which will be represented by its principal
balance;
o interest on a principal balance or notional amount, at a fixed, variable
or adjustable pass-through rate;
o specified, fixed or variable portions of the interest, principal or
other amounts received on the related mortgage assets;
o payments of principal, with disproportionate, nominal or no
distributions of interest;
o payments of interest, with disproportionate, nominal or no distributions
of principal;
o payments of interest or principal that commence only as of a specified date
or only after the occurrence of certain events, such as the payment in full
of the interest and principal outstanding on one or more other classes of
certificates of the same series;
o payments of principal to be made, from time to time or for designated
periods, at a rate that is faster (and, in some cases, substantially faster)
or slower (and, in some cases, substantially slower) than the rate at which
payments or other collections of principal are received on the related
mortgage assets;
o payments of principal to be made, subject to available funds, based on a
specified principal payment schedule or other methodology; or
o payments of all or part of the prepayment or repayment premiums, fees and
charges, equity participations payments or other similar items received on
the related mortgage assets.
Any class of offered certificates may be senior or subordinate to one or
more other classes of certificates of the same series, including a non-offered
class of certificates of that series, for purposes of some or all payments
and/or allocations of losses or other shortfalls.
A class of offered certificates may have two or more component parts, each
having characteristics that are described in this prospectus as being
attributable to separate and distinct classes. For example, a class of offered
certificates may have a total principal balance on which it accrues interest at
a fixed, variable or adjustable rate. That class of offered certificates may
also accrue interest on a total notional amount at a different fixed, variable
or adjustable rate. In addition, a class of offered certificates may accrue
interest on one portion of its total principal balance or notional amount at one
fixed, variable or adjustable rate and on another portion of its total principal
balance or notional amount at a different fixed, variable or adjustable rate.
Each class of offered certificates will be issued in minimum denominations
corresponding to specified principal balances, notional amounts or percentage
interests, as described in the related prospectus supplement. A class of offered
certificates may be issued in fully registered, definitive form and evidenced by
physical certificates or may be issued in book-entry form through the facilities
of The Depository Trust Company. Offered certificates held in fully registered,
definitive form may be transferred or exchanged, subject to any restrictions on
transfer described in the related prospectus supplement, at the location
specified in the related prospectus supplement, without the payment of any
service charges, except for any tax or other governmental charge payable in
connection with the transfer or exchange. Interests in offered certificates held
in book entry form will be transferred on the book-entry records of DTC and its
participating organizations.
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See"--Book Entry Registration and Definitive Certificates".
Payments on the Certificates
Payments on a series of offered certificates may occur monthly, bimonthly,
quarterly, semi-annually, annually or at any other specified interval. In the
prospectus supplement for each series of offered certificates, we will identify:
o the periodic payment date for that series; and
o the record date as of which certificateholders entitled to payments on any
particular payment date will be established.
All payments with respect to a class of offered certificates on any
payment date will be allocated pro rata among the outstanding certificates of
that class in proportion to the respective principal balances, notional amounts
or percentage interests, as the case may be, of those certificates. Payments on
an offered certificate will be made to the holder entitled thereto either:
o by wire transfer of immediately available funds to the account of that holder
at a bank or similar entity, provided that the holder has furnished the party
making the payments with wiring instructions no later than the applicable
record date and has satisfied any other conditions specified in the related
prospectus supplement; or
o by check mailed to the address of that holder as it appears in the
certificate register, in all other cases.
In general, the final payment on any offered certificate will be made only
upon presentation and surrender of that certificate at the location specified to
the holder in the notice of final payment.
Payments of Interest
In the case of each class of interest-bearing offered certificates,
interest will accrue from time to time, at the applicable pass-through rate and
in accordance with the applicable interest accrual method, on the total
outstanding principal balance or notional amount of that class.
The pass-through rate for a class of interest-bearing offered certificates
may be fixed, variable or adjustable. We will specify in the related prospectus
supplement the pass-through rate for each class of interest-bearing offered
certificates or, in the case of a variable or adjustable pass-through rate, the
method for determining that pass-through rate.
Interest may accrue with respect to any offered certificate on the basis
of:
o a 360-day year consisting of 12 30-day months;
o the actual number of days elapsed during each relevant period in a year
assumed to consist of 360 days;
o the actual number of days elapsed during each relevant period in a
normal calendar year; or
o another method identified in the related prospectus supplement.
We will identify the interest accrual method for each class of offered
certificates in the related prospectus supplement.
Subject to available funds and any adjustments to interest entitlements
described in the related prospectus supplement, accrued interest on each class
of interest-bearing offered certificates will normally be payable on each
payment date. However, in the case of some classes of interest-bearing offered
certificates, which we will refer to as "compound interest certificates",
payments of accrued interest will only begin on a particular payment date or
under the circumstances described in the related prospectus supplement. Prior to
that time, the amount of accrued interest otherwise payable on that class will
be added to its total principal balance on each date or otherwise deferred as
described in the related prospectus supplement.
If a class of offered certificates accrues interest on a total notional
amount, that total notional amount, in general, will be either:
(a) based on the principal balances of some or all of the related mortgage
assets; or
(b) equal to the total principal balances of one or more other classes of
certificates of the same series.
Reference to the notional amount of any certificate is solely for
convenience in making certain calculations of interest and does not represent
the right to receive any distributions of principal.
We will describe in the related prospectus supplement the extent to which
the amount of accrued interest that is payable on, or that may be
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added to the total principal balance of, a class of interest-bearing offered
certificates may be reduced as a result of any contingencies, including
shortfalls in interest collections due to prepayments, delinquencies, losses and
deferred interest on the related mortgage assets.
Payments of Principal
A class of offered certificates may or may not have a total principal
balance. If it does, the total principal balance outstanding from time to time
will represent the maximum amount that the holders of that class will be
entitled to receive as principal out of the future cash flow on the related
mortgage assets and the other related trust assets. The total outstanding
principal balance of any class of offered certificates will be reduced by:
o payments of principal actually made to the holders of that class; and
o if and to the extent that we so specify in the related prospectus
supplement, losses of principal on the related mortgage assets that are
allocated to or are required to be borne by that class.
If a class of offered certificates are compound interest certificates,
then the total outstanding principal balance of that class may be increased by
the amount of any interest accrued, but not currently payable, on that class. We
will describe in the related prospectus supplement any other adjustments to the
total outstanding principal balance of a class of offered certificates.
Unless we so state in the related prospectus supplement, the initial total
principal balance of all classes of a series will not be greater than the total
outstanding principal balance of the related mortgage assets transferred by us
to the related trust. We will specify the expected initial total principal
balance of each class of offered certificates in the related prospectus
supplement.
The payments of principal to be made on a series of offered certificates
from time to time will, in general, be a function of the payments, other
collections and advances received or made on the mortgage assets as described in
the related prospectus supplement. Payments of principal on a series of offered
certificates may also be made from the following sources:
o amounts attributable to interest accrued but not currently payable on
one or more other classes of certificates;
o interest received or advanced on the underlying mortgage assets that exceeds
the interest currently accrued on the certificates of the applicable series;
o prepayment premiums, fees and charges, payments from equity participations or
any other amounts received on the underlying mortgage assets that do not
constitute interest or principal; or
o any other amounts described in the related prospectus supplement.
We will describe in the related prospectus supplement the principal
entitlement of each class of offered certificates on each payment date.
Allocation of Losses and Shortfalls
If and to the extent that any losses or shortfalls in collections on the
mortgage assets in any of the trusts are not covered or offset by delinquency
advances or draws on any reserve fund or under any instrument of credit support,
they will be allocated among the classes of certificates of the related series
in the priority and manner, and subject to the limitations, specified in the
related prospectus supplement. As described in the related prospectus
supplement, the allocations may be effected as follows:
o by reducing the entitlements to interest and/or the total principal
balances of one or more of those classes; and/or
o by establishing a priority of payments among those classes.
See "Description of Credit Support."
Advances in Respect of Delinquencies
If any trust established by us includes mortgage loans, then as and to the
extent described in the related prospectus supplement, the related master
servicer, the related trustee, any related provider of credit support and any
other specified person may be obligated to advance, or have the option of
advancing, delinquent payments of principal and interest due on those mortgage
loans, other than balloon payments. If there are any limitations with respect to
a party's advancing obligations, we will discuss those limitations in the
related prospectus supplement.
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Advances are intended to maintain a regular flow of scheduled interest and
principal payments to certificateholders. Advances are not a guarantee against
losses. The advancing party will be entitled to recover all of its advances out
of subsequent recoveries on the related mortgage loans, including amounts drawn
under any fund or instrument constituting credit support, and out of any other
specific sources identified in the related prospectus supplement.
If and to the extent that we specify in the related prospectus supplement,
any entity making advances will be entitled to receive interest on some or all
of those advances for a specified period during which they are outstanding at
the rate specified in that prospectus supplement. That entity may be entitled to
payment of interest on its outstanding advances periodically from general
collections on the mortgage assets in the related trust, or at such other times
and from such sources as we may describe in the related prospectus supplement,
prior to any payment to the related series of certificateholders.
If any trust established by us includes mortgage-backed securities, we
will discuss in the related prospectus supplement any comparable advancing
obligations in respect of those securities or the mortgage loans that back them.
Reports to Certificateholders
On or about each payment date, the related trustee will forward to each
offered certificateholder a statement substantially in the form, or specifying
the information, set forth in the related prospectus supplement. In general,
that statement will include information regarding:
o the payments made on that payment date with respect to the applicable
class of offered certificates; and
o the recent performance of the mortgage assets.
Within a reasonable period of time after the end of each calendar year,
the trustee will be required to furnish to each person who at any time during
the calendar year was a holder of an offered certificate a statement containing
information regarding the principal, interest and other amounts paid on the
applicable class of offered certificates, totaled for that calendar year or the
applicable portion thereof during which the person was a certificateholder. The
obligation to provide that annual statement will be deemed to have been
satisfied by the related trustee to the extent that substantially comparable
information is provided pursuant to any requirements of the Internal Revenue
Code of 1986.
See, also, "--Book-Entry Registration and Definitive Certificates" below.
If one of the trusts includes mortgage-backed securities, the ability of
the related trustee to include in any payment date statement information
regarding the mortgage loans that back those securities will depend on
comparable reports being received with respect to them.
Voting Rights
Voting rights will be allocated among the respective classes of offered
and non-offered certificates of each series in the manner described in the
related prospectus supplement. Certificateholders will generally not have a
right to vote, except with respect to certain amendments to the governing
documents or as otherwise specified in the related prospectus supplement. See
"Description of the governing Documents--Amendment."
As and to the extent described in the related prospectus supplement, the
holders of specified amounts of certificates of a particular series will have
the right to act as a group to remove or replace the related trustee, master
servicer, special servicer or manager. In general, any removal or replacement
must be for cause. We will identify exceptions in the related prospectus
supplement.
Termination
The trust for each series of offered certificates will terminate and cease
to exist following:
o the final payment or other liquidation of the last mortgage asset in
that trust; and
o the payment, or provision for payment, to the certificateholders of that
series of all amounts required to be paid to them.
Written notice of termination of a trust will be given to each affected
certificateholder, and the final distribution will be made only upon
presentation and surrender of the certificates of the related series at the
location to be specified in the notice of termination.
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If we so specify in the related prospectus supplement, one or more
designated parties will be entitled to purchase all of the mortgage assets
underlying a series of offered certificates, resulting in an early retirement of
the certificates and an early termination of the related trust. We will describe
in the related prospectus supplement the circumstances under which that purchase
may occur.
In addition, if we so specify in the related prospectus supplement, on a
specified date or upon the reduction of the total principal balance of a
specified class or classes of certificates by a specified percentage or amount,
a party designated in the related prospectus supplement may be authorized or
required to solicit bids for the purchase of all the mortgage assets of the
related trust or of a sufficient portion of the mortgage assets to retire that
class or those classes of certificates. The solicitation of bids must be
conducted in a commercially reasonable manner, and assets will, in general, be
sold at their fair market value. If the fair market value of the mortgage assets
being sold is less than their unpaid balance, then the certificateholders of one
or more classes of certificates may receive an amount less than the total
certificate principal balance of, and accrued and unpaid interest on, their
certificates.
Book-Entry Registration and Definitive Certificates
Any class of offered certificates may be issued in book-entry form through
the facilities of The Depository Trust Company. If so, that class will be
represented by one or more global certificates registered in the name of DTC or
its nominee. If we so specify in the related prospectus supplement, we will
arrange for clearance and settlement through the Euroclear System or CEDEL,
S.A., for so long they are participants in DTC.
The Depository Trust Company
DTC is:
o a limited-purpose trust company organized under the New York Banking Law;
o a "banking corporation" within the meaning of the New York Banking Law;
o a member of the Federal Reserve System;
o a "clearing corporation" within the meaning of the New York Uniform
Commercial Code; and
o a "clearing agency" registered pursuant to the provisions of Section 17A of
the Securities Exchange Act of 1934.
DTC was created to hold securities for DTC participants and to facilitate
the clearance and settlement of securities transactions between DTC participants
through electronic computerized book-entry changes in their accounts, which
eliminates the need for physical movement of securities certificates. DTC
participants that maintain accounts with DTC include securities brokers and
dealers, banks, trust companies and clearing corporations and may include other
organizations. DTC is owned by a number of DTC participants and by the New York
Stock Exchange, Inc., the American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc. Access to the DTC system is also
available to others such as banks, brokers, dealers and trust companies that
directly or indirectly clear through or maintain a custodial relationship with a
DTC participant that maintains an account with DTC. The rules applicable to DTC
and DTC participants are on file with the SEC.
Purchases of book-entry certificates under the DTC system must be made by
or through, and will be recorded on the records of, the brokerage firm, bank,
thrift institution or other financial intermediary (each, a "Financial
Intermediary") that maintains the beneficial owner's account for this purpose.
In turn, the Financial Intermediary's ownership of those certificates will be
recorded on the records of DTC or, alternatively, if the beneficial owner's
Financial Intermediary is not a DTC participant, on the records of a
participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC. A beneficial owner of
book-entry certificates must rely on the foregoing procedures to evidence its
beneficial ownership of those certificates. The beneficial ownership interest of
the owner of a book-entry certificate may only be transferred by compliance with
the rules, regulations and procedures of the Financial Intermediaries and DTC
participants.
DTC has no knowledge of the actual beneficial owners of the book-entry
certificates. DTC's records reflect only the identity of the DTC participants to
whose accounts those certificates are credited, which may or may not be the
actual beneficial owners. The DTC participants will remain responsible for
keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to DTC participants,
and by DTC participants to Financial Intermediaries and beneficial owners, will
be governed by arrangements
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among them, subject to any statutory or regulatory requirements as may be in
effect from time to time.
Payments on the book-entry certificates will be made to DTC. DTC's
practice is to credit DTC participants' accounts on the related payment date in
accordance with their respective holdings shown on DTC's records, unless DTC has
reason to believe that it will not receive payment on that date. Disbursement of
payments by DTC participants to Financial Intermediaries and beneficial owners
will be:
o governed by standing instructions and customary practices, as is the case
with securities held for the accounts of customers in bearer form or
registered in "street name";
o the sole responsibility of each DTC participant, subject to any statutory or
regulatory requirements in effect from time to time.
Under a book-entry system, beneficial owners may receive payments after
the related payment date.
The only "certificateholders" of book-entry certificates will be DTC or
its nominee. Parties to the governing documents for any series of offered
certificates need not recognize beneficial owners of book-entry certificates as
"certificateholders". The beneficial owners of book-entry certificates will be
permitted to exercise the rights of "certificateholders" only indirectly through
the DTC participants, who in turn will exercise their rights through DTC. We
have been informed that DTC will take action permitted to be taken by a
"certificateholder" only at the direction of one or more DTC participants. DTC
may take conflicting actions with respect to the book-entry certificates to the
extent that the actions are taken on behalf of Financial Intermediaries whose
holdings include those certificates.
Because DTC can act only on behalf of DTC participants, who in turn act on
behalf of Financial Intermediaries and certain beneficial owners, the ability of
a beneficial owner to pledge its interest in a class of book-entry certificates
to persons or entities that do not participate in the DTC system, or otherwise
to take actions in respect of its interest in a class of book-entry
certificates, may be limited due to the lack of a physical certificate
evidencing the interest.
Unless we specify otherwise in the related prospectus supplement,
beneficial owners of affected offered certificates initially issued in
book-entry form will not be able to obtain physical certificates that represent
those offered certificates, unless:
o we advise the related trustee in writing that DTC is no longer willing or
able to discharge properly its responsibilities as depository with respect to
those offered certificates and we are unable to locate a qualified successor;
or
o we elect, at our option, to terminate the book-entry system through DTC with
respect to those offered certificates.
Upon the occurrence of either of the two events described above, DTC will
be required to notify all DTC participants of the availability through DTC of
physical certificates with respect to the affected offered certificates. Upon
surrender by DTC of the certificate or certificates representing a class of
book-entry offered certificates, together with instructions for registration,
the related trustee or other designated party will be required to issue to the
beneficial owners identified in those instructions physical certificates
representing those offered certificates.
Cedelbank
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds securities for its participants and facilitates the
clearance and settlement of securities through electronic book-entry changes in
their cash and securities accounts. Transactions can settle in Cedelbank in any
of 28 currencies, including United States dollars. Cedelbank provides
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing to its participants. Cedelbank
interfaces with domestic markets in several countries. The Luxembourg Monetary
Institute regulates Cedelbank as a professional depository. Cedelbank
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedelbank is
also available to others, such as banks, brokers, dealers, and trust companies
that maintain a clearing or custodial relationship with a Cedelbank participant.
Euroclear
The Euroclear System was created in 1968 to hold securities for
participants and to clear and
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settle transactions between participants through simultaneous electronic
book-entry delivery against payment. Transactions may now be settled in any of
40 currencies, including United States dollars. The Euroclear System includes
various other services, including securities lending and borrowing, and
interfaces with domestic markets in several countries. The Euroclear System is
operated by the Brussels, Belgium office of Morgan Guaranty Trust Company of New
York (the "Euroclear Operator"), under a contract with Euroclear Clearance
System S.C., a Belgian cooperative corporation. All operations are conducted by
the Euroclear Operator, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator. Euroclear
participants include banks (including central banks), securities brokers and
dealers. Indirect access to Euroclear is also available to other firms that
maintain a clearing or custodial relationship with a Euroclear participant.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
The Euroclear Operator acts only on behalf of Euroclear participants, and
has no record of or relationship with persons holding through participants.
DESCRIPTION OF THE GOVERNING DOCUMENT
The offered certificates of each series will be issued pursuant to a
pooling and servicing agreement or other similar agreement or collection of
agreements (individually and collectively, the "Governing Document"). In
general, the parties to the Governing Document for a series of offered
certificates will include us, a trustee, a master servicer and a special
servicer. However, if the related trust assets include mortgage-backed
securities, the Governing Document may include a manager as a party, but may not
include a master servicer, special servicer or other servicer as a party. We
will identify in the related prospectus supplement the parties to the Governing
Document for a series of offered certificates. Midland Loan Services, our parent
corporation, will be the master servicer for each of the trusts, unless we
specify a different master servicer in the related prospectus supplement.
Midland Loan Services may also be the special servicer for some of the trusts.
Any party to the Governing Document for a series of offered certificates,
or any of its affiliates, may own certificates issued thereunder. Except in
limited circumstances, certificates that are held by the related master
servicer, special servicer or manager will have the same voting rights as
certificates held by others.
A form of a pooling and servicing agreement has been filed as an exhibit
to the registration statement of which this prospectus is a part. However, the
provisions of the Governing Document for each series of offered certificates
will vary depending upon the nature of the certificates to be issued thereunder
and the nature of the related trust assets. The following summaries describe
certain provisions that may appear in the Governing Document for each series of
offered certificates. The prospectus supplement for each series of offered
certificates will provide additional information regarding the Governing
Document for that series. The summaries in this prospectus do not describe all
of the provisions of the Governing Document for each series of certificates. You
should refer to the provisions of the Governing Document for your certificates
and to the description of those provisions in the related prospectus supplement
for additional information. We will provide a copy of the Governing Document,
exclusive of exhibits, that relates to your certificates, without charge, upon
written request addressed to our principal executive offices specified under
"PNC Commercial Mortgage Acceptance Corp."
Assignment of Mortgage Assets
At the time of initial issuance of any series of offered certificates, we
will assign or cause to be assigned to the designated trustee the mortgage
assets to be included in the related trust, together with certain related
assets. We will specify in the related prospectus all material documents for the
related mortgage assets that will be delivered to the related trustee, and all
other actions to be taken by us or any prior holder of the related mortgage
assets, in connection with that assignment. Concurrently with that assignment,
the related trustee will deliver to our designee or us the certificates of that
series in exchange for the mortgage assets and the other assets to be included
in the related trust.
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Each mortgage asset included in one of the trusts will be identified in a
schedule appearing as an exhibit to the related Governing Document. That
schedule generally will include detailed information about each mortgage asset
transferred to the related trust, including:
o in the case of a mortgage loan:
1) the address of the related real property and the type of that property;
2) the mortgage interest rate and, if applicable, the applicable index,
gross margin, adjustment date and any rate cap information;
3) the remaining term to maturity;
4) the remaining amortization term; and
5) the outstanding principal balance; and
o in the case of a mortgage-backed security, the outstanding principal
balance and the pass-through rate or coupon rate.
Representations and Warranties with Respect to Mortgage Assets; Repurchases
and Other Remedies
Unless we state otherwise in the prospectus supplement for any series of
offered certificates, we will, with respect to each mortgage asset in the
related trust, make or assign, or cause to be made or assigned, certain
representations and warranties (the person making the representations and
warranties, the "Warranting Party") covering, by way of example:
o the accuracy of the information set forth for each mortgage asset on the
schedule of mortgage assets appearing as an exhibit to the Governing Document
for that series;
o the Warranting Party's title to each mortgage asset and the authority of the
Warranting Party to sell that mortgage asset; and
o in the case of a mortgage loan:
1) the enforceability of the related mortgage note and mortgage;
2) the existence of title insurance insuring the lien priority of the
related mortgage;
3) the payment status of the mortgage loan; and
4) the delivery of all documents required to be delivered with respect to
the mortgage loan as contemplated under "--Assignment of Mortgage
Assets."
We will identify the Warranting Party, and give a more complete sampling
of the representations and warranties made by the Warranting Party, in the
related prospectus supplement. We will also specify in the related prospectus
supplement any remedies against the Warranting Party available to the related
certificateholders, or the related trustee on their behalf, in the event of a
breach of any of those representations and warranties. In most cases, the
Warranting Party will be a prior holder of the particular mortgage assets.
Collection and Other Servicing Procedures With Respect to Mortgage Loans
The Governing Document for each series of offered certificates will govern
the servicing and administration of any mortgage loans included in the related
trust.
In general, the related master servicer and special servicer, directly or
through sub-servicers, will be obligated to service and administer for the
benefit of the related certificateholders the mortgage loans in any of the
trusts. The master servicer and the special servicer will be required to service
and administer those mortgage loans in accordance with applicable law and,
further, in accordance with the terms of the related Governing Document, the
mortgage loans themselves and any instrument of credit support included in that
trust. Subject to the foregoing, the master servicer and the special servicer
will each have full power and authority to do any and all things in connection
with the servicing and administration of the mortgage loans that it may deem
necessary and desirable.
As part of its servicing duties, each of the master servicer and the
special servicer for one of the trusts will be required to make reasonable
efforts to collect all payments called for under the terms and provisions of the
related mortgage loans that it services and, in general will be obligated to
follow the same collection procedures that it would follow for comparable
mortgage loans held for its own account, provided that:
o those procedures are consistent with the terms of the related Governing
Document; and
o they do not impair recovery under any instrument of credit support included
in the related trust.
Consistent with the foregoing, the master servicer and the special
servicer will each be
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permitted, in its discretion, to waive any default charge in connection with
collecting a late payment on any defaulted any mortgage loan.
Accounts
We expect that Governing Document will require the Master Servicer to
establish and maintain one or more collection accounts 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 may make
withdrawals from the collection account to, among other things:
o remit certain amounts for the related payment date into the distribution
account;
o pay certain property protection expenses, taxes, assessments and insurance
premiums and certain third-party expenses in accordance with the Governing
Document;
o pay accrued and unpaid servicing fees and other servicing compensation
to the master servicer and the special servicer; and
o reimburse the master servicer, the special servicer, the trustee and us
for certain expenses; and
o provide indemnification to master servicer, the Special Servicer and us, as
described in the Governing Document.
The related prospectus supplement may provide for additional circumstances
when the master servicer may make withdrawals from the collection account.
We expect that the Governing Document for each series of certificates will
require the trustee to establish a distribution account into which the master
servicer will deposit amounts held in the collection account from which
certificateholder distributions will be made for each payment date. On each
payment 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.
The amount at any time credited to the collection account or the
distribution account may be invested in Permitted Investments that:
o are payable on demand; or
o in general mature or are subject to withdrawal or redemption on the date so
specified in the Governing Document.
The master servicer must remit to the distribution account on or before
the business day preceding the related payment date amounts on deposit in the
collection account that are required for distribution to certificateholders.
The income from the investment of funds in the collection account and the
distribution account in Permitted Investments will constitute additional
compensation for the master servicer or the trustee. 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 or trustee, as applicable. The
amount of each such loss must be deposited by the master servicer or the trustee
in the collection account or the distribution account, as the case may be,
promptly as realized.
We expect that the Governing Document for each series of certificates will
require that an account be established and maintained for use in connection
with:
o real properties acquired upon foreclosure of a mortgage loan, which are
commonly referred to as "REO properties"; and
o if specified in the related prospectus supplement, certain other real
properties securing the mortgage loans.
To the extent set forth in the Governing Document, certain withdrawals
from this account will be made to, among other things:
o make remittances to the collection account as required;
o pay taxes, assessments, insurance premiums, other amounts necessary for
the proper operation, management and maintenance of the REO properties and
other specified real properties securing the mortgage loans and certain
third-party expenses; and
o reimburse certain expenses in respect of the REO properties and the other
specified real properties securing the mortgage loans.
The amount at any time credited to this 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
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business day preceding the day on which these amounts must be remitted to the
master servicer for deposit in the collection account. The income from the
investment of funds in the account in Permitted Investments will be for the
benefit of the master servicer, the special servicer or the trustee, as
applicable, and the risk of loss of funds in this account resulting from such
investments will be borne by the master servicer, the special servicer or the
trustee, as applicable.
Permitted Investments
"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:
o 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;
o direct obligations of the Federal Home Loan Mortgage Corporation (debt
obligations only), the Federal National Mortgage Association (debt
obligations only), the Federal Farm Credit System (consolidated system-wide
bonds and notes only), the Federal Home Loan Banks (consolidated debt
obligations only), the Student Loan Marketing Association (debt obligations
only), the Financing Corp. (consolidated debt obligations only) and the
Resolution Funding Corp. (debt obligations only);
o federal funds, time deposits in, or unsecured 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;
o 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;
o 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;
o 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
o other obligations acceptable as Permitted Investments to each rating agency
rating the certificates of a series.
Insurance
The Governing Document for each series will require that the master
servicer use reasonable efforts in accordance with the servicing standard
specified in the related prospectus supplement to cause each borrower 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:
o the full replacement cost of the improvements and equipment securing the
mortgage loan; or
o the outstanding principal balance owing on the mortgage loan or the amount as
is necessary to prevent any reduction in such policy by reason of the
application of co-insurance and to prevent the trustee for the series from
being deemed to be a co-insurer in each case with a replacement cost rider.
o The master servicer will also use its reasonable efforts to cause each
borrower to maintain any other insurance required by 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 Governing Document waive the requirement of a mortgage
loan that the related borrower maintain earthquake insurance on the related
mortgaged property. If a mortgaged property is located in a
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federally designated special flood hazard area, the master servicer will also
use its best efforts in accordance with the servicing standard in the related
prospectus supplement to cause the related borrower to maintain flood insurance
in an amount equal to the lessor of the unpaid principal balance of the related
mortgage loan and the maximum amount obtainable with respect to the mortgage
loan. The Governing Document will provide that the master servicer must maintain
the foregoing insurance if the related borrower fails to maintain this insurance
to the extent the insurance is available at commercially reasonable rates and to
the extent the trustee, as mortgagee, has an insurable interest.
The cost of any insurance maintained by the master servicer will be
advanced by the master servicer. The special servicer 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 insurance for an REO property will
be payable out of amounts collected on the related REO property 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:
o public liability insurance;
o loss of rent endorsements; and
o such other insurance as provided in the related mortgage loan.
Any insurance that is required to be maintained with respect to any REO
property will only be so required to the extent the insurance is available at
commercially reasonable rates.
The Governing Document 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 the insurance allocable to any particular mortgage
loan or REO property, if not borne by the related borrower, 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 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 in the account but for such clause to
the extent that the 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 Governing Document.
The prospectus supplement may describe other provisions concerning the
insurance policies required to be maintained under the Governing Document.
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.
Fidelity Bonds and Errors and Omissions Insurance
The Governing Document for each series will generally require that the
master servicer and the special servicer 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. The Governing Document will allow the
master servicer and the special servicer to self-insure against loss occasioned
by the errors and omissions of the officers and employees of the master servicer
and the special servicer so long as certain criteria set forth in the Governing
Document are met.
Servicing Compensation and Payment of Expenses
The master servicer's principal compensation for its activities under the
Governing Document for each series will come from the payment to it or retention
by it, with respect to each mortgage loan, of a "servicing fee". The exact
amount and calculation of the servicing fee will be established in the
prospectus supplement and
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Governing Document for the related series. Since the total 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 Governing Document for a series may provide that the
master service is entitled to receive, as additional compensation:
o prepayment premiums, late fees and certain other fees collected from
borrowers;
o any interest or other income earned on funds deposited in the collection
account and, distribution account except to the extent such income is
required to be paid to the related borrowers, any escrow accounts.
The amount and calculation of the fee for the servicing of specially
serviced mortgage loans will be described in the prospectus supplement and the
Governing Document for each series.
In addition to the compensation described above, the master servicer and
the special servicer 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.
Modifications, Waivers and Amendments
The Governing Document for each series will provide the master servicer or
the special servicer 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 listed in the Governing
Document. These conditions will general include the condition that the
modification, waiver or amendment will not result in the mortgage loan ceasing
to be a "qualified mortgage" under the REMIC regulations.
Events of Default
In summary, the Governing Document for each series will provide that the
following are events of default with respect to the master servicer and special
servicer:
o any failure by the master servicer or the special servicer 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 the Governing
Document requires to be so remitted;
o any failure by the master servicer or special servicer 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 with respect to any mortgage
loan) under the Governing Document, 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 by the trustee or us, or to the
master servicer, special servicer, the trustee and us, by the holders of
certificates evidencing voting rights of at least 25% of any affected class;
o 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;
o certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings and certain actions by, on behalf of or
against the master servicer or special servicer, as applicable, indicating
its insolvency or inability to pay its obligations; or
o any failure by the master servicer to make a required advance.
The related prospectus supplement may provide or 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
terminate all of the rights and obligations of the master servicer or special
servicer, as the case may be, and the trustee must do so upon the written
direction of the holders of certificates entitled to 25% of the aggregate voting
rights of all certificates of a series. The Governing Document provides that the
terminated master servicer or special servicer remains 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 Governing Document. The Governing Document for the series may
specify that
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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 at least 66 2/3% of the total
voting rights of the certificates of a series may, on behalf of all holders of
certificates, waive any default by the master servicer or special servicer in
the performance of its obligations under the Governing Document 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 Governing
Document. Upon any such waiver of a past default, the default will cease to
exist, and any event of default arising therefrom will be deemed to have been
remedied for every purpose of the Governing Document. No such waiver will extend
to any subsequent or other default or impair any resulting right.
On and after the date of termination, the trustee will succeed to all
authority and power of the terminated master servicer or special servicer under
the Governing Document and will be entitled to compensation similar to that to
which the terminated master servicer or special servicer would have been
entitled. The trustee must appoint, or petition a court of competent
jurisdiction to appoint, an established mortgage loan servicing institution to
act as successor to the terminated master servicer or special servicer under the
Governing Document if :
o the trustee is unwilling or unable to act as successor;
o the holders of certificates evidencing a majority of the total voting
rights so request; or
o 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 appointment of which will not result in the downgrading, withdrawal or
qualification of the ratings then assigned to any class of certificates as
evidenced in writing by each rating agency rating the certificates of such
series.
The trustee and any 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 Governing
Document.
Other Matters
The master servicer and/or the special servicer for one of the trusts,
directly or through sub-servicers, must also perform various other customary
functions of a servicer of comparable loans, including:
o maintaining escrow or impound accounts for the payment of taxes, insurance
premiums, ground rents and similar items, or otherwise monitoring the timely
payment of those items;
o ensuring that the related properties are properly insured;
o attempting to collect delinquent payments;
o supervising foreclosures;
o negotiating modifications;
o responding to borrower requests for partial releases of the encumbered
property, easements, consents to alteration or demolition and similar
matters;
o protecting the interests of certificateholders with respect to senior
lienholders;
o conducting inspections of the related real properties on a periodic or
other basis;
o collecting and evaluating financial statements for the related real
properties;
o managing or overseeing the management of real properties acquired on behalf
of the trust through foreclosure, deed-in-lieu of foreclosure or otherwise;
and
o maintaining servicing records relating to mortgage loans in the trust.
We will specify in the related prospectus supplement when, and the extent
to which, servicing of a mortgage loan is to be transferred from a master
servicer to a special servicer. In general, a special servicer for any of the
trusts will be responsible for the servicing and administration of:
o mortgage loans that are delinquent in respect of a specified number of
scheduled payments;
o mortgage loans as to which there is a material non-monetary default;
o mortgage loans as to which the related borrower has entered into or
consented to bankruptcy, appointment of a receiver or conservator or similar
insolvency proceeding, or the related borrower has become the subject of a
decree or order for such a proceeding which shall have remained in force
undischarged or unstayed for a specified number of days; and
o real properties acquired as part of the trust in respect of defaulted
mortgage loans.
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The related Governing Document may also may provide that if a default on a
mortgage loan in the related trust has occurred or, in the judgment of the
related master servicer, a payment default is reasonably foreseeable, the
related master servicer may elect to transfer the servicing of that mortgage
loan, in whole or in part, to the related special servicer. When the
circumstances no longer warrant a special servicer continuing to service a
particular mortgage loan, such as when the related borrower is paying in
accordance with the forbearance arrangement entered into between the special
servicer and that borrower, the master servicer will generally resume the
servicing duties with respect to the particular mortgage loan.
Unless we state otherwise in the related prospectus supplement, the master
servicer for your series will be responsible for filing and settling claims in
respect of particular mortgage loans for your series under any applicable
instrument of credit support. See "Description of Credit Support" in this
prospectus.
A borrower's failure to make required mortgage loan payments may mean that
operating income from the related borrower's real property is insufficient to
service the mortgage debt, or may reflect the diversion of that income from the
servicing of the mortgage debt. In addition, a borrower that is unable to make
mortgage loan payments may also be unable to make timely payment of taxes and
otherwise to maintain and insure the related real property. In general, the
related special servicer will be required to:
o monitor any mortgage loan that is in default;
o evaluate whether the causes of the default can be corrected over a reasonable
period without significant impairment of the value of the related real
property;
o initiate corrective action in cooperation with the mortgagor if cure is
likely;
o inspect the related real property; and
o take such other actions as it deems necessary and appropriate.
A significant period of time may elapse before a special servicer is able
to assess the success of any corrective action or the need for additional
initiatives. The time within which a special servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a real property in lieu of foreclosure) on behalf
of the certificateholders of the related series may vary considerably depending
on:
o the particular mortgage loan;
o the related real property;
o the borrower;
o the presence of an acceptable party to assume the mortgage loan;
o and the laws of the jurisdiction in which the related real Property is
located.
If a borrower files a bankruptcy petition, the special servicer may not
be permitted to accelerate the maturity of the defaulted loan or to foreclose
on the related real property for a considerable period of time. See "Certain
Legal Aspects of Mortgage Loans-Bankruptcy Laws."
A special servicer may also perform certain limited duties in respect of
mortgage loans for which the master servicer is primarily responsible, such as
performing property inspections and collecting and evaluating financial
statements. A master servicer may perform certain limited duties in respect of
any mortgage loan for which the special servicer is primarily responsible, such
as continuing to receive payments on the mortgage loan, making certain
calculations with respect to the mortgage loan and making remittances and
preparing certain reports to the related trustee and/or certificateholders with
respect to the mortgage loan. The duties of the master servicer and special
servicer for your series will be more fully described in the related prospectus
supplement.
Sub-Servicers
A master servicer or special servicer may delegate its servicing
obligations to one or more third-party servicers or sub-servicers. However,
unless we specify otherwise in the related prospectus supplement, the master
servicer or special servicer will remain obligated under the related Governing
Document. Each sub-servicing agreement between a master servicer or special
servicer, as applicable, and a sub-servicer must provide for servicing of the
applicable mortgage loans consistent with the related Governing Document. Each
master servicer or special servicer for one of the trusts must monitor the
performance of sub-servicers that it retains.
Unless we specify otherwise in the related prospectus supplement, any
master servicer or special servicer for the related trust will be solely liable
for
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all fees owed by it to any sub-servicer, regardless of whether the master
servicer's or special servicer's compensation pursuant to the related Governing
Document is sufficient to pay those fees. Each sub-servicer will be entitled to
reimbursement from the master servicer or special servicer, as the case may be,
that retained it, for certain expenditures that it makes, generally to the same
extent the master servicer or special servicer would be reimbursed under the
related Governing Document.
Collection of Payments on Mortgage-Backed Securities
Unless we specify otherwise in the related prospectus supplement, if a
mortgage-backed security is included among the trust assets underlying any
series of offered certificates, then:
o that mortgage-backed security will be registered in the name of the
related trustee or its designee;
o the related trustee will receive payments on that mortgage-backed
security; and
o subject to any conditions described in the related prospectus supplement, the
related trustee or a designated manager will, on behalf and at the expense of
the trust, exercise all rights and remedies in respect of that
mortgaged-backed security, including the prosecution of any legal action
necessary in connection with any payment default.
Certain Matters Regarding the Master Servicer, the Special Servicer, the
REMIC Administrator, the Manager and the Depositor
Unless we specify otherwise in the related prospectus supplement, no
master servicer, special servicer or manager for any of the trusts may resign
from its obligations in such capacity, except upon--
o the appointment of, and the acceptance of the appointment by, a successor to
the resigning party and receipt by the related trustee of written
confirmation from each applicable rating agency that the resignation and
appointment will not result in a withdrawal or downgrade of any rating
assigned by that rating agency to any class of certificates of the related
series; or
o a determination that those obligations are no longer permissible under
applicable law or are in material conflict by reason of applicable law with
any other activities carried on by the resigning party.
In general, no resignation will become effective until the related trustee
or other successor has assumed the obligations and duties of the resigning
master servicer, special servicer or manager, as the case may be. Each master
servicer, special servicer and, if it receives distributions on mortgage-backed
securities, manager for one of the trusts will be required to maintain a
fidelity bond and errors and omissions policy or their equivalent that provides
coverage against losses that may be sustained as a result of an officer's or
employee's misappropriation of funds or errors and omissions, subject to such
limitations as to amount of coverage, deductible amounts, conditions, exclusions
and exceptions as may be permitted by the rating agencies assigning ratings to
the related series of certificates.
In no event will we, any master servicer, special servicer or manager for
one of the trusts, or any of our or their respective directors, officers,
employees or agents be under any liability to the related trust or
certificateholders for any action taken, or not taken, in good faith pursuant to
the Governing Document for any series of certificates or for errors in judgment.
None of those persons or entities will be protected, however, against any
liability that would otherwise be imposed by reason of willful misfeasance, bad
faith or negligence in the performance of obligations or duties under the
Governing Document for any series of certificates or by reason of reckless
disregard of those obligations and duties.
Furthermore, the Governing Document for each series of offered
certificates will entitle us, the master servicer, special servicer and/or
manager for the related trust, and our and their respective directors, officers,
employees and agents to indemnification out of the related trust assets for any
loss, liability or expense incurred in connection with any legal action that
relates to that Governing Document or series of offered certificates or to the
related trust. The indemnification will not extend, however, to any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of obligations or duties under that Governing
Document, or by reason of reckless disregard of those obligations or duties.
Neither we nor any master servicer, special servicer or manager for the
related trust will be under any obligation to appear in, prosecute or defend any
legal action that is not incidental to its respective responsibilities under the
Governing Document for any series of offered certificates or that in its opinion
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may involve it in any ultimate expense or liability. However, we and each of
those other parties may undertake any legal action that may be necessary or
desirable with respect to the enforcement and/or protection of the rights and
duties of the parties to the Governing Document for any series of offered
certificates and the interests of the certificateholders of that series under
that Governing Document. In that event, the legal expenses and costs of the
action, and any liability resulting therefrom, will be expenses, costs and
liabilities of the related trust and payable out of related trust assets.
Any person into which we or any related master servicer, special servicer
or manager may be merged or consolidated, or any person resulting from any
merger or consolidation to which we or any related master servicer, special
servicer or manager is a party, or any person succeeding to the business of us
or any related master servicer, special servicer or manager, will be the
successor of us or that master servicer, special servicer or manager, as the
case may be, under the Governing Document for each series of offered
certificates.
The compensation arrangements with respect to the master servicer, special
servicer and/or manager for any of the trusts will be described in the related
prospectus supplement. In general, that compensation will be payable out of the
related trust assets.
Amendment
The Governing Document for each series of offered certificates may be
amended by the parties thereto, without the consent of any of the holders of
those certificates, or of any non-offered certificates of the same series, for
the following reasons:
1) to cure any ambiguity;
2) to correct, modify or supplement any provision in the Governing Document
that is inconsistent with any other provision in the Governing Document,
in this prospectus or the related prospectus supplement or to correct
any error;
3) to add any other provisions with respect to matters or questions arising
under the Governing Document that are not inconsistent with the existing
provisions of that document;
4) to the extent applicable, to relax or eliminate any requirement under
the Governing Document imposed by the provisions of the Internal Revenue
Code of 1986 relating to REMICs if the provisions of that code are
amended or clarified so as to allow for the relaxation or elimination of
that requirement;
5) to relax or eliminate any requirement under the Governing Document
imposed by the Securities Act of 1933 or the rules under that Act if the
Securities Act of 1933 or those rules are amended or clarified so as to
allow for the relaxation or elimination of that requirement;
6) to comply with any requirements imposed by the Internal Revenue Code of
1986 or any final, temporary or, in some cases, proposed regulation,
revenue ruling, revenue procedure or other written official announcement
or interpretation relating to federal income tax laws, or to avoid a
prohibited transaction or reduce the incidence of any tax that would
arise from any actions taken with respect to the operation of any REMIC
created under the Governing Document;
7) to the extent applicable, to modify, add to or eliminate certain
transfer restrictions relating to the certificates that are "residual
interests" in a REMIC; or
8) for any other purpose.
However, no amendment of the Governing Document for any series of offered
certificates, other than an amendment for any of the specific purposes described
in clauses (6) and (7) above, may adversely affect in any material respect the
interests of any holders of offered or non-offered certificates of that series.
In addition, no amendment of the Governing Document for any series of offered
certificates covered solely by clause (8) above may result in a downgrade or
withdrawal of any then current rating assigned to any class of certificates of
the related series, as evidenced by written confirmation to that effect from
each applicable rating agency obtained by or delivered to the related trustee.
In general, the Governing Document for a series of offered certificates
may also be amended by the parties to that document, with the consent of the
holders of offered and non-offered certificates representing not less than
66-2/3%, or another percentage specified in the related prospectus supplement,
of all the voting rights allocated to those classes of that series that are
affected by the
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amendment. However, the Governing Document for a series of offered certificates
may not be amended to:
o reduce in any manner the amount of, or delay the timing of, payments received
on the related mortgage assets that are required to be distributed on any
offered or non-offered certificate of that series without the consent of the
holder of that certificate; or
o adversely affect in any material respect the interests of the holders of any
class of offered or non-offered certificates of that series in any other
manner without the consent of the holders of all certificates of that class;
or
o modify the provisions of the Governing Document relating to amendments
thereof without the consent of the holders of all offered and non-offered
certificates of that series then outstanding.
List of Certificateholders
Three or more certificateholders of record of any series may request
access to a recent list of certificateholders for that series for the purpose of
communicating with other holders of certificates of the same series with respect
to their rights under the related Governing Document. The related trustee or
other certificate registrar of that series will afford the requesting
certificateholders access during normal business hours to the most recent list
of certificateholders of that series. If the date of the list is more than 90
days before the date of receipt of the certificateholders' request, then the
trustee, if it is not the certificate registrar for that series, must request
from the registrar a current list and provide access to the current list
promptly upon receipt.
The Trustee
The trustee for each series of offered certificates will be named in the
related prospectus supplement. The commercial bank, national banking
association, banking corporation or trust company that serves as trustee for any
series of offered certificates may have typical banking relationships with us
and our affiliates and with any of the other parties to the related Governing
Document and its affiliates.
Duties of the Trustee
The trustee for each series of offered certificates will make no
representation as to the validity or sufficiency of those certificates, the
related Governing Document or any underlying mortgage asset or related document
and will not be accountable for the use or application by or on behalf of any
other party to the related Governing Document of any funds paid to that party in
respect of those certificates or the underlying mortgage assets. If no event of
default has occurred and is continuing, the trustee for each series will be
required to perform only those duties specifically required under the related
Governing Document. However, upon receipt of any of the various certificates,
reports or other instruments required to be furnished to it pursuant to the
related Governing Document, the trustee must examine those documents and
determine whether they conform to the requirements of that Governing Document.
Certain Matters Regarding the Trustee
Unless the related prospectus supplement describes another source of
payment, the fees of the trustee for any series of offered certificates will be
paid by the related trust assets.
The trustee for each series of offered certificates will be entitled to
indemnification, out of related trust assets, for any loss, liability or expense
incurred by that trustee in connection with its acceptance or administration of
its trusts under the related Governing Document. The indemnification of a
trustee will not extend to any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence on the part of the trustee in the
performance of its obligations and duties under the related Governing Document,
or by reason of its reckless disregard of those obligations or duties.
The trustee for each series of offered certificates will be entitled to
execute any of its trusts or powers and perform any of its duties under the
related Governing Document, either directly or by or through agents or
attorneys. The trustee will not be responsible for any willful misconduct or
negligence on the part of any such agent or attorney appointed by it with due
care.
Resignation and Removal of the Trustee
The trustee for any series of offered certificates may resign at any time.
We will be obligated to appoint a successor to a resigning trustee. We may also
remove the trustee for any series of offered certificates if that trustee ceases
to be eligible to continue as such under the related Governing Document. Unless
we indicate otherwise
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in the related prospectus supplement, the trustee for any series of offered
certificates may also be removed at any time by the holders of the offered and
non-offered certificates of that series evidencing not less than 51%, or such
other percentage specified in the related prospectus supplement, of the voting
rights for that series. However, if the removal was without cause, the
certificateholders effecting the removal may be responsible for any costs and
expenses incurred by the terminated trustee in connection with its removal. Any
resignation or removal of a trustee and appointment of a successor trustee will
not become effective until acceptance of the appointment by the successor
trustee.
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DESCRIPTION OF CREDIT SUPPORT
Credit support may be provided with respect to one or more classes of the
offered certificates of any series or with respect to the related mortgage
assets. That credit support may be in the form of any of the following:
o the subordination of one or more other classes of certificates of the
same series;
o the use of a letter of credit, a surety bond, an insurance policy or a
guarantee;
o interest rate or foreign currency exchange agreements;
o the establishment of one or more reserve funds; or
o any combination of the foregoing.
If and to the extent described in the related prospectus supplement, any
of the above forms of credit support may provide credit enhancement for
non-offered certificates, as well as offered certificates, or for more than one
series of certificates.
If you are the beneficiary of any particular form of credit support, that
credit support may not protect you against all risks of loss and will not
guarantee payment to you of all amounts to which you are entitled under your
certificates. If losses or shortfalls occur that exceed the amount covered by
that credit support or that are of a type not covered by that credit support,
you will bear your allocable share of deficiencies. Moreover, if that credit
support covers the offered certificates of more than one class or series and
total losses on the related mortgage assets exceed the amount of that credit
support, it is possible that the holders of offered certificates of other
classes and/or series will be disproportionately benefited by that credit
support to your detriment.
If you are the beneficiary of any particular form of credit support, we
will include in the related prospectus supplement a description of the
following:
o the nature and amount of coverage under that credit support;
o any conditions to payment not otherwise described in this prospectus;
o any conditions under which the amount of coverage under that credit support
may be reduced and under which that credit support may be terminated or
replaced; and
o the material provisions relating to that credit support.
Additionally, we will set forth in the related prospectus supplement
certain information with respect to the obligor, if any, under any instrument of
credit support.
Subordinate Certificates
If and to the extent described in the related prospectus supplement, one
or more classes of certificates of any series may be subordinate to one or more
other classes of certificates of that series. If you purchase subordinate
certificates, your right to receive distributions out of collections and
advances on the related trust assets on any payment date will be subordinated to
the corresponding rights of the holders of the more senior classes of
certificates. If and to the extent described in the related prospectus
supplement, the subordination of a class of certificates may apply only in the
event of certain types of losses or shortfalls. In the related prospectus
supplement, we will set forth information concerning the method and amount of
subordination provided by a class or classes of subordinate certificates in a
series and the circumstances under which that subordination will be available.
If the mortgage assets in any trust are divided into separate groups, each
supporting a separate class or classes of certificates of the related series,
credit support may be provided by cross-support provisions requiring that
distributions be made on senior certificates evidencing interests in one group
of mortgage assets prior to distributions on subordinate certificates evidencing
interests in a different group of mortgage assets. We will describe in the
related prospectus supplement the manner and conditions for applying any
cross-support provisions.
Insurance or Guarantees with Respect to Mortgage Loans
The mortgage loans included in any trust may be covered for certain
default risks by insurance policies or guarantees. If so, we will describe in
the related prospectus supplement the nature of these default risks and the
extent of the coverage.
Arrangements Providing Interest Rate Protection
The trust assets for a series of offered certificates may include
guaranteed investment
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contracts pursuant to which moneys held in the funds and accounts established
for that series will be invested at a specified rate. The trust assets may also
include:
o interest rate exchange agreements;
o interest rate cap agreements;
o interest rate floor agreements; or
o other agreements or arrangements intended to reduce the effects of interest
rate fluctuations.
In the related prospectus supplement, we will describe any agreements or
other arrangements designed to protect the holders of a class of offered
certificates against shortfalls resulting from movements or fluctuations in
interest rates. If applicable, we will also identify any obligor under the
agreement or other arrangement.
Arrangements Providing Foreign Currency Protection
If any of the mortgage assets are payable in a foreign currency, the trust
assets for a series of offered certificates may include:
o foreign currency exchange agreements; or
o other agreements and arrangements designed to reduce the effects of foreign
currency fluctuations on the related mortgage assets or one or more classes
of offered certificates of the related series.
In the related prospectus supplement, we will describe any of these
agreements or other arrangements. If applicable, we will also identify any
obligor under the agreement or other arrangement.
Letter of Credit
If and to the extent described in the prospectus supplement, deficiencies
in amounts otherwise payable on a series of offered certificates or certain
classes of those certificates will be covered by one or more letters of credit,
issued by a bank or other financial institution specified in the related
prospectus supplement. Under a letter of credit, the issuing financial
institution will be obligated to honor draws under the letter of credit for a
total fixed dollar amount, net of unreimbursed payments under the letter of
credit, generally equal to a percentage of either:
o the total principal balance of some or all of the related mortgage
assets as of the date the related trust was formed; or
o the initial total principal balance of one or more classes of certificates of
the applicable series.
This percentage will be specified in the related prospectus supplement.
The letter of credit may permit draws only in the event of certain types of
losses and shortfalls. The amount available under the letter of credit will, in
all cases, be reduced to the extent of the unreimbursed payments under the
letter of credit and may otherwise be reduced as described in the related
prospectus supplement. The obligations of the issuing financial institution
under the letter of credit for any series of offered certificates will expire at
the earlier of the date specified in the related prospectus supplement or the
termination of the related trust.
Certificate Insurance and Surety Bonds
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
certain classes of those certificates will be covered by insurance policies or
surety bonds provided by one or more insurance companies or sureties. Those
instruments may cover, with respect to one or more classes of the offered
certificates of the related series, timely distributions of interest and
principal or timely distributions of interest and 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. We will describe in
the related prospectus supplement any limitations on the draws that may be made
under any such instrument.
Reserve Funds
If and to the extent described in the related prospectus supplement,
deficiencies in amounts otherwise payable on a series of offered certificates or
certain classes of those certificates will be covered, to the extent of
available funds, by one or more reserve funds in which cash, a letter of credit,
permitted investments, a demand note or a combination of the foregoing, will be
deposited, in the amounts specified in the related prospectus supplement. If and
to the extent described in the related prospectus supplement, the reserve fund
for the related series of offered certificates may also be funded over time.
Amounts on deposit in any reserve fund for a series of offered
certificates will be applied for the purposes, in the manner, and to the extent
specified in
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the related prospectus supplement. If and to the extent described in the related
prospectus supplement, reserve funds may be established to provide protection
only against certain types of losses and shortfalls. Following each payment date
for the related series of offered certificates, amounts in a reserve fund in
excess of any required balance may be released from the reserve fund under the
conditions and to the extent specified in the related prospectus supplement.
Credit Support with Respect to MBS
If and to the extent described in the related prospectus supplement, any
mortgage-backed security included in one of the trusts and/or the mortgage loans
that back that security may be covered by one or more of the types of credit
support described in this prospectus. We will specify in the related prospectus
supplement, as to each form of credit support, the information indicated above
with respect to that mortgage-backed security, to the extent that the
information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
Most, if not all, of the underlying mortgage loans will be secured by
multifamily and commercial properties in the United States. Some mortgage loans
underlying a series of offered certificates may be secured by multifamily and
commercial properties outside the United States.
The following discussion contains general summaries of certain legal
aspects of mortgage loans secured by multifamily and commercial properties in
the United States. Because these legal aspects are governed by applicable state
law and these laws may differ substantially, the summaries do not purport to
cover all applicable laws, to reflect the laws of any particular state or to
encompass the laws of all jurisdictions in which the security for the mortgage
loans underlying the offered certificates is situated. Accordingly, you should
be aware that the summaries are qualified in their entirety by reference to the
applicable laws of those states. See "Description of the Trust Assets--Mortgage
Loans."
If a significant percentage of mortgage loans underlying a series of
offered certificates are secured by properties in a particular state, we will
discuss the relevant state laws in the related prospectus supplement, to the
extent they vary materially from this discussion. For purposes of this
discussion, "mortgage loan" means a multifamily or commercial mortgage loan that
directly or indirectly backs a series of offered certificates.
Each mortgage loan will be evidenced by a note or bond and secured by an
instrument granting a security interest in real property. The instrument
granting a security interest in real property may be a mortgage, deed of trust
or a deed to secure debt, depending upon the prevailing practice and law in the
state in which the related mortgaged property is located. Mortgages, deeds of
trust and deeds to secure debt are called "mortgages" in this prospectus
supplement. A mortgage creates a lien upon, or grants a title interest in, the
covered real property, and represents the security for the repayment of the
indebtedness evidenced by the note or bond. The priority of this lien or
interest depends on the terms of the mortgage. The priority, in some cases, will
depend on:
o the terms of separate subordination agreements or inter-creditor agreements
with others that hold interests in the real property;
o the knowledge of the parties to the mortgage; and
o the order of recordation of the mortgage in the appropriate public
recording office.
However, the lien of a recorded mortgage will generally be subordinate to
later-arising liens for real estate taxes and assessments and other charges
imposed under governmental police powers.
Types of Mortgage Instruments
There are two parties to a mortgage-
o a mortgagor, who is the owner of the encumbered interest into the
subject property and usually the borrower; and
o a mortgagee, who is the lender.
In contrast, a deed of trust is a three-party instrument. The parties to
a deed of trust are-
o the trustor, the equivalent of a mortgagor;
o the trustee to whom the real property is conveyed; and
o the beneficiary, who is the lender.
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Under a deed of trust, the trustor grants the property, irrevocably until
the debt is paid, in trust and generally with a power of sale, to the trustee to
secure repayment of the related note or bond.
A deed to secure debt typically has two parties. Pursuant to a deed to
secure debt, the grantor, who is the equivalent of a mortgagor, conveys title to
the real property to the grantee, who is the lender, generally with a power of
sale, until the debt is repaid.
If 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.
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:
o the express provisions of the related instrument;
o the law of the state in which the real property is located;
o certain federal laws; and
o in some deed-of-trust transactions, the directions of the beneficiary.
Leases and Rents
Mortgages that encumber income-producing property often contain an
assignment of rents and leases and/or may be accompanied by a separate
assignment of rents and leases. Under an assignment of rents and leases, the
borrower assigns to the lender the borrower's rights under, and all income from,
each lease. The borrower generally retains a revocable license to directly
collect the rents until a default. If the borrower defaults, the license
terminates and the lender is entitled to collect the rents directly. Local law
may require that the lender take possession of the property, obtain a
court-appointed receiver and/or take other similar action before becoming
entitled to collect the rents.
Mortgages that encumber a hotel or motel generally require the borrower to
pledge room rates as additional security for the loan. In most states, these
rates are considered accounts receivable under the Uniform Commercial Code. In
general, the lender must file financing statements in order to perfect its
security interest in the room rates and must file continuation statements,
generally every five years, to maintain that perfection. Mortgage loans secured
by hotels or motels may be included in one of the trusts even if the security
interest in the room rates was not perfected or the requisite Uniform Commercial
Code filings were allowed to lapse. A lender will generally be required to
commence a foreclosure action or otherwise take possession of the property in
order to enforce its rights to collect the room rates following a default, even
if the lender's security interest in room rates is perfected under applicable
non-bankruptcy law.
In the bankruptcy setting, the lender will be stayed from enforcing its
rights to collect hotel and motel room rates. However, the room rates will
constitute "cash collateral" and cannot be used by the bankrupt borrower without
a hearing or the lender's consent or unless the lender's interest in the room
rates is given adequate protection, such as a cash payment for otherwise
encumbered funds or a replacement lien on unencumbered property, in either case
equal in value to the amount of room rates that the bankrupt borrower proposes
to use. See "-Bankruptcy Laws".
Personal Property
Certain types of mortgaged properties, such as hotels, motels and nursing
homes, may include personal property that may, to the extent owned by the
borrower and not previously pledged, constitute a significant portion of the
property's value as security. The creation and enforcement of liens on personal
property are governed by the Uniform Commercial Code. Accordingly, if a borrower
pledges personal property as security for a mortgage loan, the lender generally
must file Uniform Commercial Code financing statements in order to perfect its
security interest in the personal property and must file continuation
statements, generally every five years, to maintain that perfection. In certain
cases, mortgage loans secured in part by personal property may be included in
one of the trusts even if the security interest in the personal property was not
perfected or the requisite Uniform Commercial Code filings were allowed to
lapse.
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Foreclosure
Foreclosure Procedures Vary From State to State
Foreclosure is a legal procedure that allows the lender to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the borrower defaults in payment or performance of its obligations
under the note or mortgage, the lender has the right to institute foreclosure
proceedings to sell the real property at public auction to satisfy the
indebtedness.
The two primary methods of foreclosing a mortgage are:
o judicial foreclosure, involving court proceedings; and
o non-judicial foreclosure pursuant to a power of sale granted in the
mortgage instrument.
Other foreclosure procedures are available in some states, but they are
either infrequently used or available only in limited circumstances.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses are raised or counterclaims are made. A foreclosure
action sometimes requires several years to complete.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having a recorded subordinate
interest in the real property and all parties in possession of the property,
under leases or otherwise, whose interests are subordinate to the mortgage.
Difficulties in locating defendants can delay proceedings. When the lender's
right to foreclose is contested, the legal proceedings can be time-consuming.
Upon a successful completion of the judicial foreclosure proceeding, the court
generally issues a judgment of foreclosure and appoints a referee or other
officer to conduct a public sale of the mortgaged property. The proceeds of the
public sale are used to satisfy the judgment. These sales are made in accordance
with procedures that vary from state to state.
Equitable and Other Limitations on Enforceability of Certain Provisions
Courts have traditionally used general equitable principles to limit the
remedies available to lenders in foreclosure actions where the court viewed the
foreclosures as harsh or unfair. Relying on these principles, a court may:
o alter the specific terms of a loan as necessary to prevent or remedy an
injustice, undue oppression or overreaching;
o require the lender to determine the cause of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan;
o require the lender to reinstate a loan or recast a payment schedule in order
to accommodate a borrower that is suffering from a temporary financial
disability; or
o limit the lender's foreclosure rights in the case of a non-monetary default,
such as a failure to adequately maintain the mortgaged property or an
impermissible further encumbrance of the mortgaged property.
Some courts have addressed the issue of whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that a borrower receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the statutory notice provisions or have found that a public sale under a
mortgage providing for a power of sale does not involve sufficient state action
to trigger constitutional protections.
In addition, some states may have statutory protection such as the right
of the borrower to reinstate its mortgage loan after commencement of foreclosure
proceedings but prior to a foreclosure sale.
Nonjudicial Foreclosure/Power of Sale
In states permitting non-judicial foreclosure proceedings, foreclosure of
a deed of trust is generally accomplished by a non-judicial trustee's sale
pursuant to a power of sale typically granted in the deed of trust. A power of
sale may also be contained in any other type of mortgage instrument if
applicable law so permits. A power of sale under a deed of trust allows the
trustee to conduct a non-judicial public sale generally following a request from
the beneficiary/lender to sell the property after a default by the borrower if
notice of sale is given in
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accordance with the terms of the mortgage and applicable state law.
In some states, prior to a non-judicial public sale, the trustee under the
deed of trust must record a notice of default and notice of sale and send a copy
to the borrower and to any other party who has recorded a request for a copy of
a notice of default and notice of sale. In addition, in some states, the trustee
must provide notice to any other party having an interest of record in the real
property, including junior lienholders. 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 borrower 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 expenses incurred in
enforcing the obligation. In other states, the borrower 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. Generally, state law
governs the procedure for public sale, the parties entitled to notice, the
method of giving notice and the applicable time periods.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a
public sale because of:
o difficulty in determining the exact status of title to the property due to,
among other things, redemption rights that may exist; and
o possible physical deterioration of the property that may have occurred during
the foreclosure proceedings.
Therefore, it is common for the lender to purchase the mortgaged property,
subject to the borrower's right in some states to remain in possession during a
redemption period. In that case, the lender will have both the benefits and
burdens of ownership, including the obligation to:
o pay debt service on any senior mortgages;
o pay taxes;
o obtain casualty insurance; and
o make repairs necessary to render the property suitable for sale.
The costs of operating and maintaining a commercial or multifamily
residential property may be significant and may be greater than the income
derived from that property. The lender also will commonly obtain the services of
a real estate broker and pay the broker's commission in connection with the sale
or lease of the property. Whether the ultimate proceeds of the sale of the
property equal the lender's investment in the property depends upon market
conditions. Moreover, because of the expenses associated with acquiring, owning
and selling a mortgaged property, a lender could realize an overall loss on a
mortgage loan even if the 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 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 have 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.
Rights of Redemption
The purposes of a foreclosure action are to enable the lender to realize
upon its security and to bar the borrower, and all persons who have interests in
the property that are subordinate to that of the foreclosing lender, from
exercising their "equity of redemption". The doctrine of equity of redemption
provides that, until the property encumbered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having interests that are subordinate to that of the foreclosing lender have the
right to redeem the property by paying the entire debt with interest. 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 terminated.
Equity of redemption is a common-law, non-statutory right that should be
distinguished from post-sale statutory rights of redemption. In some states, the
borrower and foreclosed junior lienholders are given a statutory period in which
to redeem the property after a foreclosure. In some states, statutory redemption
may occur only upon payment of the foreclosure sale price. In other states,
redemption may be permitted if the former borrower pays only a portion of the
sums due. A statutory right of redemption will diminish the ability of the
lender to
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sell the foreclosed property, because the exercise of a right of redemption
would defeat the title of any purchaser through a foreclosure. Consequently, the
practical effect of the redemption right is to force the lender to own the
property until the redemption period has expired. In some states, a post-sale
statutory right of redemption may exist following a judicial foreclosure, but
not following a trustee's sale under a deed of trust.
Anti-Deficiency Legislation
Some or all of the mortgage loans may be non-recourse loans. Recourse
after default on these loans will be limited to the related mortgaged property
and any other assets pledged to secure the related mortgage loan. However, even
if a mortgage loan provides for recourse to the borrower's other assets, a
lender's ability to realize upon those assets may be limited by state law. For
example, in some states, a lender cannot obtain a deficiency judgment against
the borrower following foreclosure or sale under a deed of trust. A deficiency
judgment is a personal judgment against the former borrower equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Other states may require the lender
to exhaust the security afforded under a mortgage before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting the security, but in doing so, the lender may be precluded from
foreclosing upon the security. Finally, other statutory provisions, designed to
protect borrowers from exposure to large deficiency judgments that might result
from bidding at below-market values at the foreclosure sale, limit any
deficiency judgment to the excess of the outstanding debt over the fair market
value of the property at the time of the sale.
Leasehold Considerations
Mortgage loans may be secured by a mortgage on the borrower's leasehold
interest under a ground lease. Leasehold mortgage loans are subject to certain
risks not associated with mortgage loans secured by a lien on the fee estate of
the borrower. The most significant of these risks is that if the borrower's
leasehold were to be terminated, the leasehold mortgagee would lose its
security. This risk may be lessened if the ground lease:
o requires the lessor to give the lender notices of lessee defaults and an
opportunity to cure them;
o permits the leasehold estate to be assigned to and by the lender or the
purchaser at a foreclosure sale; and
o contains certain other protective provisions typically included in a
"mortgageable" ground lease.
Certain mortgage loans, however, may be secured by ground leases that do
not contain these provisions.
Cooperative Shares
Mortgage loans may be secured by a security interest on the borrower's
ownership interest in shares, and the proprietary leases belonging to those
shares, allocable to cooperative dwelling units that may be vacant or occupied
by non-owner tenants. Loans secured in this manner are subject to certain risks
not associated with mortgage loans secured by a lien on a borrower's fee estate
in real property. The loan typically is subordinate to any mortgage on the
cooperative's building. This mortgage, if foreclosed, could extinguish the
equity in the building and the proprietary leases of the dwelling units derived
from ownership of the shares of the cooperative. Further, transfer of shares in
a cooperative is subject to various regulations as well as to restrictions under
the governing documents of the cooperative. The shares may be canceled in the
event that associated maintenance charges due under the related proprietary
leases are not paid. Typically, a recognition agreement between the lender and
the cooperative provides, among other things, that the lender may cure a default
under a proprietary lease.
Under the laws applicable in many states, "foreclosure" on cooperative
shares is accomplished by a sale in accordance with the provisions of Article 9
of the Uniform Commercial Code and the security agreement relating to the
shares. Article 9 of the Uniform Commercial Code requires that a sale be
conducted in a "commercially reasonable" manner, which may be dependent upon,
among other things, the notice given the debtor and the method, manner, time,
place and terms of the sale. Article 9 of the Uniform Commercial Code provides
that the proceeds of the sale will be applied first to pay the costs and
expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. A recognition agreement, however, generally provides
that the lender's right to reimbursement is subject to the right of the
cooperative corporation to receive sums due under the proprietary leases.
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Bankruptcy Laws
The U.S. bankruptcy code and state insolvency laws may interfere with or
affect a lender's ability to realize upon collateral and/or to enforce a
deficiency judgment. For example, under the U.S. bankruptcy code, virtually all
actions, including foreclosure actions and deficiency judgment proceedings,
affecting the debtor are automatically stayed upon the filing of the bankruptcy
petition. It is not unusual for the debtor to make no interest or principal
payments during the course of the bankruptcy case. The delay and the
consequences of the delay caused by an automatic stay can be significant. Also,
the filing of a petition in bankruptcy by or on behalf of a junior lienholder
may stay the senior lender from taking action to foreclose out the junior lien.
Under the U.S. bankruptcy code, the amount and terms of a mortgage loan
secured by a lien on property of the debtor may be modified under certain
circumstances, provided that substantive and procedural safeguards protective of
the lender are met. A bankruptcy court may, among other things:
o reduce the secured portion of the outstanding amount of the loan to the
then-current value of the property, which would leave the lender a general
unsecured creditor for the difference between the then-current value of the
property and the outstanding balance of the loan;
o reduce the amount of each scheduled payment, by means of a reduction in the
rate of interest and/or an alteration of the repayment schedule, with or
without affecting the unpaid principal balance of the loan;
o extend or shorten the term to maturity;
o permit the debtor to cure a mortgage loan default by paying the
arrearage over a number of years; or
o permit the debtor, through its rehabilitative plan, to reinstate a mortgage
loan payment schedule even if the lender has obtained a final judgment of
foreclosure prior to the filing of the debtor's petition.
Federal bankruptcy law may also have the effect of interfering with or
blocking the ability of a secured lender to enforce the borrower's assignment of
rents and leases related to the mortgaged property. Even if the lender is
ultimately allowed to enforce the assignment, the legal proceedings necessary to
resolve the issue could be time-consuming, and cause delays in the lender's
receipt of the rents
The commencement of a bankruptcy case involving the tenant under a lease
of the related property may impair a borrower's ability to make payment on a
mortgage loan. Under the U.S. bankruptcy code, the filing of a petition in
bankruptcy by or on behalf of a tenant results in a stay in bankruptcy against
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
tenant's bankruptcy petition. In addition, the U.S. bankruptcy code generally
provides that a trustee or debtor-in-possession may, subject to approval of the
court:
o assume the lease and retain it or assign it to a third party; or
o reject the lease.
If the lease is assumed, the trustee, 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. These remedies may be insufficient, and any assurances provided to
the lessor may be inadequate. If the debtor rejects the lease, the lessor will
be treated, except potentially to the extent of any security deposit, as an
unsecured creditor with respect to its claim for damages for termination of the
lease. The U.S. bankruptcy code also limits a lessor's damages for lease
rejection to:
o the rent under the lease without regard to acceleration for the greater of
one year, or 15%, not to exceed three years, of the remaining term of the
lease; plus
o unpaid rent to the earlier of the surrender of the property or the
tenant's bankruptcy filing.
Environmental Considerations
A lender may be subject to environmental risks when taking a security
interest in real property. Of particular concern may be properties that are or
have been used for industrial, manufacturing, military or disposal activity.
These environmental risks include the possible diminution of the value of a
contaminated property or, as discussed below, potential liability for clean-up
costs or other remedial actions. These remedial or clean-up costs could exceed
the value of the property or the amount of the lender's loan. In certain
circumstances, a lender may decide to abandon a contaminated mortgaged
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property as collateral for its loan rather than foreclose and risk liability for
clean-up costs.
Superlien Laws
Under the laws of many states, contamination on a property may give rise
to a lien on the property for clean-up costs. In several states, such a lien has
priority over all existing liens, including those of existing mortgages. In
these states, the lien of a mortgage may lose its priority to such a
"superlien".
CERCLA
The federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980, commonly referred to as "CERCLA", imposes strict
liability on present and past "owners" and "operators" of contaminated real
property for the costs of clean-up. A secured lender may be liable as an "owner"
or "operator" of a contaminated mortgaged property if agents or employees of the
lender have participated in the management of the mortgaged property or the
operations of the borrower. Liability may exist even if the lender did not cause
or contribute to the contamination and regardless of whether the lender has
actually taken possession of the mortgaged property through foreclosure, deed in
lieu of foreclosure or otherwise. Moreover, liability is not limited to the
original or unamortized principal balance of a loan or to the value of the
mortgaged property. 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 the so-called "secured creditor exemption".
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
amended, among other things, the provisions of CERCLA with respect to lender
liability and the secured creditor exemption. This Act offers substantial
protection to lenders by defining the activities in which a lender can engage
without losing the benefit of the secured creditor exemption. In order for a
lender to be deemed to have participated in the management of a mortgaged
property, the lender must actually participate in the operational affairs of the
property of the borrower. The Act provides that "merely having the capacity to
influence, or unexercised right to control" operations does not constitute
participation in management. A lender will lose the protection of the secured
creditor exemption only if:
o it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices; or
o assumes day-to-day management of operational functions of the mortgaged
property.
The Act also provides that a lender will continue to have the benefit of
the secured creditor exemption even if it purchases a mortgaged property at a
foreclosure sale or accepts a deed-in-lieu of foreclosure, provided that the
lender seeks to sell the mortgaged property at the earliest practicable
commercially reasonable time on commercially reasonable terms.
Certain Other Federal and State Laws
Many states have statutes similar to CERCLA, and not all those statutes
provide for a secured creditor exemption. In addition, under federal law, there
is potential liability relating to hazardous wastes and underground storage
tanks under the federal Resource Conservation and Recovery Act.
Certain federal, state and local laws, regulations and ordinances govern
the management, removal, encapsulation or disturbance of asbestos-containing
materials. These laws, as well as common law standards, may impose liability for
releases of or exposure to asbestos-containing materials and may permit third
parties to seek recovery from owners or operators of real properties for
personal injuries associated with such releases.
Federal law requires owners of residential housing constructed prior to
1978 to disclose to potential residents or purchasers any known lead-based paint
hazards and imposes treble damages for any failure to disclose. In addition, the
ingestion of lead-based paint chips or dust particles by children can result in
lead poisoning. The owner of a property where these circumstances exist may be
held liable for injuries and for the costs of removal or encapsulation of the
lead-based paint.
In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender 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.
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Beyond statute-based environmental liability, there exist common law
causes of action related to hazardous environmental conditions on a property,
such as actions based on nuisance or on toxic tort resulting in death, personal
injury or damage to property. Although it may be more difficult to hold a lender
liable under common law causes of action, unanticipated or uninsured liabilities
of the borrower may jeopardize the borrower's ability to meet its loan
obligations.
Federal, state and local environmental regulatory requirements change
often. It is possible that compliance with a new regulatory requirement could
impose significant compliance costs on a borrower. These costs may jeopardize
the borrower's ability to meet its loan obligations.
Additional Considerations
Remediating hazardous substance contamination at a property can be very
costly. If a lender becomes liable, it can bring an action for contribution
against the owner or operator who created the environmental hazard. However,
that individual or entity may be without substantial assets. Accordingly, it is
possible that the costs could become a liability of the related trust and
occasion a loss to the related certificateholders.
If the operations on a foreclosed property are subject to environmental
laws and regulations, the lender must operate the property in accordance with
those laws and regulations. This compliance may entail substantial expense,
especially in the case of industrial or manufacturing properties.
In addition, a lender may have 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. This
disclosure may decrease the amount that prospective buyers are willing to pay
for the affected property, sometimes substantially.
Environmental Site Assessments
In most cases, an environmental site assessment of each mortgaged property
will have been performed in connection with the origination of the related
mortgage loan or at some time prior to the issuance of the related series of
offered certificates. Environmental site assessments, however, vary considerably
in their content, quality and cost. Even when adhering to good professional
practices, environmental consultants will sometimes not detect significant
environmental problems.
Due-on-Sale and Due-on-Encumbrance Provisions
Certain of the mortgage loans may contain "due-on-sale" and
"due-on-encumbrance" clauses that purport to permit the lender to accelerate the
maturity of the loan if the borrower transfers or encumbers the mortgaged
property. In recent years, court decisions and legislative actions placed
substantial restrictions on the right of lenders to enforce these clauses in
many states. However, the Garn-St. Germain Depository Institutions Act of 1982
generally preempts state laws that prohibit the enforcement of due-on-sale
clauses and permits lenders to enforce these clauses in accordance with their
terms, subject to certain limitations prescribed in that Act and the regulations
promulgated under the Act.
Junior Liens; Rights of Holders of Senior Liens
Any of the trusts may include mortgage loans secured by junior liens, and
the loans secured by the related senior liens may not be included in that trust.
The primary risk to holders of mortgage loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related senior liens to satisfy fully both the senior loans
and the junior loan.
In the event that a holder of a senior lien forecloses on a mortgaged
property, the proceeds of the foreclosure or similar sale will be applied in
accordance with the law of the state in which the property is located.
Generally, that order is as follows:
o first, to the payment of court costs and fees in connection with the
foreclosure;
o second, to real estate taxes;
o third, in satisfaction of all principal, interest, any prepayment or
acceleration penalties, and any other sums due and owing to the holder of the
senior liens; and
o last, in satisfaction of all principal, interest, any prepayment and
acceleration penalties and any other sums due and owing to the holder of the
junior mortgage loan.
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Subordinate Financing
The terms of certain of the mortgage loans may not restrict the borrower
from using the mortgaged property as security for one or more additional loans,
or the restrictions may be unenforceable. If a borrower encumbers a mortgaged
property with one or more junior liens, the senior lender is exposed to the
following additional risks:
o the borrower may have difficulty servicing and repaying multiple loans;
o if the subordinate financing permits recourse to the borrower, as is
frequently the case, and the senior loan does not permit recourse, a borrower
may have more incentive to repay sums due on the subordinate loan;
o acts of the senior lender that prejudice the junior lender or impair the
junior lender's security, such as the senior lender agreeing to an increase
in the principal amount of or the interest rate payable on the senior loan,
may create a superior priority in favor of the junior lender;
o if the borrower defaults on the senior loan and/or any junior loan or loans,
the existence of junior loans and actions taken by junior lenders can impair
the security available to the senior lender and can interfere with or delay
the taking of action by the senior lender; and
o the bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
Default Interest and Limitations on Prepayments
Notes and mortgages may contain provisions that require the borrower to
pay a late charge or additional interest if payments are late. They may also
contain provisions that prohibit prepayments for a specified period and/or
condition prepayments upon the borrower's payment of prepayment premium, fee or
charge. In certain states, there are or may be specific limitations on the late
charges that a lender may collect from a borrower for delinquent payments.
Certain states also limit the amounts that a lender may collect from a borrower
as an additional charge if the loan is prepaid. In addition, the enforceability
of provisions that provide for prepayment premiums, fees and charges upon an
involuntary prepayment is unclear under the laws of many states.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980 provides that state usury limitations do not apply to certain types
of residential (including multifamily) first mortgage loans originated by
certain lenders after March 31, 1980. Title V authorized any state to re-impose
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 rejected, any state may adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to re-impose interest rate limits and/or to limit
discount points or other charges.
Certain Laws and Regulations
Multifamily and commercial properties are subject to compliance with
various federal, state and local statutes and regulations. Failure to comply,
together with an inability to remedy any failure, could result in material
diminution in the value of a mortgaged property.
Americans with Disabilities Act
Under Title III of the Americans with Disabilities Act of 1990 and the
related rules, public accommodations, such as hotels, restaurants, shopping
centers, hospitals, schools and social service center establishments, must
remove architectural and communication barriers that are structural in nature
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, the
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 borrower in
its capacity as owner or landlord, the ADA may also impose requirements on a
foreclosing lender who succeeds to the interest of the borrower as owner or
landlord. Furthermore, since the "readily achievable" standard may vary
depending on the financial condition of the owner or landlord, a foreclosing
lender who is financially more capable than the borrower of complying with the
requirements of the ADA may be subject to more
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stringent requirements than those to which the borrower is subject.
Soldiers' and Sailors' Civil Relief Act of 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, a
borrower who enters military service after the origination of a loan, including
a borrower who was in reserve status and is called to active duty after
origination of the mortgage loan, may not be charged interest, including fees
and charges, above an annual rate of 6% during the period of the borrower's
active duty status, unless a court orders otherwise upon application of the
lender. The Act applies to individuals who are members of the Army, Navy, Air
Force, Marines, National Guard, Reserves, Coast Guard and officers of the U.S.
Public Health Service assigned to duty with the military. Because the Act
applies to individuals who enter military service, including reservists who are
called to active duty, after origination of the related mortgage loan, no
information can be provided as to the number of loans with individuals as
borrowers that may be affected by the Act.
Application of the Act would adversely affect, for an indeterminate period
of time, the ability of a master servicer or special servicer to collect the
full amount of interest on certain of the mortgage loans underlying the offered
certificates. Any shortfalls in interest collections resulting from the
application of the Act would result in a reduction of the amounts distributable
to the holders of certificates of the related series, and would not be covered
by advances or, unless otherwise specified in the related prospectus supplement,
any form of credit support provided in connection with the certificates. In
addition, the Act imposes limitations that would impair the ability of a master
servicer or special servicer to foreclose on an affected mortgage loan during
the borrower's period of active duty status and, under certain circumstances,
during an additional three-month period after the active duty status ceases.
Forfeitures in Drug and RICO Proceedings
Federal law provides that the government can seize property owned by
persons convicted of drug-related crimes or criminal violations of the Racketeer
Influenced and Corrupt Organizations, or "RICO" statute, if the property was
used in, or purchased with, the proceeds of those crimes. Under procedures
contained in the comprehensive Crime Control Act of 1984, the government may
seize the property even before conviction. The government must publish notice of
the forfeiture proceeding and give notice to all parties "known to have an
alleged interest in the property", including the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that:
o its mortgage was executed and recorded before commission of the crime
upon which the forfeiture is based; or
o the lender was, at the time of execution of the mortgage, "reasonably without
cause to believe" that the property was used in, or purchased with the
proceeds of, illegal drug or RICO activities.
FEDERAL INCOME TAX CONSEQUENCES
This is a general discussion of the material federal income tax
consequences of owning the offered certificates. To the extent it relates to
matters of law or legal conclusions, it represents the opinion of our counsel,
subject to any qualifications as may be expressed in this discussion. Unless
otherwise specified in the related prospectus supplement, our counsel for each
series will be Morrison & Hecker L.L.P.
This discussion is directed to certificateholders that hold the offered
certificates as "capital assets" within the meaning of Section 1221 of the
Internal Revenue Code of 1986 (for purposes of this "Federal Income Tax
Consequences" section and the "ERISA Considerations" section, the "Code"). It
does not purport to discuss all federal income tax consequences that may be
relevant to owners of the offered certificates, particularly as to investors
subject to special treatment under the Code, such as:
o banks;
o insurance companies; and
o foreign investors.
Further, this discussion and the opinion referred to below are based on
authorities that can change, or be interpreted differently, with possible
retroactive effect. No rulings have been or will be sought from the Internal
Revenue Service with respect to any of the federal income tax consequences
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discussed below. Accordingly, the IRS may take contrary positions.
Investors 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:
o 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
o is directly relevant to the determination of an entry on a tax return.
Accordingly, even if this discussion addresses an issue regarding the tax
treatment of the owner of certificates, investors should consult their own tax
advisors regarding that issue. Investors should do so not only as to federal
taxes, but also as to state and local taxes. See "State and Other Tax
Consequences".
The following discussion addresses securities of three general types:
o certificates representing interests in a trust, or a portion of a trust, as
to which a designated party under the related Governing Document (the "REMIC
Administrator") will make a real estate mortgage investment conduit ("REMIC")
election under Sections 860A through 860G of the Code;
o certificates representing interests in a trust, or portion of a trust, as to
which a fixed asset securitization investment trust ("FASIT") election is
made under Section 860L of the Code; and
o certificates ("Grantor Trust Certificates") representing interests in a trust
or a portion of a trust (a "Grantor Trust Fund"), as to which no REMIC or
FASIT election will be made.
The prospectus supplement for each series 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. If so specified in the applicable prospectus
supplement, the portion of a trust fund as to which a REMIC election is not made
may be treated as either a grantor trust for federal income tax purposes or a
FASIT. For purposes of this tax discussion, references to a "certificateholder"
or a "holder" are to the beneficial owner of a certificate.
The following discussion is limited in applicability to the offered
certificates. Moreover, this discussion applies only to the extent that mortgage
assets held by a trust consist solely of mortgage loans. To the extent that
other trust assets, including mortgage-backed securities and government
securities, are to be held by a trust, the tax consequences associated with the
inclusion of such assets will be disclosed 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 under such sections (the "OID
Regulations"). It is also based on the rules governing REMICs in Sections
860A-860G of the Code and in the Treasury regulations issued under those
statutes (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the offered certificates.
REMICs
Classification of REMICs
With respect to each series as to which the REMIC Administrator will make
a REMIC election, our counsel will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Governing Document
and certain other documents, and subject to certain assumptions set forth
therein, the related trust, or each applicable portion of the trust, will
qualify as a REMIC and the REMIC Certificates offered with respect thereto will
be considered to evidence ownership of "regular interests" (such certificates,
the "REMIC Regular Certificates") or the sole class of "residual interests"
(such certificates, the "REMIC Residual Certificates") in that REMIC within the
meaning of sections 860A-860G of the Code.
Qualification as a REMIC
In order for the trust to qualify as a REMIC, there must be ongoing
compliance on the part of the trust with the requirements set forth in the Code.
The trust must fulfill an asset test, which requires that no more than a de
minimis portion of its assets, as of the close of the third calendar month
beginning after the "Startup Day" (which for purposes of this discussion
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is the date of issuance of the certificates) and at all times thereafter, may
consist of assets other than "qualified mortgages" and "permitted investments."
The REMIC Regulations provide a "safe harbor" pursuant to which the de minimis
requirement is met if at all times the total adjusted basis of the nonqualified
assets is less than 1% of the total adjusted basis of all the REMIC's assets. An
entity that fails to meet the safe harbor may nevertheless demonstrate that it
holds no more than a de minimis amount of nonqualified assets. A REMIC also must
provide "reasonable arrangements" to prevent its residual interest from being
held by "disqualified organizations" and applicable tax information to
transferors or agents that violate this requirement. Accordingly, the Governing
Document for each series will contain provisions intended to assure that the
asset and reasonable arrangements tests will be met at all times that the
Certificates are outstanding. See "--Taxation of Owners of REMIC Residual
Certificates--Tax and Restrictions on Transfer of REMIC Residual Certificates to
Certain Organizations."
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 after that
date pursuant to a fixed-price contract in effect on the Startup Day. Qualified
mortgages include whole mortgage loans if, in general:
o the fair market value of the real property security (including buildings and
structural components) 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
o 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 the first bullet point 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:
o in exchange for any qualified mortgage within a three-month period
thereafter; or
o in exchange for a "defective obligation" within a two-year period
thereafter.
A "defective obligation" includes:
o a mortgage in default or as to which default is reasonably foreseeable;
o a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC pool has been breached;
o a mortgage that was fraudulently procured by the mortgagor; and
o 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 the last bullet point
and 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 discussion, 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 to 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 the property is acquired, with
extensions granted by the IRS.
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 may lose its status as a REMIC for that
year and thereafter. In that event, such entity may be
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taxable as a corporation, and the related REMIC Certificates may not be accorded
the status or given the tax treatment described below. 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 related trust's
income for the period in which the requirements for the status are not
satisfied. The Governing Document with respect to each REMIC will include
provisions designed to maintain the related trust's status as a REMIC under the
Code. It is not anticipated that the status of any trust as a REMIC will be
inadvertently terminated.
Characterization of Investments in REMIC Certificates
If 95% or more of the assets of the REMIC qualify for any of the following
characterizations at all times during a calendar year, the REMIC Certificates
will qualify for the corresponding status in their entirety for that calendar
year:
o "real estate assets" within the meaning of Section 856(c)(5)(B) of the
Code, and
o assets described in Section 7701(a)(19)(C) of the Code (to the extent that
the REMIC assets constitute mortgages on property not used for residential or
certain other prescribed purposes, the REMIC Certificates will not be treated
as assets qualifying under Section 7701(a)(19)(C)).
Interest (including original issue discount) on the REMIC Regular
Certificates and income allocated to the REMIC Residual Certificates will be
interest described in Section 856(c)(3)(B) of the Code to the extent that such
certificates are treated as "real estate assets" within the meaning of Section
856(c)(5)(B) of the Code. If less than 95% of the REMIC's assets consist of
assets described the preceding paragraph, then a REMIC certificate will qualify
for the corresponding tax treatment in such categories in the proportion that
such REMIC assets are qualifying assets.
In addition, the REMIC Regular Certificates will be:
o "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Code in the hands of another REMIC, and
o "permitted assets" under Section 860L(c)(1)(G) for a "financial asset
securitization investment trust" or "FASIT".
The REMIC Administrator will determine the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the Code
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
REMIC Administrator will report those determinations to certificateholders in
the manner and at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to mortgage loans,
payments on mortgage loans held pending distribution on the REMIC Certificates
and any property acquired by foreclosure held pending sale, and may include
amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale, and amounts in reserve accounts would be
considered to be part of the mortgage loans, or whether those assets, to the
extent not invested in assets described in the foregoing sections of the Code,
otherwise would receive the same treatment as the mortgage loans for purposes of
all of the foregoing sections of the Code. In addition, in some instances
mortgage loans may not be treated entirely as assets described in the foregoing
sections of the Code. If so, we will describe in the related prospectus
supplement the mortgage loans that may not be so treated. Treasury regulations
do provide, however, that cash received from payments on mortgage loans held
pending distribution is considered part of the mortgage loans for purposes of
Section 856(c)(4)(A) of the Code.
To the extent an offered certificate represents ownership of an interest
in any mortgage loan that is secured in part by the related borrower's interest
in an account containing any holdback of loan proceeds, a portion of the
certificate may not represent ownership of assets described in Section
7701(a)(19)(C) of the Code and "real estate assets" under Section 856(c)(4)(A)
of the Code. Also the interest on the certificate may not constitute "interest
on obligations secured by mortgages on real property" within the meaning of
Section 856(c)(3)(B) of the Code.
Finally, holders of REMIC Certificates should be aware that:
o REMIC Certificates held by a regulated investment company will not
constitute
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"government securities" within the meaning of Code Section 851(b)(3)(A)(i);
and
o REMIC 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).
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate elections
may be made to treat designated portions of the related trust as separate REMICs
("Tiered REMICs") for federal income tax purposes. As to each such series of
REMIC Certificates, assuming compliance with all provisions of the related
Governing Document, the Tiered REMICs will each qualify as a REMIC, and the
REMIC Certificates issued by the Tiered REMICs will be considered "regular
interests" or the sole class of "residual interests" to evidence ownership of
REMIC Regular Certificates or REMIC Residual Certificates in the related REMIC
within the meaning of the Code.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(B) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Unless
otherwise provided herein, interest on the REMIC Regular Certificates will be
taxed as ordinary income to the holders of such Certificates using the accrual
method of accounting, regardless of the certificateholder's normal methods of
accounting.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the "constant yield" method described below, in advance of the
receipt of the cash attributable to such income. In addition, Section 1272(a)(6)
of the Code provides special rules applicable to REMIC Regular Certificates and
certain other debt instruments issued with original issue discount. Regulations
have not been issued under that section. Further, the application of the OID
Regulations to the REMIC Regular Certificates remains unclear in other respects
because the OID Regulations either do not address, or are subject to varying
interpretation with regard to, several relevant issues.
The Code requires that a reasonable prepayment assumption be used with
respect to mortgage loans held by a REMIC in computing the accrual of original
issue discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations that have not yet been issued. The Conference Committee
Report accompanying the Tax Reform Act of 1986 (the "Committee Report")
indicates that Congress intended that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate will be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption used in reporting original issue discount
for each series of REMIC Regular Certificates will be consistent with this
standard and will be disclosed in the related prospectus supplement. However,
neither we nor any other person will make any representation that the mortgage
loans will in fact prepay at a rate conforming to the prepayment assumption or
at any other rate or that the prepayment assumption will not be challenged by
the IRS on audit.
The original issue discount, if any, on a REMIC Regular Certificate will
be the excess of its stated redemption price at maturity over its issue price.
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The issue price of a particular class of REMIC Regular Certificates will
be the first cash price at which a substantial amount of REMIC Regular
Certificates of that class is sold to the public (excluding sales to bond
houses, brokers and underwriters). If less than a substantial amount of a
particular class of REMIC Regular Certificates is sold for cash on or prior to
the related date of initial issuance, the issue price for such class will be its
fair market value on the related issue date. The issue price of a REMIC Regular
Certificate also includes the amount paid by an initial certificateholder for
accrued interest that relates to a period prior to the issue date of the REMIC
Regular Certificate.
Under the OID Regulations, the stated redemption price of a REMIC Regular
Certificate is equal to the total of all payments to be made on such certificate
other than "qualified stated interest". "Qualified stated interest" is interest
that is unconditionally payable at least annually during the entire term of the
instrument, at:
o a "single fixed rate";
o a "qualified floating rate";
o an "objective rate";
o a combination of a single fixed rate and one or more "qualified floating
rates" or one "qualified inverse floating rate"; or
o a combination of "qualified floating rates" that can reasonably be expected
to have approximately the same values throughout the term of the instrument.
In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such certificates, we will describe in the related prospectus supplement the
manner in which these rules will be applied with respect to those certificates
in preparing information returns to the certificateholders and the IRS.
Certain classes of the REMIC Regular Certificates may provide for the
first interest payment with respect to those certificates to be made more than
one month after the date of issuance, a period which is longer than the
subsequent monthly intervals between interest payments. Assuming the "accrual
period" (as defined below) for original issue discount is each monthly period
that ends on a payment date, in some cases, as a consequence of this "long first
accrual period", some or all interest payments may be required to be included in
the stated redemption price of the REMIC Regular Certificate and accounted for
as original issue discount. Because interest on REMIC Regular Certificates must
in any event be accounted for under an accrual method, applying this analysis
would result in only a slight difference in the timing of the inclusion in
income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first payment date
is computed with respect to a period that begins prior to the related issue
date, a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns provided to
the certificateholders and the IRS will be based on the position that the
portion of the purchase price paid for the interest accrued with respect to
periods prior to the related issue date is treated as part of the overall cost
of that REMIC Regular Certificate, and not as a separate asset the cost of which
is recovered entirely out of interest received on the next payment date, and
that portion of the interest paid on the first payment date in excess of
interest accrued for a number of days corresponding to the number of days from
the related issue date to the first payment date should be included in the
stated redemption price of that REMIC Regular Certificate. However, the OID
Regulations state that all or some portion of such accrued interest may be
treated as a separate asset the cost of which is recovered entirely out of
interest paid on the first payment date. It is unclear how an election to do so
would be made under the OID Regulations and whether that election could be made
unilaterally by a certificateholder.
Notwithstanding the general definition, original issue discount on a REMIC
Regular Certificate will be considered zero if it is less than a de minimis
amount determined under the Code. Original issue discount on a REMIC Regular
Certificate will be considered to be de minimis if it is less than 0.25% of the
stated redemption price of the REMIC Regular Certificate multiplied by its
weighted average maturity. For this purpose, the weighted average maturity of
the REMIC Regular Certificate is computed as the sum of the amounts determined,
as to each payment included in the stated redemption price of such REMIC Regular
Certificate, by multiplying:
o the number of complete years, rounding down for partial years, from the issue
date until such payment is expected to be made, presumably
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taking into account the relevant prepayment assumption, by
o a fraction, the numerator of which is the amount of the payment, and the
denominator of which is the stated redemption price at maturity of such REMIC
Regular Certificate.
Under the OID Regulations, original issue discount of only a de minimis
amount, other than de minimis original issue discount attributable to a
so-called "teaser" interest rate or an initial interest holiday, will be
included in income as each payment of stated principal is made, based on the
product of:
o the total amount of such de minimis original issue discount; and
o a fraction, the numerator of which is the amount of such principal
payment and the denominator of which is the outstanding stated principal
amount of the REMIC Regular Certificate.
The OID Regulations also would permit a certificateholder to elect to
accrue de minimis original issue discount into income currently based on a
constant yield method. See "-Taxation of Owners of REMIC Regular
Certificates-Market Discount" below for a description of this election under the
OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of
a de minimis amount, the holder of that certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held the REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", a calculation will be made of the portion of
the original issue discount that accrued during such accrual period. Unless we
state otherwise in the related prospectus supplement, each accrual period will
begin on a date that corresponds to a payment date, or in the case of the first
period, begins on the issue date, and ends on the day preceding the immediately
following payment date. The portion of original issue discount that accrues in
any accrual period will equal the excess, if any, of:
o the sum of:
(A) the present value, as of the end of the accrual period, of all of the
distributions remaining to be made on the REMIC Regular Certificate, if
any, in future periods; and
(B) the distributions made on such REMIC Regular Certificate during the
accrual period of amounts included in the stated redemption price, over
the adjusted issue price of such REMIC Regular Certificate at the
beginning of the accrual period.
The present value of the remaining distributions referred to in the
preceding sentence will be calculated:
o assuming that distributions on the REMIC Regular Certificate will be received
in future periods based on the mortgage loans being prepaid at a rate equal
to the applicable prepayment assumption;
o using a discount rate equal to the original yield to maturity of the
certificate; and
o taking into account events, including actual prepayments, that have occurred
before the close of the accrual period.
For these purposes, the original yield to maturity of the certificate will
be calculated based on its issue price and assuming that distributions on the
certificate will be made in all accrual periods based on the mortgage loans
being prepaid at a rate equal to the applicable prepayment assumption. The
adjusted issue price of a REMIC Regular Certificate at the beginning of any
accrual period will equal the issue price of the certificate, increased by the
total amount of original issue discount that accrued with respect to the
certificate in prior accrual periods, and reduced by the amount of any
distributions made on the certificate in prior accrual periods other than
amounts of qualified stated interest. The original issue discount accruing
during any accrual period, computed as described above, will be allocated
ratably to each day during the accrual period to determine the daily portion of
original issue discount for such day. Although original issue discount will be
reported to certificateholders based on the applicable prepayment assumption,
there is no assurance that the mortgage loans will be prepaid at that rate and
no representation is made to the certificateholders that mortgage loans will be
prepaid at that rate or at any other rate.
A subsequent purchaser of a REMIC Regular Certificate that purchases the
certificate at a cost, excluding any portion of that cost attributable to
accrued qualified stated interest, less than its
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remaining stated redemption price will also be required to include in gross
income the daily portions of any original issue discount with respect to the
certificate. However, each daily portion will be reduced, if that cost is in
excess of its "adjusted issue price", in proportion to the ratio such excess
bears to the total original issue discount remaining to be accrued on the REMIC
Regular Certificate. The adjusted issue price of a REMIC Regular Certificate on
any given day between payment dates equals the sum of:
o the adjusted issue price, or, in the case of the first accrual period, the
issue price, of that certificate at the beginning of the accrual period which
includes such day; plus
o the daily portions of original issue discount for all days during the accrual
period prior to such day.
A holder who pays an acquisition premium instead may elect to accrue
original issue discount by treating the purchase as a purchase at original
issue.
If the foregoing method for computing original issue discount results in a
negative amount of original issue discount as to any accrual period with respect
to a REMIC Regular Certificate, the amount of original issue discount allocable
to that accrual period will be zero. That is, no current deduction of the
negative amount will be allowed to the holder of the certificate. The holder
will instead only be permitted to offset the negative amount against future
positive original issue discount, if any, attributable to that certificate.
Although not free from doubt, it is possible that a certificateholder may be
permitted to deduct a loss to the extent his or her basis in the certificate
exceeds the maximum amount of payments the certificateholder could ever receive
with respect to the certificate. However, any such loss may be a capital loss,
which is limited in its deductibility. The foregoing considerations are
particularly relevant to Stripped Interest Certificates, which can have negative
yields under certain circumstances that are not default related. A "Stripped
Interest Certificate" is a certificate that entitles the holder to payment of
interest, with disproportionate, little or no payments of principal.
Market Discount
A certificateholder that purchases a REMIC Regular Certificate at a market
discount, other than a de minimis amount, in the case of a REMIC Regular
Certificate issued without original issue discount, at a purchase price less
than its remaining stated principal amount, or in the case of a REMIC Regular
Certificate issued with original issue discount, at a purchase price less than
its adjusted issue price, will recognize gain upon receipt of each distribution
representing some or all of the stated redemption price. In particular, under
Section 1276 of the Code such a certificateholder generally must allocate the
portion of each distribution representing some or all of the stated redemption
price first to accrued market discount not previously included in income, and to
recognize ordinary income to that extent. A certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis in accordance with the foregoing. If made, this election
will apply to all market discount bonds acquired by the certificateholder on or
after the first day of the first taxable year to which the election applies.
The OID Regulations also permit a certificateholder to elect to accrue all
interest and discount, including de minimis market or original issue discount,
in income as interest, and to amortize premium, based on a constant yield
method. If a certificateholder makes this election with respect to a REMIC
Regular Certificate with market discount, the certificateholder would be deemed
to have made an election to include currently market discount in income with
respect to all other debt instruments having market discount that the
certificateholder acquires during the taxable year of the election or
thereafter, and possibly previously acquired instruments. Similarly, a
certificateholder that made this election for a certificate that is acquired at
a premium would be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that the
certificateholder owns or acquires. See "-Taxation of Owners of REMIC Regular
Certificates-Premium" below. Each of the elections in this and the preceding
paragraph to accrue interest, discount and premium with respect to a certificate
on a constant yield method or as interest would be irrevocable except with the
approval of the IRS.
However, market discount with respect to a REMIC Regular Certificate will
be considered to be zero for purposes of Section 1276 of the Code if the market
discount is less than 0.25% of the remaining stated redemption price of that
REMIC Regular Certificate multiplied by the number of complete years to maturity
remaining after the date of its purchase. In interpreting a similar rule with
respect to original issue discount on obligations payable in installments, the
OID Regulations refer to the weighted average maturity of obligations. It is
likely
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that the IRS would apply the same rule with respect to market discount,
presumably taking into account the applicable prepayment assumption. If market
discount is treated as de minimis under this rule, it appears that the actual
discount would be treated in a manner similar to original issue discount of a de
minimis amount. See "-Taxation of Owners of REMIC Regular Certificates-Original
Issue Discount" above. Such treatment would result in discount being included in
income at a slower rate than discount would be required to be included in income
using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. The Treasury Department has not yet issued treasury regulations
implementing the market discount rules; therefore, you should consult your own
tax advisors regarding the application of these rules and the advisability of
making any of the elections allowed under Code Sections 1276 through 1278. Until
the Treasury Department issues regulations, certain rules described in the
Committee Report apply. The Committee Report indicates that in each accrual
period market discount on REMIC Regular Certificates should accrue, at the
certificateholder's option:
o on the basis of a constant yield method;
o in the case of a REMIC Regular Certificate issued without original issue
discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to
the total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period; or
o in the case of a REMIC Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining
market discount as the original issue discount accrued in the accrual period
bears to the total original issue discount remaining on the REMIC Regular
Certificate at the beginning of the accrual period.
The prepayment assumption used in calculating the accrual of original
issue discount is also used in calculating the accrual of market discount. To
the extent that REMIC Regular Certificates provide for monthly or other periodic
distributions throughout their term, the effect of these rules may be to require
market discount to be includible in income at a rate that is not significantly
slower than the rate at which that discount would accrue if it were original
issue discount. Moreover, in any event a holder of a REMIC Regular Certificate
generally will be required to treat a portion of any gain on the sale or
exchange of that certificate as ordinary income to the extent of the market
discount accrued to the date of disposition under one of the foregoing methods,
less any accrued market discount previously reported as ordinary income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry a REMIC Regular Certificate purchased with market discount.
For these purposes, the de minimis rule referred to above applies. Any such
deferred interest expense would not exceed the market discount that accrues
during that taxable year and is, in general, allowed as a deduction not later
than the year in which the market discount is includible in income. If a holder,
however, has elected to include market discount in income currently as it
accrues, the interest deferral rule described above would not apply.
Premium
A REMIC Regular Certificate purchased at a cost that is greater than its
remaining stated redemption price at maturity will be considered to be purchased
at a premium. For the purposes of the preceding sentence, any portion of that
cost attributable to accrued qualified stated interest at maturity is excluded.
The holder of such a REMIC Regular Certificate may elect under Section 171 of
the Code to amortize this premium under the constant yield method over the life
of the certificate. If a holder elects to amortize the premium, that premium
would be amortized on a constant yield method and would be applied as an offset
against qualified stated interest (and not as a separate deduction item). If
made, such an election will apply to all debt instruments having amortizable
bond premium that the holder owns or subsequently acquires. The OID Regulations
also permit certificateholders to elect to include all interest, discount and
premium in income based on a constant yield method, further treating the
certificateholder as having made the election to amortize premium generally. See
"-Taxation of Owners of REMIC Regular Certificates-Market Discount" above. The
Committee report states that the same rules that apply to accrual of market
discount will also apply in amortizing bond premium
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under Section 171 of the Code. These rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether those certificates have original issue
discount.
The Treasury Department issued final Treasury regulations in December 1997
which address the amortization of bond premiums (the "Premium Amortization
Regulations"). The preamble to the Premium Amortization 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
Amortization 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 Amortization 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 Amortization 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.
Realized Losses
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire the certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their certificates become wholly or partially worthless as the
result of one or more realized losses on the mortgage loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until that holder's certificate becomes wholly worthless
(that is, until its principal balance has been reduced to zero), and that the
loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to that certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the related mortgage loans, until it can be established that
any such reduction ultimately will not be recoverable. As a result, the amount
of taxable income reported in any period by the holder of a REMIC Regular
Certificate could exceed the amount of economic income actually realized by the
holder in that period. Although the holder of a REMIC Regular Certificate
eventually will recognize a loss or reduction in income attributable to
previously accrued and included income that, as the result of a realized loss,
ultimately will not be realized, the law is unclear with respect to the timing
and character of that loss or reduction in income.
Taxation of Owners of REMIC Residual Certificates
General
Although a REMIC is a separate entity for federal income tax purposes, a
REMIC generally is not subject to entity-level taxation, except with regard to
income from prohibited transactions and certain other transactions. See
"-Prohibited Transactions Tax and Other Taxes" below. Rather, the taxable income
or net loss of a REMIC is generally taken into account by the holder of the
REMIC Residual Certificates. Accordingly, the REMIC Residual Certificates will
be subject to tax rules that differ significantly from those that would apply if
the REMIC Residual Certificates were treated for federal income tax purposes as
direct ownership interests in the mortgage loans or as debt instruments issued
by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
prospectus supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on that day. Any amount included in the gross income or
allowed as a loss of
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any REMIC Residual Certificateholder by virtue of this paragraph will be treated
as ordinary income or loss. Ordinary income derived from the REMIC Residual
Certificates will be "portfolio income" for taxpayers subject to the Code
Section 469 limitation or the deductibility of "passive losses." The taxable
income of the REMIC will be determined under the rules described below in
"-Taxable Income of the REMIC" and will be taxable to the REMIC Residual
Certificateholders without regard to the timing or amount of cash distributions
by the REMIC until the REMIC's termination.
A holder of a REMIC Residual Certificate that purchased the certificate
from a prior holder also will be required to report on its federal income tax
return amounts representing its daily share of the taxable income or net loss of
the REMIC for each day that it holds that REMIC Residual Certificate. Those
daily amounts generally will equal the amounts of taxable income or net loss
determined as described above. The Committee Report indicates that certain
modifications of the general rules may be made, by regulations, legislation or
otherwise to reduce or increase the income of a REMIC Residual Certificateholder
that purchased that REMIC Residual Certificate from a prior holder of that
certificate at a price greater than (or less than) the adjusted basis (as
defined below) such REMIC Residual Certificate would have had in the hands of an
original holder of the certificate. The REMIC Regulations, however, do not
provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate from the
seller of that certificate in connection with the acquisition of that REMIC
Residual Certificate will be taken into account in determining the income of
that holder for federal income tax purposes. Although it appears likely that any
such payment would be includible in income immediately upon its receipt, the IRS
might assert that the payment should be included in income over time according
to an amortization schedule or according to some other method. Because of the
uncertainty concerning the treatment of these payments, it is recommended that
holders of REMIC Residual Certificates consult their tax advisors concerning the
treatment of these payments for income tax purposes.
The amount of income REMIC Residual Certificateholders must report, or the
tax liability associated with that income, may exceed the amount of cash
distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions",
residual interests without "significant value" and "non-economic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by those REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect those REMIC Residual
Certificateholders' after-tax rate of return. This disparity between income and
distributions may not be offset by corresponding losses or reductions of income
attributable to the REMIC Residual Certificateholder until subsequent tax years
and, then, may not be completely offset due to changes in the Code, tax rates or
character of the income or loss. REMIC Residual Certificates may in some
instances have negative "value". See "Risk Factors-Federal Tax Considerations
Regarding REMIC Residual Certificates".
Taxable Income of the REMIC
The taxable income of the REMIC will equal:
o the income from the mortgage loans and other assets of the REMIC; plus
o any cancellation of indebtedness income due to the allocation of
realized losses to REMIC Regular Certificates; less
o the sum of:
1. the deductions allowed to the REMIC for interest, including original
issue discount;
2. stated interest for Regular Certificates;
3. amortization of any premium with respect to mortgage loans; and
4. servicing fees and other expenses (except as otherwise stated in this
prospectus.)
For purposes of determining its taxable income, the REMIC will have an
initial total basis in its assets equal to the sum of the issue prices of all
REMIC Certificates, or, if a class of REMIC Certificates is not sold initially,
their fair market values. Such total basis will be allocated among the mortgage
loans and the other assets of the REMIC in proportion to their respective fair
market values.
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The issue price of any REMIC Certificates offered by this prospectus will
be determined in the manner described above under "-Taxation of Owners of REMIC
Regular Certificates-Original Issue Discount". The issue price of a REMIC
Certificate received in exchange for an interest in the mortgage loans or other
property will equal the fair market value of those interests in the mortgage
loans or other property. Accordingly, if one or more classes of REMIC
Certificates are retained initially rather than sold, the REMIC Administrator
may be required to estimate the fair market value of those interests in order to
determine the basis of the REMIC in the mortgage loans and other property held
by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to mortgage loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates, that is, under the constant yield method taking into account the
applicable prepayment assumption. However, a REMIC that acquires loans at a
market discount must include such market discount in income currently, as it
accrues, on a constant yield basis. See "-Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing this discount income
that is analogous to that required to be used by a REMIC for mortgage loans with
market discount that it holds.
A mortgage loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis in the mortgage loan, determined
as described in the preceding paragraph, is less than (or greater than) its
stated redemption price. Any such discount will be includible in the income of
the REMIC as it accrues, in advance of receipt of the cash attributable to that
income, under a method similar to the method described above for accruing
original issue discount on the REMIC Regular Certificates. It is anticipated
that each REMIC will elect under Section 171 of the Code to amortize any premium
on the mortgage loans. Premium on any mortgage loan to which that election
applies may be amortized under a constant yield method, presumably taking into
account the applicable prepayment assumption.
A REMIC will be allowed deductions for interest, including original issue
discount, on the REMIC Regular Certificates equal to the deductions that would
be allowed if the REMIC Regular Certificates were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount", except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates described in
that section will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of that class (such excess, "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of that class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount".
As a general rule, a REMIC will determine its taxable income in the same
manner as if it were an individual having the calendar year as its taxable year
and using the accrual method of accounting. However, the REMIC may not take into
account any item of income, gain, loss or deduction allocable to a prohibited
transaction. See "-Prohibited Transactions Tax and Other Taxes" below. Further,
the limitation on miscellaneous itemized deductions imposed on individuals by
Section 67 of the Code will not be applied at the REMIC level. As a result, the
REMIC will be allowed deductions for servicing, administrative and other
non-interest expenses in determining its taxable income. All these expenses will
be allocated as a separate item to the holders of REMIC Certificates, subject to
the limitation of Section 67 of the Code. See "-Possible Pass-Through of
Miscellaneous Itemized Deductions" below. If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, that excess will be the net loss
for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for that REMIC Residual Certificate, increased by amounts included
in the income of the holder of a REMIC Residual Certificate and decreased, but
not below zero, by distributions made, and by net losses allocated, to that
holder.
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A holder of a REMIC Residual Certificate may not take into account any net
loss for any calendar quarter to the extent the net loss exceeds the holder's
adjusted basis in its REMIC Residual Certificate as of the close of such
calendar quarter, determined without regard to that net loss. Any loss that is
not currently deductible by reason of this limitation may be carried forward
indefinitely to future calendar quarters and, subject to the same limitation,
may be used only to offset income from the REMIC Residual Certificate. The
ability of the holders of REMIC Residual Certificates to deduct net losses may
be subject to additional limitations under the Code. We recommend that you
consult your tax advisors as to these limitations.
Any distribution on a REMIC Residual Certificate will be treated as a
nontaxable return of capital to the extent it does not exceed the holder's
adjusted basis in the REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of that REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in those REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in those REMIC
Residual Certificates will initially equal the amount paid for the REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders (and increases in such initial bases either occur after such
distributions or, together with their initial bases, are less than the amount of
such distributions), gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a holder of a REMIC Residual Certificate
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "-Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to that holder and the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original holder see "-Taxation of Owners of REMIC Residual Certificates-General"
above.
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate will
be subject to federal income tax in all events. For holders of REMIC Residual
Certificates, excess inclusions:
o will not be permitted to be offset by deductions, losses or loss
carryovers from other activities;
o will be treated as "unrelated business taxable income" to an otherwise
tax-exempt organization; and
o will not be eligible for any rate reduction or exemption under any applicable
tax treaty with respect to the 30% United States withholding tax imposed on
distributions to REMIC Residual Certificateholders that are foreign
investors. See, however "-Foreign Investors in REMIC Certificates" below.
Furthermore, for purposes of the alternative minimum tax:
o excess inclusions will not be permitted to be offset by the alternative
tax net operating loss deduction; and
o alternative minimum taxable income may not be less than the taxpayer's excess
inclusions.
This last rule has the effect of preventing non-refundable tax credits
from reducing the taxpayer's income tax to an amount lower than the alternative
minimum tax on excess inclusions.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of:
o the daily portions of REMIC taxable income allocable to that REMIC
Residual Certificate,
over
o the sum of the "daily accruals" (as defined below) for each day during that
quarter that the REMIC Residual Certificate was held by the REMIC Residual
Certificateholder.
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The daily accruals of a REMIC Residual Certificateholder will be
determined by allocating to each day during a calendar quarter its ratable
portion of the product of the "adjusted issue price" of the REMIC Residual
Certificate at the beginning of the calendar quarter and 120% of the "long-term
Federal rate" in effect on the issue date. For this purpose, the adjusted issue
price of a REMIC Residual Certificate as of the beginning of any calendar
quarter will be equal to:
o the issue price of the REMIC Residual Certificate;
o increased by the sum of the daily accruals for all prior quarters; and
o decreased, but not below zero, by any distributions made with respect to
that REMIC Residual Certificate before the beginning of that quarter.
The issue price of a REMIC Residual Certificate is the initial offering
price to the public, excluding bond houses and brokers, at which a substantial
amount of the REMIC Residual Certificates were sold. The "long-term Federal
rate" is an average of current yields on Treasury securities with a remaining
term of greater than nine years, computed and published monthly by the IRS.
Although it has not done so, the Treasury Department also has authority
to issue regulations that would treat the entire amount of income accruing on a
REMIC Residual Certificate as an excess inclusion if the REMIC Residual
Certificates are considered not to have "significant value".
The REMIC Regulations provide that in order to be treated as having
significant value, the REMIC Residual Certificates must have:
o a total issue price at least equal to 2% of the total issue prices of all of
the related REMIC's regular and residual interests; and
o the anticipated weighted average life of the REMIC Residual Certificates must
equal or exceed 20% of the anticipated weighted average life of the REMIC,
based on the Prepayment Assumption and on any required or permitted clean up
calls or required liquidation provided for in the REMIC's organizational
documents.
In the related prospectus supplement we will disclose whether offered
REMIC Residual Certificates may be considered to have "significant value" under
the REMIC Regulations. Any disclosure that a REMIC Residual Certificate will
have "significant value" will be based upon certain assumptions, and we will
make no representation that a REMIC Residual Certificate will have "significant
value" for purposes of the above-described rules.
In the case of any REMIC Residual Certificates held by a real estate
investment trust, the total excess inclusions with respect to those REMIC
Residual Certificates, reduced, but not below zero, by the real estate
investment trust taxable income, within the meaning of Section 857(b)(2) of the
Code, excluding any net capital gain, will be allocated among the shareholders
of that trust in proportion to the dividends received by those shareholders from
that trust, and any amount so allocated will be treated as an excess inclusion
with respect to a REMIC Residual Certificate as if held directly by such
shareholder. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ("thrift institutions") to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC Residual Certificates that have "significant value" within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to REMIC Residual Certificates
continuously held by a thrift institution since November 1, 1995.
Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, transfers of "non-economic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax". If a transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on that "non-economic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is non-economic unless, based on the
Prepayment Assumption and on any required or permitted clean up call or required
liquidation provided for in the REMIC's organizational documents:
1. the present value of the expected future distributions, discounted using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess
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inclusions are expected to accrue with respect to the REMIC Residual
Certificate, which rate is computed and published monthly by the IRS, on the
REMIC Residual Certificate equals at least the present value of the expected
tax on the anticipated excess inclusions; and
2. the transferor reasonably expects that the transferee will receive
distributions with respect to the REMIC Residual Certificate at or after the
time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes.
Accordingly, all transfers of REMIC Residual Certificates that may
constitute non-economic residual interests will be subject to certain
restrictions under the terms of the related Governing Document that are intended
to reduce the possibility of any such transfer being disregarded. These
restrictions will require each party to a transfer to provide an affidavit that
no purpose of the transfer is to impede the assessment or collection of tax,
including certain representations as to the financial condition of the
prospective transferee as well as the prospective transferee's acknowledgement
that it understands that it may incur tax liabilities in excess of any cash flow
generated by the REMIC Residual Interest. In addition, the transferor will also
be required to make a reasonable investigation to determine the transferee's
historic payment of its debts and ability to continue to pay its debts as they
come due in the future. Prior to purchasing a REMIC Residual Certificate,
prospective purchasers should consider the possibility that a purported transfer
of that REMIC Residual Certificate by such a purchaser to another purchaser at
some future date may be disregarded in accordance with the above-described rules
which would result in the retention of tax liability by the first purchaser.
We will disclose in the related prospectus supplement whether offered
REMIC Residual Certificates may be considered "non-economic" residual interests
under the REMIC Regulations. Any disclosure that a REMIC Residual Certificate
will not be considered "non-economic" will be based upon certain assumptions,
and we will make no representation that a REMIC Residual Certificate will not be
considered "non-economic" for purposes of the above-described rules. See
"-Foreign Investors in REMIC Certificates" below for additional restrictions
applicable to transfers of certain REMIC Residual Certificates to foreign
persons.
Mark-to-Market Rules
The IRS recently released regulations under Section 475 of the Code (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate is not treated as a security for
purposes of Section 475 of the Code, and thus is not subject to the
mark-to-market rules. It is recommended that prospective purchasers of a REMIC
Residual Certificate consult their tax advisors regarding the Mark-to-Market
Regulations.
Foreign Investors
The REMIC Regulations provide that the transfer of a REMIC Residual
Certificate that has a "tax avoidance potential" to a "foreign person" will be
disregarded for federal income tax purposes. This rule appears to apply to a
transferee who is not a U.S. Person (as defined below in "--Foreign Investors in
REMIC Certificates") unless the transferee's income in respect of the REMIC
Residual Certificate is effectively connected with the conduct of a United
States trade or business. A REMIC Residual Certificate is deemed to have a tax
avoidance potential unless, at the time of transfer, the transferor reasonably
expects that the REMIC will distribute to the transferee amounts that will equal
at least 30% of each excess inclusion, and that these amounts will be
distributed at or after the time the excess inclusion accrues and not later than
the end of the calendar year following the year of accrual. If the non-U.S.
Person transfers the REMIC Residual Certificate to a U.S. Person, the transfer
will be disregarded, and the foreign transferor will continue to be treated as
the owner, if the transfer has the effect of allowing the transferor to avoid
tax on accrued excess inclusions.
Any attempted transfer or pledge in violation of the transfer restrictions
will be absolutely null and void and will vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to consult
their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax that may be imposed on a
pass-through entity.
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Unless we state otherwise in the related prospectus supplement, transfers
of REMIC Residual Certificates to investors that are not United States Persons
(as defined below in "-Foreign Investors in REMIC Certificates") will be
prohibited under the related Governing Document. If transfers of REMIC Residual
Certificates to investors that are not United States Persons are permitted
pursuant to the related Governing Document, we will describe in the related
prospectus supplement any additional restrictions applicable to transfers of
certain REMIC Residual Certificates to those persons.
Pass-Through of Non-Interest Expenses of the REMIC as Itemized Deductions
A REMIC will generally allocate its fees and expenses to the holders of
the related REMIC Residual Certificates. Temporary Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, such fees and expenses and a matching amount of additional income
will be allocated among holders of the related REMIC Regular and Residual
Certificates on a daily basis in proportion to the relative amounts of income
accruing to each Certificateholder on that day. Unless we state otherwise in the
related prospectus supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
A holder of a REMIC Residual Certificates or REMIC Regular Certificates,
who receives an allocation of fees and expenses in accordance with the preceding
discussion, and who is an individual, estate or trust, or a "pass-through
entity" beneficially owned by one or more individuals, estates or trusts will:
o add an amount equal to that individual's, estate's or trust's share of those
fees and expenses to that holder's gross income; and
o treat that individual's, estate's or trust's share of those fees and expenses
as a miscellaneous itemized deduction allowable subject to the limitation of
Section 67 of the Code, which permits such deductions only to the extent
they, together with other miscellaneous itemized deductions of the holder,
exceed 2% of such taxpayer's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of:
o 3% of the excess of the individual's adjusted gross income over that
amount; and
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
The amount of additional taxable income reportable by REMIC
Certificateholders that are subject to the limitations of either Section 67 or
Section 68 of the Code may be substantial. As a result, these certificateholders
may have total taxable income in excess of the total amount of cash received on
the 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 a holder of a REMIC Certificate 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 that holder's
allocable portion of servicing fees and other miscellaneous itemized deductions
of the REMIC, even though an amount equal to the amount of these fees and other
deductions will be included in the holder's gross income. Accordingly, REMIC
Residual Certificates will generally not be appropriate investments for:
o individuals;
o estates or trusts; or
o pass-through entities beneficially owned by one or more individuals,
estates or trusts.
It is recommended that these prospective investors consult with their tax
advisors prior to making an investment in such certificates.
Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Certificate. The adjusted basis of
a REMIC Regular Certificate generally will equal:
o the cost of the REMIC Regular Certificate to the certificateholder;
o increased by income reported by such certificateholder with respect to
the REMIC Regular Certificate (including original issue discount and market
discount income); and
o reduced (but not below zero) by distributions (other than qualified
stated interest) on that
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REMIC Regular Certificate received by that certificateholder and by any
amortized premium.
The adjusted basis of a REMIC Residual Certificate will be determined as
described above under "-Taxation of Owners of REMIC Residual Certificates-Basis
Rules, Net Losses and Distributions". Except as described below, any gain or
loss will be capital gain or loss, provided the REMIC Certificate is held as a
capital asset (generally, property held for investment) within the meaning of
Section 1221 of the Code. However, REMIC Certificates will be "evidences of
indebtedness" within the meaning of Section 582(c)(1) of the Code, so that a
bank or thrift institution's gain or loss recognized from the sale of a REMIC
Certificate to which this Section applies will be ordinary income or loss. The
Code as of the date of this prospectus provides for lower rates as to long-term
capital gains than those applicable to the short-term capital gains and ordinary
income realized or received by individuals. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
a capital gain will be treated as ordinary income to the extent of the gain that
does not exceed the excess, if any, of:
o the amount that would have been includible in the seller's income with
respect to such REMIC Regular Certificate assuming that income had accrued
on the certificate at a rate equal to 110% of the "applicable Federal rate"
(generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the certificate based on
the application of the Prepayment Assumption to such certificate),
determined as of the date of purchase of the REMIC Regular Certificate;
over
o the amount of ordinary income actually includible in the seller's income
prior to the sale.
In addition, gain recognized on the sale of a REMIC Regular Certificate by
a seller who purchased the REMIC Regular Certificate at a market discount will
be taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period the REMIC Certificate was held by that
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium".
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that the certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" at the time the taxpayer
enters into the conversion transaction, subject to appropriate reduction for
prior inclusion of interest and other ordinary income items from the
transaction.
Finally, a non-corporate taxpayer may elect to have net capital gain taxed
at ordinary income rates rather than capital gains rates in order to include the
net capital gain in total net investment income for the taxable year, 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.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires that REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of a sale, that sale will be subject to the "wash sale" rules of
Section 1091 of the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to the REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
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Prohibited Transactions Tax and Other Taxes
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means:
o the disposition of a mortgage loan;
o the receipt of income from a source other than a mortgage loan or
certain other permitted investments;
o the receipt of compensation for services; or
o gain from the disposition of an asset purchased with the payments on the
mortgage loans for temporary investment pending distribution on the REMIC
Certificates.
It is not anticipated that any REMIC will engage in any prohibited
transactions as to which it would be subject to a material Prohibited
Transaction Tax.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Governing Document will include provisions designed
to prevent the acceptance of any contributions that would be subject to this
tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property", determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means income from foreclosure property other than qualifying
rents and other qualifying income for a real estate investment trust. Under
certain circumstances, the special servicer may be authorized to conduct
activities with respect to a real property acquired by a trust that causes the
trust to incur this tax if doing so would, in the reasonable discretion of the
special servicer, maximize the net after-tax proceeds to certificateholders.
However, under no circumstance will the special servicer cause the acquired real
property to cease to be a "permitted investment" under Section 860G(a)(5) of the
Code.
Unless otherwise disclosed in the related prospectus supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless we state otherwise 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 REMIC Administrator, master servicer, special servicer, manager or
trustee, in any case out of its own funds, if the person has sufficient assets
to do so, and the tax arises out of a breach of that person's obligations under
the related Governing Document. Any such tax not borne by a REMIC Administrator,
master servicer, special servicer, manager or trustee would be charged against
the related trust resulting in a reduction in amounts payable to holders of the
related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to Certain
Organizations
An entity will not qualify as a REMIC unless there are reasonable
arrangements designed to ensure that;
o residual interests in the entity are not held by disqualified
organizations; and
o information necessary for the application of the tax described in this
prospectus will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain
other provisions that are intended to meet this requirement will be included in
each Governing Document, and will be discussed in any prospectus supplement
relating to the offering of any REMIC Residual Certificate.
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed on the transfer of that
REMIC Residual Certificate in an amount (determined under the REMIC Regulations)
equal to the product of:
o the present value of the total anticipated excess inclusions with respect to
such REMIC Residual Certificate for periods after the transfer; and
o the highest marginal federal income tax rate applicable to corporations.
The present value will be calculated using a discount rate equal to the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected
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to accrue with respect to the REMIC Residual Certificate.
The anticipated excess inclusions must be determined as of the date that
the REMIC Residual Certificate is transferred and must be based on:
o events that have occurred up to the time of the transfer;
o the Prepayment Assumption; and
o any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents.
This tax generally would be imposed on the transferor of the REMIC
Residual Certificate. However, if the transfer is through an agent for a
disqualified organization, the tax would instead be imposed on the agent. A
transferor of a REMIC Residual Certificate would in no event be liable for this
tax 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 this affidavit is
false.
In addition, if a Disqualified Organization is the record holder of an
interest in a pass-through entity that owns a Residual Certificate, the
pass-through entity must pay tax equal to the product of (1) the amount of
excess inclusion income of the REMIC for that taxable year allocable to the
interest held by the Disqualified Organization; multiplied by (2) the highest
marginal federal income tax rate imposed on corporations by Code Section
11(b)(1).
A pass-through entity will not be subject to this tax for any period,
however, if each record holder of an interest in the pass-through entity
furnishes to the pass-through entity:
o the holder's social security number and a statement under penalties of
perjury that the social security number is that of the record holder; or
o a statement under penalties of perjury that the record holder is not a
disqualified organization.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership" holds a REMIC Residual Certificate, all interests in the
electing large partnership are treated as held by disqualified organizations for
purposes of the tax imposed upon a pass-through entity by Section 860E(c) of the
Code. An exception to this tax, otherwise available to a pass-through entity
that is furnished certain affidavits by record holders of interests in the
entity and that does not know such affidavits are false, is not available to an
electing large partnership.
For these purposes, a "disqualified organization" means:
o the United States, any State or political subdivision thereof, any foreign
government, any international organization, or any agency or instrumentality
of the foregoing (but would not include an instrumentality if all of its
activities are subject to tax and, except for the Federal Home Loan Mortgage
Corporation, a majority of its board of directors is not selected by any such
governmental agency);
o any organization (other than certain farmers' cooperatives described in
Section 521 of the Code) that is exempt from federal income tax, unless it is
subject to the tax or "unrelated business taxable income" imposed by Section
511 of the Code; or
o a rural electric or telephone cooperative.
For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. An "electing large
partnership" means any partnership having more than 100 members during the
preceding tax year (other than certain service partnerships and commodity
pools), which elect to apply simplified reporting provisions under the Code. In
addition, a person holding an interest in a pass-through entity as a nominee for
another person will, with respect to that interest, be treated as a pass-through
entity.
Liquidation and Termination
A REMIC will terminate after the payment date following the REMIC's
receipt of the final payment in respect of the mortgage loans or upon the
REMIC's sale of its assets following its adoption of a plan of complete
liquidation. If the REMIC adopts a plan of complete liquidation, within the
meaning of Code Section 860F(a)(4)(A)(i), which may be accomplished by
designating in the REMIC's final tax return a date on which such adoption is
deemed to occur, and sells all of its assets other than cash within a 90-day
period beginning on that date, the REMIC will not be subject to any Prohibited
Transaction Tax. The REMIC must credit or distribute in liquidation
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all of the sale proceeds plus its cash, other than the amounts retained to meet
claims, to holders of Regular and REMIC Residual Certificates within the 90-day
period. The last distribution on a REMIC Regular Certificate will be treated as
a payment in retirement of a debt instrument. In the case of a REMIC Residual
Certificate, if the last distribution on the REMIC Residual Certificate is less
than the REMIC Residual Certificateholder's adjusted basis in that certificate,
the REMIC Residual Certificateholder should (but may not) be treated as
realizing a capital loss equal to the amount of this difference.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the
REMIC will be treated as a partnership and REMIC Residual Certificateholders
will be treated as partners. Unless otherwise stated in the related prospectus
supplement, the REMIC Administrator will file REMIC federal income tax returns
on behalf of the related REMIC, and will be designated as and will act as the
"tax matters person" with respect to the REMIC in all respects. Tax information
reports will be furnished quarterly to each REMIC Residual Certificateholder who
holds a REMIC Residual Certificate on any day in the prior calendar quarter as
discussed below.
As the tax matters person, the REMIC Administrator, subject to certain
notice requirements and various restrictions and limitations, generally will
have the authority to act on behalf of the REMIC and the holders of REMIC
Residual Certificates in connection with the administrative and judicial review
of items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. Holders of REMIC Residual Certificates generally will be
required to report these 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 REMIC Administrator, as tax matters person, and
the IRS concerning any of these REMIC items. Adjustments made to the REMIC's tax
return may require a holder of a REMIC Residual Certificate 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 the
return of a holder of a REMIC Residual Certificate.
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
REMIC 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 that person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS. Holders of REMIC Regular Certificates that are:
o corporations;
o trusts;
o securities dealers; and
o certain other non-individuals;
will be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a privately placed REMIC Regular Certificate
issued with original issue discount to disclose on its face the amount of
original issue discount and the issue date, and requiring such information to be
reported to the IRS. Reporting with respect to REMIC Residual Certificates,
including:
o income;
o excess inclusions;
o investment expenses; and
o relevant information regarding qualification of the REMIC's assets;
will be made as required under the Treasury regulations, generally on a
quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price
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that the REMIC may not have, these regulations only require that information
pertaining to the appropriate proportionate method of accruing market discount
be provided. See "--Taxation of Owners of REMIC Regular Certificates--Market
Discount".
Unless we state otherwise in the related prospectus supplement, the REMIC
Administrator will have the responsibility for complying with the foregoing
reporting rules.
Backup Withholding with Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds from
the sale of REMIC Certificates, may be subject to the "backup withholding tax"
under Section 3406 of the Code at a rate of 31% if recipients of these payments
fail to furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from this
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against that recipient's federal income tax. Furthermore,
the IRS may impose certain penalties on a recipient of payments that is required
to supply information but does not do so in the proper manner.
Foreign Investors in REMIC Certificates
Unless we stated otherwise in the related prospectus supplement, a holder
of a REMIC Regular Certificate that is not a "United States Person" (as defined
below) and is not subject to federal income tax as a result of any direct or
indirect connection to the United States in addition to its ownership of a REMIC
Regular Certificate generally will not be subject to United States federal
income or withholding tax in respect of a distribution on a REMIC Regular
Certificate if the holder complies to the extent necessary with certain
identification requirements. These requirements include delivery of a statement,
signed by the certificateholder under penalties of perjury, certifying that the
certificateholder is not a United State Person and providing the name and
address of the certificateholder. If a non-United States Person's REMIC Regular
Certificate is effectively connected with the conduct by the Certificateholder
of a trade or business within the United States, then the income realized on the
certificate will be subject to U.S.
income tax at regular graduated income tax rates.
For these purposes, "United States Person" means:
o a citizen or resident of the United States;
o a corporation, partnership or other entity created or organized in, or under
the laws of, the United States or any political subdivision of the United
States;
o an estate whose income from sources outside the United States is includible
in gross income for United States federal income tax purposes regardless of
its connection with the conduct of a trade or business within the United
States; or
o a trust as to which (1) a court in the United States is able to exercise
primary supervision over the administration of the trust and (2) one or more
United States Persons have the authority to control all substantial decisions
of the trust.
It is possible that the IRS may assert that the foregoing tax exemption
should not apply with respect to a REMIC Regular Certificate held by a holder of
a REMIC Residual Certificate that owns directly or indirectly a 10% or greater
interest in the certificates. If the holder does not qualify for exemption,
distributions of interest to that holder, including distributions in respect of
accrued original issue discount, may be subject to a tax rate of 30%, subject to
reduction under any applicable tax treaty.
It is possible, under regulations promulgated under Section 881 of the
Code concerning conduit financing transactions, that the exemption from
withholding taxes described above may not be available to a holder who is not a
United States person and (1) owns 10% or more of one or more underlying
borrowers or (2) if the holder is a controlled foreign corporation, is related
to one or more borrowers.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a nonresident alien individual and would not be subject to
United States estate taxes. However, it is recommended that certificateholders
who are nonresident alien individuals consult their tax advisors concerning this
question.
Unless we state otherwise in the related prospectus supplement, transfers
of REMIC Residual Certificates will be prohibited under the related Governing
Document to any investor that is:
o a foreign person; or
o a United States Person, if classified as a partnership under the Code, unless
all of its beneficial owners are United States Persons.
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Grantor Trust Funds
Classification of Grantor Trust Funds
With respect to each series of certificates as to which no REMIC election
will be made, our counsel will deliver its opinion to the effect that, assuming
compliance with all provisions of the related Governing Document, the related
Grantor Trust Fund will be classified as a grantor trust under subpart E, part I
of subchapter J of the Code and not as a partnership or an association taxable
as a corporation.
For purposes of the following discussion, a certificate representing an
undivided equitable ownership interest in the principal of the mortgage loans
constituting the related Grantor Trust Fund, together with interest thereon at a
pass-through rate, will be referred to as a "Grantor Trust Fractional Interest
Certificate". A certificate representing ownership of all or a portion of the
difference between interest paid on the mortgage loans constituting the related
Grantor Trust Fund (net of normal administration fees) and interest paid to the
holders of Grantor Trust Fractional Interest Certificates issued with respect to
the Grantor Trust Fund will be referred to as a "Grantor Trust Strip
Certificate". A Grantor Trust Strip Certificate may also evidence a nominal
ownership interest in the principal of the mortgage loans constituting the
related Grantor Trust Fund.
Characterization of Investments in Grantor Trust Certificates
Grantor Trust Fractional Interest Certificates
In the case of Grantor Trust Fractional Interest Certificates, unless we
state otherwise in the related prospectus supplement, our counsel will deliver
an opinion that, in general, Grantor Trust Fractional Interest Certificates will
represent interests in:
o "loans secured by an interest in real property" within the meaning of Section
7701(a)(19)(C)(v) of the Code, but generally only to the extent that the
underlying mortgage loans have been made with respect to property that is
used for residential or certain other prescribed purposes;
o "obligation[s] (including any participation or certificate of beneficial
ownership therein) which . . . [are] principally secured by an interest in
real property" within the meaning of Section 860G(a)(3) of the Code;
o "permitted assets" within the meaning of Section 860L(a)(1)(C) of the
Code; and
o "real estate assets" within the meaning of Section 856(c)(5)(B) of the
Code.
In addition, our counsel will deliver an opinion that interest on Grantor
Trust Fractional Interest Certificates will to the same extent be considered
"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.
Grantor Trust Strip Certificates
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund:
o consisting of mortgage loans that are "loans secured by an interest in real
property" within the meaning of Section 7701(a)(19)(C)(v) of the Code;
o consisting of mortgage loans that are "real estate assets" within the
meaning of Section 856(c)(5)(B) of the Code; and
o interest on which is "interest on obligations secured by mortgages on real
property" within the meaning of Section 856(c)(3)(A) of the Code;
o it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. Our counsel will not deliver any opinion
on these questions. We recommend that prospective purchasers to which the
characterization of an investment in Grantor Trust Strip Certificates is
material consult their tax advisors regarding whether the Grantor Trust Strip
Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be:
o "obligation[s] (including any participation or certificate of beneficial
ownership therein) which [are] principally secured by an interest in real
property" within the meaning of Section 860G(a)(3)(A) of the Code; and,
o in general, "permitted assets" within the meaning of Section
860L(a)(1)(C) of the Code.
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Taxation of Owners of Grantor Trust Fractional Interest Certificates
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be:
o required to report on their federal income tax returns their shares of the
entire income from the mortgage loans, including amounts used to pay
reasonable servicing fees and other expenses, in accordance with their method
of accounting; and
o will be entitled to deduct their shares of any such reasonable servicing fees
and other expenses subject to the limitations discussed below.
Because of stripped interests, market or original issue discount, or premium,
the amount includible in income on account of a Grantor Trust Fractional
Interest Certificate may differ significantly from the amount distributable
thereon representing interest on the mortgage loans.
Under Section 67 of the Code, an individual, estate or trust holding a
Grantor Trust Fractional Interest Certificate directly or through certain
pass-through entities will be allowed a deduction for these reasonable servicing
fees and expenses only to the extent that the total of that holder's
miscellaneous itemized deductions exceeds 2% of that holder's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of:
o 3% of the excess of the individual's adjusted gross income over such
amount; or
o 80% of the amount of itemized deductions otherwise allowable for the
taxable year.
The amount of additional taxable income reportable by holders of Grantor
Trust Fractional Interest Certificates who are subject to the limitations of
either Section 67 or Section 68 of the Code may be substantial. Further,
certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holder's alternative minimum taxable income.
Although it is not entirely clear, it appears that in transactions in
which multiple classes of Grantor Trust Certificates (including Grantor Trust
Strip Certificates) are issued, these fees and expenses should be allocated
among the classes of Grantor Trust Certificates using a method that recognizes
that each such class benefits from the related services. In the absence of
statutory or administrative clarification as to the method to be used, we
currently expect that information returns or reports to the IRS and
certificateholders will be based on a method that allocates such expenses among
classes of Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of 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 resume some or all of the principal payments
creates "stripped bonds" with respect to principal payments and stripped coupons
with respect to interest payments. Grantor Trust Fractional Interest
Certificates may be subject to those rules if:
o a class of Grantor Trust Strip Certificates is issued as part of the
same series; or
o we or any of our affiliates retains (for our or their own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on a mortgage asset.
Further, the IRS has ruled that an unreasonably high servicing fee
retained by a seller or servicer will be treated as a retained ownership
interest in mortgages that constitutes a stripped coupon. We will include in the
related prospectus supplement information regarding servicing fees paid to a
master servicer, a special servicer, any sub-servicer or their respective
affiliates.
If Stripped Bond Rules Apply
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code. This is subject, however, to
the discussion below regarding:
o the treatment of certain stripped bonds as market discount bonds; and
o de minimis market discount.
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See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--Market Discount" below.
Under the stripped bond rules, the holder of a Grantor Trust Fractional
Interest Certificate (whether a cash or accrual method taxpayer) will be
required to report original issue discount from its Grantor Trust Fractional
Interest Certificate for each month in an amount equal to the income that
accrues on the certificate in that month calculated under a constant yield
method, in accordance with the rules of the Code relating to original issue
discount. This economic accrual of income includible in the income of the
Grantor Trust Fractional Interest Certificateholder in any taxable year may
exceed amounts actually received during the year.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of the certificate's stated redemption price over
its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by the purchaser
of the Grantor Trust Fractional Interest Certificate. The stated redemption
price of a Grantor Trust Fractional Interest Certificate will be:
o the sum of all payments to be made on such certificate, other than
"qualified stated interest", if any;
o the certificate's share of reasonable servicing fees and other expenses.
See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of:
o the holder's adjusted basis in the Grantor Trust Fractional Interest
Certificate at the beginning of that month (see "--Sales of Grantor Trust
Certificates" below); and
o the yield of the Grantor Trust Fractional Interest Certificate to the
holder.
The yield would be computed as the rate (compounded based on the regular
interval between payment dates) that, if used to discount the holder's share of
future payments on the mortgage loans, would cause the present value of those
future payments to equal the price at which the holder purchased the
certificate. In computing yield under the stripped bond rules, a
certificateholder's share of future payments on the mortgage loans will not
include any payments made in respect of any ownership interest in the mortgage
loans retained by us, a master servicer, a special servicer, any sub-servicer or
their respective affiliates, but will include such certificateholder's share of
any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires:
o the use of a reasonable prepayment assumption in accruing original issue
discount; and
o adjustments in the accrual of original issue discount when prepayments do not
conform to the prepayment assumption, with respect to certain categories of
debt instruments.
Legislation in 1997 extended the scope of that section to any pool of debt
instruments the yield on which may be affected by reason of prepayments. The
precise application of the new legislation is unclear in certain respects. For
example, it is uncertain whether:
o a prepayment assumption will be applied
1) collectively to all a taxpayer's investments in pools of debt
instruments; or
2) on an investment-by-investment basis; and
o the assumed prepayment rate is to be determined based on conditions:
1) at the time of the first sale of the Grantor Trust Fractional Interest
Certificate or,
2) with respect to any holder, at the time of purchase of the Grantor Trust
Fractional Interest Certificate by that holder.
It is recommended that certificateholders consult their tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at
a price equal to the principal amount of the mortgage loans allocable to that
certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease the yield, and thus accelerate or
decelerate, respectively, the reporting of income.
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In the absence of statutory or administrative clarification, we currently
expect that information reports or returns to the IRS and certificateholders
will be based on:
o a prepayment assumption determined when certificates are offered and
sold hereunder; and
o on a constant yield computed using a representative initial offering price
for each class of certificates.
However, neither we nor any other person will make any representation
that:
o the mortgage loans will in fact prepay at a rate conforming to the
applicable prepayment assumption or any other rate or
o the applicable prepayment assumption will not be challenged by the IRS
on audit.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price.
Under Treasury Regulation Section 1.1286-1, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon:
o there is no original issue discount or only a de minimis amount of
original issue discount; or
o the annual stated rate of interest payable on the original bond is no more
than one percentage point lower than the gross interest rate payable on the
original mortgage loan, before subtracting any servicing fee or any stripped
coupon.
If interest payable on a Grantor Trust Fractional Interest Certificate is
more than one percentage point lower than the gross interest rate payable on the
mortgage loans, we will disclose that fact in the related prospectus supplement.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than the
product of:
o 0.25% of the stated redemption price; and
o the weighted average years to maturity of the mortgage loans,
then such original issue discount or market discount will be considered to be de
minimis. Original issue discount or market discount of only a de minimis amount
will be included in income in the same manner as de minimis original issue
discount and market discount described in "--Taxation of Owners of Grantor Trust
Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" and
"--Market Discount" below.
If Stripped Bond Rules Do Not Apply
Subject to the discussion below on original issue discount, if the
stripped bond rules do not apply to a Grantor Trust Fractional Interest
Certificate, the certificateholder will be required to report its share of the
interest income on the mortgage loans in accordance with the certificateholder's
normal method of accounting. In that case, the original issue discount rules
will apply, even if the stripped bond rules do not apply, to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
mortgage loans issued with original issue discount.
The original issue discount, if any, on the mortgage loans will equal the
difference between the stated redemption price of such mortgage loans and their
issue price. For a definition of "stated redemption price", see "--Taxation of
Owners of REMIC Regular Certificates--Original Issue Discount" above. In
general, the issue price of a mortgage loan will be the amount received by the
borrower from the lender under the terms of the mortgage loan, less any "points"
paid by the borrower. The stated redemption price of a mortgage loan will equal
its principal amount, unless the mortgage loan provides for an initial "teaser",
or below-market interest rate. The determination as to whether original issue
discount will be considered to be de minimis will be calculated using the same
test as in the REMIC discussion. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above.
In the case of mortgage loans bearing adjustable or variable interest
rates, we will describe in the related prospectus supplement the manner in which
such rules will be applied with respect to those mortgage loans by the trustee
or master servicer, as applicable, in preparing information returns to the
certificateholders and the IRS.
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If original issue discount is in excess of a de minimis amount, all
original issue discount with respect to a mortgage loan will be required to be
accrued and reported in income each month, based on a constant yield. Under
recent legislation, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing yield with respect to any pool of debt
instruments, the yield on which may be affected by prepayments. The precise
application of the new legislation is unclear in certain respects.
For example, it is uncertain:
o whether a prepayment assumption will be applied:
(1) collectively to all a taxpayer's investments in pools of debt
instruments; or
(2) on an investment-by-investment basis.
o as to investments in Grantor Trust Fractional Interest Certificates, whether
the assumed prepayment rate is to be determined based on conditions:
(1) at the time of the first sale of the Grantor Trust Fractional Interest
Certificate or,
(2) with respect to any holder, at the time of that holder's purchase of the
Grantor Trust Fractional Interest Certificate.
We recommend that certificateholders consult their own tax advisors
concerning reporting original issue discount with respect to Grantor Trust
Fractional Interest Certificates and refer to the related prospectus supplement
with respect to each series to determine whether and in what manner the original
issue discount rules will apply to mortgage loans in such series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
the certificate's allocable portion of the total remaining stated redemption
price of the mortgage loans held in the related trust must also include in gross
income the certificate's daily portions of any original issue discount with
respect to the mortgage loans. However, each such daily portion will be reduced,
if the cost of the Grantor Trust Fractional Interest Certificate to the
purchaser is in excess of the certificate's allocable portion of the total
"adjusted issue prices" of the mortgage loans held in the related trust,
approximately in proportion to the ratio the excess bears to the certificate's
allocable portion of the total original issue discount remaining to be accrued
on the mortgage loans.
The adjusted issue price of a mortgage loan on any given day equals the
sum of:
o the adjusted issue price (or, in the case of the first accrual period, the
issue price) of the mortgage loan at the beginning of the accrual period that
includes that day; and
o the daily portions of original issue discount for all days during the accrual
period prior to that day.
The adjusted issue price of a mortgage loan at the beginning of any
accrual period will equal the issue price of the mortgage loan, increased by:
o the total amount of original issue discount with respect to such mortgage
loan that accrued in prior accrual periods, and reduced by
o the amount of any payments made on the mortgage loan in prior accrual periods
of amounts included in its stated redemption price.
In the absence of statutory or administrative clarification, we currently
expect that information reports or returns to the IRS and certificateholders
will be based on:
o a prepayment assumption determined when certificates are offered and
sold hereunder and disclosed in the related prospectus supplement; and
o a constant yield computed using a representative initial offering price for
each class of certificates.
However, neither we nor any other person will make any representation
that:
o the mortgage loans will in fact prepay at a rate conforming to the
applicable prepayment assumption or any other rate; or
o the applicable prepayment assumption will not be challenged by the IRS
on audit.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price.
Market Discount
If the stripped bond rules do not apply to a Grantor Trust Fractional
Interest Certificate, a
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certificateholder may be subject to the market discount rules of Sections 1276
through 1278 of the Code to the extent an interest in a mortgage loan is
considered to have been purchased at a "market discount". That is:
o in the case of a mortgage loan issued without original issue discount, at a
purchase price less than its remaining stated redemption price (as defined
above); or
o in the case of a mortgage loan issued with original issue discount, at a
purchase price less than its adjusted issue price (as defined above).
If market discount is in excess of a de minimis amount (as described
below), the holder generally will be required to include in income in each month
the amount of such discount that has accrued (under the rules described in the
next paragraph) through that month that has not previously been included in
income, but limited, in the case of the portion of such discount that is
allocable to any mortgage loan, to the payment of stated redemption price on the
mortgage loan that is received by (or, in the case of accrual basis
certificateholders, due to) the trust in that month. A certificateholder may
elect to include market discount in income currently as it accrues (under a
constant yield method based on the yield of the certificate to such holder)
rather than including it on a deferred basis in accordance with the foregoing
under rules similar to those described in "--Taxation of Owners of REMIC Regular
Interests--Market Discount" above.
Section 1276(b)(3) of the Code authorizes the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until regulations are issued by the Treasury Department, certain rules described
in the Committee Report apply. Under those rules, in each accrual period market
discount on the mortgage loans should accrue, at the holder's option:
o on the basis of a constant yield method;
o in the case of a mortgage loan issued without original issue discount, in an
amount that bears the same ratio to the total remaining market discount as
the stated interest paid in the accrual period bears to the total stated
interest remaining to be paid on the mortgage loan as of the beginning of the
accrual period; or
o in the case of a mortgage loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as
the original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period.
Under recent legislation, Section 1272(a)(6) of the Code requires that a
prepayment assumption be used in computing the accrual of original issue
discount with respect to any pool of debt instruments, the yield on which may be
affected by prepayments. Because the mortgage loans will be such a pool, it
appears that the prepayment assumption used (or that would be used) in
calculating the accrual of original issue discount, if any, is also to be used
in calculating the accrual of market discount. However, the precise application
of the new legislation is unclear in certain respects. For example, it is
uncertain whether:
o a prepayment assumption will be applied:
(1) collectively to all of a taxpayer's investments in pools of debt
instruments, or
(2) on an investment-by-investment basis; and
o the assumed prepayment rate is to be determined:
(1) at the time of the first sale of the Grantor Trust Fractional Interest
Certificate, or
(2) with respect to any holder, at the time of that holder's purchase of the
Grantor Trust Fractional Interest Certificate.
Moreover, because regulations clarifying the legislation referred to in
the preceding paragraph have not been issued, it is not possible to predict what
effect these regulations might have on the tax treatment of a mortgage loan
purchased at a discount in the secondary market. We recommend that
certificateholders consult their own tax advisors concerning accrual of market
discount with respect to Grantor Trust Fractional Interest Certificates.
Certificateholders should also refer to the related prospectus supplement with
respect to each series to determine whether and in what manner the market
discount will apply to mortgage loans in that series purchased at a market
discount.
To the extent that the mortgage loans provide for periodic payments of
stated redemption price, market discount may be required to be included in
income at a rate that is not significantly slower than the rate at which the
discount would be included in income if it were original issue discount.
Market discount with respect to mortgage loans may be considered to be de
minimis and, if so, will be includible in income under de minimis rules similar
to those described above in "--REMICs--
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Taxation of Owners of REMIC Regular Certificates --Original Issue Discount"
above.
Further, under the rules described above in "--REMICs--Taxation of Owners
of REMIC Regular Certificates--Market Discount", any discount that is not
original issue discount and exceeds a de minimis amount may require the deferral
of interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to the origination
dates of the mortgage loans. If such an election is made to accrue market
discount on a Grantor Trust Fractional Interest Certificate on a constant yield
basis, such election is deemed made with respect to all other debt instruments
with market discount which the certificateholder acquires during the year of
election or thereafter.
Premium
If a certificateholder is treated as acquiring the underlying mortgage
loans at a premium, that is, at a price in excess of their remaining stated
redemption price, the certificateholder may elect under Section 171 of the Code
to amortize using a constant yield method the portion of such premium allocable
to mortgage loans originated after September 27, 1985. Amortizable premium is
treated as an offset to interest income on the related debt instrument, rather
than as a separate interest deduction. However, premium allocable to mortgage
loans originated before September 28, 1985 or to mortgage loans for which an
amortization election is not made, should be:
o allocated among the payments of stated redemption price on the mortgage
loan; and
o allowed as a deduction as such payments are made (or, for a certificateholder
using the accrual method of accounting, when such payments of stated
redemption price are due).
A certificateholder that makes this election for a mortgage loan or any
other debt instrument that is acquired at a premium will be deemed to have made
an election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that the certificateholder acquires during the year of
the election or thereafter.
It is not clear whether a prepayment assumption should be used in
computing amortization of premium allowable under Section 171 of the Code
similar to that described for calculating the accrual of market discount of
Grantor Trust Fractional Interest Certificates. See "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates--Market Discount", above.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Fractional Interest Certificate
representing an interest in a mortgage loan acquired at a premium should
recognize a loss if a mortgage loan with respect to an asset prepays in full,
equal to the difference between:
o the portion of the prepaid principal amount of the mortgage loan or
underlying mortgage loan that is allocable to the certificate; and
o the portion of the adjusted basis of the certificate that is allocable to the
mortgage loan or underlying mortgage loan.
If a reasonable prepayment assumption is used to amortize the premium, it
appears that such a loss would be available, if at all, only if prepayments have
occurred at a rate faster than the reasonable assumed prepayment rate. It is not
clear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
The IRS has issued Premium Amortization Regulations. The Premium
Amortization Regulations specifically do not apply to pre-payable debt
instruments or any pool of debt instruments the yield on which may be affected
by prepayments, such as the trust fund, which are subject to Section 1272(a)(6)
of the Code. Absent further guidance from the IRS and to the extent set forth in
the related prospectus supplement, the trustee will account for amortizable bond
premium in the manner described in this section. Prospective purchasers should
consult their tax advisors regarding amortizable bond premium and the Premium
Amortization Regulations.
Taxation of Owners of Grantor Trust Strip Certificates
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "-Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply", no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty
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exists as to how it will be applied to securities such as the Grantor Trust
Strip Certificates. Accordingly, we recommend that holders of Grantor Trust
Strip Certificates consult their tax advisors concerning the method to be used
in reporting income or loss with respect to these certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of the holder's adjusted basis in the Grantor Trust
Strip Certificate at the beginning of that month and the yield of the Grantor
Trust Strip Certificate to the holder. This yield would be calculated based on:
o the price paid for that Grantor Trust Strip Certificate by its holder;
and
o the payments remaining to be made thereon at the time of the purchase;
o plus an allocable portion of the servicing fees and expenses to be paid
with respect to the mortgage loans.
See "--Taxation of Owners of Grantor Trust Fractional Interest
Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that:
o a prepayment assumption be used in computing the accrual of original issue
discount with respect to certain categories of debt instruments; and
o adjustments be made in the amount and rate of accrual of such discount when
prepayments do not conform to such prepayment assumption.
It appears that those provisions would apply to Grantor Trust Strip
Certificates. It is uncertain whether the assumed prepayment rate would be
determined based on conditions:
o at the time of the first sale of the Grantor Trust Strip Certificate or,
o with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
If the method for computing original issue discount under Section
1272(a)(6) results in a negative amount of original issue discount as to any
accrual period with respect to a REMIC Regular Certificate, the amount of
original issue discount allocable to that accrual period will be zero. That is,
no current deduction of the negative amount will be allowed to the holder of the
certificate. The holder will instead only be permitted to offset the negative
amount against future positive original issue discount (if any) attributable to
the certificate. Although not free from doubt, it is possible that a
certificateholder may be permitted to deduct a loss to the extent his or her
basis in the certificate exceeds the maximum amount of payments the
certificateholder could ever receive with respect to the certificate. However,
any such loss may be a capital loss, which is limited in its deductibility. The
foregoing considerations are particularly relevant to Stripped Interest
Certificates, which can have negative yields under circumstances that are not
default related.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower using a prepayment assumption than if yield is computed
assuming no prepayments. In the absence of statutory or administrative
clarification, we currently expect that information returns or reports to the
IRS and certificateholders will be based on:
o the applicable prepayment assumption disclosed in the related prospectus
supplement; and
o a constant yield computed using a representative initial offering price for
each class of certificates.
However, neither we nor any other person will make any representation
that:
o the mortgage loans will in fact prepay at a rate conforming to the
applicable prepayment assumption or at any other rate; or
o the applicable prepayment assumption will not be challenged by the IRS
on audit.
Certificateholders also should bear in mind that the use of a
representative initial offering price will mean that the information returns or
reports, even if otherwise accepted as accurate by the IRS, will in any event be
accurate only as to the initial certificateholders of each series who bought at
that price. We recommend that prospective purchasers of
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the Grantor Trust Strip Certificates consult their tax advisors regarding the
use of the applicable prepayment assumption.
Sales of Grantor Trust Certificates
Any gain or loss, equal to the difference between the amount realized on
the sale or exchange of a Grantor Trust Certificate and its adjusted basis,
recognized on the sale or exchange of a Grantor Trust Certificate by an investor
who holds the Grantor Trust Certificate as a capital asset, will be capital gain
or loss, except as described below.
The adjusted basis of a Grantor Trust Certificate generally will equal its
cost:
o increased by any income reported by the seller, including original issue
discount and market discount income; and
o reduced (but not below zero) by any:
(1) previously reported losses;
(2) amortized premium; and
(3) distributions with respect to such Grantor Trust Certificate.
The Code as of the date of this prospectus provides for lower rates as to
long-term capital gains, than those applicable to the short-term capital gains
and ordinary income realized or received by individuals. No such rate
differential exists for corporations. In addition, the distinction between a
capital gain or loss and ordinary income or loss remains relevant for other
purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code.
Furthermore, a portion of any gain that might otherwise be capital gain
may be treated as ordinary income to the extent that the Grantor Trust
Certificate is held as part of a "conversion transaction" within the meaning of
Section 1258 of the Code. A conversion transaction generally is one in which the
taxpayer has taken two or more positions in the same or similar property that
reduce or eliminate market risk, if substantially all of the taxpayer's return
is attributable to the time value of the taxpayer's net investment in such
transaction. The amount of gain realized in a conversion transaction that is
recharacterized as ordinary income generally will not exceed the amount of
interest that would have accrued on the taxpayer's net investment at 120% of the
appropriate "applicable Federal rate" at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction. The "applicable
Federal rate" is computed and published monthly by the IRS.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include the net capital
gain in total net investment income for that taxable year, 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.
Grantor Trust Reporting
Unless we state otherwise in the related prospectus supplement, the
trustee will furnish to each holder of a Grantor Trust Certificate with each
distribution a statement setting forth the amount of the distribution allocable
to:
o principal on the underlying mortgage loans; and
o interest thereon at the related pass-through rate.
In addition, the trustee will furnish, within a reasonable time after the
end of each calendar year, to each holder of a Grantor Trust Certificate who was
such a holder at any time during the year:
o information regarding the amount of servicing compensation received by
the master servicer, the special servicer or any sub-servicer; and
o such other customary factual information as the trustee deems necessary or
desirable to enable holders of Grantor Trust Certificates to prepare their
tax returns.
The trustee will furnish comparable information to the IRS as and when
required by law to do so. Because the rules for accruing discount and amortizing
premium with respect to the Grantor Trust Certificates are uncertain in various
respects, we can give no assurance that the IRS will agree with the trustee's
information reports of such items of income and expense. Moreover, these
information reports, even if otherwise accepted as accurate by the IRS, will in
any event be accurate only as to the initial certificateholders that bought
their certificates at the
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representative initial offering price used in preparing the reports.
On August 13, 1998, the IRS published proposed regulations, which will,
when effective, establish a reporting framework for interests in "widely held
fixed investment trusts" similar to that for regular interests in REMICs. A
widely-held fixed investment trust is defined as any entity classified as a
"trust" under Treasury Regulation Section 301.7701-4(c) in which any interest is
held by a middleman. A middleman would include, but is not limited to:
o a custodian of a person's account;
o a nominee; and
o a broker holding an interest for a customer in street name.
These regulations are proposed to be effective for calendar years
beginning on or after the date that the final regulations are published in the
Federal Register.
Backup Withholding
In general, the rules described above in "--REMICs--Backup Withholding
with Respect to REMIC Certificates" will also apply to Grantor Trust
Certificates.
Foreign Investors
In general, the discussion with respect to REMIC Regular Certificates in
"--REMICs--Foreign Investors in REMIC Certificates" above applies to Grantor
Trust Certificates. However, unless we state otherwise in the related prospectus
supplement, Grantor Trust Certificates will be eligible for exemption from U.S.
withholding tax, subject to the conditions described in such discussion, only to
the extent the related mortgage loans were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
certificateholder's trade or business in the United States, the Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
nonresident alien individual.
FASITs
If and to the extent set forth in the prospectus supplement relating to a
particular series of certificates, an election may be made to treat the related
trust fund or one or more segregated pools of assets therein as one or more
financial asset securitization investment trusts, or FASITs, within the meaning
of the Code Section 860L(a). Qualification as a FASIT requires ongoing
compliance with certain conditions. With respect to each series of FASIT
certificates, our counsel will advise us that in such firm's opinion, assuming:
o the making of such an election;
o compliance with the pooling agreement; and
o compliance with any changes in the law, including any amendments to the
Code or applicable Treasury Regulations thereunder,
each FASIT pool will qualify as a FASIT. In that case, the regular certificates
will be considered to be "regular interests" in the FASIT and will be treated
for federal income tax purposes as if they were newly originated debt
instruments, and the residual certificate will be considered to be "ownership
interest" in the FASIT pool. The prospectus supplement for each series of
certificates will indicate whether one or more FASIT elections will be made with
respect to the related trust fund.
FASIT treatment has become available pursuant to recently enacted
legislation, and no Treasury regulations have as yet been issued detailing the
circumstances under which a FASIT election may be made or the consequences of
such an election. If a FASIT election is made with respect to any trust fund or
as to any segregated pool of assets therein, the related prospectus supplement
will describe the federal income tax consequences of the election.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Federal
Income Tax Consequences", potential investors should consider the state and
local tax consequences of the acquisition, ownership, and disposition of the
offered certificates. State tax law may differ substantially from the
corresponding federal law, and the discussion above does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore, we
recommend that prospective investors consult their tax advisors with respect to
the various tax consequences of investments in the offered certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA")
and Section 4975 of the Code impose certain requirements on certain employee
benefit plans, and on other retirement plans and arrangements, including:
o individual retirement accounts and annuities,
o Keogh plans,
o collective investment funds,
o separate accounts, and
o insurance company general accounts,
o as well as on funds or entities in which these plans, accounts or
arrangements are invested.
ERISA and the Code also impose certain requirements on fiduciaries of
these plans, accounts or arrangements, in connection with the investment of the
assets of the related plan, account or arrangement.
Some employee benefit plans, such as governmental plans, and church plans
which have not made an election under the Code are not subject to ERISA
requirements. Accordingly, assets of these plans may be invested in the offered
certificates without regard to the ERISA considerations described below, subject
to the provisions of other applicable federal and state laws. Any such plan
which is qualified and exempt from taxation under Sections 401(a) and 501(a) of
the Code, however, is subject to the prohibited transaction rules in Section 503
of the Code.
ERISA imposes certain general fiduciary requirements on fiduciaries,
including:
o investment prudence and diversification; and
o the investment of the assets of the related plan, account or arrangement in
accordance with the documents governing the plan, account or arrangement.
Section 406 of ERISA and Section 4975 of the Code also prohibit a broad
range of transactions involving assets of a plan, account or arrangement and
persons who have certain specified relationships to the plan, account or
arrangement, unless a statutory or administrative exemption is available. The
types of transactions that are prohibited include:
o sales, exchanges or leases of property;
o loans or other extensions of credit; and
o the furnishing of goods and services.
Certain persons that participate in a prohibited transaction may be
subject to an excise tax imposed under Section 4975 of the Code and/or a penalty
imposed under Section 502(i) of ERISA, unless a statutory or administrative
exemption is available. In addition, the persons involved in the prohibited
transaction may have to cancel the transaction and pay an amount to the plan,
account or arrangement for any losses realized by the plan, account or
arrangement for any profits realized by these persons. In addition, individual
retirement accounts involved in the prohibited transaction may be disqualified
which would result in adverse tax consequences to the owner of the account.
Regulation of Assets Included in a Plan, Account or Arrangement
A fiduciary's investment of the assets of a plan, account or arrangement
in offered certificates may cause the underlying mortgage assets and other trust
assets to be deemed assets of the plan, account or arrangement. Section
2510.3-101 of the United States Department of Labor regulations provides that
when a plan, account or arrangement acquires an equity interest in an entity,
the assets of the plan, account or arrangement include both the equity interest
and an undivided interest in each of the underlying assets of the entity, unless
an exception applies. The underlying assets will not be included if
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the equity participation in the entity is not "significant". Equity
participation by benefit plan investors will be "significant" if, on any date,
25% or more of the value of any class of equity interests in the entity is held
by benefit plan investors, which include benefit plans such as governmental
plans, church plans and other plans not subject to ERISA. The percentage owned
by benefit plan investors is determined by excluding the investments of persons:
o with discretionary authority or control over the assets of the entity;
o who provide investment advice directly or indirectly for a fee with
respect to the assets; and
o who are affiliates of the these persons.
In the case of a trust, investments by us or by the related trustee,
master servicer, special servicer, any other party with discretionary authority
over the trust assets and the affiliates of these persons will be excluded.
Because the availability of this exemption depends upon the identity of
the holders of the offered certificates at any time, there can be no assurance
that any class of the offered certificates will qualify for this exemption.
A fiduciary of an investing plan is any person who in connection with the
assets of the plan, account or arrangement:
o has discretionary authority or control over the management or
disposition of assets; or
o provides investment advice for a fee.
If the mortgage loans and other trust assets constitute assets of a plan,
account or arrangement, then any party exercising management or discretionary
control regarding those assets, such as the related trustee, master servicer or
special servicer, any sub-servicer or affiliates of these parties may be deemed
to be a "fiduciary" with respect to the investing plan, account or arrangement
and be subject to the fiduciary responsibility provisions of ERISA. In addition,
if the trust assets constitute assets of a plan, account or arrangement,
transactions involving the trust assets may involve prohibited transactions
under ERISA or the Code. For example, if a person who has a relationship to a
plan, account or arrangement is a borrower under a mortgage loan included in the
trust assets, the purchase of certificates by the plan, account or arrangement
could constitute a prohibited loan between the plan, account or arrangement and
the party in interest.
The Department of Labor regulations provide that where a plan, account or
arrangement purchases a "guaranteed governmental mortgage pool certificate", the
assets of the plan, account or arrangement include the certificate but do not
include any of the mortgages underlying the certificate. The regulations include
in the definition of a "guaranteed governmental mortgage pool certificate"
certain certificates issued or guaranteed by the federal Home Loan Mortgage
Corporation, the Government National Mortgage Association or the Federal
National Mortgage Association but do not include certificates issued or
guaranteed by the Federal Agricultural Mortgage Corporation. Accordingly, even
if these types of mortgaged-backed securities, other than Federal Agricultural
Mortgage Corporation certificates, included in the trust assets were deemed to
be assets of the investors of a plan, account or arrangement, the underlying
mortgages, other than the mortgages underlying any Federal Agricultural Mortgage
Corporation certificates, would not be treated as assets of the plan, account or
arrangement. Private label mortgage participations, mortgage pass-through
certificates, Federal Agricultural Mortgage Corporation certificates or other
mortgage-backed securities are not "guaranteed governmental mortgage pool
certificates" within the meaning of the regulations.
In addition, the acquisition or holding of offered certificates by or on
behalf of a plan, account or arrangement could give rise to a prohibited
transaction if we or the related trustee, master servicer or special servicer or
any related underwriter, sub-servicer, REMIC administrator, manager, borrower or
obligor under any credit enhancement mechanism, or certain of their affiliates,
has, or acquires, a relationship to an investing plan, account or arrangement.
If you invest on behalf of a plan, account or arrangement, you should
consult your legal counsel and review the ERISA discussion in the related
prospectus supplement before purchasing any certificates.
Prohibited Transaction Exemptions
If you are a fiduciary of a plan, account or arrangement, before
purchasing any offered certificates, you should consider the availability of one
of the Department of Labor's prohibited transaction exemptions, such as
prohibited transaction class exemption 75-1, which exempts certain transactions
involving plans, accounts and
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arrangements and certain broker-dealers, reporting dealers and banks.
We cannot provide any assurance that such a class exemption will apply
with respect to any particular investment on behalf of a plan, account or
arrangement in the certificates or, even if it were deemed to apply, that the
exemption would apply to all transactions that may occur in connection with the
investment. The prospectus supplement with respect to the offered certificates
of any series may contain additional information regarding the availability of
other exemptions, such as the one discussed below.
Underwriters Exemptions
The Department of Labor has issued individual prohibited transaction
exemptions to most of the underwriters that we would use. Each of these
individual prohibited transaction exemptions generally exempt from the
application of the prohibited transaction provisions of ERISA and the Code
certain transactions relating to, among other things:
o the servicing and operation of certain trust assets pools, and
o the purchase, sale and holding of certain certificates that are
underwritten by that underwriter, or any person under common control with
that underwriter.
In order for these exemptions to apply, certain requirements must be
satisfied, including:
o the acquisition of the certificate by a plan, account or arrangement must be
on terms that are at least as favorable to the plan, account or arrangement
as they would be in an arm's-length transaction with an unrelated party;
o the rights and interests evidenced by the certificates must not be
subordinated to the rights and interests evidenced by the other certificates
evidencing interests in the same mortgage asset pool;
o at the time of its acquisition by the plan, account or arrangement, the
certificate must be rated in one of the three highest generic rating
categories of any nationally recognized statistical rating organization;
o the trustee cannot be an affiliate of us, the servicer and certain other
persons;
o the sum of all payments made to and retained by the trustee, the servicer and
certain other persons must represent not more than reasonable compensation
for underwriting the certificates;
o the sum of all payments made to and retained by us must represent not more
than the fair market value of obligations deposited in the trust;
o the sum of all payments made to and retained by the master servicer, the
special servicer and any sub-servicer must represent not more than reasonable
compensation for such person's services and reimbursement of such person's
reasonable expenses in connection therewith; and
o the investing plan, account or arrangement must be an accredited
investor.
The prospectus supplement with respect to the offered certificates of any
series may contain additional information regarding the availability of these
exemptions.
Insurance Company General Accounts
The Small Business Job Protection Act of 1996 added a new Section 401(c)
to ERISA, which provides relief from the fiduciary and prohibited transaction
provisions of ERISA and the Code for transactions involving an insurance company
general account. This exemption is in addition to any exemption that may be
available under prohibited transaction class exemption 95-60 for the purchase
and holding of offered certificates by an insurance company general account.
Pursuant to Section 401(c) of ERISA, the Department of Labor was required
to issue final regulations no later than December 31, 1997, providing guidance
for determining, in cases where insurance policies supported by an insurer's
general account are issued to or for the benefit of a plan, account or
arrangement on or before December 31, 1998, which general account assets
constitute assets of the plan, account or arrangement. The Department of Labor
has not yet issued such final regulations. Section 401(c) of ERISA generally
provides that, until the date which is 18 months after those final regulations
become final, no person shall be subject to liability under Part 4 of Title I of
ERISA and Section 4975 of the Code on the basis of a claim that the assets of an
insurance company general account constitute assets of a plan, account or
arrangement, unless:
o as otherwise provided by the Secretary of Labor in those final
regulations to prevent avoidance of the regulations; or
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o an action is brought by the Secretary of Labor for certain breaches of
fiduciary duty which would also constitute a violation of federal or state
criminal law.
Any assets of an insurance company general account which support insurance
policies issued to a plan, account or arrangement after December 31, 1998 or
issued to a plan, account or arrangement on or before December 31, 1998 for
which the insurance company does not comply with the final regulations under
section 401(c) of ERISA may be treated as assets of the plan, account or
arrangement. In addition, because Section 401(c) of ERISA does not relate to
insurance company separate accounts, separate account assets are still treated
as assets of any plan, account or arrangement invested in the separate account.
If you are contemplating the investment of general account assets in offered
certificates, you should consult your legal counsel as to the applicability of
Section 401(c) of ERISA and the availability of exemptive relief under
prohibited transaction class exemption 95-60.
Consultation With Counsel
If you are a plan fiduciary which proposes to purchase offered
certificates on behalf of or with assets of a plan, account or arrangement, you
should consider your general fiduciary obligations under ERISA and you should
consult with your legal counsel as to the potential applicability of ERISA and
the Code to any investment and the availability of any prohibited transaction
exemption in connection with any investment.
Tax Exempt Investors
A plan, account or arrangement that is exempt from federal income taxation
pursuant to Section 501 of the Code will be subject to federal income taxation
to the extent that its income is "unrelated business taxable income" within the
meaning of Section 512 of the Code. All "excess inclusions" of a REMIC allocated
to a REMIC residual certificate held by a tax-exempt plan, account or
arrangement will be considered "unrelated business taxable income" and will be
subject to federal income tax.
See "Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Residual Certificates-Excess Inclusions" in this prospectus.
LEGAL INVESTMENT
If and to the extent specified in the related prospectus supplement, the
offered certificates of any series will constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA").
"Mortgage related securities" are legal investments to the same extent that,
under applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any of its agencies or instrumentalities
constitute legal investments for entities, the authorized investments of which
are subject to state regulation.
Prior to December 31, 1996, classes of offered certificates would be
"mortgage related securities" for purposes of SMMEA only if they:
o were rated in one of the two highest rating categories by at least one
nationally recognized statistical rating organization; and
o were part of a series evidencing interests in a trust asset consisting of
loans directly secured by a first lien on a single parcel of real estate upon
which is located a dwelling or mixed residential and commercial structure,
and originated by the types of originators specified in SMMEA.
Further, under SMMEA as originally enacted, if a state enacted legislation
prior to October 3, 1991 that specifically limited the legal investment
authority of any entities referred to in the preceding paragraph with respect to
"mortgage related securities" under such definition, offered certificates would
constitute legal investments for entities subject to the legislation only to the
extent provided in that legislation.
Effective December 31, 1996, the definition of "mortgage related
securities" was modified to include among the types of loans to which the
securities may relate, loans secured by "one or more parcels of real estate upon
which is located one or more commercial structures". In addition, the related
legislative history states that this expanded definition includes multifamily
loans secured by more than one parcel of real estate upon which is located more
than one structure. Until September 23, 2001, any state
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may enact legislation limiting the extent to which "mortgage related securities"
under this expanded definition would constitute legal investments under that
state's laws.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows:
o federal savings and loan associations and federal savings banks may invest
in, sell or otherwise deal with "mortgage related securities" without
limitation as to the percentage of their assets represented by those
securities; and
o federal credit unions may invest in "mortgage related securities" and
national banks may purchase "mortgage related securities" for their own
account without regard to the limitations generally applicable to investment
securities prescribed in 12 U.S.C. 24 (Seventh),
subject in each case to the regulations that the applicable federal regulatory
authority may prescribe.
Effective December 31, 1996, the Office of the Comptroller of the Currency
amended 12 C.F.R. Part 1 to authorize national banks to purchase and sell for
their own account, without limitation as to a percentage of the bank's capital
and surplus (but subject to compliance with certain general standards concerning
"safety and soundness" and retention of credit information in 12 C.F.R. Section
1.5), certain "Type IV securities", defined in 12 C.F.R. Section 1.2(1) to
include certain "commercial mortgage-related securities" and "residential
mortgage-related securities". As defined, "commercial mortgage-related security"
and "residential mortgage-related security" mean, in relevant part, "mortgage
related security" within the meaning of SMMEA, provided that, in the case of a
"commercial mortgage-related security," it "represents ownership of a promissory
note or certificate of interest or participation that is directly secured by a
first lien on one or more parcels of real estate upon which one or more
commercial structures are located and that is fully secured by interests in a
pool of loans to numerous obligors." In the absence of any rule or
administrative interpretation by the Office of the Comptroller of the Currency
defining the term "numerous obligors," no representation is made as to whether
any class of offered certificates will qualify as "commercial mortgage-related
securities", and thus as "Type IV securities", for investment by national banks.
The National Credit Union Administration has adopted rules, codified at 12
C.F.R. Part 703, which permit federal credit unions to invest in "mortgage
related securities" under certain limited circumstances, other than stripped
mortgage related securities, residual interests in mortgage related securities,
and commercial mortgage related securities, unless the credit union has obtained
written approval from the National Credit Union Administration to participate in
the "investment pilot program" described in 12 C.F.R. Section 703.140. The
Office of Thrift Supervision has issued Thrift Bulletin 13a (December 1, 1998),
"Management of Interest Rate Risk, Investment Securities, and Derivatives
Activities", which thrift institutions subject to the jurisdiction of the Office
of Thrift Supervision should consider before investing in any of the offered
certificates.
All depository institutions considering an investment in the offered
certificates should review the "Supervisory Policy Statement on Investment
Securities and End-User Derivatives Activities" of the Federal Financial
Institutions Examination Council, which has been adopted by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, the Office of Thrift Supervision and the Office of the Comptroller
of the Currency effective May 26, 1998, and by the National Credit Union
Administration effective October 1, 1998. The policy statement sets forth
general guidelines which depository institutions must follow in managing risks,
including market, credit, liquidity, operational (transaction), and legal risks,
applicable to all securities, including mortgage pass-through securities and
mortgage-derivative products used for investment purposes.
There may be other restrictions on your ability either to purchase certain
classes of offered certificates or to purchase any class of offered certificates
representing more than a specified percentage of your assets. We make no
representations as to the proper characterization of any class of offered
certificates for legal investment or other purposes. Also, we make no
representations as to the ability of particular investors to purchase any class
of offered certificates under applicable legal investment restrictions. These
uncertainties may adversely affect the liquidity of any class of offered
certificates. Accordingly, if your investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities you should consult with your legal advisor in determining
whether and to what extent the offered certificates of any class and series
constitute legal investments or are subject to investment, capital or other
restrictions.
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USE OF PROCEEDS
Unless otherwise specified in the related prospectus supplement, the net
proceeds to be received from the sale of the offered certificates of any series
will be applied by us to the purchase of assets for the related trust or will be
used by us to cover expenses related to these purchases. We expect to sell the
certificates from time to time, but the timing and amount of offerings of
certificates will depend on a number of factors, including the volume of
mortgage assets acquired by us, prevailing interest rates, availability of funds
and general market conditions.
METHOD OF DISTRIBUTION
The certificates offered by this prospectus and the related prospectus
supplements will be offered in series through one or more of the methods
described below. The prospectus supplement prepared for the offered certificates
of each series will describe the method of offering being utilized for the
offered certificates and will state the net proceeds to us from the sale of the
offered certificates.
We intend that offered certificates will be offered through the following
methods from time to time and that offerings may be made concurrently through
more than one of these methods or that an offering of the offered certificates
of a particular series may be made through a combination of two or more of these
methods. Such methods are as follows:
o by negotiated firm commitment or best efforts underwriting and public
offering by one or more underwriters specified in the related prospectus
supplement;
o by placements by us with institutional investors through dealers; and
o by direct placements by us with institutional investors.
In addition, if specified in the related prospectus supplement, the
offered certificates of a series may be offered in whole or in part to the
seller of the related mortgage assets that would comprise the related trust
assets for the certificates. Furthermore, the related trust assets for one
series of offered certificates may include offered certificates from other
series.
If underwriters are used in a sale of any offered certificates, other than
in connection with an underwriting on a best efforts basis, the offered
certificates will be acquired by the underwriters for their own account. These
certificates may be resold from time to time in one or more transactions,
including negotiated transactions, at fixed public offering prices or at varying
prices to be determined at the time of sale or at the time of commitment
therefor. The managing underwriter or underwriters with respect to the offer and
sale of offered certificates of a particular series will be described on the
cover of the prospectus supplement relating to the series and the members of the
underwriting syndicate, if any, will be named in the relevant prospectus
supplement.
Underwriters may receive compensation from us or from purchasers of the
offered certificates in the form of discounts, concessions or commissions.
Underwriters and dealers participating in the distribution of the offered
certificates may be deemed to be underwriters in connection with the
certificates, and any discounts or commissions received by them from us and any
profit on the resale of offered certificates by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
It is anticipated that the underwriting agreement pertaining to the sale
of the offered certificates of any series will provide that:
o the obligations of the underwriters will be subject to certain
conditions precedent;
o the underwriters will be obligated to purchase all the certificates if any
are purchased (other than in connection with an underwriting on a best
efforts basis); and
o in limited circumstances, we will indemnify the several underwriters and the
underwriters will indemnify us against certain civil liabilities, including
liabilities under the Securities Act of 1933, or will contribute to payments
required to be made in respect of any liabilities.
The prospectus supplement with respect to any series offered by placements
through dealers will contain information regarding the nature of the offering
and any agreements to be entered into between us and purchasers of offered
certificates of the series.
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We anticipate that the offered certificates will be sold primarily to
institutional investors. Purchasers of offered certificates, including dealers,
may, depending on the facts and circumstances of the purchases, be deemed to be
"underwriters" within the meaning of the Securities Act of 1933 in connection
with re-offers and sales by them of offered certificates. Holders of offered
certificates should consult with their legal advisors in this regard prior to
any reoffer or sale.
Where You Can Find More Information
We have filed with the Securities and Exchange Commission a registration
statement under the Securities Act of 1933 with respect to the certificates
offered by this prospectus. This prospectus forms a part of the registration
statement. This prospectus and the related prospectus supplement do not contain
all of the information with respect to an offering that is contained in the
registration statement. For further information regarding the documents referred
to in this prospectus and the related prospectus supplement, you should refer to
the registration statement and its exhibits.
You can inspect the registration statement and its exhibits, and make
copies of these documents at prescribed rates, at the public reference
facilities maintained by the SEC at its Public Reference Section:
450 Fifth Street, N.W.
Washington, D.C. 20549,
and at its Regional Offices located as follows:
Chicago Regional Office:
500 West Madison
14th Floor
Chicago, Illinois 60661
New York Regional Office
Seven World Trade Center
New York, New York 10048.
You can also obtain copies of these materials electronically through the
SEC's Web site at www.sec.gov.
In connection with each series of offered certificates, we will file or
arrange to have filed with the SEC with respect to the related trust any
periodic reports that are required under the Securities Exchange Act of 1934.
All documents and reports that are so filed for any particular trust prior to
the termination of an offering of certificates are incorporated by reference
into, and should be considered a part of, this prospectus. Upon request, we will
provide without charge to each person receiving this prospectus in connection
with an offering, a copy of any or all documents or reports that are so
incorporated by reference. All requests should be directed to us in writing at:
210 West 10th Street
6th Floor
Kansas City, Missouri 64105
Attention: Lawrence D. Ashley
or by telephone at (816) 435-5000.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement, certain
legal matters in connection with the certificates of each series, including
certain federal income tax consequences, will be passed upon for us by Morrison
& Hecker L.L.P., our counsel.
FINANCIAL INFORMATION
A new trust will be formed with respect to each series, and no trust will
engage in any business activities or have any assets or obligations prior to the
issuance of the related series. Accordingly, no financial statements with
respect to any trust will be included in this prospectus or in the related
prospectus supplement. We have determined that our financial statements will not
be material to the offering of any offered certificates.
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RATINGS
It is a condition to the issuance of any class of offered certificates
that they will have been rated not lower than investment grade, that is, in one
of the four highest rating categories, by at least one nationally recognized
statistical rating organization.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by the holders of the certificates of all collections on the underlying
mortgage assets to which the holders are entitled. These ratings address:
o the structural, legal and issuer-related aspects associated with the
certificates;
o the nature of the underlying mortgage assets; and
o 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 borrowers or of the
degree by which the prepayments might differ from those originally anticipated.
As a result, if you purchase any offered certificates, you might suffer a lower
than anticipated yield. In addition, if you purchase Stripped Interest
Certificates you might, in certain cases, fail to recoup your initial
investment. Furthermore, ratings on mortgage pass-through certificates do not
address the price of the certificates or the suitability of the certificates to
you as an investment.
In particular, ratings on the offered certificates of any series will not
represent any assessment of:
o the tax attributes of those certificates or of the related trust;
o whether or to what extent prepayments of principal may be received on
the underlying mortgage loans;
o the likelihood or frequency of prepayments of principal on the
underlying mortgage loans;
o the degree to which the amount or frequency of prepayments on the underlying
mortgage loans might differ from those originally anticipated;
o whether or to what extent the interest distributable on any class of offered
certificates may be reduced in connection with interest shortfalls resulting
from the timing of voluntary prepayments;
o the likelihood that prepayment premiums, fees and charges or interest in
excess of interest at the related mortgage interest rates will be received
with respect to the underlying mortgage loans; or
o whether the holders of any Stripped Interest Certificates, despite receiving
all distributions of interest to which they are entitled, would or would not
ultimately recover their initial investments in those certificates.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
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The information in this prospectus is not complete and may be changed. We
may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to Completion, Dated March 3, 2000
PROSPECTUS SUPPLEMENT
(To Prospectus dated _______, 2000)
$_____________(Approximate)
PNC Mortgage Acceptance Corp.
as Depositor
Midland Loan Services, Inc. and _________________
as Mortgage Loan Sellers
and
Midland Loan Services, Inc.
as Master Servicer and Special Servicer
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES ____-___
-------------------------
PNC Mortgage Acceptance Corp. is offering [eight] classes of its series
____-___ commercial mortgage pass-through certificates, which represent
beneficial ownership interests in a trust. The trust's assets will primarily be
____ loans secured by [first] liens on ___ commercial and multifamily
residential properties. The offered certificates are not obligations of PNC
Mortgage Acceptance Corp. or any of its affiliates. No governmental agency or
any other person will insure or guaranty the certificates or the underlying
mortgage loans.
PNC Mortgage Acceptance Corp. will not list the offered certificates on
any national securities exchange or on any automated quotation system of any
registered securities association such as NASDAQ.
Investing in the certificates involves risks. See "Risk Factors" beginning
on page S-13 of this prospectus supplement and page 6 of the prospectus.
The following classes of the series ____-___ certificates are being
offered by this prospectus supplement:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Initial
Principal Approximate Initial Description of Pass-
Balance or Pass-Through Through Scheduled Final Ratings
Class Notional Amount Rate Rate Distribution Date ____/_____
[Class S ........ $___________ ______% ________ 20__
Class A-1A....... $___________ ______% ________ 20__
Class A-1B....... $___________ ______% ________ 20__
Class A-2........ $___________ ______% ________ 20__
Class A-3........ $___________ ______% ________ 20__
Class A-4........ $___________ ______% ________ 20__
Class B-1........ $___________ ______% ________ 20__
Class B-2]....... $___________ ______% ________ 20__
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved the offered certificates or determined if this
prospectus supplement and the accompanying prospectus are truthful and complete.
It is unlawful to represent otherwise.
__________________________________ and PNC Capital Markets, Inc., as
underwriters, will purchase the offered certificates from the depositor. They
will offer the offered certificates for sale to the public at negotiated prices
determined at the time of sale. The depositor will receive approximately
$________________ in sale proceeds, plus accrued interest, before expenses. It
is expected that delivery of the offered certificates will be made in book-entry
form only through the facilities of The Depository Trust Company in the United
States, or Cedel Bank, S.A. or the Euroclear System, in Europe, against payment
therefor on or about ___________, 200__.
<PAGE>
---------------------------------
____[Underwriters]____________ PNC Capital Markets,
Inc.
The date of this Prospectus Supplement is _______________, ______
<PAGE>
Important Notice about Information Presented in this Prospectus Supplement
and the Accompanying Prospectus
We provide information to you about the offered certificates in two
separate documents that progressively provide more detail:
o the accompanying prospectus, which provides general information,
some of which may not apply to the offered certificates, and
o this prospectus supplement, which describes the specific terms of the offered
certificates.
You should read both this prospectus supplement and the prospectus before
investing in any of the offered certificates.
You should rely only on the information contained in this prospectus
supplement and accompanying prospectus. If the descriptions of the offered
certificates in the prospectus and in this prospectus supplement vary, you
should rely on the information in this prospectus supplement.
We include cross-references in this prospectus supplement and the
prospectus to captions in these materials where you can find further related
discussions. Unless we tell you otherwise, all references to captions are to
sections of this prospectus supplement. The table of contents on page S-3
provides the page numbers on which these captions are located.
You can find a listing of the pages where capitalized terms used in this
prospectus supplement and the prospectus are defined under the caption "Index of
Definitions" on page S-93 in this prospectus supplement and under the caption
"Index of Definitions" in the prospectus.
Limitations on Offers or Solicitations
We do not intend this document to be an offer or solicitation:
o if used in a jurisdiction in which such offer or solicitation is not
authorized;
o if the person making such offer or solicitation is not qualified to
do so; or
o if such offer or solicitation is made to anyone to whom it is unlawful to
make such offer or solicitation.
You should rely only on the information contained in this document, the
accompanying prospectus and the related registration statement. We have not
authorized anyone to provide you with information that is different. This
document may only be used where it is legal to sell these securities. The
information in this document may only be accurate as of the date of this
document.
Until _________, 200_, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealer's obligation to deliver
a prospectus when acting as an underwriter and with respect to unsold allotments
or subscriptions.
S-2
<PAGE>
TABLE OF CONTENTS
SUMMARY.................................................................... S-4
RISK FACTORS...............................................................S-13
DESCRIPTION OF THE MORTGAGE POOL...........................................S-30
General............................................................S-30
Security for the Mortgage Loans....................................S-30
Underwriting Standards.............................................S-31
Certain Terms and Conditions of the Mortgage Loans.................S-32
Certain Characteristics of the Mortgage Pool.......................S-36
Other Information..................................................S-39
The Sellers........................................................S-42
Changes in Mortgage Pool Characteristics...........................S-42
Representations and Warranties; Repurchase.........................S-43
MASTER SERVICER AND SPECIAL SERVICER.......................................S-45
DESCRIPTION OF THE CERTIFICATES............................................S-46
General............................................................S-46
Principal Balances and Notional Amounts............................S-47
Pass-Through Rates.................................................S-47
Distributions......................................................S-48
Treatment of REO Properties........................................S-52
Appraisal Reductions of Loan Balances..............................S-52
Application of Realized Losses and Expense
Losses to Principal Balances.......................................S-54
Prepayment Interest Excesses and Shortfalls........................S-55
Scheduled Final Distribution Date..................................S-55
Subordination......................................................S-56
Optional Termination...............................................S-56
Voting Rights......................................................S-57
Delivery, Form and Denomination....................................S-57
Registration and Transfer of Definitive Certificates...............S-60
YIELD AND MATURITY CONSIDERATIONS..........................................S-60
Rate and Timing of Principal Payments..............................S-60
Yield Sensitivity of the Interest Only Certificates................S-63
Weighted Average Life..............................................S-64
THE POOLING AND SERVICING AGREEMENT........................................S-66
Assignment of the Mortgage Loans...................................S-66
Servicing of the Mortgage Loans; Collection of Payments............S-67
Collection Activities..............................................S-68
Advances...........................................................S-68
Accounts...........................................................S-69
Enforcement of "Due-on-Sale"Clauses................................S-71
Enforcement of "Due-on-Encumbrance"Clauses.........................S-71
Inspections........................................................S-72
Realization Upon Mortgage Loans....................................S-73
Amendments, Modifications and Waivers..............................S-75
The Trustee........................................................S-75
Servicing Compensation and Payment of Expenses.....................S-77
Special Servicing..................................................S-77
The Controlling Class Representative...............................S-79
Sub-Servicers......................................................S-80
Reports to Certificateholders; Where You
Can Find More Information..........................................S-81
MATERIAL FEDERAL INCOME TAX CONSEQUENCES...................................S-83
ERISA CONSIDERATIONS.......................................................S-85
Plan Asset Regulation..............................................S-86
Individual Exemption...............................................S-86
Other Exemptions...................................................S-88
Insurance Company Purchasers.......................................S-88
LEGAL INVESTMENT...........................................................S-89
PLAN OF DISTRIBUTION.......................................................S-91
USE OF PROCEEDS............................................................S-92
LEGAL MATTERS..............................................................S-92
RATINGS....................................................................S-92
INDEX OF DEFINITIONS.......................................................S-94
EXHIBIT A-1 -Certain Characteristics of the
Mortgage Loans and Mortgaged Properties...................................A-1-1
EXHIBIT A-2 -Mortgage Pool Information....................................A-2-2
EXHIBIT B -Significant Loan Summaries.......................................B-1
EXHIBIT C -Form of Trustee Report...........................................C-1
EXHIBIT D -Decrement Tables for the Class A-1A,
Class A-1B, Class A-2, Class A-3, Class A-4, Class
B-1 and Class B-2 Certificates..............................................D-1
EXHIBIT E -Price/Yield Tables for the Class S Certificates..................E-1
EXHIBIT F -Summary Term Sheet...............................................F-1
S-3
<PAGE>
SUMMARY
o This summary highlights selected information from this prospectus supplement
and does not contain all of the information that you need to consider in
making your investment decision. To understand the terms of the offered
certificates you must carefully read this entire document and the
accompanying prospectus.
o This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
o We provide information on the privately offered certificates in this
prospectus supplement only to enhance your understanding of the offered
certificates.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Description Approximate
Principal Approximate Approximate Weighted of Initial
Balance Percent of Percent of Average Principal Pass- Pass-
or Notional Rating by Initial Pool Credit Life Window Through Through
Class Amount ____/____ Balance Support (Years) (Months/Year) Rate Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Senior Certificates
- ------------------------------------------------------------------------------------------------------------------------------------
[S $__________ N/A N/A ____ N/A _____%
A-1A $__________ _____% _____% ____ _____-_____ _____%
A-1B $__________ _____% _____% ____ _____-_____ _____%
- ------------------------------------------------------------------------------------------------------------------------------------
Subordinate Certificates
- ------------------------------------------------------------------------------------------------------------------------------------
A-2 $__________ _____% _____% ____ _____-_____ _____%
A-3 $__________ _____% _____% ____ _____-_____ _____%
A-4 $__________ _____% _____% ____ _____-_____ _____%
B-1 $__________ _____% _____% ____ _____-_____ _____%
B-2 $__________ _____% _____% ____ _____-_____ _____%
- ------------------------------------------------------------------------------------------------------------------------------------
B-3 to D] $__________ -- _____% -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
___ Offered certificates. ____ These certificates are not
offered by this prospectus
supplement. They constitute
"privately offered certificates".
The total initial principal balances and notional amounts for the certificates
may vary by up to [5%].
The column entitled "Principal Window" lists the months during which
certificateholders would receive distributions of principal. The weighted
average life and principal window figures are based on the maturity assumptions
described under "Yield and Maturity Considerations" assuming no prepayments and
that the hyper-amortization loans pay on their anticipated repayment dates.
The percentages indicated under the column "Approximate Percent of Credit
Support" with respect to the class [A-1A and class A-1B] certificates represent
the approximate credit support for the class [A-1A and class A-1B] certificates
in the aggregate.
The notional amount for the class [S] certificates will generally be equal to
the total principal balance of the other classes of certificates identified in
the table above.
["Variable IO" refers to a variable pass-through rate that is equal to the
excess, if any, of (1) a weighted average coupon derived from net interest rates
on the loans that will back the certificates, over (2) a weighted average of the
pass-through rates in respect of each of the other classes of certificates
identified in the table above.
"WAC Cap" refers to a variable pass-through rate that is equal to the lesser of
(1) the initial pass-through rate for the subject class of certificates and (2)
a weighted average coupon derived from net interest rates on the loans that will
back the certificates.
"WAC" refers to a variable pass-through rate that is equal to a weighted average
coupon derived from net interest rates on the loans that will back the
certificates.]
The privately offered certificates will also include the following classes of
certificates that are not shown above: [class E, class R-I, class R-II and class
R-III]. These other privately offered certificates do not have principal
balances, notional amounts or pass-through rates. They do not provide any
material credit support for the offered certificates.
S-4
<PAGE>
Relevant Parties and Dates
Depositor
PNC Mortgage Acceptance Corp., a wholly-owned subsidiary of Midland Loan
Services, Inc. PNC Mortgage Acceptance Corp.'s principal offices are located at
210 West 10th Street, 6th Floor, Kansas City, Missouri, 64105, telephone number
(816) 435-5000. See "PNC Mortgage Acceptance Corporation" in the prospectus.
Sellers
Midland Loan Services, Inc., a wholly owned subsidiary of
PNC Bank, N.A., is selling ___ loans (____%). Midland is an affiliate of
PNC Capital Markets, Inc.
_____________________, is selling ___ loans (___%).
Underwriters
____________________ and PNC Capital Markets, Inc. _________ is
the lead manager and sole bookrunner for this offering. PNC Capital
Markets is the co-manager.
Master Servicer and Special Servicer
Midland Loan Services, Inc. or any successor master servicer or
special servicer. See "Master Servicer and Special Servicer".
Trustee
________________________________. See "The Pooling and Servicing
Agreement--The Trustee".
Controlling Class
The most subordinate class of principal balance certificates that has at
least [25%] of its initial principal balance still outstanding. If no class has
at least [25%] of its initial principal balance still outstanding, the most
subordinate class of principal balance certificates still outstanding will be
the controlling class.
Controlling Class Representative
The holder of a majority of the controlling class may appoint a
representative. The special servicer must notify the controlling class
representative before it takes certain actions and must obtain the controlling
class representative's approval on certain matters. The controlling class
representative may replace the special servicer without cause. See "The Pooling
and Servicing Agreement--General" and "--The Controlling Class Representative".
Significant Dates
Cut-off Date
______________, 20__.
Closing Date
On or about ______________, 20__.
Distribution Date
Payments on the offered certificates are scheduled to occur monthly,
commencing in _______ 200_. [The distribution date for each month will be the
later of:
o the ____ calendar day of that month, or if that day is not a
business day, then the next business day, and
o the ______ business day after the determination date for the month.]
Scheduled Final Distribution Date
The distribution date on which a class's principal balance or notional
amount would become zero if there are:
o no defaults or delinquencies,
o no prepayments of any kind, except that it is assumed that hyper-amortization
loans will pay on their anticipated repayment dates; and
o no modifications or extensions of any loans.
Please note that it is very unlikely that these assumptions will hold
true. See "Description of the Certificates--Scheduled Final Distribution Date".
S-5
<PAGE>
Rated Final Distribution Date
The distribution date in ________, 20__, which is the distribution date
occurring three years after the end of the amortization term of the loan with
the longest remaining amortization term on the closing date.
See "Ratings".
Record Date
For each distribution date, the close of business on the _____ business
day of the prior calendar month.
Interest Accrual Period
For each distribution date, the prior calendar month.
Collection Period
For each distribution date, the period beginning the day after the
determination date in the preceding month and ending on the related
determination date. For the first distribution date, the collection period
begins the day after the cut-off date.
Determination Date
[For each distribution date, the ______ calendar day of the month or, if
that day is not a business day, the first business day before that day.]
Due Date
The date scheduled payments come due under each mortgage loan
(disregarding grace periods). The due date for all the mortgage loans is the
first day of the month.
Information About the Certificates
Offered Certificates
We are offering the following classes of PNC Mortgage Acceptance
Corp. Commercial Mortgage Pass-Through Certificates, Series ____-___.
[Class S
Class A-1A
Class A-1B
Class A-2
Class A-3
Class A-4
Class B-1
Class B-2]
We have not registered the other classes of certificates under the
Securities Act of 1933 and are not offering them to you.
The approximate initial class principal balance, initial pass-through rate
and interest type of each class of the offered certificates will be as listed on
the chart on page S-4.
Certificate Designations
In this prospectus supplement, we will refer to the following groups of
certificates by the indicated designations:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C>
Designation Related Classes
- -----------------------------------------------------------------------------------------------------------------------
Offered certificates Classes [S, A-1A, A-1B, A-2, A-3, A-4, B-1 and B-2]
Privately offered certificates Classes [B-3, B-4, B-5, B-6, B-7, B-8, C, D, E, R-I, R-II and R-III]
Senior certificates Classes [S, A-1A and A-1B]
Principal balance certificates Classes [A-1A, A-1B, A-2, A-3, A-4, B-1, B-2, B-3, B-4, B-5, B-6, B-7, B-8, C and D]
Interest only certificates Class [S]
Subordinate certificates Classes [A-2, A-3, A-4, B-1, B-2, B-3, B-4, B-5, B-6, B-7, B-8, C and D]
Deferred interest certificates Class [E]
Residual certificates Classes [R-I, R-II and R-III]
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
S-6
<PAGE>
Accrual of Interest
Each class of offered certificates will bear interest. In each case, that
interest will accrue during each interest accrual period based upon--
o the pass-through rate applicable for the particular class for that
interest accrual period,
o the aggregate principal balance or notional amount, as the case may be, of
the particular class outstanding immediately prior to the related
distribution date, and
o the assumption that each year consists of 360 days and 12 30-day
months.
Distributions
Distributions to Senior Certificates
On each distribution date, funds available for distribution from the
mortgage loans, net of prepayment premiums and deferred interest, will be
distributed to the holders of the senior certificates in the following order:
Interest on Senior Certificates: to pay interest to the holders of
the senior certificates in an amount equal to their interest entitlement.
Principal on [Class A-1A and Class A-1B] Certificates: to pay principal
from the funds available for principal distributions to the holders of the
[class A-1A and class A-1B] certificates, in that order, until reduced to zero.
If the principal amount of each class of principal balance certificates other
than [class A-1A and class A-1B] certificates has been reduced to zero, funds
available for principal distributions will be distributed to the holders of the
[class A-1A and class A-1B] certificates, pro rata, rather than sequentially.
Reimbursement of [Class A-1A and Class A-1B] Losses: to reimburse the
holders of the [class A-1A and class A-1B] certificates, pro rata, for any
losses on the mortgage loans that resulted in an unreimbursed reduction of the
principal balances of such certificates, plus interest on such amounts.
Distributions to Subordinate Certificates
On each distribution date, following the above distributions on the senior
certificates, the trustee will distribute the remaining portion of the funds
available for distribution to the holders of each class of subordinate
certificates in alphabetical and numerical order of class designation. In the
case of each class of subordinate certificates, those payments will be as
follows:
o first, distributions of interest in an amount equal to the class'
interest entitlement;
o second, to pay principal from the funds available for principal
distributions, if the principal balance of the class [A-1A and class A-1B]
certificates and each other class of subordinate certificates, if any, with
an earlier alphabetical and numerical class designation, has been reduced to
zero; and
o third, to reimburse the class for any losses on the mortgage loans that
resulted in an unreimbursed reduction of the principal balance of such class
of certificates, plus interest on such amounts.
Each class of subordinate certificates will receive distributions only
after all required distributions have been made on the senior certificates and
each other class of subordinate certificates, if any, with an earlier
alphabetical and numerical class designation.
In this prospectus supplement, "alphabetical and numerical order" is
determined first by alphabetical order, and then if the alphabetical
designations are the same, by numerical order.
Distribution of Prepayment Premiums
Any prepayment premium collected on a mortgage loan during a collection
period will be distributed to the holders of the offered certificates on the
next distribution date as set forth in "Description of the
Certificates--Distributions--Distributions of Prepayment Premiums".
Subordination
The rights of the subordinate certificates to receive payments of
principal and interest will be subordinated to the rights of the senior
certificates. Each class of subordinate certificates is also subordinate to the
rights of holders of each other class of subordinate certificates with an
earlier alphabetical and numerical class designation.
Such subordination results from:
o applying the funds available from the loans in the order described
above; and
o allocating losses on the loans and certain default-related and unanticipated
expenses of the trust to the certificates in reverse order of their
alphabetical and numerical class designations.
S-7
<PAGE>
After the balances of all subordinate certificates have been reduced to
zero, losses are allocated to the [class A-1A and A-1B] certificates in
proportion to their class principal balances.
The [class S] certificates receive no such allocations but do incur
reductions of their notional amount whenever the principal balance is reduced on
any class.
The certificates have no other form of credit enhancement.
Prepayment Interest Shortfalls and Excesses
If a borrower prepays a loan before the determination date in any calendar
month and pays interest which accrued on the prepayment from the beginning of
the calendar month, then that interest, net of master servicer fees, is a
"prepayment interest excess".
If a borrower prepays a loan after the determination date in a calendar
month and does not pay interest on the prepayment through the end of the
calendar month, then this interest shortfall, net of master servicer fees, is a
"prepayment interest shortfall".
Prepayment interest excesses collected during a collection period will
first offset prepayment interest shortfalls during the collection period. The
master servicer retains any remaining amount as additional servicing
compensation. The master servicer must cover prepayment interest shortfalls not
offset by prepayment interest excesses from its own funds up to certain maximum
amounts.
If and to the extent there are prepayment interest shortfalls not offset
by prepayment interest excesses or covered by the master servicer from its own
funds, then those prepayment interest shortfalls will be allocated among the
certificates in proportion to the interest accrued on each certificate during
the corresponding interest accrual period. Such net interest shortfalls
allocated to a class will reduce the distributable certificate interest on the
class. See "The Pooling and Servicing Agreement--Servicing Compensation and
Payment of Expenses".
Advances
The master servicer must make advances for delinquent payments of
principal (except for delinquent balloon payments) and/or interest on the loans
and to cover certain servicing expenses.
If the master servicer fails to make a required advance and the trustee is
aware of the failure, the trustee must make it.
Advances are required only if the advancing party determines in its
reasonable discretion that they are ultimately recoverable from future
collections on the related loan or mortgaged property.
All advances will accrue interest at the "prime rate".
To the extent not offset by collected late payment charges on the related
loan or default interest on any loan, payments of advance interest will reduce
the cash available to pay interest on the most subordinate class of certificates
then outstanding. See "The Pooling and Servicing Agreement--Advances".
Appraisal Reductions
If certain adverse events or circumstances occur or exist with respect to
a loan or the related mortgaged property, the master servicer or the special
servicer must obtain a new appraisal of the mortgaged property. If the principal
balance of the loan, plus certain other amounts due under the loan, is more than
[90%] of the new appraised value plus the amount of any escrows or reserves for
the loan that are not related to taxes or insurance, the amount of interest that
the master servicer is required to advance will be reduced. Due to the payment
priorities, this reduction in advances will reduce the cash available to pay
interest on the most subordinate class of certificates then outstanding. See
"Description of the Certificates--Appraisal Reductions."
Information About the Mortgage Loans
The certificates will represent beneficial ownership interests in a trust
fund created by the depositor. The trust fund will consist primarily of a pool
of ____ [fixed-rate] loans with a total cut-off date principal balance of
approximately $_________, plus or minus [5%]. We frequently refer to the total
cut-off date principal balance of the loans as the "initial pool balance".
S-8
<PAGE>
We include in this prospectus supplement a variety of information
regarding the loans and mortgaged properties. In reviewing this information, you
should be aware that:
o All numerical information provided about the loans is provided on an
approximate basis.
o All weighted average information provided about the loans or any sub-group of
loans reflects the weighting of those loans by their respective cut-off date
principal balances. The "cut-off date principal balance" of any loan is its
unpaid principal balance on ________, 20__, after application of all payments
of principal due on the loan on or before that date, whether or not those
payments are received.
o In the presenting the cut-off date principal balances of the loans, we have
assumed that:
(i) all scheduled payments of principal and/or interest due on the loans on
or before ___________, 20__ are timely made, and,
(ii) there are no prepayments or other unscheduled collections of principal
with respect to any of the loans during the period from __________, 20__
up to and including __________, 20__.
o When information about the loans or the properties is expressed as a
percentage, the percentage is based upon the cut-off date principal balances
of the related loans and not the number of loans.
o Some of the loans provide that they are cross-collateralized and
cross-defaulted with one or more other loans. Except as otherwise
indicated, when a loan is cross-collateralized and cross-defaulted with
another loan, we have presented the information regarding those loans
as if each of them was secured only by a lien on the corresponding
property identified on Exhibit A-1 to this prospectus supplement. One
such exception is that each and every loan in any particular group of
cross-collateralized and cross-defaulted loans is treated as having the
combined loan-to-value ratio and the combined debt service coverage
ratio for that entire group. None of the loans is cross-collateralized
with any loan that will not be included in the trust.
o In making the count of loans in the trust fund, any single loan evidenced by
one or more notes and secured by mortgages over multiple properties was
counted as one loan. In some cases, for purposes of providing certain
property-specific information with respect to such multiple property loans we
have allocated each such loan among its related properties based upon:
o relative appraised values;
o relative underwritable cash flow; or
o prior allocations reflected in the related loan documents.
The loan-to-value ratios and debt service coverage ratios shown for each of
the separate properties securing a multiple property loan are the ratios for
that loan based upon all of those properties.
o In some cases, when multiple parcels of property secure a single
indebtedness, we have treated those parcels as a single "property" because of
their proximity to each other, the interrelationship of their operations or
for other reasons deemed appropriate by us.
o Whenever we refer to a particular property by name, we mean the property
identified by that name on Exhibit A-1 to this prospectus supplement.
o Statistical information regarding the loans may change prior to the date of
initial issuance of the certificates due to changes in the composition of the
mortgage pool prior to that date.
A [first] lien on a fee simple or leasehold estate in a mortgaged property
secures each loan.
o Fee - ____ properties (____%).
o Leasehold - ____ properties (____%).
o Fee/Leasehold - ___ properties (____%).
The mortgage pool includes ___ separate sets of cross-collateralized
loans. The largest of these sets is ____% of the initial pool balance.
You should consider all of the loans to be non-recourse. You should also
consider them not to be insured or guaranteed by any person or entity.
________________ loans (_____%) are "balloon loans" that are expected to
have more than [10%] of their original principal balance remaining unpaid at
their maturity date.
____ of the loans (____%) are hyper-amortization loans and provide for an
increase in their interest rate and/or principal amortization prior to maturity.
S-9
<PAGE>
____ Mortgage Loans (____%) have remaining amortization terms that are
substantially the same as their remaining terms to maturity.
The loans generally grant the related borrower a right to transfer its
loan under certain conditions, including the lender's prior consent. Some of the
loans may provide that the lender cannot unreasonably withhold its consent to
the proposed transferee.
Property types included in the mortgage pool include:
o multifamily - ___ properties (____%).
o retail - ___ properties (____%).
o office - ___ properties (____%).
o industrial - ___ properties (____%).
o hospitality - ___ properties (____%).
o mixed use - ___ properties (____%).
o manufactured housing - __ properties (___%).
o self storage - __ properties (____%).
o credit tenant lease - __ property (____%).
Properties located in each of ______ and ______ secure at least [10%] of
the initial pool balance. Also, properties located in each of _____, ______,
_______, _______ and ______ secure at least [5%], but less than [10%], of the
initial pool balance. None of the remaining ____ jurisdictions has mortgaged
properties securing [5%] or more of the initial pool balance.
No set of loans to a single borrower or to a single group of affiliated
borrowers constitutes more than ____% of the initial pool balance.
_________ properties (____%) are at least 50% occupied by a major
tenant or the borrower.
___________________ loans (____%) permit the borrower to defease its loan,
subject to certain conditions.
Other than loans allowing defeasance, the loans generally permit voluntary
prepayments after any lock-out period if a prepayment premium is also paid.
Prepayment premiums are generally calculated based on a yield maintenance
formula or a specified percentage of the amount prepaid. The prepayment premium
percentage will remain constant over time. The tables included in Exhibit A-2
analyze the percentage of the declining balance of the mortgage pool that will
be within a lock-out period or in which principal prepayments must be
accompanied by the indicated prepayment premium, for each of the time periods
indicated.
As of the cut-off date, the loans have the following characteristics:
o mortgage rates range from _____% to _____% per annum, with a weighted average
mortgage rate of _____% per annum;
o remaining terms to stated maturity range from __ months to ___ months, with a
weighted average remaining term to stated maturity of ___ months;
o cut-off date principal balances range from $______ to $_________, with an
average cut-off date principal balance of $_________;
o a weighted average underwritable debt service coverage ratio of ____x (see
"Description of the Mortgage Pool--Other Information"); and
o a weighted average cut-off date loan-to-value ratio of ____% (see
"Description of the Mortgage Pool--Other Information").
Any weighted average loan-to-value and debt service coverage ratio
calculations in this prospectus supplement exclude the __ loan (___%) secured by
a mortgaged property subject to a credit tenant lease.
The characteristics of the loans are more fully described under
"Description of the Mortgage Pool" and in the Exhibits.
Yield and Prepayment Considerations
The yield on an offered certificate will depend on many factors,
including:
o the pass-through rate for the certificate in effect from time to
time;
o whether the certificate is purchased at a discount or premium;
o the timing of principal distributions that reduce the principal
balance or notional amount of the certificate;
o appraisal reductions;
o expense losses; and
o realized losses.
See "Description of the Certificates--Distributions--Application of
Available Funds" and
S-10
<PAGE>
"--Distributions--Principal Distribution Amount".
We cannot predict the actual rate of principal prepayments. You should
independently estimate prepayment rates to use in evaluating an investment in
the offered certificates. See "Yield and Maturity Considerations".
A different rate of principal payments than you anticipate will cause the
actual yield to vary, perhaps significantly, from your expected yield.
You may be unable to reinvest principal distributions in an alternative
investment with a comparable yield.
The [class S] certificates are interest-only certificates and receive no
distributions of principal. The yield to maturity of [class S] certificates will
be very sensitive to the prepayment, repurchase, extension, default and recovery
experience on the mortgage loans. These may fluctuate significantly from time to
time. A rate of principal payments, liquidations, unreimbursed expense or losses
on the mortgage loans that is more rapid than you expect will significantly
reduce your expected yield to maturity on these certificates. See "Yield and
Maturity Considerations--Yield Sensitivity of the Interest Only Certificates".
Additional Information About the Certificates
Tax Status of the Certificates
An election will be made to treat the trust as three separate "real estate
mortgage investment conduits" - REMIC I, REMIC II and REMIC III for federal
income tax purposes. In the opinion of counsel, the trust will qualify for this
treatment.
Pertinent federal income tax consequences of an investment in the offered
certificates include:
o Each class of offered certificates will constitute a "regular interest" in
REMIC III.
o The regular interests will be treated as newly originated debt instruments
for federal income tax purposes.
o You will be required to report income on the offered certificates in
accordance with the accrual method of accounting.
o The [class S and class B-2] certificates will be, and the other classes of
the offered certificates will not be, issued with original issue discount.
See "Material Federal Income Tax Consequences" in this prospectus
supplement and in the accompanying prospectus.
Optional Termination
If the total stated principal balance of all outstanding principal balance
certificates is less than [1%] of the initial pool balance on any distribution
date, then each of the following in this order has an option to purchase all
loans and property in the trust fund at a specified price:
o the majority holders of the controlling class,
o the master servicer,
o the special servicer, and
o any holder of more than [50%] of the class R-I certificates.
Such a purchase will terminate the trust fund and cause early retirement
of the then outstanding certificates. See "Description of the
Certificates--Optional Termination".
Denominations
You may purchase offered certificates in minimum denominations of [$5,000]
initial principal balance or notional amount, as applicable, and in any higher
whole-dollar denomination.
Clearance and Settlement
You must hold your certificates in book-entry form. In the United States,
we will deliver through the facilities of The Depository Trust Company. In
Europe, we may deliver through the facilities of Cedelbank or the Euroclear
System. DTC, Cedelbank or Euroclear rules and operating procedures govern
transfers within the system. Crossmarket transfers between persons holding
directly or indirectly through DTC, on the one hand, and counterparties holding
directly or indirectly through Cedelbank or Euroclear, on the other, will be
effected in DTC through Citibank, N.A., the depositary for Cedelbank, or the
Brussels, Belgium office of Morgan Guaranty Trust Company of New York, the
depositary for Euroclear.
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ERISA Considerations
Subject to important considerations described under "ERISA Considerations"
in this prospectus supplement and in the accompanying prospectus, the [class S,
class A-1A and class A-1B] certificates are eligible for purchase by persons
investing assets of employee benefit plans or individual retirement accounts.
The [class A-2, class A-3, class A-4, class B-1 and class B-2]
certificates may not be purchased by, or transferred to, any employee benefit
plan or other retirement arrangement subject to the Employee Retirement Income
Security Act of 1974, or Section 4975 of the Internal Revenue Code of 1986, or
any person investing the assets of any such employee benefit plan or other
retirement arrangement. This prohibition does not apply to an insurance company
investing assets of its general account under circumstances that would qualify
for an exemption under Sections I and III of prohibited transaction class
exemption 95-60.
If you are a fiduciary of any retirement plan or other employee benefit plan or
arrangement subject to ERISA or section 4975 of the Internal Revenue Code of
1986, you should review carefully with your legal advisors whether the purchase
or holding of the offered certificates could give rise to a transaction that is
prohibited under ERISA or Section 4975 of the Internal Revenue Code of 1986. See
"ERISA Considerations" in this prospectus supplement and in the prospectus.
Ratings
It is a condition of the issuance of the offered certificates that they
receive credit ratings no lower than the ratings indicated on the cover of this
prospectus supplement from ______________ and
- ---------------.
A credit rating is not a recommendation to buy, sell or hold securities
and may be revised or withdrawn at any time by the assigning rating agency.
See "Ratings" in this prospectus supplement and in the prospectus for a
discussion of the basis upon which ratings are given, the limitations of and
restrictions on the ratings, and the conclusions that should not be drawn from a
rating.
Legal Investment
The [class S, A-1A, A-1B and A-2] certificates will [not] be "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 [so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization.]
If your investment authority is restricted by law, then you should consult
your own legal advisors to determine whether and to what extent the offered
certificates constitute legal investments for you. See "Legal Investment" in
this prospectus supplement and in the prospectus.
Reports To Certificateholders
The trustee will make monthly reports available to certificateholders of
record.
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RISK FACTORS
You should carefully consider the risks before making an investment
decision. In particular, the timing and amount of distributions on your
certificates will depend on payments and other recoveries received on the loans.
Therefore, you should carefully consider the risk factors relating to the loans
and the mortgaged properties.
The risks and uncertainties described below are not the only ones relating
to the offered certificates. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair your
investment.
If any of the following risks actually occur, your investment could be
materially and adversely affected.
This prospectus supplement also contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those anticipated in these forward-looking statements as a result of a variety
of factors, including the risks described below and elsewhere in this prospectus
supplement and the prospectus.
Your Investment Is Not Insured or Guaranteed and Your Source for
Repayment Is Limited
You should consider all of the loans to be nonrecourse loans. You should
also consider them not to be insured or guaranteed by any person or entity. If a
default occurs, the lender's remedies generally are limited to foreclosing
against the specific real property and other assets pledged to secure the
defaulted loan. Such remedies may be insufficient to provide a full return on
your investment. Payment of amounts due under a loan prior to maturity is
dependent primarily on the sufficiency of the net operating income of the
mortgaged property. Payment of a loan at maturity is primarily dependent upon
the borrower's ability to sell or refinance the property for an amount
sufficient to repay the loan.
The offered certificates will represent interests solely in the assets of
the trust and will not represent an interest in or an obligation of any other
person. Distributions on any class of the offered certificates will depend
solely on the amount and timing of payments on the loans.
____________________ of the loans (____%) were originated within 12 months
prior to the cut-off date. Consequently, these loans do not have a long-standing
payment history.
The Repayment of a Multifamily or Commercial Loan Is Dependent on the
Cash Flow Produced by the Property, Which Can Be Volatile and
Insufficient to Allow Timely Payment on Your Certificates
The loans are secured by various types of income-producing commercial
properties. Because, among other things, commercial lending typically involves
larger loans, it is generally thought to expose a lender to greater risk than
one-to-four family residential lending.
The repayment of a commercial loan is typically dependent upon the ability
of the applicable property to produce cash flow. Even the liquidation value of a
commercial property is determined, in substantial part, by the amount of the
property's cash flow or its potential to generate cash flow. However, net
operating income and cash flow can be volatile and may be insufficient to cover
debt service on the loan at any given time.
A large number of factors may adversely affect the net operating income,
cash flow and property value of the mortgaged properties. Some of these factors
relate to the property itself, such as:
o the age, design and construction quality of the property;
o perceptions regarding the safety, convenience and attractiveness of
the property;
o the proximity and attractiveness of competing properties;
o the adequacy of the property's management and maintenance;
o increases in operating expenses at the property and in relation to
competing properties;
o an increase in the capital expenditures needed to maintain the
property or make improvements;
o the dependence upon a single tenant, or a concentration of tenants
in a particular business or industry;
o a decline in the financial condition of a major tenant;
o an increase in vacancy rates; and
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o decline in rental rates as leases are renewed or entered into with new
tenants.
Others factors are more general in nature, such as:
o national, regional or local economic conditions, including plant closings,
military base closings, industry slowdowns and unemployment rates;
o local real estate conditions, such as an oversupply of competing
properties, space or housing;
o demographic factors;
o decreases in consumer confidence;
o changes in consumer tastes and preferences; and
o retroactive changes in building codes.
The volatility of net operating income will be influenced by many of the
foregoing factors, as well as by:
o the length of tenant leases;
o the creditworthiness of tenants;
o tenant defaults;
o in the case of rental properties, the rate at which new rentals
occur; and
o the property's "operating leverage" (i.e., the percentage of total property
expenses in relation to revenue, the ratio of fixed operating expenses to
those that vary with revenues, and the level of capital expenditures required
to maintain the property and to retain or replace tenants).
A decline in the real estate market or in the financial condition of a
major tenant will tend to have a more immediate effect on the net operating
income of properties with short-term revenue sources and may lead to higher
rates of delinquency or defaults under loans.
Converting Commercial Properties to Alternative Uses May Require
Significant Expenditures Which Could Reduce Payments on Your Certificates
Some of the mortgaged properties may not be readily convertible to
alternative uses if the current use of those properties were to become
unprofitable for any reason. Converting commercial properties to alternate uses
generally requires substantial capital expenditures. In addition, zoning or
other restrictions also may prevent alternative uses. The liquidation value of
any such mortgaged property consequently may be substantially less than the
liquidation value of a property that the owner could readily adapt to other
uses.
Property Value May Be Adversely Affected Even When There Is No Change in
Current Operating Income
Various factors may adversely affect the value of the mortgaged properties
without affecting the properties' current net operating income. These factors
include, among others:
o changes in governmental regulations, fiscal policy, zoning or tax
laws;
o potential environmental legislation or liabilities or other legal
liabilities;
o the availability of refinancing; and
o changes in interest rate levels.
Tenant Concentration Increases the Risk That Cash Flow Will Be
Interrupted, Which May Have an Adverse Effect on the Payment of Your
Certificates
A deterioration in the financial condition of a tenant can be particularly
significant if a mortgaged property is leased to a single tenant or a small
number of tenants, or if the lease payments of such tenant or tenants account
for a significant portion of the property's gross revenue. Such properties are
more susceptible to interruptions of cash flow if a tenant fails to renew its
lease or defaults under its lease. This is so because the owner may:
o suffer severe financial effects from the absence of all or a
significant portion of the property's rental income;
o require more time to re-lease the space; and
o incur substantial capital costs to make the space appropriate for replacement
tenants.
For ___properties (____%), a single tenant or the borrower occupies more
than [50%] of the related mortgaged property.
____ loan (____%) is secured by a mortgaged property subject to a credit
tenant lease. This loan has a lower debt service coverage ratio and a higher
loan-to-value ratio than would have been acceptable if the property had been
leased to a less creditworthy tenant. The tenant for this property has a
long-term local issuer credit rating of "___" from Standard & Poor's. This loan
is fully amortizing over the lease term of the related credit tenant.
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<PAGE>
A concentration of particular tenants among the mortgaged properties or of
tenants in a particular business or industry may also adversely affect retail
and office properties.
Leasing Mortgaged Properties to Multiple Tenants May Result in Higher
Re-Leasing Expenditures, Which May Have an Adverse Effect on the Payment
of Your Certificates
If a mortgaged property has multiple tenants, re-leasing expenditures may
be more frequent than in the case of mortgaged properties with fewer tenants.
These additional expenses will reduce the cash flow available for debt service
payments. Mortgaged properties with multiple tenants also may experience higher
continuing vacancy rates and greater volatility in rental income and expenses.
The Presence of Large Loans or a Large Concentration of Loans Among
Related Borrowers Increases the Possibility of Losses on the Loans Which
May Have an Adverse Effect on Your Certificates
The effect of mortgage pool loan losses will be more severe if:
o the pool is comprised of a small number of loans, each with a
relatively large principal amount; or
o the losses relate to loans that account for a disproportionately large
percentage of the pool's aggregate principal balance.
The __ largest loans, or groups of cross-collateralized loans, represent
___% of the initial pool balance. The potential loss on any of these loans may
have a more adverse effect on the offered certificates than a loss on a smaller
loan. Each of the other loans represents less than ___% of the initial pool
balance.
A concentration of loans with the same borrower or related borrowers also
can pose increased risks. Several groups of loans are made to the same borrower
or to borrowers related through common ownership and where, in general, the
related mortgaged properties are commonly managed. The three largest of these
groups represent ___%, ___% and ___%, respectively, of the initial pool balance.
The mortgaged properties for __ loans (___%) are owned by affiliated borrowers
and are also commonly managed by the same property management company. This
property management company is also related to each of the separate borrowers
through common ownership.
The bankruptcy or insolvency of any borrower in any such group could have
an adverse effect on the operation of all of the related mortgaged properties
and on the ability of such related mortgaged properties to produce sufficient
cash flow to make required payments on the related loans. For example, if a
person that owns or controls several mortgaged properties experiences financial
difficulty at one such property, it could:
o defer maintenance at one or more other mortgaged properties in order to
satisfy current expenses with respect to the mortgaged property experiencing
financial difficulty, or
o attempt to avert foreclosure by filing a bankruptcy petition that might have
the effect of interrupting monthly payments for an indefinite period on all
the related loans.
Large Geographic Concentrations of Mortgaged Properties May Have an
Adverse Effect on the Payment of Your Certificates
Concentrations of mortgaged properties in geographic areas may increase
the risk that adverse economic or other developments or a natural disaster
affecting a particular region of the country could increase the frequency and
severity of losses on loans secured by the properties. In recent periods,
several regions of the United States have experienced significant real estate
downturns. Regional economic declines or adverse conditions in regional real
estate markets could adversely affect the income from, and market value of, the
mortgaged properties located in such region. Other regional factors such as
earthquakes, floods or hurricanes or changes in governmental rules or fiscal
policies also may adversely affect the mortgaged properties located in such
region. For example, mortgaged properties located in California may be more
susceptible to certain hazards (such as earthquakes) than properties in other
parts of the country.
The mortgaged properties are located in __ jurisdictions. Mortgaged
properties located in each of _____________and __________ secure at least [10%]
of the initial pool balance. Also, mortgaged properties located in each of
_________, ________, _______, __________ and ________ secure at least [5%], but
less than [10%], of the initial pool balance. None of the remaining __
jurisdictions has mortgaged properties securing [5%] or more of the initial pool
balance. See "Description of the Mortgage Pool".
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<PAGE>
Large Concentrations of Multifamily Properties Securing Loans Will
Subject Your Investment to the Special Risks of These Properties
Multifamily properties secure ___% of the initial pool balance.
A large number of factors may affect the value and successful operation of
a multifamily property, including:
o the physical attributes of the property, such as its age, appearance
and construction quality;
o the location of the property;
o the characteristics of the surrounding neighborhood;
o the ability of management to provide adequate maintenance and
insurance;
o the types of services and amenities provided at the property;
o the property's reputation;
o the tenant mix, such as a tenant population that is dependent upon
students, workers from a particular business or personnel from a local
military base;
o the level of mortgage interest rates, which may encourage tenants to
purchase rather than rent housing;
o the presence of competing properties;
o local or national economic conditions;
o the extent to which a property is subject to covenants that require
rental to low income tenants;
o state and local regulations, such as rent control regulations and
regulations that govern eviction; and
o overnment assistance/rent subsidy programs.
___ multifamily properties (___%) are residential condominium projects.
These properties are subject to the governing documents of the owners'
association, local laws applicable to condominiums and other special
considerations. Consequently, realizing upon any such property following a
default under the related loan could expose the trust to greater delay, expense
and risk than a loan secured by a property that is not a condominium.
Large Concentrations of Retail Properties Securing Loans Will Subject
Your Investment to the Special Risks of These Properties
Retail properties secure ___% of the initial pool balance. The quality and
success of a retail property's tenants significantly affect the property's
value. For example, if the sales of retail tenants were to decline, rents tied
to a percentage of gross sales may decline and those tenants may be unable to
pay their rent or other occupancy costs.
The success of tenants at a retail property will be affected by:
o competition from other retail properties;
o perceptions regarding the safety, convenience and attractiveness of
the property;
o demographics of the surrounding area;
o traffic patterns and access to major thoroughfares;
o availability of parking;
o customer tastes and preferences; and
o the drawing power of other tenants.
The presence or absence of an "anchor store" at a retail property also can
be important. Anchors play a key role in generating customer traffic and making
a retail property desirable for other tenants. Consequently, the economic
performance of an anchored retail property will be adversely affected by:
o an anchor store's failure to renew its lease;
o termination of an anchor store's lease;
o the bankruptcy or economic decline of an anchor store or self-owned
anchor; or
o an anchor store closing its business, even if, as a tenant, it
continues to pay rent.
If an anchor store at a mortgaged property were to close, the related
borrower may be unable to replace the anchor in a timely manner or without
suffering adverse economic consequences. Furthermore, some anchor stores have
co-tenancy clauses in their leases that permit them to cease operating if
certain other stores are not operated at the mortgaged property or if certain
other covenants are breached. Some non-anchor tenants may also be permitted to
terminate their leases if certain other stores are not operated or if those
tenants fail to meet certain business objectives.
Retail properties also face competition from sources outside a given real
estate market. For example, all of the following compete with more traditional
retail properties for consumer dollars:
o factory outlet centers;
o discount shopping centers and clubs;
o catalogue retailers;
o home shopping networks;
o internet web sites; and
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<PAGE>
o telemarketing.
These alternative retail outlets often have lower operating costs than
traditional retail properties. Continued growth of these alternative retail
outlets could adversely affect the rents, income and market value of the retail
properties in the mortgage pool.
Moreover, additional competing retail properties may be built in the areas
where the retail properties are located.
Large Concentrations of Office Properties Securing Loans Will Subject
Your Investment to the Special Risks of These Properties
Office properties secure ___% of the initial pool balance.
A large number of factors may adversely affect the value of office
properties, including:
o the quality of an office property's tenants;
o the diversity of an office property's tenants or reliance on a
single or dominant tenant;
o the physical attributes of the property in relation to competing office
properties, such as age, condition, design, location, access to
transportation and ability to offer certain amenities, such as sophisticated
building systems;
o the desirability of the area as a business location; and
o the strength and nature of the local economy, including labor costs
and quality, tax environment and quality of life for employees.
Moreover, the cost of refitting office space for a new tenant is often
higher than the cost of refitting other types of property.
Large Concentrations of Industrial Properties Securing Loans Will Subject
Your Investment to the Special Risks of Such Properties
Industrial properties secure ___% of the initial pool balance. Various
factors may adversely affect the economic performance of an industrial property,
including:
o reduced demand for industrial space because of a decline in a
particular industry segment;
o a property becoming functionally obsolete;
o strikes or the unavailability of labor sources;
o changes in energy prices;
o relocation of highways and the construction of additional highways
or other changes in access;
o a change in the proximity of supply sources; and
o environmental hazards.
Large Concentrations of Hospitality Properties Securing Loans Will
Subject Your Investment to the Special Risks of Such Properties
Hospitality properties secure ___% of the initial pool balance. Various
factors may adversely affect the economic performance of a hospitality property,
including:
o adverse local, regional, national or international economic and social
conditions, which may limit the amount that can be charged for a room and
reduce occupancy levels;
o the construction of competing hospitality properties;
o continuing expenditures for modernizing, refurbishing and
maintaining existing facilities prior to the expiration of their
anticipated useful lives;
o a deterioration in the financial strength or managerial capabilities
of the owner and operator of a hospitality property; and
o changes in travel patterns, changes in access, increases in energy prices,
strikes, relocation of highways or the construction of additional highways.
Because rooms at hospitality properties generally are rented for short
periods of time, the financial performance of those properties tend to be
affected by adverse economic conditions and competition more quickly than other
types of commercial properties.
Moreover, the hospitality industry is generally seasonal in nature. This
seasonality can be expected to cause periodic fluctuations in a hospitality
property's revenues, occupancy levels, room rates and operating expenses.
Further, in the event of a foreclosure, the trustee or a purchaser of a
hospitality property probably would not be entitled to the rights under any
liquor license for that property. Such party would be required to apply for a
new license in its own name. The inability to obtain a new liquor license may
have an adverse effect on the value of a hospitality property.
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<PAGE>
The Affiliation of Some of the Properties with a Franchise or Hotel
Management Company May Have an Adverse Effect on the Payment of Your
Certificates
___ of the hospitality properties (___%) are operated as franchises of
national hotel chains or managed by a hotel management company. The performance
of a hospitality property operated as a franchise or by a hotel management
company depends in part on:
o the continued existence and financial strength of the franchisor or
hotel management company;
o the public perception of the franchise or hotel chain service mark;
and
o the duration of the franchise license or management agreements.
The transferability of a franchise license agreement may be restricted. In
the event of a foreclosure, the lender or its agent may not have the right to
use the franchise license without the franchisor's consent. Conversely, in some
instances, the lender may be unable to remove a franchisor or a hotel management
company that it desires to replace following a foreclosure.
The adverse effect of an economic decline in a particular hotel chain will
be more significant if there is a concentration of hotels operated by that chain
among the properties securing loans in the mortgage pool. In this regard, the
largest concentration consists of __ hospitality properties (___%) that are
operated as ________ franchises.
Certain Additional Risks Relating to Tenants
The income from, and market value of, the mortgaged properties leased to
various tenants would be adversely affected if:
o space in the mortgaged properties could not be leased or re-leased; o tenants
were unable to meet their lease obligations; o a significant tenant were to
become a debtor in a bankruptcy case; or o rental payments could not be
collected for any other reason.
Even if vacated space is successfully relet, the costs associated with
reletting, including tenant improvements and leasing commissions, could be
substantial and could reduce cash flow from the mortgaged properties. Moreover,
if a tenant defaults in its obligations to a borrower, the borrower may incur
substantial costs and experience significant delays associated with enforcing
its rights and protecting its investment, including costs incurred in renovating
and reletting the property.
Tenant Bankruptcy May Adversely Affect the Income Produced by the
Property and May Have an Adverse Effect on the Payment of Your
Certificates
The bankruptcy or insolvency of a major tenant, or a number of smaller
tenants, in retail and office properties may adversely affect the income
produced by a mortgaged property. Under federal bankruptcy law, a tenant/debtor
has the option of affirming or rejecting any unexpired lease. If the tenant
rejects the lease, the landlord's claim for breach of the lease would be a
general unsecured claim against the tenant, absent collateral securing the
claim. The claim would be limited to:
o the unpaid rent under the lease for the periods prior to the bankruptcy
petition or the earlier surrender of the leased premises, plus
o the rent under the lease for the greater of one year or 15%, not to exceed 3
years, of the remaining term of the lease.
Federal or State Environmental Laws May Affect the Value of a Mortgaged
Property or the Ability of a Borrower to Make Required Loan Payments and
May Have an Adverse Effect on the Payment of Your Certificates
Various environmental laws may make a current or previous owner or
operator of real property liable for the costs of removal or remediation of
hazardous or toxic substances on, under, adjacent to, or in the property. Those
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of the hazardous or toxic substances. For example,
certain laws impose liability for release of asbestos-containing materials into
the air or require the removal or containment of these materials. In some
states, contamination of a property may give rise to a lien on the property to
assure payment of the costs of cleanup. In some states, this lien has priority
over the lien of a pre-existing mortgage. Additionally, third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to asbestos, lead-based paint or other hazardous
substances.
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The owner's liability for any required remediation generally is not
limited by law and could exceed the value of the property and/or the aggregate
assets of the owner. The presence of hazardous or toxic substances also may
adversely affect the owner's ability to refinance the property or to sell the
property to a third party. The presence of, or strong potential for
contamination by, hazardous substances consequently can materially adversely
affect the value of the property and a borrower's ability to repay its loan.
In addition, under certain circumstances, a lender (such as the trust)
could be liable for the costs of responding to an environmental hazard. See
"Certain Legal Aspects of the Mortgage Loans--Environmental Considerations" in
the prospectus.
Environmental Issues Relating to Specific Properties May Have an Adverse
Effect on the Payment of Your Certificates
Environmental site assessments were obtained for ___ of the mortgaged
properties (___%) during the [24]-month period ending on ___________, 20__. The
assessments for __ of those mortgaged properties (___%) were obtained more than
18 months prior to the cut-off date. The assessments for ___ of those mortgaged
properties (___%) did not satisfy all of the requirements necessary to be
considered "Phase I" environmental site assessments.
Environmental consultants have detected asbestos or lead-based paint at
several mortgaged properties by sampling. The environmental consultants suspect
that asbestos or lead-based paint may be located at other mortgaged properties.
In some cases, the asbestos or lead-based paint is in poor condition. The
asbestos or lead-based paint found or suspected is not expected to present a
significant risk as long as the related mortgaged property is properly managed
or, when recommended by the consultant, the problem is remedied or abated.
Nonetheless, the value of a mortgaged property as collateral for the related
loan could be adversely affected, and claims for damages could arise from
parties injured by such asbestos or lead-based paint.
In certain cases, an assessment disclosed other known or potential adverse
environmental conditions, such as underground storage tanks or soil or
groundwater contamination. We cannot assure you, however, that the environmental
assessments revealed all existing or potential environmental risks or that all
adverse environmental conditions have been completely remediated.
Except as described herein, where an assessment disclosed a known or
potential material and adverse environmental condition, the originator required
the borrower to:
o escrow funds deemed sufficient to ensure remediation of or to
monitor the environmental issue;
o obtain an environmental insurance policy that covers the
environmental issue; or
o establish an operations and maintenance plan that, if implemented, would
prevent any material and adverse consequences resulting from the
environmental issue.
Set forth below are some of the known or potential material and adverse
environmental conditions for which an escrow has been established to cover
remediation costs or an environmental insurance policy has been obtained to
cover potential clean-up costs:
o ___ mortgaged properties (___%) - potential or existing contamination arising
from the operation of dry cleaning facilities upon or near such properties;
o ___ mortgaged properties (___%) - potential or existing contamination arising
from the operation of gas stations or automobile/marine repair facilities
upon or near such properties;
o ___ mortgaged property (___%) - by the former use of this property
as part of an oil production field;
o ___ mortgaged property (___%) - by the presence of underground
storage tanks upon this property; or
o ___ mortgaged properties (___%) - by the presence of leaking underground
storage tanks or other adverse environmental conditions on or near such
properties.
In some cases, the environmental consultant did not recommend that any
action be taken with respect to a known or potential adverse environmental
condition at a mortgaged property or a nearby property because:
o a remediation, under the supervision of an environmental regulatory
agency, had been completed or was currently underway;
o an environmental regulatory agency had issued a "no further action"
letter regarding the condition; or
o a responsible party with respect to the condition had already been
identified.
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No environmental site assessments were obtained for ___ mortgaged properties
(___%). For ___mortgaged properties (___%) a "Phase II" environmental site
assessment was recommended but not performed. In general, the decision not to
take the foregoing actions with respect to any of those mortgaged properties was
based upon the borrower or the lender obtaining an environmental insurance
policy with respect to the mortgaged property.
For ___ of the mortgaged properties (___%), the depositor will obtain a
separate secured creditor impaired property group policy covering certain
environmental matters with respect to such properties. For each of ___ other
mortgaged properties (___%), _______________ obtained a separate secured
creditor impaired property policy covering certain environmental matters with
respect to such properties. See "Description of the Mortgage Pool--Environmental
Insurance" for a more detailed description of these secured creditor impaired
property policies.
Each environmental insurance policy obtained with respect to a mortgaged
property contains certain coverage limits. In addition, the policies do not
provide coverage for adverse environmental conditions at levels below legal
limits or for conditions involving asbestos and lead-based paint. There is no
assurance that any escrowed funds will be sufficient to complete remediation of
any environmental conditions affecting the related mortgaged property.
The environmental assessments, when obtained, have not revealed any
environmental liability that the depositor believes would have a material
adverse effect on the borrowers' businesses, assets or results of operations
taken as a whole. Nevertheless, there may be material environmental liabilities
of which the depositor is unaware. Moreover, there is no assurance that:
o future laws, ordinances or regulations will not impose any material
environmental liability; or
o the current environmental condition of the mortgaged properties will not be
adversely affected by tenants or by the condition of land or operations in
the vicinity of the mortgaged properties, such as underground storage tanks.
Before the special servicer acquires title to a property on behalf of the
trust or assumes operation of the mortgaged property, it must obtain an
environmental assessment of the mortgaged property. This requirement will
decrease the likelihood that the trust will become liable under any
environmental law. However, this requirement may effectively preclude
foreclosure until a satisfactory environmental assessment is obtained or any
required remedial action is completed. There is accordingly some risk that the
mortgaged property will decline in value while this assessment is being obtained
or the remedial work completed. Moreover, there is no assurance this requirement
will protect the trust from liability under environmental laws.
Borrower May Be Unable to Repay the Remaining Principal Balance on Its
Maturity Date or Anticipated Repayment Date, Which May Have an Adverse
Effect on the Payment of Your Certificates
__________ of the loans (___%) are expected to have more than [10%] of the
original principal balance remaining unpaid on their stated maturity date or, in
the case of hyper-amortization loans, on their anticipated repayment date. We
cannot assure you that each borrower will have the ability to repay the
remaining principal balance on the pertinent date. Additionally, a borrower in a
hyper-amortization loan is not obligated to repay its loan on the anticipated
repayment date. Loans with substantial remaining principal balances at their
stated or anticipated maturity involve greater risk than fully amortizing loans.
A borrower's ability to repay a loan on its maturity date or anticipated
repayment date typically will depend upon its ability either to refinance the
loan or to sell the mortgaged property at a price sufficient to permit
repayment. A borrower's ability to achieve either of these goals will be
affected by a number of factors, including:
o the availability of, and competition for, credit for commercial and
multifamily properties;
o prevailing interest rates;
o the fair market value of the related properties;
o the borrower's equity in the related properties;
o the borrower's financial condition;
o the operating history and occupancy level of the property;
o tax laws; and
o prevailing general and regional economic conditions.
The availability of funds in the credit markets fluctuates over time.
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See "Description of the Mortgage Pool - Certain Terms and Conditions of
the Mortgage Loans".
Borrowers That Are Not Special-Purpose Entities May be More Likely to
Pursue a Bankruptcy
The organizational documents of the borrowers for ___ loans (___%) do not
limit the borrowers' business activities to owning their respective properties.
Most of the borrowers (and any special-purpose entity having an interest
in any of the borrowers) do not have an independent director whose consent would
be required to file a voluntary bankruptcy petition on behalf of the borrower.
One of the purposes of an independent director (or of a special-purpose entity
having an interest in the borrower) is to reduce the likelihood of a bankruptcy
petition filing intended solely to benefit an affiliate and not justified by the
borrower's own economic circumstances.
The Borrower's Ability to Effect Other Borrowings May Reduce the Cash
Flow Available to the Property, Which May Have an Adverse Effect on the
Payment of Your Certificates
The loans generally do not permit the borrower to incur additional
indebtedness using the mortgaged property as collateral. However, ___ property
(___%) is known to be encumbered by a subordinate mortgage securing other debt
of the related borrower. The borrower for ___ other loan (___%) is also known to
have, and other borrowers may have, other unsecured debt, including debt
incurred in the ordinary course of business.
When a borrower (or its constituent members) also has one or more other
outstanding loans (even if subordinated, unsecured or mezzanine loans), the
trust is subjected to additional risk. The borrower and/or its constituent
members may have difficulty servicing and repaying multiple loans. The existence
of another loan generally will make it more difficult for the borrower to obtain
refinancing of the loan, which may jeopardize repayment of the loan. Moreover,
the need to service additional debt may reduce the cash flow available to the
borrower to operate and maintain the mortgaged property.
Additionally, if the borrower (or its constituent members) defaults on its
loan and/or any other loan, actions taken by other lenders could impair the
security available to the trust. If a junior lender files an involuntary
petition for bankruptcy against the borrower or the borrower files a voluntary
petition to stay enforcement by a junior lender, the trust's ability to
foreclose on the property will be automatically stayed, and principal and
interest payments might not be made during the course of the bankruptcy case.
The bankruptcy of another lender also may operate to stay foreclosure by the
trust.
Further, if another loan secured by the mortgaged property is in default,
the other lender may foreclose on the mortgaged property, unless the other
lender has agreed not to foreclose. A foreclosure by the other lender may cause
a delay in payments and/or an involuntary repayment of the loan prior to
maturity. The trust may also be subject to the costs and administrative burdens
of involvement in foreclosure proceedings or related litigation.
Bankruptcy Proceedings Relating to a Borrower May Result in a
Restructuring of the Loan
Under federal bankruptcy law, the filing of a petition in bankruptcy by or
against a borrower will stay the sale of the real property that the borrower
owns, as well as the commencement or continuation of a foreclosure action. In
addition, if a court determines that the value of the mortgaged property is less
than the principal balance of the loan it secures, the court may prevent a
lender from foreclosing on the mortgaged property, subject to certain
protections available to the lender. As part of a restructuring plan, a court
also may reduce the amount of secured indebtedness to the current value of the
mortgaged property. Such an action would make the lender a general unsecured
creditor for the difference between the current value of the property and the
amount of its loan. A bankruptcy court also may:
o grant a debtor a reasonable time to cure a payment default on a
loan;
o reduce monthly payments due under a loan;
o change the rate of interest due on a loan; or
o otherwise alter the loan's repayment schedule.
Moreover, the filing of a petition in bankruptcy by, or on behalf of, a
junior lienholder may stay the senior lienholder from taking action to foreclose
on the junior lien. Additionally, the borrower's trustee or the borrower, as
debtor-in-possession, has certain special powers to avoid, subordinate or
disallow debts. In certain circumstances, the claims of the trustee may be
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subordinated to financing obtained by a debtor-in-possession subsequent to its
bankruptcy.
Under federal bankruptcy law, the lender will be stayed from enforcing a
borrower's assignment of rents and leases. Federal bankruptcy law also may
interfere with a lender's ability to enforce any lockbox requirements. The legal
proceedings necessary to resolve these issues can be time-consuming and may
significantly delay the lender's receipt of rents. Rents also may escape an
assignment if the borrower uses the rents to maintain the mortgaged property or
for other court authorized expenses.
Thus, the trustee's recovery from borrowers in bankruptcy proceedings may
be significantly delayed, and the total amount ultimately collected may be
substantially less than the amount owed.
The Operation of Commercial Properties Is Dependent upon Successful
Management
The successful operation of a real estate project depends upon the
property manager's performance and viability. The property manager is generally
responsible for:
o responding to changes in the local market;
o planning and implementing a rental structure for the property;
o operating the property and providing building services;
o managing operating expenses; and
o assuring that maintenance and capital improvements are completed in
a timely fashion.
Properties deriving revenues primarily from short-term sources are
generally more management intensive than properties leased to creditworthy
tenants under long-term leases.
A good property manager can improve cash flow, reduce vacancy, leasing and
repair costs and preserve building value if it:
o controls costs;
o provides appropriate service to tenants; and
o maintains the improvements.
On the other hand, management errors can, in some cases, impair short-term
cash flow and the long-term viability of an income-producing property.
The depositor makes no representation or warranty as to the skills of any
present or future managers. Additionally, the depositor cannot assure you that
the property managers will be in a financial condition to fulfill their
management responsibilities throughout the terms of their respective management
agreements.
Property Inspections Performed on the Mortgaged Properties May Not
Reflect All Conditions That Require Repair on the Property
Licensed engineers or consultants inspected all of the mortgaged
properties in connection with the origination of the loans to assess items such
as:
o structure;
o exterior walls;
o roofing;
o interior construction;
o mechanical and electrical systems; and
o general condition of the site, buildings and other improvements.
However, there is no assurance that the inspectors identified all
conditions requiring repair or replacement.
The Absence of or Inadequacy of Insurance Coverage on the Mortgaged
Properties May Have an Adverse Effect on the Payment of Your Certificates
The mortgaged properties may suffer casualty losses due to risks that
insurance does not cover or for which insurance coverage is inadequate. There is
also no assurance borrowers will be able to maintain adequate insurance.
Moreover, changes in laws may materially affect the borrower's ability to
reconstruct the property or make major repairs or may materially increase the
cost of such reconstruction or repairs.
Certain of the mortgaged properties are located in [California, Texas and
along the southeastern coastal areas of the United States]. These areas have
historically been at greater risk regarding acts of nature (such as hurricanes,
floods and earthquakes) than other areas. The loans generally do not
specifically require the borrowers to maintain earthquake or hurricane
insurance.
As a result of any of the foregoing, the amount available to make
distributions on the certificates could be reduced.
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Appraisals May Inaccurately Reflect the Value of the Mortgaged
Properties
The originators obtained an appraisal or other market analysis of each
mortgaged property in connection with the origination or acquisition of the
related loan. The resulting estimates of value were used to calculate the
Cut-off Date LTV Ratios referred to in this prospectus supplement. Those
estimates represent the analysis and opinion of the person performing the
appraisal or market analysis and are not guarantees of present or future values.
Moreover, the values of the mortgaged properties may have changed significantly
since the appraisal or market valuation was performed. In addition, appraisals
seek to establish the amount a typically motivated buyer would pay a typically
motivated seller. Such amount could be significantly higher than the amount
obtained from the sale of a mortgaged property under a distress or liquidation
sale. Information regarding the values of mortgaged properties available to the
depositor is presented in Exhibits A-1, A-2 and B for illustrative purposes
only.
The Timing of Loan Amortization May Have an Adverse Effect on the Payment
of Your Certificates
As principal payments or prepayments are made on loans in the mortgage
pool, the remaining certificateholders may be subject to more risk because of
the decreased:
o number of mortgaged properties;
o diversity of mortgaged property types;
o diversity of geographic locations; and
o number of borrowers and affiliated borrowers.
Classes of the certificates that have a later alphabetical or numerical
designation or a lower payment priority are more likely to be exposed to this
concentration risk than are classes with an earlier alphabetical or numerical
designation or higher priority. This is because principal on the certificates is
generally payable in sequential order, and no class entitled to distribution of
principal generally receives principal until the principal amount of the
preceding class or classes entitled to receive principal has been reduced to
zero.
Subordination of Subordinate Certificates Will Affect the Timing of
Payments and the Application of Losses on Your Certificates
As described in this prospectus supplement, unless your certificates are
[class S, class A-1A or class A-1B] certificates, your rights to receive
distributions of amounts collected or advanced on or in respect of the loans
will be subordinated to those of the holders of the certificates with an earlier
alphabetical or numerical designation. See "Description of the Certificates -
Distributions" and "-Subordination; Allocation of Losses and Certain Expenses"
in this prospectus supplement and "Risk Factors - Any Credit Support for Your
Certificates May be Insufficient to Protect You Against All Potential
Losses--Disproportionate Benefits to Certain Classes and Series" in the
prospectus.
The Operation of a Mortgaged Property upon Foreclosure of the Loan May
Affect the Tax Status of the Trust and May Have an Adverse Effect on the
Payment of Your Certificates
If the trust acquires a mortgaged property pursuant to a foreclosure or
deed in lieu of foreclosure, the special servicer will generally retain an
independent contractor to operate the property. Any net income from such
operation (other than qualifying "rents from real property"), or any rental
income based on the net profits of a tenant or sub-tenant or allocable to a
non-customary service, will subject the trust to a federal tax on such income at
the highest marginal corporate tax rate (currently [35%]), and in addition, to
possible state or local tax. In such event, the net proceeds available for
distribution to certificateholders will be reduced. The special servicer may
permit the trust to earn "net income from foreclosure property" that is subject
to tax if it determines that the net after-tax benefit to certificateholders is
greater than under another method of operating or leasing the mortgaged
property. If the mortgaged property did not qualify as foreclosure property
because of certain disqualifying events, any income realized from operation or
disposition of the property would be subject to a 100% prohibited transaction
tax. It is not anticipated that the trust will receive any income from
prohibited transactions.
State Laws Applicable to the Enforcement of Lender Remedies May Affect
the Timing of Payments on Your Certificates and May Have an Adverse
Effect on the Payment of Your Certificates
[All] of the loans permit the lender to accelerate the debt upon default
by the borrower. The courts of all states will enforce acceleration clauses in
the event of a material payment default. State equity courts, however, may
refuse to permit foreclosure or acceleration if a default is deemed
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immaterial or the exercise of those remedies would be unjust or unconscionable.
If a mortgaged property has tenants, the borrower assigns its income as
landlord to the lender as further security, while retaining a license to collect
rents as long as there is no default. If the borrower defaults, the license
terminates and the lender is entitled to collect rents. In certain
jurisdictions, such assignments may not be perfected as security interests until
the lender takes actual possession of the property's cash flow. In some
jurisdictions, the lender may not be entitled to collect rents until the lender
takes possession of the mortgaged property, secures the appointment of a
receiver or otherwise acts to enforce its remedies. In addition, as previously
discussed, a bankruptcy or similar proceeding commenced by or for the borrower
could adversely affect the lender's ability to collect the rents.
The laws of some states, including [California], prohibit more than one
"judicial action" to enforce a mortgage obligation. Some courts have construed
the term "judicial action" broadly. In the case of a loan secured by mortgaged
properties located in multiple states, the master servicer or special servicer
may be required to foreclose first on mortgaged properties located in states
where such "one action" rules apply (and where non-judicial foreclosure is
permitted) before foreclosing on properties located in states where judicial
foreclosure is the only permitted method of foreclosure. As a result, state laws
may limit the trust's ability to realize upon the loans. Foreclosure actions may
also, in certain circumstances, subject the trust to liability as a
"lender-in-possession" or result in the equitable subordination of the claims of
the trustee to the claims of other creditors of the borrower. The master
servicer or the special servicer may take these state laws into consideration in
deciding which remedy to choose following a default by a borrower.
Loans Secured by Mortgages on a Leasehold Interest Will Subject Your
Investment to a Risk of Loss Upon a Lease Default
____ of the mortgaged properties (___%) are encumbered by mortgages on a
borrower's leasehold interest under ground leases. ___ other mortgaged
properties (___%) are encumbered by mortgages on a borrower's leasehold interest
under ground leases and the fee interest of the owner of the property.
Leasehold loans are subject to risks not associated with loans secured by
a lien on the fee estate of the borrower. The most significant of these risks is
that if the landlord terminates the borrower's leasehold interest upon a lease
default, the leasehold mortgagee would lose its security. The ground lease loans
may require the master servicer to give notices or to take actions in addition
to those required for a fee loan in order for the trust to avail itself of its
rights under the related loan. Generally, the related ground lease:
o requires the landlord to give the leasehold mortgagee notice of tenant
defaults and an opportunity to cure them prior to enforcing its remedies;
o prohibits any amendment of the ground lease without the lender's
prior consent;
o permits the leasehold estate to be assigned to the leasehold
mortgagee or the purchaser at a foreclosure sale; and
o contains certain other protective provisions typically included in a
"mortgageable" ground lease.
Upon the bankruptcy of a landlord or tenant under a ground lease, the
debtor entity has the right to assume or reject the lease. If a debtor landlord
rejects the lease, the tenant has the right to remain in possession of its
leased premises for the term of the lease including renewals, at the same rent.
If a debtor tenant/borrower rejects any or all of its leases, the leasehold
lender could succeed to the tenant/ borrower's position under the lease only if
the landlord specifically grants the lender such right. As a result, the lender
may lose its security. If both the landlord and the tenant/borrower are involved
in bankruptcy proceedings, the trustee may be unable to enforce the bankrupt
tenant/borrower's obligation to not terminate a ground lease rejected by a
bankrupt landlord. In such circumstances, a ground lease could be terminated
notwithstanding lender protection agreements.
Ground leases securing the mortgaged properties may provide that the
ground rent payable under the lease increases during the lease term. These
increases may adversely affect the cash flow and net income of the borrower from
the mortgaged property.
The execution of a mortgage over its fee interest by an owner/landlord to
secure the debt of a borrower/tenant may be subject to challenge as a fraudulent
conveyance. Among other things, a legal challenge to the granting of the liens
may focus on the benefits realized by the owner/landlord from the loan. If a
court concluded that the granting of the mortgage was an avoidable fraudulent
conveyance, it
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might take actions detrimental to the holders of the certificates, including,
under certain circumstances, invalidating the mortgage over the
fee interest of the owner/landlord.
Cross-Collateralization of Groups of Loans Could Have an Adverse Effect
on the Payment of Your Certificates
Cross-collateralization arrangements involving more than one borrower
could be challenged as fraudulent conveyances:
o by creditors of the related borrower in an action brought outside a
bankruptcy case; or
o if the borrower were to become a debtor in a bankruptcy case, by the
borrower or its representative.
A lien granted by a borrower for the benefit of another borrower in a
cross-collateralization arrangement could be avoided if a court were to
determine that:
1. such borrower was:
o insolvent when it granted the lien;
o rendered insolvent by the granting of the lien;
o left with inadequate capital by granting the lien; or
o not able to pay its debts as they matured; and
2. such borrower did not receive fair consideration or reasonably equivalent
value when it allowed its mortgaged property or properties to be encumbered
by a lien securing the indebtedness of the other borrower.
Among other things, a legal challenge to the granting of the liens may
focus on the benefits realized by such borrower from the respective loan
proceeds, as well as the overall cross-collateralization. If a court were to
conclude that the granting of the liens was an avoidable fraudulent conveyance,
that court could subordinate all or part of the loan to existing or future
indebtedness of that borrower. The court also could recover payments made under
that loan or take other actions detrimental to the holders of the certificates,
including, under certain circumstances, invalidating the loan or the mortgages
securing the cross-collateralized loans.
The Trust May Not Control the Termination of Leases Upon Foreclosure
In some jurisdictions, a lease may terminate upon the transfer of a
mortgaged property to a foreclosing lender or purchaser at foreclosure if the
tenant lease is:
o subordinate to the lien created by the mortgage, and
o does not contain provisions requiring the tenant to recognize a
successor owner following foreclosure as landlord under the lease (also known
as attornment provisions).
The depositor has not reviewed all the leases to determine if they have
these provisions. Accordingly, if a mortgaged property is located in one of
these jurisdictions and is leased to one or more desirable tenants under leases
that are subordinate to the mortgage but do not contain attornment provisions,
the mortgaged property could experience a further decline in value if such
tenants' leases were terminated. This is particularly likely if the tenants were
paying above-market rents or could not be replaced.
If a lease is not subordinate to a mortgage, the trust will not have the
right to remove the tenant upon foreclosure of the mortgaged property, unless it
has otherwise agreed with the tenant. If a non-subordinate lease contains
provisions inconsistent with the mortgage or that could affect the enforcement
of the lender's rights, the provisions of the lease will take precedence over
the provisions of the mortgage. Many anchor tenant leases may not be
subordinate, or, if subordinate, may provide that the lease terms control in
certain matters, such as the application of insurance proceeds. Some non-anchor
leases may also not be subordinate to the related mortgage.
Litigation Arising Out of Ordinary Business May Have an Adverse Effect on
Your Certificates
There may be pending or threatened legal proceedings against the borrowers
and/or managers of the mortgaged properties and their affiliates arising out of
the ordinary business of the borrowers, managers and affiliates. We cannot
assure you that any such litigation would not have a material adverse effect on
the distributions on the certificates.
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The Cash Flow From Mortgaged Properties Not in Compliance With the
Americans with Disabilities Act May be Affected, Which May Have an
Adverse Effect on the Payment of Your Certificates
Under the Americans with Disabilities Act of 1990, all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. Borrowers may incur costs complying with the
ADA. In addition, noncompliance could result in the imposition of fines by the
federal government or an award of damages to private litigants.
Various Conflicts of Interest May Have an Adverse Effect on Your
Certificates
[Conflicts Between Various Classes of Certificateholders. The special
servicer is given considerable latitude in determining when and how to liquidate
or modify defaulted loans. The controlling class representative has the right to
replace the special servicer. At any given time, the holders of the most
subordinate class of principal balance certificates that has at least 25% of its
initial principal balance still outstanding will control the controlling class
representative. If no class has at least 25% of its initial principal balance
still outstanding, the most subordinate class of principal balance certificates
still outstanding will be the controlling class. These holders may have
interests in conflict with those of the holders of the other certificates. For
instance, these holders might desire to mitigate the potential for loss to their
certificates from a troubled loan by deferring enforcement in the hope of
maximizing future proceeds. However, the interests of the trust may be better
served by prompt action, since delay followed by a market downturn could result
in less proceeds to the trust than would have been realized if earlier action
had been taken.
It is anticipated that an entity managed by an affiliate of Midland Loan
Services, Inc., the initial special servicer, will acquire most of the privately
offered certificates, including those that have the right to appoint the initial
controlling class representative. Under such circumstances, the special servicer
may have interests that conflict with the interests of the other holders of the
certificates.]
[Conflicts Between the Trust and Affiliates of the Sellers. Conflicts of
interest may arise between the trust and affiliates of each of the sellers that
engage in the acquisition, development, operation, financing and disposition of
real estate.
Those conflicts may arise because affiliates of each of the sellers intend
to continue to actively acquire, develop, operate, finance and dispose of real
estate-related assets in the ordinary course of their business. During the
course of their business activities, those affiliates may acquire or sell
properties, or finance loans secured by properties which may include the
mortgaged properties or properties that are in the same markets as the mortgaged
properties. In such case, the interests of those affiliates may differ from, and
compete with, the interests of the trust. Decisions made with respect to those
assets may adversely affect the amount and timing of distributions on the
certificates. Midland Loan Services, Inc., one of the sellers, is also the
initial master servicer and special servicer.]
[Conflicts Between Managers and the Loan Borrowers. Substantially all of
the property managers for the mortgaged properties or their affiliates manage
additional properties, including properties that may compete with the mortgaged
properties. Affiliates of the managers, and certain of the managers themselves,
also may own other properties, including competing properties. The managers of
the mortgaged properties may accordingly experience conflicts of interest in the
management of the mortgaged properties.
Conflicts Between Sellers of Loans and Classes of Certificateholders.
Affiliates of the sellers could acquire the certificates entitled to appoint the
controlling class representative. Decisions made by the controlling class
representative may favor the interests of affiliates of such certificateholders
in a manner that could adversely affect the amount and timing of distributions
on the other certificates.]
[Midland Loan Services, Inc. May Have Conflicts as a Seller and as
Master Servicer. Each seller is obligated to substitute a qualified
substitute loan or to repurchase a loan if:
o there is a defect with respect to the documents relating to the
loan, or
o one or more of its representations or warranties concerning the loan
in the related loan purchase agreement are breached,
provided that such defect or breach materially and adversely affects the
interests of the certificateholders and such defect or breach is not cured as
required. 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 or
substitution of loans. In addition, since the pooling and servicing
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agreement requires the master servicer to enforce on behalf of the trust the
sellers' obligations to repurchase or substitute loans, Midland may experience a
conflict of interest to the extent that Midland is obligated to repurchase or
substitute a loan as a seller.]
Prepayments May Reduce the Yield on Your Certificates
The yield to maturity on your certificates may depend, in significant
part, upon the rate and timing of principal payments on the loans. For this
purpose, principal payments include:
o voluntary prepayments, if permitted, and
o involuntary prepayments resulting from:
1. casualty or condemnation of mortgaged properties,
2. defaults and liquidations by borrowers, or
3. repurchases upon a seller's breach of a representation or warranty.
Because the notional amount of the class S certificates is based upon the
principal balance of the certificates with principal amounts, the yield to
maturity on the class S certificates will be extremely sensitive to the rate and
timing of prepayments of principal.
The investment performance of your certificates may vary materially and
adversely from your expectations if the actual rate of prepayment is higher or
lower than you anticipate.
Voluntary prepayments under certain of the loans require payment of a
prepayment premium unless the loan is within a specified number of days of the
anticipated repayment date or stated maturity date, as the case may be. See
"Description of the Mortgage Pool - Certain Terms and Conditions of the Mortgage
Loans - Prepayment Provisions". Nevertheless, we cannot assure you that the
related borrowers will refrain from prepaying their loans due to the existence
of a prepayment premium. We also cannot assure you that involuntary prepayments
will not occur. The rate at which voluntary prepayments occur on the loans will
be affected by a variety of factors, including:
o the terms of the loans;
o the length of any prepayment lockout period;
o the level of prevailing interest rates;
o the availability of mortgage credit;
o the applicable yield maintenance charges or percentage premiums;
o the master servicer's or special servicer's ability to enforce those
charges or premiums;
o the occurrence of casualties or natural disasters; and
o economic, demographic, tax, legal or other factors.
Generally, the loan documents do not require the borrower to pay a
prepayment premium for prepayments in connection with a casualty or
condemnation, unless an event of default has occurred and is continuing. In
addition, if a seller repurchases any mortgage from the trust due to breaches of
representations or warranties, the repurchase price paid will be passed through
to the holders of the certificates with the same effect as if the loan had been
prepaid, except that no prepayment premium would be payable. Such a repurchase
may therefore adversely affect the yield to maturity on your certificates.
The Effect of State Laws Upon the Enforceability of Prepayment Premiums
May Affect the Payment and Yield of Your Certificates
Provisions requiring prepayment premiums and lock-out periods may not be
enforceable in some states and under federal bankruptcy law. Those provisions
for charges and premiums also may constitute interest under applicable usury
laws. Accordingly, we cannot assure you that the obligation to pay a prepayment
premium or to prohibit prepayments will be enforceable. We also cannot assure
you that any foreclosure proceeds will be sufficient to pay an enforceable
prepayment premium. Additionally, although the collateral substitution
provisions related to defeasance do not have the same effect on the
certificateholders as prepayment, we cannot assure you that a court would not
interpret those provisions as requiring a prepayment premium. In certain
jurisdictions, those collateral substitution provisions might therefore be
deemed unenforceable under applicable law, or usurious.
The Yield on Your Certificate Will Be Affected by the Price at Which the
Certificate Was Purchased and the Rate, Timing and Amount of
Distributions on the Certificate
The yield on any certificate will depend on (1) the price at which the
certificate is purchased by an investor and (2) the rate, timing and amount of
distributions on the certificate. The rate, timing and amount of distributions
on any certificate will, in turn, depend on, among other things:
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o the interest rate for the certificate;
o the rate and timing of principal payments, including prepayments,
and other principal collections on or in respect of the loans;
o the extent to which principal collections are applied to or otherwise result
in a reduction of the principal balance or notional amount of the
certificate;
o the rate, timing and severity of losses on or in respect of the
loans or unanticipated expenses of the trust;
o the timing and severity of any interest shortfalls resulting from
prepayments;
o the timing and severity of any reductions in advances as described
under "Description of the Certificates--Appraisal Reductions of Loan
Balances"; and
o the extent to which prepayment premiums are collected and, in turn,
distributed on the certificate.
You Bear the Risk of Borrower Defaults
The rate and timing of delinquencies or defaults on the loans will affect
the following aspects of the certificates:
o the aggregate amount of distributions on them;
o their yield to maturity;
o their rates of principal payments; and
o their weighted average lives.
The rights of holders of each class of subordinate certificates to receive
certain payments of principal and interest otherwise payable on their
certificates will be subordinated to the rights of the holders of the more
senior certificates having an earlier alphabetical and numerical class
designation. See "Description of the Certificates - Distributions." Losses on
the loans will be allocated to the [class D, class C, class B-8, class B-7,
class B-6, class B-5, class B-4, class B-3, class B-2, class B-1, class A-4,
class A-3 and class A-2] certificates, in that order, reducing amounts otherwise
payable to each class. Any remaining losses would then be allocated to the
[class A-1A and class A-1B] certificates, pro rata, based on their
then-outstanding class principal balances.
If losses on the loans exceed the aggregate principal amount of the
classes of certificates subordinated to a particular class, that class will
suffer a loss equal to the full amount of the excess (up to the outstanding
principal amount of the class).
If you calculate your anticipated yield based on assumed rates of default
and losses that are lower than the default rate and losses actually experienced
and such losses are allocable to your certificates, your actual yield to
maturity will be lower than your assumed yield. Under certain extreme scenarios,
your yield could be negative. In general, the earlier a loss borne by your
certificates occurs, the greater the effect on your yield to maturity.
Additionally, delinquencies and defaults on the loans may significantly
delay the receipt of distributions by you on your certificates, unless:
o the master servicer makes advances to cover delinquent payments, or
o the subordination of another class of certificates fully offsets the
effects of any such delinquency or default.
Also, if the related borrower does not repay a loan with a
hyper-amortization feature by its anticipated repayment date, the effect will be
to increase the weighted average life of your certificates and, if your
certificate was purchased at a discount, may reduce your yield to maturity.
Compensation and Other Payments to the Master Servicer, the Special
Servicer and the Trustee May Have an Adverse Effect on the Payment of
Your Certificates
To the extent described in this prospectus supplement, the master
servicer, the special servicer and the trustee will each be entitled to receive
interest on unreimbursed advances made by it. This interest will generally
accrue from the date on which the related advance is made or the related expense
is incurred through the date of reimbursement. In addition, under certain
circumstances, including delinquencies in the payment of principal and interest,
a loan will be specially serviced, and the special servicer is entitled to
compensation for special servicing activities. The right to receive interest on
advances or special servicing compensation is senior to the rights of
certificateholders to receive distributions.
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A Number of Factors That Affect the Liquidity of Your Certificates May
Have an Adverse Effect on the Value of Your Certificates
Your certificates will not be listed on any securities exchange, and there
is currently no secondary market for the offered certificates. While
___________________ and _______________ each currently intends to make a
secondary market in the offered certificates, it is not obligated to do so.
Accordingly, you may not have an active or liquid secondary market for your
certificates. Lack of liquidity could result in a substantial decrease in the
market value of your certificates. Furthermore, you should be aware that the
market for securities of the same type as the certificates has recently been
volatile and offered very limited liquidity. Finally, affiliates of the sellers
may acquire certain classes of offered certificates in which case the market for
those classes of offered certificates may not be as liquid as if third parties
had acquired such certificates.
Risk of Pass-Through Rate Variability
The interest rates of the [class S, class B-1 and class B-2] certificates
are based on a weighted average of certain net mortgage rates of the loans.
Loans with relatively high interest rates are more likely to prepay than loans
with relatively low interest rates. Higher rates of principal payments on loans
having mortgage interest rates above the weighted average interest rate of the
loans will have the effect of reducing the interest rate of such certificates.
In addition, the pass-through rates on the [class A-1B, class A-2, class A-3 and
class A-4] certificates may not exceed the weighted average of the net mortgage
rates of the loans.
[Computer Programming Problems Related to the Year 2000 May Have Adverse
Effects on the Payment of Your Certificates
We are aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "year 2000 problem"
is pervasive and complex; virtually every computer operation will be affected in
some way by the rollover of the two-digit year value to 00. The issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or otherwise fail.
We have been advised by each of the master servicer, the special servicer
and the trustee that they either:
o are implementing modifications to their respective existing systems to the
extent required to cause them to be year 2000 compliant, or
o will acquire computer systems that are year 2000 compliant.
However, we have not made any independent investigation of the computer
systems of the master servicer, the special servicer or the trustee. In the
event that the computer systems of the master servicer, the special servicer or
the trustee are not fully year 2000 compliant, the resulting disruptions in the
collection or distribution of receipts on the loans could materially adversely
affect your investment.
Additionally, we have not made any independent investigation of the
computer systems of any borrower or any tenant of a mortgaged property. The
operation of a borrower or a tenant at a mortgaged property may be dependent
upon computer systems that are not fully year 2000 compliant. In such case,
disruptions could occur in the borrower's collection of rents and other income
from such mortgaged property, potentially resulting in disruptions in the
borrower's required payments due in connection with such loan.]
Other Risks
See "Risk Factors" in the prospectus for a description of certain other
risks and special considerations that may be applicable to your certificates.
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DESCRIPTION OF THE MORTGAGE POOL
General
The mortgage pool will consist of ___ multifamily and commercial "whole"
loans, with an aggregate Cut-off Date Principal Balance of $__________ (the
"Initial Pool Balance"), subject to a variance of plus or minus [5%]. In making
this count, each Multiple Property Loan was counted as one loan. The Multiple
Property Loans and all other loans in the mortgage pool are collectively
referred to as the "Mortgage Loans". All numerical information concerning the
Mortgage Loans is approximate.
The "Cut-off Date Principal Balance" of each Mortgage Loan is its unpaid
principal balance as of __________ 1, 20__ (the "Cut-off Date"), after
application of all principal payments due on or before such date, whether or not
received.
The description of the Mortgage Loans in this prospectus supplement is a
generalized description of the Mortgage Loans in the aggregate. Many of the
individual Mortgage Loans have special terms and provisions that are different
from the generalized, aggregated description.
A brief summary of some of the terms of the [5] largest Mortgage Loans, or
groups of Cross-Collateralized Loans, is set forth in Exhibit B. Additionally,
certain information regarding Mortgage Loans secured by Mortgages encumbering
multifamily properties is set forth in Exhibit A-1.
Each Mortgage Loan is evidenced by one or more separate promissory notes.
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"), which creates a lien on one or
more of a fee simple estate or a leasehold estate in one or more parcels of real
property (a "Mortgaged Property") improved for multifamily or commercial use.
See Exhibit A-2 for information as to the percentage of the Initial Pool Balance
represented by each type of Mortgaged Property.
None of the Mortgage Loans is insured or guaranteed by the United States
of America, by any governmental agency or instrumentality, by any private
mortgage insurer or by the depositor, the sellers, the master servicer, the
special servicer, the trustee, the underwriters or any of their respective
affiliates.
All of the Mortgage Loans should be considered non-recourse loans. This
means that if the loan is in default, the lender's remedies are limited to
foreclosing or acquiring the related Mortgaged Property and any other assets
pledged to secure the loan. For those Mortgage Loans that permit recourse
against any person or entity, the depositor has not evaluated the financial
condition of those persons or entities. In many cases, the only assets such
entities may have are those pledged to secure the loan.
The depositor will purchase the Mortgage Loans on or before the closing
date from the sellers, in each case pursuant to separate mortgage loan purchase
and sale agreements entered into between the depositor and the particular
seller. As described under "Description of the Mortgage Pool--Representations
and Warranties; Repurchase", each seller must generally repurchase a Mortgage
Loan or substitute a Qualified Substitute Mortgage Loan if a representation or
warranty made by the seller in its mortgage loan purchase agreement about the
Mortgage Loan was incorrect at the time it was made, if the breach materially
and adversely affects the interests of the certificateholders and is not cured.
There can be no assurance that any 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
if a seller fails to do so. The depositor will assign the Mortgage Loans,
together with the depositor's rights and remedies against the sellers in respect
of breaches of representations or warranties regarding the Mortgage Loans, to
the trustee pursuant to the pooling and servicing agreement.
Security for the Mortgage Loans
All of the Mortgage Loans are secured by a [first] lien encumbering one or
more of a fee simple estate or a leasehold estate in the related Mortgaged
Property, subject generally only to:
o liens for real estate and other taxes and special assessments not
yet delinquent or accruing interest or penalties,
o rights of tenants, as tenants only, under third party leases which
were not required to be subordinated,
o covenants, conditions, restrictions, rights of way, easements and other
matters of public record as of the date of recording of the Mortgage or
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otherwise specified in the applicable lender's title insurance policy,
o purchase money security interests,
o other exceptions and encumbrances on the Mortgaged Property that are
reflected in the related title insurance policies, and
o other matters to which like properties are commonly subject.
Ground Leases
The Mortgages for __ Mortgaged Properties (___%) encumber the related
borrower's leasehold interest in the related Mortgaged Property. For each 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. The Mortgages for
__ other Mortgaged Properties (___%) encumber both the related borrower's
leasehold interest and the fee interest of the owner/landlord in the related
Mortgaged Property.
Cross-Collateralized Loans
The mortgage pool includes __ separate sets of Mortgage Loans (the
"Cross-Collateralized Loans") that are cross-collateralized and cross-defaulted
with one or more related Cross-Collateralized Loans. None of the Mortgage Loans
are cross-collateralized or cross-defaulted with any mortgage loan not included
in the mortgage pool. No set of related Cross-Collateralized Loans constitutes
more than ___% of the Initial Pool Balance. See Exhibit A-1 for more information
regarding the Cross-Collateralized Loans.
Multiple Property Loans
For purposes of the statistical information contained in this prospectus
supplement and the Exhibits, a single indebtedness secured by separate Mortgages
encumbering separate Mortgaged Properties is considered as one Mortgage Loan
(collectively, the "Multiple Property Loans").
However, for purposes of providing certain property-specific information
for the Multiple Property Loans, each such Mortgage Loan has been allocated
among its respective Mortgaged Properties based upon:
o relative appraised value;
o relative underwritable cash flow; or
o prior allocations reflected in the related loan documents.
Underwriting Standards
The following is a discussion of the customary underwriting policies and
procedures used to originate the Mortgage Loans. Such policies and procedures
involved an evaluation of both the prospective borrower and the proposed real
estate collateral.
Factors typically analyzed in connection with a Mortgaged Property
include:
Physical Characteristics:
o age and condition;
o appraised value;
o gross square footage, net rentable area and gross land area; o number of
units, rooms or beds; and o property interest to be mortgaged (fee or
leasehold).
Tenants:
o current tenants' size and identity;
o termination or purchase option rights;
o term, expiration and rental rates under current leases;
o leasing commissions; and
o tenant improvements and concessions.
Financial Information:
o historical cash flow;
o applicable market rentals for similar properties;
o historical vacancy rate and credit loss rate;
o debt service coverage ratio; and
o loan-to-value ratio.
A site inspection of the related Mortgaged Property was also typically
performed, and third party appraisals and engineering reports were generally
obtained. Environmental site assessments were obtained in connection with ___
Mortgaged Properties (___%), and environmental insurance policies were obtained
for the remaining Mortgaged Properties.
Factors typically analyzed in connection with a prospective borrower
include:
o credit history;
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o capitalization and overall financial resources; and
o management skill and experience in the applicable property type.
The above information has been provided by the sellers and has not been
independently verified by the depositor, the master servicer, the special
servicer, the underwriters or the trustee.
Certain Terms and Conditions of the Mortgage Loans
Due Dates
Monthly Payments are due on the [first] day of each month.
Mortgage Rates; Calculations of Interest
_______________ of the Mortgage Loans (____%) accrue interest on the basis
of the actual number of days elapsed each month in an assumed 360-day year. The
remainder of the Mortgage Loans accrue interest on the basis of an assumed
360-day year with twelve 30-day months. Except with respect to the
Hyper-Amortization Loans, each Mortgage Loan generally accrues interest at an
annualized rate that is fixed for the entire term of such Mortgage Loan and does
not permit any negative amortization or the deferral of fixed interest.
Amortization of Principal
Many of the Mortgage Loans provide for monthly payments of principal based
on amortization schedules substantially longer than their remaining terms.
_________________ Mortgage Loans (____%) are "balloon loans" that are expected
to have more than [10%] of their original principal balance remaining unpaid at
their maturity date. ___ of the Mortgage Loans (___%) are hyper-amortization
loans that will have substantial balloon payments on their Anticipated Repayment
Date. Such hyper-amortization loans also provide for an increase in their
interest rate and/or principal amortization prior to maturity. ____ Mortgage
Loans (___%) have remaining amortization terms that are substantially the same
as their remaining terms to maturity. However, if the Monthly Payment for any
Mortgage Loan (including any Hyper-Amortization Loan) is calculated on an
assumed 30/360 basis but interest accrues on an actual/360 basis, there will be
a remaining balance or a larger balloon payment due upon maturity.
The weighted average Maturity/ARD LTV Ratio of the mortgage pool is ____%.
See "Description of the Mortgage Pool--Other Information".
___ of the Mortgage Loans (___%) (the "Hyper-Amortization Loans") have the
following characteristics:
o each bears interest until its Anticipated Repayment Date at its
Initial Interest Rate;
o each bears interest on and after its Anticipated Repayment Date at
its Revised Interest Rate, and
o each requires that all gross revenue from the Mortgaged Property from and
after its Anticipated Repayment Date be deposited into a lockbox account
controlled by the lender and generally applied in the following order
(although individual loans may have exceptions):
o to tax and insurance reserves;
o to interest at the Initial Interest Rate;
o to all other amounts owed the lender not set forth below;
o to all principal due under the original amortization;
o to all other reserves;
o to all approved operating or capital expenses;
o to all other principal then outstanding;
o to all outstanding Deferred Interest; and
o to the borrower.
To the extent not paid from gross revenues, the payment of interest
accrued at the excess of the Revised Interest Rate over the Initial Interest
Rate is deferred until the maturity date or when the principal is prepaid in
full. The deferred interest may also bear interest at the Revised Interest Rate.
The accrued and deferred interest, and interest thereon, is referred to as
"Deferred Interest").
"Anticipated Repayment Date" or "ARD" means for any Hyper-Amortization
Loan the date on and after which the Revised Interest Rate applies and the
lockbox is activated.
"Initial Interest Rate" means for any Hyper-Amortization Loan the rate at
which such Hyper-Amortization Loan accrues interest from its origination until
its Anticipated Repayment Date.
"Revised Interest Rate" means for any Hyper-Amortization Loan the
increased rate at which the Hyper-Amortization Loan bears interest from
and
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after its Anticipated Repayment Date. The Revised Interest Rate is
typically equal to the greater of:
o its Initial Interest Rate plus [2%], or
o the yield rate on the U.S. Treasury obligation that matures in the month or
succeeding month in which the original maturity date of the
Hyper-Amortization Loan occurs plus [2%].
The Revised Interest Rate may also be subject to a cap equal to its
Initial Interest Rate plus a percentage specified in the related note.
However, for __ Hyper-Amortization Loans (___%), the Revised Interest Rate
is equal to the Initial Interest Rate plus ___% and __%, respectively.
Prepayment Provisions
____________ of the Mortgage Loans (____%) are subject to specified
periods following origination during which no voluntary prepayments are allowed
(a "Lock-out Period").
The Mortgage Loans (other than the Defeasance Loans) generally permit the
borrower to voluntarily prepay the Mortgage Loan after the Lock-out Period if it
pays a prepayment premium. The Mortgage Loan documents generally provide for a
specified period prior to maturity during which a prepayment may be made without
a prepayment premium. Other than as described below or during any such "open
period", the Mortgage Loans prohibit any borrower from making a partial
prepayment.
A borrower does not have to pay a prepayment premium if it pays a
Hyper-Amortization Loan on or after its Anticipated Repayment Date.
With respect to Mortgage Loans other than the Defeasance Loans, the
applicable prepayment premium is generally calculated:
o for ___ Mortgage Loans, for a certain period (a "Yield Maintenance Period")
after the origination of the related Mortgage Loan or the expiration of the
applicable Lock-out Period, if any, on the basis of a yield maintenance
formula or, for some Mortgage Loans, a specified percentage of the amount
prepaid if the percentage is greater than the yield maintenance amount,
o for ___ Mortgage Loan, after the expiration of the applicable Yield
Maintenance Period, a specified percentage of the amount prepaid, which
percentage will remain constant over time, and
o for ___ Mortgage Loan, no prepayment premium is required after the expiration
of the applicable Lock-out Period.
Exhibit A-1 contains more specific information about the prepayment
premiums for each Mortgage Loan.
Each Mortgage Loan providing for the payment of a yield maintenance amount
in connection with a permitted principal prepayment provides that the amount
will be calculated by one of the following methods:
o [subtracting the amount of principal being prepaid from the discounted
present value (using a discount rate determined in accordance with the note),
as of the prepayment date, of the remaining scheduled payments of principal
and interest on that Mortgage Loan from the prepayment date through its
maturity date (including any balloon payment);] or
o [multiplying:
1. the amount of principal being prepaid; times
2. the difference obtained by subtracting a United States Treasury
Security yield rate (determined in accordance with the note) from the
interest rate applicable to the related Mortgage Loan; times
3. a present value factor calculated using the following formula:
1 - (1+r) -n
r
r = the specified yield rate (per item 2. above)
n = number of years, and any fraction thereof, remaining between
the prepayment date and the maturity date of the Mortgage Loan,
or Anticipated Repayment Date for Hyper-Amortization Loans.]
The Mortgage Loans typically:
o provide that a borrower has to pay a prepayment premium in connection with
any involuntary prepayment resulting from a casualty or condemnation only if
the loan is in default;
o require the payment of the applicable prepayment premium for any prepayment
after an event of default (but prior to the sale by the mortgagee of the
Mortgaged Property through foreclosure or otherwise); and
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o permit the borrower to transfer the Mortgaged Property to a third party
without prepaying the Mortgage Loan if certain conditions are satisfied,
including, without limitation, an assumption by the transferee of all of the
borrower's obligations under the Mortgage Loan.
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.
The tables included in Exhibit A-2 set forth an analysis of the percentage
of the declining balance of the mortgage pool that, for each of the time periods
indicated, will be within a Lock-out Period or in which Principal Prepayments
must be accompanied by the indicated prepayment premium.
Defeasance
For ___ of the Mortgage Loans (____%) (the "Defeasance Loans"), even
though a voluntary prepayment may be generally prohibited, the borrower may,
after the expiration of a specified period during which defeasance is
prohibited, obtain a release of the related Mortgaged Property by pledging
certain substitute collateral to the holder of the Mortgage Loan. No defeasance
may occur before the second anniversary of the closing date. This substitute
collateral consists of direct, non-callable United States Treasury obligations
that provide for payments prior, but as close as possible, to all dates on which
a Monthly Payment or final balloon payment is due. Each of the payments on the
substitute collateral must be equal to or greater than the Monthly Payment or
final balloon payment due on such date. For Hyper-Amortization Loans, the
payments on the substitute collateral must be sufficient to pay-off the loan on
its Anticipated Repayment Date. Any excess amounts will be returned to the
borrower.
The master servicer will require the cost, if any, of a defeasance to be
paid by the borrower and not by the trust.
"Due-on-Encumbrance" and "Due-on-Sale" Provisions
The Mortgages 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. The master servicer or special servicer, as applicable, will
determine, in a manner consistent with the servicing standard described 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 generally prohibit the borrower from transferring any
material interest in the Mortgaged Property or allowing a material change in the
ownership or control of the related borrower without the mortgagee's prior
consent. However, a transfer or change generally will be permitted if certain
conditions specified in the related Mortgage Loan documents are satisfied. These
conditions may include one or more of the following:
o no event of default exists;
o the proposed transferee meets the mortgagee's customary underwriting
criteria;
o the Mortgaged Property continues to meet the mortgagee's customary
underwriting criteria; and
o an acceptable assumption agreement is executed.
The related Mortgages may also allow changes in the ownership or control
of the related borrower between partners, members or shareholders as of the
closing of the Mortgage Loan, family members, affiliated companies and certain
specified individuals, or for estate planning purposes.
The master servicer or the special servicer, as applicable, will
determine, in a manner consistent with the servicing standard described under
"The Pooling and Servicing Agreement--Servicing of the Mortgage Loans;
Collection of Payments", whether to exercise any right the mortgagee may have to
accelerate payment of a Mortgage Loan upon, or to withhold its consent to, any
transfer of all or any of a Mortgaged Property or any transfer or change in
ownership or control of the related borrower. The depositor makes no
representation as to the enforceability of any due-on-sale or due-on-encumbrance
provision in any Mortgage Loan that is the subject of a proceeding under federal
bankruptcy law. See "Certain Legal Aspects of Mortgage Loans--Due-on-Sale and
Due-on-Encumbrance Provisions" in the prospectus.
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Hazard, Liability and Other Insurance
Generally, each Mortgage Loan requires that the Mortgaged Property be
insured against loss or damage by fire or other risks and hazards covered by a
standard extended coverage insurance policy. The minimum amount of such
insurance is usually the lesser of the full replacement cost of the Mortgaged
Property or the outstanding principal balance of the loan, but in any event in
an amount sufficient to ensure that the insurer would not deem the borrower a
co-insurer. Generally, each Mortgage Loan also requires that the related
borrower maintain the following insurance during the term of the Mortgage Loan:
o comprehensive public liability insurance, typically with a minimum
limit of [$1,000,000] per occurrence;
o 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 least
of the outstanding principal balance of the loan, full replacement cost of
the Mortgaged Property and the maximum limit of coverage available from
governmental sources;
o if deemed advisable by the originator, rent loss and/or business interruption
insurance in an amount equal to all net operating income from the operation
of the Mortgaged Property for a period as required by the Mortgage; and
o 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.
The Mortgage Loans generally do not require the borrower to maintain
earthquake insurance.
With respect to many of the Mortgage Loans, the borrower has
satisfied the applicable insurance requirements by obtaining blanket
insurance policies. The mortgagee generally has the right to review and
approval the blanket insurance policy, including the amount of insurance
and the number of properties covered by the policy.
Casualty and Condemnation
Casualty and Condemnation
Subject to the rights of the lessor under any ground lease, the Mortgage
Loan documents typically provide that all material insurance proceeds or
condemnation awards will be paid to the mortgagee if:
o the Mortgaged Property is damaged by fire or another casualty; or
o any taking or exercise of the power of eminent domain occurs with
respect to a Mortgaged Property.
In general, the mortgagee then has the option to either apply the proceeds or
awards to the outstanding indebtedness of the Mortgage Loan, or allow the
borrower to use the proceeds to restore the Mortgaged Property. However, if
certain specified conditions are satisfied, the mortgagee may be required to pay
the proceeds or awards to the borrower for restoration of the Mortgaged
Property. In certain of the Mortgage Loans, the lease between the borrower and a
tenant of all or part of the Mortgaged Property may require the borrower or the
tenant to restore the Mortgaged Property if a casualty or condemnation occurs.
In this case, the Mortgage Loan documents may permit the application of all
applicable proceeds or awards to satisfy the requirement.
Financial Reporting
The Mortgages generally contain a covenant that requires the borrower to
provide the mortgagee with certain financial reports at least once a year about
the borrower's operations at the Mortgaged Property. Such reports typically
include information about income and expenses for the property for the period
covered by such reports, and/or current tenancy information. However, in the
case of owner-occupied properties, the borrower typically provides financial
information for itself instead of the Mortgaged Property.
Delinquencies
[No] Mortgage Loan was 30 or more days delinquent in respect of any
Monthly Payment as of the Cut-off Date, or during the 12 months immediately
preceding the Cut-off Date.
Prior Bankruptcies
Some of the borrowers under the Mortgage Loans or their affiliates have
been parties to, and/or
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some of the underlying real properties have been the subject of, prior
bankruptcy proceedings.
Borrower Escrows and Reserve Accounts
In many of the Mortgage Loans, the 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 those matters
and in such amounts deemed necessary by the originator of the loan. These
matters may include one or more of the following:
o necessary repairs and replacements,
o tenant improvements and leasing commissions,
o real estate taxes and assessments,
o water and sewer charges,
o insurance premiums,
o environmental remediation,
o improvements mandated under the Americans with Disabilities Act of
1990, or
o deferred maintenance and/or scheduled capital improvements.
Exhibit A-1 contains more specific information about the Reserve Accounts
for each Mortgage Loan.
Certain Characteristics of the Mortgage Pool
Concentration of Mortgage Loans and Borrowers
The largest single Mortgage Loan has a Cut-off Date Principal Balance that
represents ___% of the Initial Pool Balance. The __ largest individual Mortgage
Loans (or sets of Cross-Collateralized Loans) represent in the aggregate ____%
of the Initial Pool Balance. No set of Mortgage Loans made to a single borrower
or to a single group of affiliated borrowers constitutes more than ___% of the
Initial Pool Balance. See Exhibit A-1 for further information regarding these
Mortgage Loans.
Environmental Risks
Environmental site assessments were obtained for ___ of the Mortgaged
Properties (____%) during the [24]-month period ending on ___________, 20__. The
assessments for __ of those Mortgaged Properties (___%) were obtained more than
__ months prior to the Cut-off Date. The assessments for __ of those Mortgaged
Properties (___%) did not satisfy all of the requirements necessary to be
considered "Phase I" environmental site assessments.
No environmental site assessments were obtained for ___ Mortgaged
Properties (___%). For each of __ Mortgaged Properties (___), a "Phase II"
environmental site assessment was recommended but not performed. In general, the
decision not to take either of the foregoing actions with respect to any of
those Mortgaged Properties was based upon the borrower or the lender obtaining
an environmental insurance policy with respect to the Mortgaged Property.
Except as described herein, where an environmental site assessment
disclosed a known or potential material and adverse environmental condition, the
originator required the borrower to:
o escrow funds deemed sufficient to ensure remediation of or to
monitor the environmental issue;
o obtain an environmental insurance policy that covers the
environmental issue; or
o establish an operations and maintenance plan that, if implemented, would
prevent any material and adverse consequences resulting from the
environmental issue.
In some cases, the environmental consultant did not recommend that any
action be taken with respect to a known or potential adverse environmental
condition at a Mortgaged Property or a nearby property because:
o a remediation, under the supervision of an environmental regulatory
agency, had been completed or was currently underway;
o an environmental regulatory agency had issued a "no further action"
letter regarding the condition; or
o a responsible party with respect to the condition had already been
identified.
See "Risk Factors--Environmental Issues Relating to Specific Properties
May Have an Adverse Effect on the Payment of Your Certificates" for more
information about the environmental condition of certain Mortgaged Properties.
Some of the Mortgaged Properties are in areas of known groundwater
contamination or in the vicinity of sites containing "leaking underground
storage tanks" or other potential sources of groundwater contamination. The
environmental site
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assessments mentioned above generally do not anticipate that the borrower will
have to undertake remedial investigations or actions at these
sites. Further, the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 and certain state environmental laws provide for a
third-party defense that generally would preclude liability for a party whose
property is contaminated by off-site sources. In addition, in its final "Policy
Toward Owners of Property Containing Contaminated Aquifers," dated May 24, 1995,
the United States Environmental Protection Agency stated that it would not take
enforcement actions against the owner of such property to require the
performance of remediation actions or the payment of remediation costs. This
policy statement is subject to certain conditions and applies only if the
hazardous substances have come to be located on or in a property solely as a
result of subsurface migration in an aquifer from a source or sources outside
the property.
Even if the owners of these Mortgaged Properties and the trust fund are
not liable for such contamination, enforcement of the borrower's or the trust
fund's rights against third parties may result in additional transaction costs.
In addition, the presence of such contamination or potential contamination may
affect the borrower's ability to:
o refinance the Mortgage Loan using the Mortgaged Property as
collateral, or
o sell the Mortgaged Property to a third party.
It may also affect the value of the Mortgaged Property that may be realized upon
any foreclosure.
You should understand that the results of the environmental site
assessments do not constitute an assurance or guaranty by the underwriters, the
depositor, the originators, the sellers, 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. There can be no assurance that any hold-back or other
escrow of funds to pay the cost of completing any clean-up, remediation or
compliance actions with respect to a Mortgaged Property will be sufficient to
complete such actions.
[Environmental Insurance
Depositor Group Policy.
In connection with the issuance of the certificates, the depositor will
obtain a secured creditor impaired property group policy covering environmental
matters with respect to ___ Mortgaged Properties (___%). In general, that group
policy provides coverage for the following losses, subject to no deductibles
and, further, to the coverage limits discussed below:
o if during the term of the policy, adverse environmental conditions exist at
levels above legal limits on an insured Mortgaged Property and the borrower
defaults under the related Mortgage Loan, the insurer will indemnify the
trust for the outstanding principal balance of the related Mortgage Loan on
the date of the default, together with accrued interest;
o if the trust becomes legally obligated to pay as a result of a claim first
made against the trust and reported to the insurer during the term of the
policy, for bodily injury, property damage or clean-up costs resulting from
adverse environmental conditions on, under or emerging from an insured
Mortgaged Property, the insurer will cover that claim; and
o if the trust enforces the related mortgage and the related insured Mortgaged
Property is acquired by the trust, the insurer will thereafter pay clean-up
costs for adverse environmental conditions at levels above legal limits which
exist on or under that Mortgaged Property.
The coverage limits for this secured creditor impaired property group
policy are as follows:
o the per occurrence limit will equal [125%] of the principal balance
of the related Mortgage Loan, and
o the aggregate limit will equal [40%] of the aggregate principal balance of
all the covered Mortgage Loans.
_______ Individual Policies.
Additionally, with respect to ___ Mortgage Loans (___%) to be
acquired by the depositor from
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_____________, secured creditor impaired property policies were obtained
covering environmental matters with respect to the related Mortgaged Properties.
In general, each of these policies provide coverage for the following losses,
subject to the exclusions from coverage discussed under "--Environmental
Insurance--General Information" below:
o if during the term of the policy, adverse environmental conditions exist at
levels above legal limits on the related insured Mortgaged Property and the
borrower defaults under the related Mortgage Loan, the insurer will indemnify
the trust for the outstanding principal balance of the related Mortgage Loan
on the date of the default, together with accrued interest;
o if the trust becomes legally obligated to pay as a result of a claim first
made against the trust and reported to the insurer during the term of the
policy, for bodily injury, property damage or clean-up costs resulting from
adverse environmental conditions on, under or emerging from the related
insured Mortgaged Property, the insurer will cover that claim; and
o if the trust enforces the related mortgage and the related insured Mortgaged
Property is acquired by the trust, the insurer will thereafter pay clean-up
costs for adverse environmental conditions at levels above legal limits which
exist on or under that Mortgaged Property;
provided that the trustee, the master servicer and/or the special servicer first
became aware of those adverse environmental conditions during the term of the
policy and the appropriate party reported those conditions to the government in
accordance with applicable law.
General Information.
Each of the secured creditor impaired property policies described above,
including the group policy, require that the appropriate party associated with
the trust report a claim during the term of the related policy. None of those
policies includes coverage for asbestos and lead-based paint. Furthermore, none
of those policies pays for unreimbursed servicing advances.
The premium for each of the secured creditor impaired policies
described above, including the group policy, has been or, as of the date
of initial issuance of the certificates, will be paid in full. The
insurer under each of those policies is either
___________________________________ or
_________________________________________.]
Geographic Concentration
Mortgaged Properties located in ________ and _____ secure approximately
____% and ____%, respectively, of the Initial Pool Balance. Additionally,
Mortgaged Properties located in each of _______, _______, _____________, and
__________ secure at least [5%], but less than [10%], of the Initial Pool
Balance. The occurrence of adverse economic conditions in any such jurisdiction
may affect repayments of the related Mortgage Loans or the value of such
Mortgaged Properties. Such Mortgaged Properties may be more susceptible to
certain special hazard losses than properties located in other areas of the
country. No more than [5%] of the Initial Pool Balance is secured by Mortgaged
Properties located in any other jurisdiction. See "Risk Factors--Increased
Geographic Concentrations of Mortgaged Properties May Have an Adverse Effect on
the Payment of Your Certificates" and Exhibit A-2.
Zoning Compliance
The originator for each Mortgage Loan 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 the improvements qualified as permitted
non-conforming uses. Where a Mortgaged Property is operated as a permitted
non-conforming use, an analysis was generally conducted as to whether existing
replacement cost hazard insurance or, if necessary, supplemental "law and
ordinance coverage" would, in the event of a material casualty, be sufficient to
satisfy the entire Mortgage Loan or, taking into account the cost of the repair,
be sufficient to pay down that Mortgage Loan to a level that the remaining
collateral would be adequate security for the remaining loan amount.
Tenant Matters
Certain additional information regarding Mortgaged Properties that are
owner occupied or leased in whole or in large part to a single tenant is listed
in Exhibit A-2. Generally, these owners or major tenants do not have
investment-grade credit ratings. The major tenants generally occupy their
premises pursuant to leases which may require them to pay all applicable real
property taxes, maintain
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insurance over the improvements thereon and maintain the physical
condition of such improvements. For __ of the Mortgaged Properties (____%), the
owner or major tenant occupies [50%] or more of the Mortgaged Property.
Other Information
Each of the tables in Exhibit A-2 lists certain characteristics of the
mortgage pool presented, where applicable, as of the Cut-off Date. The sum in
any column of any of the tables in Exhibit A-2 may not add to 100% and may not
equal the indicated total due to rounding. For a detailed presentation of
certain of the characteristics of the Mortgage Loans and the Mortgaged
Properties, on an individual basis, see Exhibit A-1. For a brief summary of
certain of the terms of the [5] largest Mortgage Loans, or groups of
Cross-Collateralized Loans, see Exhibit B. Certain information regarding
Mortgage Loans secured by Mortgages encumbering multifamily properties is listed
in Exhibit A-1. Finally, certain information regarding the Reserve Accounts for
each Mortgage Loan is set forth in Exhibit A-1.
For purposes of the tables in Exhibit A-2 and for the information included
in this prospectus supplement and in Exhibits A-1 and B the following
definitions and assumptions apply:
Debt Service Coverage Ratio
In general, income property lenders use debt service coverage ratios
(DSCR) to measure the ratio of (a) cash currently generated by a property that
is available for debt service 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 does not possess a stable
operating expectancy (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
and/or that may be difficult to replace), 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.
For purposes of this prospectus supplement, including for the tables in
Exhibit A-2 and the information in Exhibits A-1 and B, the "Debt Service
Coverage Ratio" or "DSCR" for any Mortgage Loan (or group of
Cross-Collateralized Loans) is the ratio of either the "Underwritable Cash Flow"
estimated to be produced by the related Mortgaged Property or Properties or the
Most Recent Net Operating Income, as described below, to the annualized amount
of debt service payable under that Mortgage Loan (or that group of
Cross-Collateralized Loans). All debt service coverage ratio information
included in this prospectus supplement excludes the ___ Mortgaged Property
subject to a credit tenant lease.
"Most Recent DSCR" for a Mortgage Loan (or group of Cross-Collateralized
Loans) is the ratio of its Most Recent Net Operating Income to the annualized
amount of debt service payable under that Mortgage Loan (or group of
Cross-Collateralized Loans).
"U/W DSCR" or "Underwritable Debt Service Coverage Ratio" for a Mortgage
Loan (or group of Cross-Collateralized Loans) is the ratio of its Underwritable
Cash Flow calculated in connection with the underwriting of the Mortgage Loan to
the annualized amount of debt service payable under that Mortgage Loan (or group
of Cross-Collateralized Loans).
"Underwritable Cash Flow" in each case is an estimate of stabilized cash
flow available for debt service. In general, it is the estimated stabilized
revenue derived from the use and operation of a Mortgaged Property (consisting
primarily of rental income) less the sum of:
o estimated stabilized operating expenses (such as utilities, administrative
expenses, repairs and maintenance, management fees and advertising),
o fixed expenses (such as insurance, real estate taxes and, if
applicable, ground lease payments), and
o recurring capital expenditures and reserves for capital expenditures,
including tenant improvement costs and leasing commissions.
Underwritable Cash Flow generally does not reflect interest expenses and
non-cash items such as depreciation and amortization.
In determining Underwritable Cash Flow for a Mortgaged Property, the
seller relied on rent rolls and other generally unaudited financial information
provided by the borrowers and calculated stabilized estimates of cash flow that
took into consideration historical financial statements, material changes in the
operating position of the Mortgaged Property of which the seller was aware
(e.g., new signed leases or end of "free rent" periods and market data), and
estimated recurring capital expenditures and reserves for leasing commission and
tenant improvements. The seller made certain adjustments to particular
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items in the operating statements and operating information obtained from
the borrowers, resulting in either an increase or decrease in the estimate of
Underwritable Cash Flow derived therefrom. These adjustments were based upon the
seller's evaluation of such operating statements and operating information and
the assumptions applied by the borrowers in preparing such statements and
information. Such adjustments may not have been consistent with generally
accepted accounting principles. In certain cases, partial year operating income
data was annualized, with certain adjustments for items deemed not appropriate
to be annualized, or borrower supplied "trailing-12 months" income and/or
expense information was utilized. In certain instances, historical expenses were
inflated. For purposes of calculating Underwritable Cash Flow for Mortgage Loans
where leases have been executed by one or more affiliates of the borrower, the
rents under some of such leases have been adjusted to reflect market rents for
similar properties. In some instances, lease rentals were adjusted to take into
account rent increases scheduled to occur within the next 12 months. Several
Mortgage Loans are secured by Mortgaged Properties with newly constructed
improvements and, accordingly, there were no historical operating results or
financial statements available with respect to such Mortgaged Properties. In
such cases, items of revenue and expense used in calculating Underwritable Cash
Flow were generally derived from rent rolls, estimates set forth in the related
appraisal or from borrower-supplied information.
The amount of any underwritten or contractual recurring replacement
reserve amounts and/or underwritten or contractual leasing commissions and
tenant improvements for each of the Mortgaged Properties is shown in the table
titled "Engineering Reserves and Recurring Replacement Reserves" on Exhibit A-1.
The underwritten or contractual recurring replacement reserve amounts shown on
Exhibit A-1 are expressed as dollars per unit in the case of multifamily rental
properties and manufactured housing communities, a percentage of total
departmental revenues in the case of hospitality properties and dollars per
leasable square footage in the case of other commercial properties.
No assurance can be given with respect to the accuracy of the information
provided by any borrowers, or the adequacy of the procedures used by the seller
in determining the presented operating information.
The Debt Service Coverage Ratios are presented for illustrative purposes
only and, as discussed above, are limited in their usefulness in assessing the
current, or predicting the future, ability of a Mortgaged Property to generate
sufficient cash flow to repay the Mortgage Loan. Accordingly, no assurance can
be given, and no representation is made that the Debt Service Coverage Ratios
accurately reflect that ability.
Loan-to-Value
References in the tables to "Cut-off Date Loan-to-Value" or "Cut-off Date
LTV" are references to the ratio, expressed as a percentage, of the Cut-off Date
Principal Balance of a Mortgage Loan (or the aggregate Cut-off Date Principal
Balance of a group of Cross-Collateralized Loans) to the value of the related
Mortgaged Property or Properties as determined by the most recent appraisal or
market valuation of such Mortgaged Property, as described below. All
loan-to-value ratio information included in this prospectus supplement does not
include the 1 Mortgaged Property subject to a credit tenant lease.
References to "Maturity/ARD Balance" is the principal balance of a
Mortgage Loan (or the aggregate principal balance of a group of
Cross-Collaterialized Loans) anticipated to be outstanding at its maturity date,
or for a Hyper-Amortization Loan, at its Anticipated Repayment Date (calculated
based on the Maturity Assumptions and a 0% CPR).
References to "Maturity/ARD LTV" or "Maturity/ARD LTV Ratio" are
references to the ratio, expressed as a percentage, of the Maturity/ARD Balance
of a Mortgage Loan (excluding the Mortgage Loans expected to fully amortize over
their remaining term) to the value of the related Mortgaged Property or
Properties as determined by the most recent appraisal or market valuation of
such Mortgaged Property or Properties available to the depositor.
Each Mortgaged Property was appraised at the request of the originator of
the 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 Mortgaged Property. None of the depositor, the
sellers, the master servicer, the special servicer, the underwriters or the
trustee or any other entity has prepared or obtained a separate independent
appraisal or reappraisal, unless such person was the originator of the Mortgage
Loan. There can be no assurance that another appraiser would have arrived at the
same
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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 Mortgaged Property or the amount that would be realized upon a sale.
Accordingly, you should not place undue reliance on the loan-to-value ratios set
forth in this prospectus supplement.
Year Built/Renovated
References to "years built/renovated" are references to the later of the
year in which a Mortgaged Property was originally constructed or the most recent
year in which the Mortgaged Property was substantially renovated.
Weighted Averages
References to "weighted averages" are references to averages weighted on
the basis of the Cut-off Date Principal Balances of the Mortgage Loans.
Most Recent Appraised Value
References to "Most Recent Appraised Value" for each of the Mortgaged
Properties is the "as is" or, if provided, the "as cured" value estimate
reflected in the most recent appraisal or market valuation obtained by or
otherwise in the possession of the related seller. The "cured value" is
generally calculated as the sum of:
o the "as is" value set forth in the related appraisal or market
valuation, plus
o the estimated costs (as of the date of the appraisal or market valuation), if
any, of implementing any deferred maintenance required to be undertaken
immediately or in the short term under the terms of the related Mortgage
Loan.
In general, the amount of these estimated costs is based on:
o an estimate by the individual preparing the appraisal or market
valuation,
o an estimate by the related borrower,
o the estimate set forth in the property condition assessment
conducted in connection with the origination of the related Mortgage
Loan, or
o a combination of these estimates.
Leasable Square Footage
References to "S.F." or "Sq.Ft." means, in the case of any Mortgaged
Property that is a commercial property (other than a hospitality property), the
estimated square footage of its gross leasable area, as reflected in information
provided by the related borrower or in the appraisal or market valuation on
which the Most Recent Appraised Value of the Mortgaged Property is based.
Units
References to (1) in the case of any Mortgaged Property that is a
multifamily rental property, its estimated number of apartments, regardless of
the number or size of rooms in the apartments, and (2) in the case of any
Mortgaged Property that is a manufactured housing community, its estimated
number of pads to which a mobile home can be hooked up, in each case, as
reflected in information provided by the related borrower or in the appraisal or
market valuation on which the Most Recent Appraised Value is based.
Rooms
References to "Rooms" means, in the case of any Mortgaged Property that is
a hospitality property, its estimated number of rooms and/or suites, without
regard to the size of the rooms or the number or size of the rooms in the
suites, as reflected in information provided by the related borrower or in the
appraisal or market valuation on which the Most Recent Appraised Value of the
property is based.
Occupancy Rate At Underwriting
References to "Occupancy Rate at Underwriting" or "Occupancy Rate at U/W"
generally mean the percentage of leasable square footage, in the case of
Mortgaged Properties that are commercial properties (other than hospitality
properties), or units, in the case of Mortgaged Properties that are multifamily
rental properties and manufactured housing communities, of the subject Mortgaged
Properties that were occupied or leased as of the approximate date of the
original underwriting of the related Mortgage Loan or such later date as we
considered appropriate, in any event as reflected in information provided by the
related borrower or in the appraisal or market valuation on which the Most
Recent Appraised Value of the Mortgaged Property is based. Information shown in
this prospectus supplement with respect to any weighted average of
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occupancy rates at underwriting excludes hospitality properties from
the relevant calculations.
Major Tenant
References to "Major Tenant" means any one of the top three tenants (based
on the net rentable area of its space) of a commercial property that leases at
least [10%] or more of the net rentable area of the Mortgaged Property.
Most Recent Operating Statement Date
References to "Most Recent Operating Statement Date" means, with respect
to each of the Mortgage Loans, the date indicated on Exhibit A-1 as the "most
recent operating statement date" with respect to the Mortgage Loan. In general,
this date is the end date of the period covered by the latest available annual
or, in some cases, partial-year operating statement for the related Mortgaged
Property.
Most Recent Net Operating Income
References to "Most Recent Net Operating Income" mean, with respect to
each of the Mortgaged Properties, its total cash flow that was available for
annual debt service on the related Mortgage Loan, calculated as the most recent
revenues less most recent expenses for that Mortgaged Property. For purposes of
calculating the most recent net operating income for each of the Mortgaged
Properties:
o "most recent revenues" are the revenues received, or annualized or estimated
in certain cases, in respect of a Mortgaged Property for the 12-month period
ended as of the most recent operating statement date, based upon the latest
available annual or, in some cases, partial-year operating statement and
other information furnished by the related borrower, and
o "most recent expenses" are the expenses incurred, or annualized or estimated
in certain cases, for a Mortgaged Property for the 12-month period ended as
of the most recent operating statement end date, based upon the latest
available annual or, in some cases, partial-year operating statement and
other information furnished by the related borrower.
The Sellers
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, Midland Loan
Services, Inc., a newly formed, wholly owned subsidiary of PNC Bank, National
Association, acquired substantially all of the assets of Midland Loan Services,
L.P. Since 1994, Midland has been originating commercial and multifamily
mortgage loans for the purpose of securitization. Midland is an affiliate of PNC
Capital Markets, Inc.
See "Master Servicer and Special Servicer".
[___ Mortgage Loans (____%) were originated by Midland. Midland will
sell these Mortgage Loans directly to the depositor on the closing date. ]
[_____________________________
[Add disclosure for other Sellers]
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:
o the depositor deems such removal necessary or appropriate, or
o the loan 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 in this prospectus supplement. Accordingly, the range of interest
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 in this prospectus supplement.
A Current Report on Form 8-K will be filed, together with the pooling and
servicing agreement, with the Securities and Exchange Commission within
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15 days after the closing date. If Mortgage Loans are removed from or
added to the mortgage pool as set forth in the preceding paragraph, the removal
or addition will be noted in the Form 8-K.
Representations and Warranties; Repurchase
The following is a summary of certain of the representations and
warranties to be made by each seller with respect to each of its Mortgage Loans.
Other representations and warranties may also be required by the Rating Agencies
or the purchasers of the privately offered certificates. The representations
will be made as of the closing date or as of another date specifically stated in
the representation or warranty. There may be exceptions to some of the
representations and warranties.
1. The information in the schedule of the Mortgage Loans attached to the related
mortgage loan purchase agreement is true and correct in all material respects
as of the Cut-off Date.
2. The seller owns the Mortgage Loans and is conveying them free and clear of
any pledge, lien or security interest.
3. No scheduled payment of principal and interest under any Mortgage Loan is 30
days or more past due nor has been during the preceding 12-month period.
4. The related Mortgage constitutes a valid and enforceable first lien upon the
related Mortgaged Property, subject to:
o creditors' rights and general principles of equity,
o liens for current real estate taxes and assessments not yet
delinquent or accruing interest or penalties,
o exceptions and exclusions specifically referred to in the lender's
title insurance policy,
o purchase money security interests,
o other matters to which like properties are commonly subject,
o the rights of tenants to remain at the related Mortgaged Property
following foreclosure, and
o the lien for another Mortgage Loan which is cross-collateralized with
such Mortgage Loan.
5. The related Mortgage has not been satisfied, cancelled, rescinded or
subordinated in whole or in material part.
6. The seller is not aware of any proceeding pending for the total or partial
condemnation of or affecting the related Mortgaged Property.
7. The related Mortgaged Property is or will be covered by an American Land
Title Association (or an equivalent or state-approved form) lender's title
insurance policy that insures that the related Mortgage is a valid, first
priority lien on such Mortgaged Property, subject only to the exceptions
stated in the policy.
8. The proceeds of the Mortgage Loan have been fully disbursed (subject to funds
being held back pending the satisfaction of certain leasing, repair or other
conditions), and there is no obligation for future advances with respect to
such Mortgage Loan.
9. Each note, Mortgage and other agreement of the borrower with respect to the
Mortgage Loan is its legal, valid and binding obligation, enforceable in
accordance with its terms, subject to:
o the non-recourse provisions of the loan;
o applicable state anti-deficiency or market value limit deficiency
legislation;
o bankruptcy, insolvency, reorganization and state laws related to
creditors' rights; and
o general principles of equity.
The pooling and servicing agreement will require that the custodian, the
master servicer, the special servicer or the trustee notify the applicable
seller upon its becoming aware:
o of any breach of certain representations or warranties made by that
seller in its mortgage loan purchase agreement, or
o that any document required to be included in the mortgage file does not
conform to the requirements of the pooling and servicing agreement. See "The
Pooling and Servicing Agreement--Assignment of the Mortgage Loans".
Subject to the discussion below, the applicable mortgage loan purchase agreement
provides that, if a breach or default that materially and adversely affects the
interests of the trustee or the certificateholders is
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not cured within 90 days after discovery of the breach or defect by the
applicable seller, the depositor, the custodian, the master servicer, the
special servicer or the trustee, the applicable seller will either:
1. repurchase the affected Mortgage Loan for a purchase price (the
"Repurchase Price") equal to the sum of:
o outstanding principal balance,
o unpaid accrued interest at the applicable rate (in absence of a default
and excluding any Deferred Interest) to, but not including, the date of
repurchase,
o the amount of any unreimbursed Servicing Advances relating to such
Mortgage Loan,
o accrued interest on Advances (including P&I Advances) at the Advance
Rate,
o the amount of any unpaid servicing compensation (other than master
servicing fees) and trust fund expenses allocable to the Mortgage Loan,
and
o the amount of any expenses reasonably incurred by the master servicer,
the special servicer or the trustee in respect of the repurchase
obligation, including any expenses arising out of the enforcement of
the repurchase obligation, or
2. substitute a Qualified Substitute Mortgage Loan for the affected Mortgage
Loan and pay the trustee a shortfall amount equal to the difference between
the Repurchase Price of the affected Mortgage Loan calculated as of the date
of substitution and the Stated Principal Balance of the Qualified Substitute
Mortgage Loan as of the date of substitution.
If the Mortgage Loan continues to be a "qualified mortgage" within the
meaning of the REMIC provisions of the Code, the 90-day period will not commence
until the seller receives notice of or discovers that the Mortgage Loan is a
defective Mortgage Loan. If the breach or defect cannot be cured within the
90-day period, then so long as the seller has commenced and is diligently
proceeding with the cure of the breach or defect, the 90-day period will be
extended for an additional 90 days. However, the seller will be entitled to an
extension only if it delivers to the depositor an officer's certificate:
o describing the measures being taken to cure the breach or defect,
o stating that it is possible to cure the breach or defect cured
within the 90 day period, and
o stating that the breach or defect does not cause the Mortgage Loan to fail to
be a "qualified mortgage" within the meaning of the REMIC provisions of the
Internal Revenue Code of 1986.
A "Qualified Substitute Mortgage Loan" is a mortgage loan which must, on
the date of substitution:
1. 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 Stated Principal Balance of the deleted
Mortgage Loan as of the due date in the calendar month during which the
substitution occurs;
2. have a mortgage rate not less than the Mortgage Rate of the deleted Mortgage
Loan;
3. have the same due date as the deleted Mortgage Loan; 4. accrue interest on
the same basis as the deleted Mortgage Loan (for
example, on the basis of a 360-day year consisting of twelve 30-day
months);
5. have a remaining term to stated maturity not greater than, and not more than
two years less than, the remaining term to stated maturity of the deleted
Mortgage Loan;
6. have an original loan to-value-ratio not higher than that of the deleted
Mortgage Loan and a current loan-to-value ratio not higher than the then
current loan-to-value ratio of the deleted Mortgage Loan;
7. comply as of the date of substitution with all of the representations and
warranties listed in the applicable mortgage loan purchase agreement;
8. have an environmental report for the related Mortgaged Property, which will
be part of the related mortgage file;
9. have an original debt service coverage ratio not less than the original debt
service coverage ratio of the deleted Mortgage Loan and a current debt
service coverage ratio not less than the then current debt service coverage
ratio of the deleted Mortgage Loan;
10. be determined by an opinion of counsel to be a "qualified
replacement mortgage" within the meaning of Section 860G(a)(4) of the
Internal Revenue Code of 1986;
11.not have a maturity date after the date three years prior to the Rated Final
Distribution Date;
12.not be substituted for a deleted Mortgage Loan unless the trustee has
received prior confirmation in writing by each Rating Agency that the
substitution will not result in the withdrawal, downgrade, or qualification
of the rating
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assigned by the Rating Agency to any class of the certificates then
rated by the Rating Agency. The seller will pay the cost, if any, of
obtaining the confirmation;
13.not be substituted for a deleted Mortgage Loan if it would result in
the termination of the REMIC status of REMIC I, REMIC II or REMIC III or the
imposition of tax on REMIC I, REMIC II or REMIC III other than a tax on
income expressly permitted or contemplated to be received by the terms of the
pooling and servicing agreement; and
14.not be substituted for a deleted Mortgage Loan unless the controlling class
representative has approved the substitution in its reasonable discretion.
If one or more mortgage loans are substituted for one or more deleted
Mortgage Loans, then:
o the amounts described in clause (1) will be determined on the basis
of total principal balances,
o the rates described in clause (2) above will be determined on a
weighted average basis, and
o the remaining term to stated maturity referred to in clause (5) above will be
determined on a weighted average basis.
When a Qualified Substitute Mortgage Loan is substituted for a deleted
Mortgage Loan, the applicable seller will certify that the Qualified Substitute
Mortgage Loan meets all of the requirements of the above definition and shall
send the certification to the trustee and the controlling class representative.
The obligations of the sellers to substitute, repurchase or cure
constitute the sole remedies available to the trustee for the benefit of the
holders of certificates for:
o a breach of a representation or warranty with regard to a Mortgage
Loan by a seller, or
o missing or defective Mortgage Loan documentation.
[In addition to the above remedies for breach of representations and
warranties, the controlling class representative may require a seller to
establish a cash reserve or provide a letter of credit in the amount of __% of
the principal balance of any Mortgage Loan if the related Mortgage, assignment
of leases, certain financing statements or certain assignments in favor of the
trustee remain missing, unrecorded or unfiled __ months or more after the
closing because such document was never provided in the proper form, was lost or
was returned unrecorded or unfiled as a result of a defect, but only if such
omission would materially and adversely affect the enforcement of the related
lien or security interest or the value of the Mortgage Loan at such time. If the
seller fails to cure such defects or repurchase or replace the related Mortgage
Loan when required by the related loan purchase agreement, the cash reserve or
letter of credit for the related Mortgage Loan may under certain circumstances
be applied to reimburse the trust for any expenses directly incurred as a result
of such document defects, including the costs of enforcing the seller's
obligations or curing such document defects.]
If a seller defaults on its obligation to substitute, repurchase, cure [or
provide a cash reserve or letter of credit], no other person will have an
obligation to fulfill the seller's obligations. No assurance can be given that
any seller will fulfill its obligations. If such obligations are not met, as to
a Mortgage Loan that is not a "qualified mortgage" within the meaning of the
REMIC provision of the Internal Revenue Code of 1986, REMIC I, REMIC II and
REMIC III may be disqualified.
MASTER SERVICER AND SPECIAL SERVICER
Background
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, Midland Loan
Services, Inc., a newly-formed, wholly-owned subsidiary of PNC Bank, National
Association, acquired substantially all of the assets of Midland Loan Services,
L.P. 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 for the trust fund. In
addition, Midland and its affiliates
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are the seller with respect to ___ of the Mortgage Loans (____%).
See "Description of the Mortgage Pool--The Sellers".
Standard & Poor's Ratings Services and Fitch IBCA, Inc. have approved
Midland as a master and special servicer for investment grade-rated commercial
and multifamily mortgage-backed securities. Midland is also a HUD/FHA-approved
mortgagee and a FannieMae-approved multifamily loan servicer.
Midland's Servicing Portfolio
As of __________, _____, Midland was servicing approximately ________
commercial and multifamily loans with a principal balance of approximately
$_____ billion. The collateral for these loans is located in all 50 states, the
District of Columbia, Puerto Rico and Canada. Approximately _______ of the
loans, with a total principal balance of approximately $___ billion, pertain to
commercial and multifamily mortgage-backed securities. The portfolio includes
multifamily, office, retail, hospitality and other types of income producing
properties. Midland also services newly-originated loans and loans acquired in
the secondary market for:
o financial institutions,
o private investors, and
o issuers of commercial and multifamily mortgage-backed securities.
DESCRIPTION OF THE CERTIFICATES
General
The certificates are issued under the pooling and servicing agreement and
will consist of [20] classes:
o [Class S Certificates
o Class A-1A Certificates
o Class A-1B Certificates
o Class A-2 Certificates
o Class A-3 Certificates
o Class A-4 Certificates
o Class B-1 Certificates
o Class B-2 Certificates
o Class B-3 Certificates
o Class B-4 Certificates
o Class B-5 Certificates
o Class B-6 Certificates
o Class B-7 Certificates
o Class B-8 Certificates
o Class C Certificates
o Class D Certificates
o Class E Certificates
o Class R-I Certificates
o Class R-II Certificates
o Class R-III Certificates]
We are only offering the [class S, A-1A, A-1B, A-2, A-3, A-4, B-1 and B-2]
certificates to you. See "The Pooling and Servicing Agreement" in this
prospectus supplement and "Description of the Certificates" and "Description of
the Governing Document" in the prospectus for additional important information
regarding the terms of the pooling and servicing agreement and the certificates.
The pooling and servicing agreement will be filed with the Securities and
Exchange Commission on Form 8-K within 15 days after the closing date.
The certificates represent the entire beneficial ownership interest in a
trust fund consisting primarily of:
o the Mortgage Loans and principal and interest due after the Cut-off Date and
all payments under and proceeds of the Mortgage Loans received after the
Cut-off Date (exclusive of Principal Prepayments received prior to the
Cut-off Date and scheduled payments of principal and interest due on or
before the Cut-off Date),
o any Mortgaged Property acquired on behalf of the trust fund through
foreclosure, deed-in-lieu of foreclosure or otherwise (upon acquisition, an
"REO Property"),
o funds or assets from time to time deposited in the Collection Account, the
Distribution Account, the Interest Reserve Account and any account
established in connection with REO Properties (an "REO Account"),
o the rights of the mortgagee under all insurance policies with
respect to the Mortgage Loans, and
o the depositor's rights and remedies under the applicable mortgage loan
purchase agreement, and all of the mortgagee's right, title and interest in
the Reserve Accounts.
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[The class E certificates will evidence undivided interests in a grantor
trust consisting of collections of Deferred Interest on the Mortgage Loans. The
principal balance certificates and the interest only certificates will not
receive any Deferred Interest collected on the Mortgage Loans.]
As described under "Material Federal Income Tax Consequences", the [class
R-I, R-II and R-III] certificates will constitute "residual interests" in a
REMIC. We do not anticipate that the residual certificates will receive any
distributions of cash from the trust.
Principal Balances and Notional Amounts
Upon initial issuance, the respective classes of principal balance
certificates will have the class principal balances set forth in the table on
page S-4, which may in the aggregate vary by up to [5%].
The principal balance of any class of principal balance certificates
outstanding at any time represents the maximum amount that holders are
entitled to receive as distributions allocable to principal. The
principal balance of each class will be reduced by:
o amounts distributed to the class as principal, and
o any Realized Losses and Expense Losses allocated to the class.
The [class S] certificates are interest-only certificates, have no
principal balances and are not entitled to distributions of principal. The total
notional amount of the [class S] certificates as of any date is equal to 100% of
the total principal balance of the Principal Balance Certificates.
The "Stated Principal Balance" of each Mortgage Loan will generally equal
its unpaid principal balance as of the Cut-off Date (or in the case of a
Qualified Substitute Mortgage Loan as of the date of substitution), after
applying payments due on or before that date (whether or not received), reduced
(to not less than zero) on each subsequent distribution date by:
o any payments or other collections (or advances for such amounts) of principal
of such Mortgage Loan that have been distributed on the certificates on such
date or would have been distributed on such date if they had not been applied
to cover Additional Trust Fund Expenses, and
o the principal portion of any Realized Loss allocable to such Mortgage Loan
during the related Collection Period.
However, except as stated in the discussion under
"--Distributions--Treatment of REO Properties", if any Mortgage Loan is paid in
full, liquidated or otherwise removed from the trust fund, the Stated Principal
Balance of the Mortgage Loan will be zero beginning on the first distribution
date following the Collection Period during which the event occurred.
Pass-Through Rates
The rate per annum at which any class of offered certificates accrues
interest from time to time is its "pass-through rate".
The pass-through rate for the class A-1A certificates is fixed at ______%
per annum.
The pass-through rates for the [class A-1B, class A-2, class A-3 and class
A-4] certificates for each interest accrual period will equal the lesser of (1)
the initial pass-through rate for that class, and (2) the weighted average of
the Net Mortgage Rates for the related distribution date, weighted on the basis
of the Mortgage Loans' respective Stated Principal Balances immediately before
the distribution date.
The pass-through rates for the [class B-1 and class B-2] certificates for
each interest accrual period will equal the weighted average of the Net Mortgage
Rates for the related distribution date, weighted on the basis of the Mortgage
Loans' respective Stated Principal Balances immediately before the distribution
date.
The pass-through rates for the [class B-3, class B-4 and class B-5]
certificates for each interest accrual period will equal the lesser of (1)
______% and (2) the weighted average of the Net Mortgage Rates for the related
distribution date, weighted on the basis of the Mortgage Loans' respective
Stated Principal Balances immediately before the distribution date. The
pass-through rates for the class [B-6, class B-7, class B-8, class C and class
D] certificates for each interest accrual period will equal the lesser of (1)
______% and (2) the weighted average of the Net Mortgage Rates for the related
distribution date, weighted on the basis of the Mortgage Loans' respective
Stated Principal Balances immediately before the distribution date.
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The pass-through rate on the [class S] certificates for the initial
interest accrual period will equal ______%. For each subsequent interest accrual
period, the pass-through rate on the [class S] certificates will generally be a
per annum rate equal to the excess of:
o the weighted average of the Net Mortgage Rates for the related distribution
date, weighted on the basis of the Mortgage Loans' respective Stated
Principal Balances immediately before the distribution date, over
o the weighted average of the pass-through rates for the principal balance
certificates for that interest accrual period, weighted on the basis of the
respective principal balances thereof immediately before the distribution
date.
The "Net Mortgage Rate" for each Mortgage Loan is the interest rate for
the Mortgage Loan minus the master servicer fee and the trustee fee. This
calculation is made without giving effect to any Revised Interest Rate or any
default rate. The Net Mortgage Rate for any Mortgage Loan will be determined
without regard to any post-closing date modification, waiver or amendment of the
Mortgage Loan's terms for purposes of calculating pass-through rates.
The certificates accrue interest on the basis of a 360-day year consisting
of twelve 30-day months. Therefore, when calculating the pass-through rate for
each class of certificates for a distribution date, the Net Mortgage Rate of a
Mortgage Loan that accrues interest on an actual/360 basis (the "Interest
Reserve Loans") will be adjusted to an annual rate generally equal to:
o a fraction, expressed as a percentage, the numerator of which is,
subject to adjustment as described below, 12 times the amount of
interest that accrued or would have accrued with respect to that
Mortgage Loan on an actual/360 basis during the related interest
accrual period, based on its Stated Principal Balance immediately
preceding that distribution date and its mortgage interest rate in
effect as of __________, 200_, and the denominator of which is the
Stated Principal Balance of the Mortgage Loan immediately prior to that
distribution date, minus
o the related master servicer fee and the trustee fee.
Notwithstanding the foregoing, if the subject distribution date occurs
during January (except during a leap year) or February, then, in the case of any
particular Interest Reserve Loan, the numerator of the fraction described in the
first bullet point of the preceding paragraph will be decreased by any Interest
Reserve Amount with respect to that Mortgage Loan that is transferred from the
Collection Account to the Interest Reserve Account during that month.
Furthermore, if the subject distribution date occurs during March, then, in the
case of any particular Interest Reserve Loan, the numerator of the fraction
described in the first bullet point of the preceding paragraph will be increased
by any Interest Reserve Amounts with respect to that Mortgage Loan that are
transferred from the Interest Reserve Account to the Distribution Account during
that month.
See "The Pooling and Servicing Agreement--Servicing Compensation and
Payment of Expenses".
Distributions
Method, Timing and Amount
Payments on the offered certificates are scheduled to occur monthly,
commencing in _______ 200_. [The distribution date for each month will be the
later of:
o the ___ calendar day of that month, or if that day is not a business
day, then the next business day, and
o the _____ business day after the determination date for the month.]
The "Record Date" for each distribution date is the last business day of
the month preceding the month in which the distribution date occurs. Except for
the final distribution, all distributions will be made by the trustee to the
persons in whose names the certificates are registered at the close of business
on the Record Date.
The distributions will be made:
o by wire transfer of immediately available funds if the certificateholder
provides the trustee with wiring instructions on or before the Record Date,
or
o otherwise by check mailed to the certificateholder.
The final distribution on a certificate will be made only upon presentment
or surrender of the certificate as specified in the notice of final
distribution.
The final distribution on any certificate will be determined without
regard to possible future
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reimbursement of any Realized Loss or Expense Loss previously allocated to
the certificate. Any distribution after the final distribution to reimburse a
previously-allocated Realized Loss or Expense Loss will be made by check mailed
to the certificateholder that surrendered the certificate. Such a distribution
is possible, but unlikely.
Distributions on a class of certificates are allocated among the
outstanding certificates of the class based on their principal or notional
balances.
Determining Available Funds
The total distribution on the certificates will equal the Available Funds.
The "Available Funds" for a distribution date in general will equal:
o amounts on deposit in the Collection Account at close of business on the
Determination Date, excluding:
1. Monthly Payments collected but due on a due date after the related
Collection Period,
2. prepayment premiums and Deferred Interest (which are distributed
separately),
3. amounts payable or reimbursable to any person other than the
certificateholders (including amounts payable to the master servicer, the
special servicer or the trustee as compensation or to reimburse
outstanding Advances, and amounts payable as Additional Trust Fund
Expenses),
4. amounts deposited in the Collection Account in error, 5. if the
distribution date occurs during January of any year that is not a leap
year or February of any year, the Interest Reserve Amounts for the
Interest Reserve Loans to be deposited into the Interest Reserve Account;
plus
o any P&I Advances and Compensating Interest Payments made for the
distribution date and not already included; plus
o if the distribution date occurs during March of any year, the Interest
Reserve Amounts in the Interest Reserve Account.
"Principal Prepayments" are payments of principal on a Mortgage Loan
that:
o are received before the scheduled due date, and
o are not accompanied by interest representing the full amount of
scheduled interest due in any month after the month of payment.
The "Collection Period" for a distribution date:
o begins on the day after the Determination Date in the preceding month (or, in
the case of the ___________ 20__ distribution date, on the day after the
Cut-off Date), and
o ends on the Determination Date in the month in which the
distribution date occurs.
[The "Determination Date" for a distribution date is the ________ calendar
day of the month or, if that day is not a business day, the first business day
before that day.]
Applying Available Funds
On each distribution date, the trustee will first apply Available Funds
to make distributions to the holders of the senior certificates in the following
order:
1. to pay interest to the holders of the classes of senior certificates, up to
an amount equal to, and pro rata as among those classes in accordance with,
the Distributable Certificate Interest for that class for that distribution
date;
2. to pay principal from the Principal Distribution Amount for that distribution
date:
o first to the holders of the [class A-1A] certificates; and
o second to the holders of the [class A-1B] certificates;
in each case, up to an amount equal to the lesser of:
(a) the then-outstanding principal balance of the class; and
(b) the remaining portion of the Principal Distribution Amount.
However, principal payments will be made to the [class A-1A and class A-1B]
certificates up to an amount equal to, and pro rata based on, their
outstanding class principal balances:
o if the principal balance of the subordinate certificates has been
reduced to zero; or
o on the final distribution date, if the trust fund is terminated as
discussed under "--Optional Termination" below; and
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3. to reimburse the holders of the [class A-1A and class A-1B] certificates, up
to an amount equal to, and pro rata as among those classes in accordance with
the amount of Realized Losses and Expense Losses, if any, previously
allocated to the [class A-1A and class A-1B] certificates and for which no
reimbursement has previously been paid; plus all unpaid interest on such
amounts (compounded monthly) at the pass-through rates for those classes.
On each distribution date, the holders of each class of subordinate
certificates will be entitled to the following distributions, to the extent of
the Available Funds remaining after all required distributions have been made on
the senior certificates and each other class of subordinate certificates, if
any, with an earlier alphabetical and numerical class designation:
1. distributions of interest, up to an amount equal to the
Distributable Certificate Interest in respect of such class of
certificates for that distribution date;
2. if the principal balance of the [class A-1A and class A-1B] certificates and
each other class of subordinate certificates, if any, with an earlier
alphabetical and numerical class designation has been reduced to zero,
distributions of principal, up to an amount equal to the lesser of:
(a) the then-outstanding principal balance of that class, and
(b) the remaining Principal Distribution Amount (or, on the final
distribution date in connection with the termination of the trust
fund, up to an amount equal to the then-outstanding principal
balance of the class); and
3. distributions for the purpose of reimbursement, up to an amount equal to all
Realized Losses and Expense Losses, if any, previously allocated to such
class and for which no reimbursement has previously been paid; plus all
unpaid interest on such amounts (compounded monthly) at the pass-through
rates for those classes.
"Alphabetical and numerical order" is determined first by alphabetical
order, and then if the alphabetical designations are the same, by numerical
order.
The trustee will pay any remaining Available Funds to the holders of the
residual certificates.
Reimbursement of previously allocated Realized Losses and Expense Losses
will not constitute distributions of principal for any purpose and will not
reduce the principal balances of the reimbursed certificates.
Distributable Certificate Interest
The "Distributable Certificate Interest" for each class of certificates
will equal:
o the interest accrued for the prior calendar month, at the applicable
pass-through rate on the principal balance or notional amount of the class at
the close of the preceding distribution date (or in the case of the first
distribution date, the Cut-off Date),
o reduced (to not less than zero) by the class's allocable share of any Net
Aggregate Prepayment Interest Shortfall for the distribution date, and
o increased by the class's Class Interest Shortfall, if any, for the
distribution date.
See "--Prepayment Interest Shortfalls" below.
The "Class Interest Shortfall" for a class of certificates for a
distribution date equals:
o zero on the initial distribution date; and
o for subsequent distribution dates, the sum of:
1. the excess, if any, of:
o all Distributable Certificate Interest for the class on the
preceding distribution date,
over
o all distributions of interest made for the class on the preceding
distribution date, plus
2. to the extent permitted by law, one month's interest on such excess at the
pass-through rate for the class (or, in the case of the [class S]
certificates, at a rate equal to the weighted average of the pass-through
rates for the principal balance certificates, weighted on the basis of
their respective principal balances).
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Principal Distribution Amount
The "Principal Distribution Amount " for any distribution date will, in
general, equal the following:
o the principal portions of all Monthly Payments (other than balloon payments)
and Assumed Monthly Payments due or deemed due, as the case may be, on the
Mortgage Loans on the due dates occurring during the related Collection
Period; plus
o all payments (including voluntary principal prepayments and balloon
payments) and other collections received on the Mortgage Loans during
the related Collection Period that were identified and applied by the
master servicer as recoveries of principal, in each case net of any
portion of such amounts that represents a payment or other recovery of
the principal portion of any Monthly Payment (other than a balloon
payment) due, or the principal portion of any Assumed Monthly Payment
deemed due, on a Mortgage Loan on a due date during or prior to the
related Collection Period and not previously paid or recovered.
If on any distribution date the aggregate amount of distributions of
principal made on the principal balance certificates is less than the Principal
Distribution Amount, then the amount of the shortfall will be included in the
Principal Distribution Amount for the next distribution date.
The "Monthly Payment" for any Mortgage Loan (other than any REO Mortgage
Loan) will, in general, be the scheduled payment of principal and/or interest
(excluding balloon payments, default interest and Deferred Interest) due from
time to time. The Monthly Payment will be adjusted for any waiver, modification
or amendment of the terms of the Mortgage Loan whether agreed to by the master
servicer or special servicer, or resulting from a bankruptcy or similar
proceeding.
The "Assumed Monthly Payment":
o for a balloon loan that is delinquent as to all or any portion of
its balloon payment beyond the end of the Collection Period in which
its original maturity date occurs, is an amount that is deemed due on
its original maturity date and on each successive due date that it
remains or is deemed to remain outstanding. This amount is equal to
the Monthly Payment that would have been due if the balloon payment had
not become due, and the loan had continued to amortize under the
amortization schedule, if any, in effect immediately prior to maturity
and had continued to accrue interest in accordance with its terms in
effect immediately prior to maturity.
o for a Mortgage Loan as to which the related Mortgaged Property has become an
REO Property, is an amount that is deemed due on each due date while the REO
Property remains part of the trust fund. This amount is equal to the Monthly
Payment (or, in the case of a balloon loan described in the preceding bullet
point, the Assumed Monthly Payment) due on the last due date before
acquisition of the REO Property.
Distributions of Prepayment Premiums
Any prepayment premium collected during a Collection Period will be
distributed on the next distribution date. Prepayment premiums distributed to
the holders of a class of certificates may be insufficient to compensate them
fully for any loss in yield attributable to the related Principal Prepayments.
Any prepayment premium will be distributed as follows. The holders of each
class of offered certificates receiving principal distributions on a
distribution date will be entitled to an amount equal to the product of:
o the prepayment premium available for distribution, multiplied by
o a fraction (not more than one or less than zero):
1. the numerator of which equals the excess, if any, of the
pass-through rate applicable to that class of offered certificates,
over the Discount Rate, and
2. the denominator of which equals the excess, if any, of the interest
rate for the prepaid Mortgage Loan, over the Discount Rate,
multiplied by
o a fraction (not more than one or less than zero):
1. the numerator of which is equal to the aggregate distributions of
principal to be made with respect to that class of offered
certificates on that distribution date, and
2. the denominator of which is equal to the Principal Distribution
Amount for that distribution date.
The "Discount Rate" is the rate which, when compounded monthly, is
equivalent to the Treasury Rate when compounded semi-annually.
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The "Treasury Rate" is the yield calculated by the linear interpolation of
the yields of U.S. Treasury constant maturities with a maturity date (one longer
and one shorter) most nearly approximating the maturity date (or
Hyper-Amortization Date, if applicable) of the Mortgage Loan prepaid. The
trustee will use the yields reported in Federal Reserve Statistical Release H.15
- - Selected Interest Rates under the heading "U.S. government securities/Treasury
constant maturities" for the calendar week before the Principal Prepayment. If
Release H.15 is no longer published, the trustee will select a comparable
publication to determine the Treasury Rate.
All prepayment premiums not distributed to holders of offered principal
balance certificates will be distributed to the holders of the interest only
certificates.
Treatment of REO Properties
If the trust fund acquires a Mortgaged Property through foreclosure, deed
in lieu of foreclosure or otherwise, then, until the REO Property is liquidated,
the related Mortgage Loan (an "REO Mortgage Loan") will be treated as
outstanding for several purposes, including:
o determining distributions on the certificates,
o allocations of Realized Losses and Expense Losses to the
certificates,
o computing master servicing fees, special servicing fees and trustee
fees, and
o determining pass-through rates and the Principal Distribution Amount.
Net operating revenues and other net proceeds derived from such REO
Property will be "applied" by the master servicer as principal, interest and
other amounts "due" on the Mortgage Loan. With some exceptions, the master
servicer and the trustee are required to make P&I Advances on the REO Mortgage
Loan, if proceeds received from the REO Property are less than the Assumed
Monthly Payment for the REO Mortgage Loan. See "The Pooling and Servicing
Agreement--Advances".
Appraisal Reductions of Loan Balances
An Appraisal Reduction will be calculated following the earliest of any of
the following "Appraisal Reduction Events" affecting a Mortgage Loan:
o the third anniversary of the effective date of a modification agreed to by
the special servicer that extends a Mortgage Loan's maturity date without
changing the amount of the Monthly Payment,
o [120] days after an uncured delinquency occurs on a Mortgage Loan,
o [45] days after the effective date of a modification agreed to by
the special servicer that reduces the amount of the Monthly Payment, or
changes any other material economic term of the Mortgage Loan,
o [60] days after a receiver is appointed or an involuntary bankruptcy
proceeding commences,
o immediately after a borrower declares bankruptcy, and o immediately after a
Mortgage Loan becomes an REO Mortgage Loan.
The "Appraisal Reduction" for any Mortgage Loan as to which any Appraisal
Reduction Event has occurred will be an amount equal to:
o the outstanding Stated Principal Balance of such Mortgage Loan as of
the last day of the related Collection Period, less
o the excess, if any, of:
1. [90%] of the appraised or otherwise estimated value of the related
Mortgaged Property or Properties, plus the amount of any escrows or
reserves for the Mortgage Loan that are not related to taxes or insurance,
2. the sum of:
(a) all unpaid interest on the principal balance of the Mortgage Loan
(without giving effect to any default rates or Revised Interest
Rates), but only if not previously advanced by the master servicer or
the trustee,
(b) all unreimbursed Advances for the Mortgage Loan, plus interest at
the Advance Rate, and
(c) all currently due and unpaid real estate taxes and assessments and
insurance premiums and all other amounts, including, if applicable,
ground rents, due and unpaid under the Mortgage Loan (which taxes,
premiums and other amounts have not been escrowed and are not the
subject of an Advance).
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Within [60] days after the special servicer becomes aware of an Appraisal
Reduction Event, the special servicer must:
o obtain a fair market value appraisal of the related Mortgaged Property or REO
Property from an independent appraiser who is a member of the Appraisal
Institute, with at least five years experience in the related property type
and in the jurisdiction in which the Mortgaged Property or REO Property is
located, or
o at its discretion, conduct an internal property valuation in accordance with
the servicing standard if the Mortgage Loan has an outstanding principal
balance equal to or less than [$1,000,000].
Each of the above is referred to as an "Updated Appraisal". If the special
servicer has completed or obtained an appraisal or internal valuation during the
prior [12] months, the special servicer may use that appraisal or valuation as
the "Updated Appraisal" for purposes of calculating the Appraisal Reduction, if
using such appraisal or valuation is consistent with the servicing standard. The
master servicer will pay the cost of any Updated Appraisal as a Servicing
Advance, unless the Updated Appraisal is an internal valuation performed by the
special servicer or if the Advance would be a nonrecoverable Advance.
If the special servicer is not using a previously obtained appraisal or
internal valuation to calculate the Appraisal Reduction, the special servicer
must estimate the value of the related Mortgaged Property or REO Property (the
"Appraisal Reduction Estimate"). This estimate will be used to calculate the
Appraisal Reduction until the Updated Appraisal is completed.
The master servicer will calculate the Appraisal Reduction based on the
Updated Appraisal or the special servicer's Appraisal Reduction Estimate. If the
Appraisal Reduction is calculated using the Appraisal Reduction Estimate, then
on the first distribution date after the delivery of the Updated Appraisal, the
master servicer will adjust the Appraisal Reduction to take into account the
Updated Appraisal.
The special servicer will obtain annual updates of the Updated Appraisal
during the continuance of an Appraisal Reduction Event. The master servicer will
pay the cost of such annual updates as a Servicing Advance, unless the Advance
would be nonrecoverable. In addition, the controlling class representative may
at any time request the special servicer to obtain (at the controlling class
representative's expense) an Updated Appraisal. The master servicer will
recalculate the Appraisal Reduction each time an Updated Appraisal is obtained.
The master servicer will deliver a copy of each Updated Appraisal to the trustee
and the controlling class representative within [15] days after it receives the
Updated Appraisal from the special servicer. Upon request, the trustee will
provide each Updated Appraisal to any holder of the privately offered
certificates.
The Appraisal Reduction will be eliminated upon full payment or
liquidation of the Mortgage Loan or if the Mortgage Loan becomes a Corrected
Mortgage Loan and the borrower makes three consecutive monthly debt service
payments.
An Appraisal Reduction:
o will reduce the master servicer's and the trustee's obligation to
advance delinquent interest on the Mortgage Loan;
o may reduce current distributions to one or more of the then most
subordinate classes of principal balance certificates; and
o may cause an Expense Loss to be allocated to one or more of the then most
subordinate classes of principal balance certificates.
See "The Pooling and Servicing Agreement--Advances".
Application of Realized Losses and Expense Losses to Principal Balances
If immediately following distributions on any distribution date the Stated
Principal Balance of the Mortgage Pool is less than the total principal balance
of the principal balance certificates, then the principal balances of the
various classes of the principal balance certificates will be reduced as
follows:
o First, the principal balances of the various classes of the
subordinate certificates will be reduced, sequentially in reverse
alphabetical and numerical order beginning with the [class D] certificates.
The principal balance of the lowest class will be reduced until:
o the deficit is reduced to zero; or
o the principal balance of that class is reduced to zero.
o Any deficit remaining after reducing the principal balance of the
most subordinate class to
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zero will be applied to reduce the principal balance of the next lowest
class, and so forth until the deficit is eliminated or until the total
principal balance on all the subordinate certificates is reduced to zero.
If any portion of the deficit remains after the total principal balance of
all the subordinate certificates is reduced to zero, then the class principal
balances of the [class A-1A and class A-1B] certificates will be reduced, in
proportion to their remaining class principal balances, until:
o the deficit is reduced to zero; or
o the principal balance of the [class A-1A and A-1B] certificates is
reduced to zero.
In general, any such deficit will result from Realized Losses and/or
Expense Losses on the Mortgage Loans. Accordingly, these reductions in the
principal balances allocate Realized Losses and Expense Losses among the
certificates.
Any reduction in the principal balance of any class of principal balance
certificates also reduces the notional amount of the interest only certificates.
Within a given class of principal balance certificates, Realized Losses
and Expense Losses will be allocated to holders in proportion to their
percentage interests in the class.
Realized Losses arise when the master servicer becomes unable to collect
all amounts due and owing under a Mortgage Loan for any reason, including:
o fraud;
o bankruptcy; or
o an uninsured casualty loss.
If the Mortgage Loan and any related REO Property have been fully
liquidated, the "Realized Loss" would equal:
o the sum of:
1. the outstanding principal balance;
2. accrued and unpaid interest on the loan to but not including the due
date in the Collection Period when the liquidation occurs, excluding
Deferred Interest and default interest in excess of the mortgage
interest rate;
3. all unreimbursed Servicing Advances; and
4. all outstanding liquidation expenses;
minus
o the total liquidation proceeds received, if any.
If any part of the debt due under a Mortgage Loan is forgiven, then the
amount forgiven would also be a Realized Loss.
The trust fund incurs "Expense Losses" when it pays Additional Trust Fund
Expenses that are not of the type typically subject to a Servicing Advance or
are of such type but were the subject of a determination that such Servicing
Advance, if made, would be nonrecoverable.
"Additional Trust Fund Expenses" include, among other things:
o special servicing fees, workout fees and disposition fees,
o interest on Advances not paid from default interest and late payment
charges,
o the cost of legal opinions obtained as part of servicing the loans and
administering the trust fund, if these costs are not covered by a Servicing
Advance or paid by a borrower,
o certain unanticipated, non-Mortgage Loan specific expenses of the Trust Fund,
including:
1. indemnities and reimbursements to the trustee, the master servicer,
the special servicer and the depositor, and
2. certain federal, state and local taxes, and related expenses payable
out of the trust fund, and
o other trust fund expenses not included in the calculation of Realized Loss
for which there is no corresponding collection from a borrower.
Prepayment Interest Excesses and Shortfalls
If a borrower prepays all or part of a Mortgage Loan on or before the
Determination Date in any calendar month and pays interest which accrued on the
prepayment from the beginning of the calendar month through the day preceding
the prepayment date, then such interest (less related master servicer fees) is a
"Prepayment Interest Excess".
If a borrower prepays all or part of a Mortgage Loan after the
Determination Date in a calendar month and does not pay interest on the
prepayment through the end of the calendar month, then this shortfall in a full
month's interest on the
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prepayment (less related master servicer fees) is a "Prepayment Interest
Shortfall".
Prepayment Interest Excesses collected during a Collection Period will be
used to offset Prepayment Interest Shortfalls during the Collection Period. The
master servicer will retain any remaining amount as additional servicing
compensation.
The master servicer must pay out of its own funds, without right of
reimbursement, any Prepayment Interest Shortfalls in respect of the Mortgage
Loans that are not offset by Prepayment Interest Excesses. However, the maximum
amount that the master servicer must pay is the Stated Principal Balance of the
Mortgage Loans on which it has received its master servicing fee for such
distribution date multiplied by _____% per annum. Any payment that the master
servicer makes to cover such shortfalls will be a "Compensating Interest
Payment."
The total of all Prepayment Interest Shortfalls remaining in a
Collection Period after offsetting Prepayment Interest Excesses and
applying Compensating Interest Payments, is the "Net Aggregate Prepayment
Interest Shortfall" for the distribution date.
The trustee will allocate any Net Aggregate Prepayment Interest Shortfall
among the certificates in proportion to the interest accrued on each class for
the distribution date. Such an allocation will reduce the Distributable
Certificate Interest for each class.
See "The Pooling and Servicing Agreement--Servicing Compensation and
Payment of Expenses".
Scheduled Final Distribution Date
The "Scheduled Final Distribution Date" for a class of certificates is the
distribution date on which its principal balance or notional amount would become
zero if there is no:
o early termination of the trust,
o repurchase of any loan,
o default or delinquency on any loan,
o prepayment of any kind, except that Hyper-Amortization Loans are
assumed to pay on their Anticipated Repayment Dates, or
o modification or extension of any loan.
It is very unlikely that these assumptions will hold true.
The Scheduled Final Distribution Date for each class of the offered
certificates is the distribution date in the month and year listed for such
class in the "Scheduled Final Distribution Date" column in the table on the
cover page. These Scheduled Final Distribution Dates 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, if there are defaults on the Mortgage Loans, the actual
final distribution date for one or more classes may be later, and could be
substantially later, than the related Scheduled Final Distribution Date(s).
Since the rate of payment (including voluntary and involuntary
prepayments) of the Mortgage Loans may exceed the scheduled rate of payments,
and may exceed such scheduled rate by a substantial amount, the actual final
distribution date for one or more classes 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. No assurance can be given as to
actual payment experience.
Subordination
The right of each class of subordinate certificates to receive
principal and interest distributions is subordinated to the rights of:
o the senior certificates, and
o each other class of subordinate certificates with an earlier
alphabetical and numerical class designation.
This subordination is intended to:
o protect the senior certificates against losses associated with
delinquent and defaulted Mortgage Loans, and
o enhance the likelihood of timely receipt by senior certificateholders of the
full amount of Distributable Certificate Interest payable to them, and the
ultimate receipt by the [class A-1A and class A-1B] certificateholders of
principal equal to the initial class principal balance of those classes.
Similarly, but to decreasing degrees, this subordination is also intended
to increase the likelihood that the holders of the other classes of
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offered certificates will timely receive all of the Distributable
Certificate Interest payable on their certificates on each distribution date,
and that they will eventually be paid all of their principal.
The subordination will be accomplished by:
o applying Available Funds as described above under "--Distributions",
and
o allocating Realized Losses and Expense Losses to the principal balance
certificates in reverse alphabetical and numerical order.
Realized Losses and Expense Losses are allocated to the [class A-1A and
class A-1B] certificates in proportion to their principal balances.
No losses are allocated to the [class S] certificates, but any reduction
in the principal balance of a class of principal balance certificates will
reduce the notional amount of the [class S] certificates.
No other form of credit enhancement is provided.
Optional Termination
If on any distribution date the total Stated Principal Balance of the
Mortgage Loans is less than [1%] of the Initial Pool Balance, then each of the
following (in this order) has an option to terminate the trust:
o the majority holders of the Controlling Class,
o the master servicer,
o the special servicer, and
o the holder of the majority of the class R-I certificate interests.
The termination is effected by purchasing all the Mortgage Loans and all
property acquired in respect of any Mortgage Loan then remaining in the trust
fund. Termination would cause early retirement of all then-outstanding
certificates.
The option exercise price equals the sum of:
o 100% of the total unpaid principal balance of the remaining Mortgage Loans
other than:
1. loans as to which the special servicer has determined all payments
or recoveries have been made, and
2. loans as to which the Mortgaged Property has become an REO Property, o
accrued and unpaid interest on those Mortgage Loans to the due date
in the Collection Period when the termination occurs (excluding
Deferred Interest),
o unreimbursed Servicing Advances plus interest at the Advance Rate,
and
o the fair market value of any other property (including REO Property)
remaining in the trust fund.
The option exercise price, net of amounts payable to persons other than
certificateholders, will constitute Available Funds for the final distribution
date.
Voting Rights
At all times during the term of the pooling and servicing agreement the
voting rights for the certificates will be allocated as follows:
o [98%] to the holders of the classes of principal balance
certificates in proportion to the principal balances of these classes,
and
o [2%] to the holders of the interest only certificates.
Each certificateholder of a class will share in the voting rights of that
class in proportion to the certificateholder's percentage interest in the class.
Delivery, Form and Denomination
Book-Entry Certificates
Initially, the offered certificates will be registered in the name of a
nominee of The Depository Trust Company. Investors will hold their beneficial
interests in the offered certificates through the book-entry facilities of DTC.
Investors will not receive physical certificates except in the limited
circumstances described below.
DTC has informed the depositor that its nominee will be Cede & Co.
Accordingly, Cede & Co. is expected to be the holder of record of the offered
certificates. Certificateholders may also hold certificates through Cedelbank or
Euroclear (in Europe), if they are participants in those systems or indirectly
through organizations that are participants in those systems. Cedelbank and
Euroclear will hold omnibus positions on behalf of their participants through
customers' certificates accounts in Cedelbank's and Euroclear's names on the
books of their respective depositaries, which in turn will hold such positions
in customers' certificates accounts in
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the depositaries' names on the books of DTC. Citibank, N.A. will
act as depositary for Cedelbank and the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York will act as depositary for
Euroclear.
Transfers between DTC participants will occur in accordance with DTC
rules. Transfers between Cedelbank participants and Euroclear participants will
occur in accordance with their rules.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through Cedelbank or
Euroclear, on the other, will be effected in DTC in accordance with DTC rules
through Cedelbank's or Euroclear's depositary. Cedelbank participants and
Euroclear participants may not deliver instructions directly to these
depositaries.
Because of time-zone differences, credits of certificates received in
Cedelbank or Euroclear as a result of a transaction with a DTC participant will
be made during subsequent certificates settlement processing and dated the
business day following the DTC settlement date. Such credits or any transactions
in such certificates settled during such processing will be reported to the
relevant Cedelbank or Euroclear participant on such business day. Cash received
in Cedelbank or Euroclear as a result of sales of certificates by or through a
Cedelbank participant or a Euroclear participant to a DTC participant will be
received with value on the DTC settlement date, but will be available in the
relevant Cedelbank or Euroclear cash account only as of the business day
following settlement in DTC.
The trustee will not be responsible for monitoring or restricting transfer
of ownership interests in offered certificates through the book-entry facilities
of DTC.
In DTC's book-entry system, a purchaser purchases through, or as, a direct
participant. The direct participant receives credit for the certificates on
DTC's records. The ownership interest of each beneficial owner is ultimately
reflected on the records of one of DTC's direct or indirect participants.
Beneficial owners are expected to receive written confirmations detailing the
transaction and periodic statements of their holdings, from the direct or
indirect DTC participant with whom the beneficial owner dealt. Neither the
depositor, the trustee, the master servicer, the special servicer nor any paying
agent is responsible for records of ultimate beneficial ownership or for
payments to ultimate beneficial owners.
So long as any class of offered certificates are held in book-entry form:
o actions by certificateholders will be taken by DTC upon instructions from its
participants, who in turn receive instructions directly or indirectly from
the beneficial owners of those certificates, and
o distributions, notices, reports and statements to certificateholders will be
sent to DTC or its nominee as the registered holder of those certificates for
ultimate distribution to beneficial owners of those certificates in
accordance with DTC procedures and applicable law.
Neither DTC nor its nominee will consent or vote with respect to the
offered certificates. Instead, DTC and its nominee take steps to facilitate
consent or voting in accordance with instructions from participants, who in turn
are expected to follow instructions issued by the beneficial owners of those
certificates.
Because DTC can only act on behalf of its participants, who in turn act on
behalf of indirect participants and certain banks, a beneficial owner may be
able to pledge or otherwise deal in offered certificates only with persons that
participate in the DTC system.
Under a book-entry format, beneficial owners may experience delays
in their receipt of payments, since distributions by the trustee or a
paying agent on behalf of the trustee will be paid directly to DTC's
nominee.
Definitive Certificates
The trustee will issue definitive physical certificates to
certificateholders only if:
o the depositor elects to terminate the book-entry system, or
o DTC is no longer willing or able to act as depositary and the
depositor cannot locate a qualified successor to DTC.
The trustee would then issue definitive physical certificates upon
surrender of the physical certificates held by DTC with instructions from DTC
for registering definitive physical certificates in the names of the beneficial
owners. Upon becoming registered holders of certificates, those beneficial
owners will then be entitled directly to:
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o receive payments,
o exercise voting rights, and
o transfer and exchange their certificates.
Definitive certificates will be transferable and exchangeable at the
offices of the trustee, the certificate registrar or another transfer agent.
The Depository Trust Company
DTC is:
o a limited purpose trust company organized under New York law, o a "banking
corporation" within the meaning of the New York Banking
Law,
o a member of the Federal Reserve System,
o a "clearing corporation" within the meaning of the New York Uniform
Commercial Code, and
o 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 participants and to facilitate
the clearance and settlement of securities transactions among participants
through electronic computerized book-entry changes in participants' securities
and cash accounts. This greatly reduces the need for physical movement of
certificates and cash in securities transactions. Participants that maintain
accounts with DTC include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. The rules
applicable to DTC and its participants are on file with the Securities and
Exchange Commission. Indirect access to the DTC system is available to banks,
brokers, dealers, trust companies and other institutions who maintain a clearing
or custodial relationship with a direct participant. DTC is owned by a number of
its participants and by the New York Stock Exchange, Inc., the American Stock
Exchange, Inc. and the National Association of Securities Dealers, Inc.
To facilitate transfers, all offered certificates deposited with DTC are
registered in the name of DTC's nominee, Cede & Co. The deposit of offered
certificates with DTC and their registration in the name of Cede & Co. effect no
change in beneficial ownership.
DTC does not know who are the ultimate beneficial owners of the offered
certificates. DTC's records reflect only the identity of the direct participants
to whose account offered certificates are credited on DTC's records. The
participants are responsible for keeping account of the certificates that they
hold for their customers.
If DTC or a direct or indirect participant becomes insolvent, then the
ability of ultimate beneficial owners to obtain timely payment may be impaired.
If an insolvency causes a loss that exceeds the limits of applicable Securities
Investor Protection Corporation insurance or if such coverage is unavailable,
the ultimate payment of amounts distributable on offered certificates may be
impaired.
[DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including dates
before, on, and after January 1, 2000, may encounter "Year 2000 problems." DTC
has informed its participants and other members of the financial community that
it has developed and is implementing a program so that DTC's systems, as the
same relate to the timely payment of distributions (including principal and
income payments) to securityholders, book-entry deliveries, and settlement of
trades within DTC, continue to function appropriately on or after January 1,
2000. This program includes a technical assessment and a remediation plan, each
of which is complete. Additionally, DTC's plan includes a testing phase, which
is expected to be completed within appropriate time frames.]
[However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to its participants, issuers and
their agents, as well as third party vendors from whom DTC licenses software and
hardware, and third party vendors on whom DTC relies for information or the
provision of services, including telecommunication and electrical utility
service providers, among others. DTC has informed its participants and other
members of the financial community that it is contacting (and will continue to
contact) third party vendors from whom DTC acquires services to:
o impress upon them the importance of such services being Year 2000
compliant; and
o determine the extent of their efforts for Year 2000 remediation (and, as
appropriate, testing) of their services.
In addition, DTC is in the process of developing such contingency
plans as it deems appropriate.]
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According to DTC, the foregoing information with respect to DTC has been
provided to its participants and other members of the financial community for
informational purposes only and is not intended to serve as a representation,
warranty, or contract modification of any kind.
Cedelbank
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds securities for its participants and facilitates the
clearance and settlement of securities through electronic book-entry changes in
their cash and securities accounts. Transactions can settle in Cedelbank in any
of 28 currencies, including United States dollars. Cedelbank provides
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing to its participants. Cedelbank
interfaces with domestic markets in several countries. The Luxembourg Monetary
Institute regulates Cedelbank as a professional depository. Cedelbank
participants are recognized financial institutions around the world, including
underwriters, securities brokers and dealers, banks, trust companies, clearing
corporations and certain other organizations. Indirect access to Cedelbank is
also available to others, such as banks, brokers, dealers, and trust companies
that maintain a clearing or custodial relationship with a Cedelbank participant.
Euroclear
The Euroclear System was created in 1968 to hold securities for
participants and to clear and settle transactions between participants through
simultaneous electronic book-entry delivery against payment. Transactions may
now be settled in any of 40 currencies, including United States dollars. The
Euroclear System includes various other services, including securities lending
and borrowing, and interfaces with domestic markets in several countries. The
Euroclear System is operated by the Brussels, Belgium office of Morgan Guaranty
Trust Company of New York (the "Euroclear Operator"), under a contract with
Euroclear Clearance System S.C., a Belgian cooperative corporation. All
operations are conducted by the Euroclear Operator, and all Euroclear securities
clearance accounts and Euroclear cash accounts are accounts with the Euroclear
Operator. Euroclear participants include banks (including central banks),
securities brokers and dealers. Indirect access to Euroclear is also available
to other firms that maintain a clearing or custodial relationship with a
Euroclear participant.
The Euroclear Operator is the Belgian branch of a New York banking
corporation that is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
The Euroclear Operator acts only on behalf of Euroclear participants, and
has no record of or relationship with persons holding through participants.
Denominations
The trust will issue the offered certificates in minimum denominations of
[$5,000] initial principal balance or notional amount (or in any whole dollar
amount in excess of [$5,000]). However, the trust may issue one certificate for
each class in a lower denomination to make up the difference between certificate
interests sold and the total amount offered.
Registration and Transfer of Definitive Certificates
Subject to the restrictions in the pooling and servicing agreement,
holders may transfer or exchange any definitive physical certificate in whole or
in part. No transfer or exchange can be of an amount smaller than the
denominations specified under "--Delivery, Form and Denomination
- --Denominations" above. The registered holder or his attorney-in-fact must
surrender the definitive certificate at the corporate trust office of the
certificate registrar appointed under the pooling and servicing agreement or at
the office of any transfer agent. The certificate must be accompanied by:
o an executed instrument of assignment and transfer, in the case of
transfer, or
o a written request for exchange, in the case of exchange.
The certificate registrar will cancel the old certificate and execute and
deliver (or mail) a new definitive certificate to the appropriate person within
a reasonable period of time.
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New certificates sent by first class mail will be sent at the risk of the
transferee or holder to the address specified by the person presenting the old
certificates for transfer or exchange and requesting such mailing.
The certificate registrar may decline to register an exchange or transfer
during the [15] days preceding any distribution date.
The certificate registrar will not charge a fee for registering a transfer
or exchange. However, the certificate registrar may require the transferor of a
privately offered certificate to reimburse it for any tax, expense or other
governmental charge it incurs in effecting the transfer.
For a discussion of certain transfer restrictions, see "ERISA
Considerations".
YIELD AND MATURITY CONSIDERATIONS
The yield on any offered certificate will depend on:
o the pass-through rate in effect from time to time for the
certificate;
o the price paid for the certificate, plus accrued interest;
o the rate and timing of payments of principal on the certificate; and
o the aggregate amount of distributions on the certificate.
Rate and Timing of Principal Payments
The yield to holders of the [class S] certificates and any other offered
certificates purchased at a discount or premium will be affected by the rate and
timing of principal payments made in reduction of the principal balance or
notional amount of those certificates. As described in this prospectus
supplement, the Principal Distribution Amount for each distribution date
generally will be distributed to the holders of the [class A-1A and/or class
A-1B] certificates until their principal balance is reduced to zero, and then
will be distributed to the holders of each remaining class of principal balance
certificates, sequentially in alphabetical and numerical order of class
designation, in each case until the principal balance of each class of
certificates is, in turn, reduced to zero.
Reductions in the principal balance of the principal balance certificates
will reduce the notional amount of the [class S] certificates.
The rate and timing of principal payments made in reduction of the
principal balance of the offered certificates will be directly related to the
rate and timing of principal payments on the Mortgage Loans, which will in turn
be affected by:
o the amortization schedules of the loans, including any
hyper-amortization of a Hyper-Amortization Loan following its
Anticipated Repayment Date,
o the dates on which balloon payments are due, and
o the rate and timing of Principal Prepayments and other unscheduled
collections on the loans, including:
1. liquidations of Mortgage Loans due to defaults, casualties or
condemnations affecting the Mortgaged Properties, or
2. repurchases of Mortgage Loans out of the trust fund in the manner
described under "Description of the Mortgage Pool--Representations and
Warranties; Repurchase" and "Description of the Certificates--Optional
Termination".
Prepayments, liquidations and repurchases of the Mortgage Loans will
result in distributions on the principal balance certificates of amounts that
would otherwise have been distributed over the remaining terms of the Mortgage
Loans. Conversely, 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 principal balance 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" in this prospectus supplement and
"Certain Legal Aspects of the Mortgage Loans--Foreclosure" in the prospectus.
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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:
o the terms of the Mortgage Loans (for example, the provisions requiring the
payment of prepayment premiums and amortization terms that require balloon
payments),
o prevailing interest rates,
o the market value of the Mortgaged Properties,
o the demographics and relative economic vitality of the areas in
which the Mortgaged Properties are located,
o the general supply and demand for such facilities (and their uses) in the
areas in which the Mortgaged Properties are located,
o the quality of management of the Mortgaged Properties,
o the servicing of the Mortgage Loans,
o federal and state tax laws (which are subject to change), and
o 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 Mortgage 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 converting to another
fixed rate loan with a lower interest rate.
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 Mortgaged Property. See "Risk Factors--Yield Considerations" in
this prospectus supplement and "Certain Legal Aspects of the Mortgage Loans" in
the prospectus.
You should consider the risk that rapid rates of prepayments on the
Mortgage Loans, and corresponding increased payments of principal on the
principal balance certificates, may coincide with periods of low prevailing
interest rates. During these periods, the effective interest rates on securities
in which you may choose to reinvest amounts paid to you as principal may be
lower than the yield on your certificate. Conversely, slower rates of
prepayments on the Mortgage Loans, and corresponding decreased payments of
principal on the principal balance certificates, may coincide with periods of
high prevailing interest rates. During these periods, the amount of principal
payments available to you for reinvestment at such high prevailing interest
rates may be relatively small. 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 experience an
overall decline in property values, the outstanding balance of a Mortgage Loan
could exceed the value of the Mortgaged Property. A borrower under a
non-recourse loan would then have a decreased incentive to fund operating cash
flow deficits and, as a result, actual losses could be higher than you
originally anticipated.
Neither the depositor nor the sellers make any representation as to:
o the particular factors that will affect the rate and timing of
prepayments and defaults on the Mortgage Loans,
o the relative importance of such factors,
o the percentage of the Mortgage Loans that will default or be
prepaid, or
o 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 offered
certificates may vary from your 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 on or
otherwise result in the reduction of the principal balance or notional amount of
your certificates. You should consider the risk that your actual yield may be
lower than anticipated if:
o in the case of any principal balance certificate purchased at a discount,
principal payments on the Mortgage Loans are slower than you anticipated, and
o in the case of any principal balance certificate purchased at a premium (or
the interest only certificates, which have no principal balances), principal
payments on the Mortgage Loans are faster than you anticipated.
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In general, the earlier a payment of principal on the Mortgage Loans is
distributed in reduction of the principal balance of any principal balance
certificate purchased at a discount or premium (or, in the case of an interest
only certificate, applied in reduction of its notional amount), the greater will
be the effect on your yield to maturity. As a result, the effect on your yield
of principal payments on the Mortgage Loans occurring at a rate higher (or
lower) than the rate you anticipated during any particular period would not be
fully offset by a subsequent like reduction (or increase) in the rate of such
principal payments.
The yield to maturity of the interest only certificates will be highly
sensitive to the rate and timing of principal payments (including by reason of
prepayments, repurchases, extensions, defaults and liquidations) on the Mortgage
Loans. If you intend to purchase the interest only certificates, you should
fully consider the risk that if there is an extremely rapid rate of amortization
and prepayment on the principal balance certificates, you may not recover your
initial investment. 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), the depositor can give you no assurance 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--Yield Considerations".
Balloon Payments and Anticipated
Repayment Date Payments
Most of the Mortgage Loans are either balloon loans that will have
substantial balloon payments due at their stated maturities or are
Hyper-Amortization Loans that will have a substantial balance still owing on
their Anticipated Repayment Dates. A borrower's ability to pay a balloon
payment, or pay-off a loan on its Anticipated Repayment Date, may depend on its
ability to sell or refinance the property. Factors beyond the borrower's control
may affect this ability, including:
o the level of interest rates and general economic conditions at the
time, and
o changes in federal, state or local laws, including tax, environmental and
safety laws.
A failure to make a balloon payment on time, or to pay-off an
Hyper-Amortization Loan on its Anticipated Repayment Date, will lengthen the
average life of the certificates. See the Remaining Terms to Stated Maturity
Table in Exhibit A-2 for additional information regarding the maturity dates of
the Mortgage Loans.
Losses and Shortfalls
The yield to holders of the offered certificates will also depend on the
extent to which such holders are required to bear the effects of losses or
shortfalls on the Mortgage Loans.
Shortfalls in Available Funds may result from:
o shortfalls in collections of amounts payable on the Mortgage Loans
(unless advanced),
o additional master servicer or special servicer compensation, o Additional
Trust Fund Expenses, including interest on Advances, or
o other similar items.
Shortfalls in Available Funds (other than Net Aggregate Prepayment
Interest Shortfalls) will generally be borne by holders of each class of
principal balance certificates in reverse alphabetical and numerical order in
each case to the extent of amounts otherwise payable to the class. Any such
shortfalls will be allocated to the holders of the [class A-1A and class A-1B]
certificates on a pro rata basis.
Realized Losses and Expense Losses will be:
o allocated to the principal balance certificates in reverse
alphabetical and numerical order of their class designation, and
o applied to reduce the principal balance of each affected class and the
notional amount of the interest only certificates.
As a result, a loss on any one of the Mortgage Loans could cause a
significant loss of an investor's investment in any class, but especially the
subordinate certificates with the latest alphabetic and numeric designations.
You should make your own estimate of the expected timing and severity of
Realized Losses and Expense Losses before investing in any subordinate
certificate.
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Pass-Through Rates
The pass-through rate for the [class S] certificates is sensitive to
changes in:
o the weighted average of the Net Mortgage Rates, and
o the weighted average of the pass-through rates for the principal
balance certificates.
The pass-through rates for the offered certificates (other than the [class
A-1A] certificates) are sensitive to changes in the weighted average of the Net
Mortgage Rates.
The weighted average of the pass-through rates for the principal balance
certificates will fluctuate based on the relative sizes of the principal
balances of those classes.
The weighted average of the Net Mortgage Rates will fluctuate over the
lives of the offered certificates as a result of scheduled amortization,
voluntary prepayments, liquidations and repurchases of loans.
If principal reductions occur on loans with higher than average Net
Mortgage Rates at a rate proportionally faster than principal reductions on the
mortgage pool as a whole, the pass-through rates for the [class S, class B-1 and
class B-2] certificates will be adversely affected.
In addition, the pass-through rates for the [class A-1B, class A-2, class
A-3 and class A-4] certificates may not exceed the weighted average of the Net
Mortgage Rates.
Delay in Payment of Distributions
Monthly distributions will be made no earlier than the ____ day of the
month following the month in which the interest accrued on the certificates. You
should take this delay into account in determining how much to pay for the
offered certificates.
Yield Sensitivity of the Interest Only Certificates
The yield to maturity of the interest only certificates will be especially
sensitive to the prepayment, repurchase, default and loss experience on the
Mortgage Loans, which may fluctuate significantly from time to time. A rapid
rate of principal payments (including prepayments resulting from liquidations
and repurchases) will have a material negative effect on the yield to maturity
of the interest only certificates. There can be no assurance that the Mortgage
Loans will prepay at any particular rate. If you intend to purchase interest
only certificates, you should fully consider the risk that a rapid rate of
prepayments on the Mortgage Loans could result in your receiving total
distributions that are less than the amount you paid for the interest only
certificates.
The table in Exhibit E indicates the sensitivity of the pre-tax yield to
maturity on the interest only certificates to various constant rates of
prepayment on the Mortgage Loans. That table projects the monthly total payments
of interest on the interest only certificates and computes the corresponding
pre-tax yields to maturity on a corporate bond equivalent basis, based on the
following assumptions:
o the Maturity Assumptions described under "- Weighted Average Life"
below,
o that the total purchase prices of the interest only certificates are:
o expressed in 32nds (e.g. _____ means ________%) as a percentage of
the initial aggregate notional amount of the class S certificates,
and
o exclusive of accrued interest, and
o that the initial pass-through rate and the initial notional amount for the
interest only certificates are as set forth in this prospectus supplement.
Any differences between these assumptions and the actual characteristics
and performance of the Mortgage Loans and the interest only certificates will
likely result in yields differing from those shown in the table in Exhibit E.
Discrepancies between assumed and actual characteristics and performance
underscore the hypothetical nature of that table. The depositor has provided
that table to give you a general sense of the sensitivity of yields in varying
prepayment scenarios.
The pre-tax yields in the table in Exhibit E were calculated by
determining the monthly discount rates that, when applied to the assumed stream
of cash flows to be paid on the interest only certificates, would cause the
discounted present value of such assumed stream of cash flows to equal the
assumed purchase price of those certificates, including accrued interest. These
monthly rates were then converted to semi-annual corporate bond equivalent
rates. Such calculation does not take into account:
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o Prepayment Interest Shortfalls, or
o the interest rates at which you may be able to reinvest distributions on the
interest only certificates.
Accordingly, the table in Exhibit E does not reflect the return on an
investment in the interest only certificates when such reinvestment rates are
considered.
Notwithstanding the assumed prepayment rates reflected in the table in
Exhibit E, it is highly unlikely that the Mortgage Loans will be prepaid
according to one particular pattern. For this reason, and because the timing of
cash flows is critical to determining yields, the pre-tax yield to maturity on
the interest only certificates is likely to differ from those shown in that
table, even if all of the Mortgage Loans prepay at the indicated CPRs over any
given time period or over the entire life of the interest only certificates.
You should make your investment decision based on your assessment of the
anticipated rates of prepayment under a variety of scenarios.
Weighted Average Life
Weighted average life refers to the average amount of time that will
elapse from the date a security is issued to the date each dollar is distributed
in reduction of the principal balance of the security. The weighted average life
of each class of principal balance certificates is determined by:
o multiplying the amount of each distribution in reduction of the principal
balance of that class by the number of years from the date of purchase to the
related distribution date,
o adding the results, and
o dividing the sum by the total distributions in reduction of the
principal balance of that class.
The weighted average life of any principal balance certificate will be
influenced by, among other things:
o the rate at which principal of the Mortgage Loans is paid or
otherwise collected or advanced, and
o the extent that payments, collections and/or advances of principal are
applied to reduce the certificate's principal balance.
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 those
loans. As used in each of the tables in Exhibit D, the column headed "0%"
assumes that none of the Mortgage Loans is prepaid before maturity, except that
each Hyper-Amortization Loan is assumed to pay on its Anticipated Repayment
Date. The columns headed ["25%", "50%", "75%"and"100%"] assume that no
prepayments are made on any Mortgage Loan during the Mortgage Loan's Lock-out
Period or Yield Maintenance Period, if any, and are otherwise made on each of
the Mortgage Loans at the indicated CPRs. The tables and assumptions are
intended to illustrate the sensitivity of the weighted average life of a class
of offered certificates (other than the interest only certificates) to various
prepayment rates and are not intended to predict or to provide information that
will enable you to predict the actual weighted average life of any class of
offered certificates. Consequently, no assurance can be given and no
representation is made that:
o prepayments of the Mortgage Loans (whether or not in a Lock-out Period or a
Yield Maintenance Period) will conform to any particular CPR,
o all the Mortgage Loans will prepay in accordance with the
assumptions at the same rate, or
o Mortgage Loans that are in a Lock-out Period or Yield Maintenance Period will
not prepay.
The tables in Exhibit D and E have been prepared on the basis of the
following assumptions (collectively, the "Maturity Assumptions"):
o the Initial Pool Balance is approximately $____________,
o the initial principal balance or notional amount for each class of
offered certificates is the amount on the cover page,
o the pass-through rate for each class of certificates is as described
in this prospectus supplement,
o the scheduled Monthly Payments for each Mortgage Loan are the
amounts listed in Exhibit A-1,
o all Monthly Payments are due and timely received on the [first] day
of each month,
o there are no delinquencies or losses on the Mortgage Loans,
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o there are no extensions of maturity of the Mortgage Loans,
o there are no Appraisal Reductions for the Mortgage Loans,
o there are no casualties or condemnations affecting the Mortgaged
Properties,
o prepayments are made on each of the Mortgage Loans at the indicated CPRs,
except that:
1. no prepayments are received for any Mortgage Loan during a Lock-out
Period or Yield Maintenance Period, and
2. Hyper-Amortization Loans are paid in full on their Anticipated Repayment
Dates,
o no one exercises its right to terminate the trust fund as described
under "Description of the Certificates--Optional Termination",
o no Mortgage Loan is required to be repurchased or replaced by a
seller or other party,
o no Prepayment Interest Shortfalls are incurred,
o there are no Additional Trust Fund Expenses,
o distributions on the certificates are made on the ____ day of each
month, commencing in ______ 20__,
o the certificates are settled with investors on ______________, 20__,
o the only expenses payable out of the trust are the master servicer
and the trustee fees, and
o the prepayment provisions for each Mortgage Loan are assumed to begin on the
first payment date of such Mortgage Loan and any resulting prepayment
premiums are allocated as described under "Description of the
Certificates--Distributions--Distributions of Prepayment Premiums".
To the extent that the Mortgage Loans have characteristics that differ
from those assumed in preparing the tables in Exhibit D, the offered
certificates (other than the interest only certificates) may mature earlier or
later than indicated by the tables.
It is highly unlikely that the Mortgage Loans will prepay in accordance
with the Maturity Assumptions at any constant rate or that all the Mortgage
Loans will prepay in accordance with the Maturity Assumptions at the same rate.
In addition, variations in the actual prepayment experience and the balance of
the Mortgage Loans that prepay may increase or decrease the percentages of
initial class principal balances (and weighted average lives) shown in the
tables in Exhibit D. These variations may occur even if the average prepayment
experience of the Mortgage Loans were to reflect the Maturity Assumptions and
any of the specified CPR percentages.
You should conduct your own analyses of the rates at which the Mortgage
Loans may be expected to prepay.
Subject to the above discussion and assumptions, the tables in
Exhibit D indicate:
o the weighted average life of each class of the offered certificates
(other than the interest only certificates), and
o the percentages of the initial principal balance of each class of
the offered certificates (other than the interest only certificates) that
would be outstanding after each of the listed distribution dates at various
CPRs, starting after the expiration of lockout, defeasance and yield
maintenance periods.
THE POOLING AND SERVICING AGREEMENT
The certificates will be issued under a pooling and servicing agreement to
be dated as of ___________, 20__ among the depositor, the master servicer, the
special servicer and the trustee.
You may obtain a free copy of the pooling and servicing agreement (without
exhibits) by writing to:
PNC Mortgage Acceptance Corp.
210 West 10th Street, 6th Floor
Kansas City, Missouri 64105
Attention: Lawrence D. Ashley
You may also request a copy by telephone at (816) 435-5000.
Assignment of the Mortgage Loans
By the closing date, the sellers must assign the Mortgage Loans to the
trustee for the benefit of the certificateholders. The assignments will be
without recourse. Each seller must also deliver the following documents, among
others, for each of its Mortgage Loans:
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o the original note, endorsed (without recourse) to the order of the
trustee;
o the original or a copy of the related mortgage(s), together with originals or
copies of any intervening assignments of such document(s), in each case
(unless the particular document has not been returned from the applicable
recording office) with evidence of recording noted on the document;
o the original or a copy of any related assignment(s) of leases and rents (if
any such item is a document separate from the mortgage), together with
originals or copies of any intervening assignments of any such document(s),
in each case (unless the particular document has not been returned from the
applicable recording office) with evidence of recording noted on the
document;
o an assignment of each related mortgage in favor of the trustee in
recordable form;
o an assignment of any related assignment(s) of leases and rents (if any such
item is a document separate from the mortgage) in favor of the trustee, in
recordable form;
o an original or copy of the related lender's title insurance policy (or, if a
title insurance policy has not yet been issued, a commitment for title
insurance "marked-up" at the closing of such Mortgage Loan or other binding
commitment to issue title insurance);
o originals or copies of all assumptions, modifications and substitution
agreements in those instances where the terms or provisions of the mortgage
have been modified or the Mortgage Loan assumed; and
o a copy of each assignment in favor of the trustee of each effective UCC
financing statement.
If a seller cannot deliver any original recorded document described above
or a copy of such document showing evidence of having been recorded on the
closing date, the seller will deliver it promptly after receipt from the
recording office, and in any case shall use best efforts to deliver such
documents not later than 180 days after the closing date.
The trustee is obligated to review the documents delivered to it 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 to the depositor and
the controlling class representative. Ninety days after the closing date, the
sellers will make an inquiry with each appropriate recording office regarding
the status of each unreturned assignment and will notify the trustee of the
results of their inquires. The scope of the trustee's review of each mortgage
file is, in general, limited solely to confirming that certain of the documents
listed above have been received in the manner specified. None of the trustee,
the master servicer, the special servicer or the custodian is under any duty or
obligation to inspect, review or examine any of the documents relating to the
Mortgage Loans to determine whether such document is valid, effective,
enforceable, in recordable form or otherwise appropriate for the represented
purpose.
Servicing of the Mortgage Loans; Collection of Payments
The pooling and servicing agreement will require:
o the master servicer to service and administer the Mortgage Loans;
and
o the special servicer to service and administer 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 mortgage
loan documents and the pooling and servicing agreement.
Unless the pooling and servicing agreement requires a contrary specific
course of action, the master servicer and the special servicer must each act in
accordance with the higher of the following standards:
o in the same manner, 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 that prudent institutional commercial mortgage loan
servicers use for comparable mortgage loans, or
o in the same manner in which, and with the same care, skill, prudence and
diligence with which, it services and administers similar mortgage loans that
it owns.
In observing this standard, the master servicer and special servicer may
take into account their other obligations under the pooling and servicing
agreement. However, they must disregard:
o any other relationship that the master servicer, the special servicer, any
sub-servicer or any of
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their affiliates have with any borrower or its affiliates;
o the ownership of any certificate by the master servicer, the special
servicer or their affiliates;
o their obligation to make Advances or incur servicing expenses;
o the master servicer's, the special servicer's or any sub-servicer's
right to receive compensation for its services;
o 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; and
o any obligation of the master servicer, the special servicer, any sub-servicer
or any of their affiliates to replace or repurchase any Mortgage Loan that it
sold to the trust fund.
However, neither the master servicer nor the special servicer, nor any of
their directors, members, managers, officers, employees or agents, will have any
liability to the trust fund or the certificateholders for:
o taking any action or refraining from taking any action in good
faith; or
o for errors in judgment.
The master servicer, the special servicer and such persons are not
protected against liability for:
o breaching their representations or warranties in the pooling and
servicing agreement,
o breaching the servicing standards in the pooling and servicing
agreement,
o willful misfeasance, misrepresentation, bad faith, fraud or
negligence in performing its duties under the pooling and servicing
agreement, or
o negligent disregard of its obligations or duties under the pooling
and servicing agreement.
The master servicer and the special servicer must make reasonable efforts
to collect amounts due under the Mortgage Loans, and must follow collection
procedures consistent with the servicing standard under the pooling and
servicing agreement. The special servicer may waive late payment charges or
penalty fees on delinquent Monthly Payments or balloon payments on Specially
Serviced Mortgage Loans. The master servicer may waive such amounts on all other
Mortgage Loans.
Collection Activities
The master servicer monitors the performance of all loans. It tracks the
status of outstanding payments due, grace periods and due dates. It calculates
and assesses late fees. The master servicer has created a customized collection
system that:
o downloads all current loan information from the servicing system on
a daily basis,
o prepares several regular delinquency reports,
o generates and mails a series of delinquency notice letters,
including payment-reminder letters to borrowers at 10 days past due, and more
strongly worded collection letters at 30 and 60 days past due, and
o flags higher-risk Mortgage Loans, such as those with a large principal
balance or chronic delinquency, so that the borrower receives a telephone
call rather than a letter.
A delinquent Mortgage Loan will be transferred to the special
servicer when the loan becomes a Specially Serviced Mortgage Loan. See
"--Special Servicing".
Advances
Except as noted below, if a loan is delinquent at the close of business on
the Determination Date for a distribution date, the master servicer will advance
an amount equal to the Monthly Payment or the Assumed Monthly Payment, as
applicable (each such amount, a "P&I Advance").
The master servicer must make the P&I Advance on the business day before
each distribution date.
The amount of interest to be advanced for a Mortgage Loan for which an
Appraisal Reduction has been calculated will equal the product of:
1. the amount of interest that would otherwise be required to be
advanced, and
2. a fraction,
o whose numerator equals the Stated Principal Balance of the loan at the
close of the preceding distribution date less the Appraisal Reduction, and
o whose denominator is such Stated Principal Balance.
In addition to P&I Advances, the master servicer will also be obligated to
make cash advances
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("Servicing Advances," and together with P&I Advances, "Advances") to pay:
o certain costs and expenses incurred in connection with defaulted Mortgage
Loans, acquiring or managing REO Property or selling defaulted Mortgage Loans
or REO Properties,
o delinquent real estate taxes, assessments and hazard insurance
premiums, and
o other similar costs and expenses necessary to protect and preserve the
security of a Mortgage.
If the master servicer fails to make a required Advance and the trustee is
aware of the failure, the trustee must make the Advance.
However, each of the master servicer and the trustee only has to make an
Advance if it determines that it will be recoverable from late payments,
insurance proceeds, liquidation proceeds or other collections on the Mortgage
Loan. Neither the master servicer nor the trustee is required to make any
Advance that it determines is not so recoverable. If the master servicer makes
such a nonrecoverability determination, it must deliver to the trustee an
officer's certificate explaining the procedures and basis for the determination
and supplying documentation which supports the determination, which will include
a copy of the Updated Appraisal and any other information or reports obtained by
the master servicer or the trustee, such as:
o property operating statements,
o rent rolls,
o property inspection reports, and
o engineering reports.
The trustee will be entitled to rely conclusively on a nonrecoverability
determination by the master servicer.
Unless there is a nonrecoverability determination, the obligation to make
Advances on a Mortgage Loan continues until foreclosure and liquidation of the
loan and related properties. Advances are intended to provide a limited amount
of liquidity, not to guarantee or insure against losses.
If the special servicer agrees to a modification of a Mortgage Loan that
forgives loan payments or other amounts that the master servicer or the trustee
previously advanced, and the master servicer or the trustee determines that no
other source of payment or reimbursement for such Advances is available to it,
such Advances will be deemed to be nonrecoverable.
The master servicer and the trustee will each be entitled to recover any
P&I Advances made by it, out of its own funds, from collections on the Mortgage
Loan as to which the Advance was made. If the master servicer or the trustee
determines that an Advance previously made is not so recoverable, that Advance,
plus interest, will be repaid from amounts on deposit in the Collection Account
before further distributions on the certificates.
Interest is payable on Advances at a floating rate (the "Advance Rate")
equal to the prime rate as published in The Wall Street Journal. Advance
interest will be paid first from default interest on any Mortgage Loan and late
payment charges collected on the related Mortgage Loan. If those collections are
insufficient, any remaining Advance interest will be paid from general
collections on all Mortgage Loans at the time that the Advance is repaid.
However, no interest will accrue for any P&I Advance until after the grace
period for the related Mortgage Loan has expired. In addition, no interest will
accrue for a P&I Advance if the borrower pays the delinquent Monthly Payment on
or before the business day before the related distribution date.
If interest on Advances is not offset by default interest or other
amounts, the shortfall will reduce amounts payable on the certificates. Hence,
it is possible that the making of Advances (and the charging of interest on
Advances while they are outstanding) could reduce total amounts payable to
certificateholders even if all amounts due from borrowers are eventually
received.
Accounts
Collection Account
The master servicer will establish and maintain a segregated account or
accounts (the "Collection Account") into which it must deposit the following
amounts relating to the Mortgage Loans:
o all principal payments;
o all payments of interest, including default interest and Deferred Interest,
and any prepayment premiums, late fees and late payment charges;
o any amounts required to be deposited by the master servicer for:
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1. losses realized on permitted investments of funds in the Collection
Account, and
2. Prepayment Interest Shortfalls;
o all Net REO Proceeds transferred from an REO Account;
o all condemnation proceeds, insurance proceeds and net liquidation
proceeds not required to be applied to restore or repair the Mortgaged
Property;
o any amounts received from borrowers as recoveries of Servicing
Advances;
o proceeds of any purchase or repurchase of a Mortgage Loan by the
applicable seller; and
o other amounts that the pooling and servicing agreement requires the master
servicer to deposit into the Collection Account.
The master servicer will deposit these amounts into the Collection Account
within one day after receipt. The Collection Account will be held by the master
servicer for the benefit of the trustee and the certificateholders.
See "Description of the Mortgage Pool--Representations and Warranties;
Repurchase", "The Pooling and Servicing Agreement--Realization Upon Mortgage
Loans" and "Description of the Certificates--Optional Termination".
"REO Proceeds" for any REO Property and the related Mortgage Loan are all
revenues received by the special servicer on the REO Property or REO Mortgage
Loan other than liquidation proceeds.
"Net REO Proceeds" for any REO Property and the related Mortgage Loan are
REO Proceeds less any insurance premiums, taxes, assessments and other costs and
expenses permitted to be paid from the related REO Account.
The master servicer need not deposit into the Collection Account any
payments in the nature of NSF check charges, assumption fees, loan modification
fees, loan service transaction fees, extension fees, demand fees, beneficiary
statement charges and similar fees. To the extent permitted by applicable law
and as provided in the pooling and servicing agreement, the master servicer or
the special servicer may retain such amounts as additional servicing
compensation. If the master servicer mistakenly deposits any amount into the
Collection Account, it may withdraw the mistaken deposit from the Collection
Account at any time.
Interest Reserve Account
The master servicer will establish and maintain an "Interest Reserve
Account" for the benefit of the holders of the certificates. For the
distribution date in each January (other than a leap year) and each February,
the master servicer will deposit into the Interest Reserve Account for each
Mortgage Loan bearing interest computed on an actual/360 basis (the "Interest
Reserve Loans") an amount equal to one day's interest at the related Mortgage
Rate on its Stated Principal Balance as of the due date in the month in which
the distribution date occurs (the "Interest Reserve Amount"). The master
servicer will not make the deposit if the applicable Monthly Payment has not
been paid or advanced. The master servicer will calculate the Interest Reserve
Amount without regard to the adjustments to the Net Mortgage Rates for Interest
Reserve Loans described under "Description of the Certificates--Pass-Through
Rates". For distribution dates in March of each year, the master servicer will
deposit the Interest Reserve Amounts into the Distribution Account and include
these amounts as part of the Available Funds for the distribution date.
Distribution Account
The trustee will establish a segregated account or accounts (the
"Distribution Account") into which the master servicer must deposit the
following amounts:
o a total amount equal to the Available Funds (to the extent included
in the Collection Account or the Interest Reserve Account);
o any prepayment premiums and Deferred Interest received during the
Collection Period; and
o all P&I Advances required for the distribution date and not already included
in the Available Funds.
The master servicer will deposit these amounts into the Distribution
Account on the business day before each distribution date. The Distribution
Account will be held by the trustee for the benefit of the certificateholders.
See "Description of the Certificates--Distributions".
Where Accounts May be Maintained
The Collection Account and the Distribution Account must each be either:
o for funds that will be held for more than 30 days, an account or accounts
maintained with a depository institution or trust company the long-term
unsecured debt obligations of which are
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related "__" or better by _____ (or, if not so rated by _____, then otherwise
approved by _____), and "___" or better by ________ (or, if not so rated by
___________, then otherwise approved by _________); or
o for funds that will be held for 30 days or less, an account or accounts
maintained with a depository institution or trust company, the short-term
unsecured debt obligations of which are rated "___" or better by _____ (or,
if not so rated by _____, then otherwise approved by _____), and "___" or
better by ___________ (or, if not so rated by ____________, then otherwise
approved by _____________); or
o a segregated trust account or accounts maintained with a federal- or
state-chartered depository institution or trust company acting in its
fiduciary capacity:
1. having a combined capital and surplus of at least $50,000,000,
2. subject to supervision or examination by a federal or state
authority, and
3. for state-chartered institutions, subject to regulations regarding
fiduciary funds on deposit substantially similar to 12 CFR 9.10(b);
or
o an account which each of the Rating Agencies confirms 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.
Investment of Funds in the Accounts
Amounts on deposit in such accounts may be invested in United States
government securities and other investments specified in the pooling and
servicing agreement. See "Description of the Governing Document--Collection and
Other Servicing Procedures With Respect to Mortgage Loans--Accounts" in the
prospectus for a listing of permitted investments.
Withdrawals from the Collection Account
The master servicer may withdraw funds from the Collection Account for the
following purposes:
o to remit Available Funds, Deferred Interest and prepayment premiums
to the Distribution Account,
o to pay or reimburse itself or the trustee for Advances and interest on
Advances, that payment or reimbursement to be made from the sources described
under "--Advances" above,
o to pay the unpaid portion of the master servicing fee and special servicing
fee (in the case of the master servicing fee, from interest received on the
related Mortgage Loan),
o to pay the trustee fee to the trustee,
o to pay to itself any investment income earned on funds deposited in
the Collection Account,
o to pay any Prepayment Interest Excess received in the preceding
Collection Period to itself as additional servicing compensation,
o to pay to itself or the special servicer other amounts constituting
additional servicing compensation,
o to pay to the depositor, the applicable seller or other purchaser with
respect to each Mortgage Loan or REO Property that has been purchased or
repurchased by it, all amounts received on such loan or property during the
related Collection Period and subsequent to the date as of which the amount
required to effect the purchase or repurchase was determined,
o to reimburse or pay itself, the special servicer, the trustee and/or the
depositor for other unreimbursed expenses that are reimbursable under the
pooling and servicing agreement,
o to satisfy any indemnification obligations of the trust fund under
the pooling and servicing agreement,
o to pay to the trustee amounts requested by it to pay taxes on
certain net income with respect to REO Properties,
o to withdraw any amount mistakenly deposited into the Collection
Account, and
o to clear and terminate the Collection Account upon termination and
liquidation of the trust fund.
Enforcement of "Due-on-Sale" Clauses
The master servicer or the special servicer will exercise or waive
"due-on-sale" clauses in Mortgage Loan documents in accordance with the
servicing standard. However, the master servicer or the special servicer, as
applicable, may waive a "due-on-sale" clause only if it first obtains written
confirmation from:
o [______________, with respect to any Mortgage Loan, group of
cross-collateralized Mortgage Loans or group of Mortgage Loans with
affiliated borrowers that has a then outstanding principal balance equal to
or greater than the lesser of $__ million and __% of the then outstanding
principal balance of all of the Mortgage Loans], and
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o [_____, with respect to any Mortgage Loan that at such time is one
of the __ largest loans in the trust,]
that the waiver will not result in a qualification, downgrade or withdrawal of
the rating then assigned by that Rating Agency to any class of certificates. The
master servicer or the special servicer must use reasonable efforts to require
the new borrower to pay the cost of the Rating Agency confirmation. The master
servicer will advance any costs not paid by the new borrower as a Servicing
Advance (unless the Advance would be nonrecoverable).
See "--The Controlling Class Representative" for additional limitations on
the ability of the master servicer and the special servicer to waive
"due-on-sale" clauses.
If the master servicer or the special servicer waives the "due-on-sale"
clause it may either:
o release the original borrower from liability under the Mortgage Loan
and substitute the new owner as the borrower, or
o enter into an assumption agreement with the new owner of the
Mortgaged Property.
To the extent permitted by law, the master servicer or the special
servicer, as applicable, will enter into an assumption or substitution agreement
only if the credit status of the prospective new owner is in compliance with:
o the master servicer's or the special servicer's, as applicable,
regular commercial mortgage origination or servicing standards and
criteria,
o the terms of the Mortgage Loan, and
o any other standards set by the master servicer or the special servicer, as
applicable, consistent with the servicing standard.
If a Mortgage Loan is assumed, the only permitted modifications that may
be made as part of the assumption are those described below under "--Amendments,
Modifications and Waivers."
The master servicer or special servicer may retain as additional servicing
compensation any assumption fees paid by the borrower or the new owner. See
"Certain Legal Aspects of the Mortgage Loans--Due-on-Sale and Due-on-Encumbrance
Provisions" in the prospectus.
In a bankruptcy or similar proceeding involving a Mortgaged Property, a
court may substitute a new owner or impose a junior or senior lien on the
Mortgaged Property, without the consent of the master servicer, the special
servicer or the trustee.
Enforcement of "Due-on-Encumbrance" Clauses
The Mortgage Loans contain a "due-on-encumbrance" clause, which generally
either:
o provides that the 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 the Mortgaged Property, or
o requires the consent of the related mortgagee to the creation of any lien or
other encumbrance on the Mortgaged Property.
Such clauses usually permit the owner of the Mortgage Loan to either:
o accelerate the payments due on the Mortgage Loan, or
o withhold its consent to the creation of any such lien or other
encumbrance.
The master servicer or the special servicer, as applicable, may in
accordance with the servicing standard either exercise or waive the trust fund's
rights under the "due-on-encumbrance" clause. However, the master servicer or
the special servicer, as applicable, may consent to the creation of any lien or
encumbrance only if it first obtains written confirmation from each of the
Rating Agencies that such consent will not result in a qualification, downgrade
or withdrawal of the rating then assigned by that Rating Agency to any class of
certificates.
The master servicer or the special servicer must use reasonable efforts to
require the borrower to pay the cost of such Rating Agency confirmation. The
master servicer will advance any costs not paid by the borrower as a Servicing
Advance (unless the Advance would be nonrecoverable).
See "--The Controlling Class Representative" for additional limitations on
the ability of the master servicer and the special servicer to waive
"due-on-encumbrance" clauses.
The master servicer or the special servicer may forbear from enforcing any
"due-on-encumbrance" provision in connection with any junior or senior lien on a
Mortgaged Property
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imposed in a bankruptcy proceeding involving the Mortgaged Property without
obtaining a Rating Agency confirmation.
Inspections
The special servicer is responsible for inspecting the Mortgaged
Properties securing Specially Serviced Mortgage Loans and REO Properties. The
master servicer is responsible for inspecting the other Mortgaged Properties.
The special servicer may at its option assume the master servicer's obligation
to inspect some or all of the Mortgaged Properties. Each Mortgaged Property and
REO Property will be inspected at least once every two years. If a Mortgage Loan
has a then current principal balance of at least $__ million or is a Specially
Serviced Mortgaged Loan, the related Mortgaged Property will be inspected at
least once every year. The annual inspections described above will be done at
the expense of the servicer performing the inspection. In addition, the special
servicer will inspect any Mortgaged Property if the related borrower is 60 or
more days delinquent in the payment of a Monthly Payment or other obligation. If
the last annual inspection was performed more than ___ months ago, the special
servicer will perform the inspection at its expense. Otherwise, the master
servicer will advance the cost of any such inspection as a Servicing Advance
(unless the Advance would be nonrecoverable). The master servicer and the
special servicer will cause a written inspection report to be prepared as soon
as reasonably possible after completing the inspection. A copy of each
inspection report must be delivered to the trustee and the controlling class
representative within 15 days after its preparation.
Realization Upon Mortgage Loans
Standards for Conduct Generally in Effecting Foreclosure or the Sale of
Defaulted Loans
The master servicer will advance costs and expenses of a foreclosure or
other acquisition as a Servicing Advance, unless the Advance would be
nonrecoverable.
The special servicer may proceed with a non-judicial foreclosure under the
laws of the state where the property is located. The special servicer need not
pursue a deficiency judgment against the borrower or any other party if the laws
of the state do not permit a deficiency judgment after a non-judicial
foreclosure. The special servicer may also refrain from seeking a deficiency
judgment if it determines that the likely recovery would not warrant the cost,
time, expense and/or exposure of pursuing the deficiency judgment and delivers
an officer's certificate to the trustee to that effect.
Until the conditions listed in the next sentence are satisfied, the
special servicer may not obtain title or possession or take any other action
regarding a Mortgaged Property on behalf of the trust fund, if as a result the
trustee or the trust fund would be considered to hold title, to be a
"mortgagee-in-possession", or to be an "owner" or "operator" within the meaning
of the Comprehensive Environmental Response, Compensation and Liability Act of
1980 or any comparable law. The special servicer may proceed with such steps if
it has determined, based on an updated environmental assessment report prepared
by an independent person who regularly conducts environmental audits, that:
o the Mortgaged Property complies with applicable environmental laws or, if
not, after consultation with an environmental consultant, that it would be in
the trust fund's best economic interest to take necessary corrective
measures, and
o there are no circumstances present at the Mortgaged Property
relating to the use, management or disposal of hazardous materials for
which investigation, testing, monitoring, containment, clean-up or
remediation could be required under current federal, state or local law
or regulation or, if any such hazardous materials are present for which
such action could be required, after consultation with an environmental
consultant, that it would be in the trust fund's best economic interest
to take such actions.
The cost of any environmental assessments, as well as the cost of any
remedial, corrective or other further action contemplated by the prior paragraph
will be advanced as a Servicing Advance, unless the advance would not be
recoverable.
If 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 will not include the master servicer or
the special servicer) or to a separate trustee or co-trustee on behalf of the
trustee. Notwithstanding any such acquisition of title and cancellation of the
related Mortgage Loan, the Mortgage Loan will be considered to be a Mortgage
Loan held in the trust fund until the related REO Property is sold by the trust
fund, which must occur
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before the close of the third taxable year following the taxable year in which
the trust acquired the property. The Internal Revenue Service has the authority
to grant a three year extension of this period. The principal balance of the
loan will be reduced by Net REO Proceeds allocated to it as a recovery of
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 special
servicer must administer the Mortgaged Property so that it qualifies at all
times as "foreclosure property" within the meaning of section 860G(a)(8) of the
Internal Revenue Code. An "independent contractor," within the meaning of
applicable Treasury regulations, must manage and operate any Mortgaged Property,
unless the special servicer provides the trustee with an opinion of counsel that
the operation and management of the property other than through an independent
contractor will not cause the property to fail to qualify as "foreclosure
property". The expense of the legal opinion will be covered by a Servicing
Advance, unless the advance would not be recoverable. Generally, REMIC I will
not be taxed on income received on Mortgaged Property which constitutes "rents
from real property," under section 856(c)(3)(A) of the Internal Revenue Code and
the related Treasury regulations.
"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 or
not the charges are separately stated. Services furnished to the tenants of a
particular building will be considered 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. The depositor has not determined
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 from a Mortgaged Property owned by
the trust fund would not constitute "rents from real property."
Net income from a trade or business operated or managed by an independent
contractor on a Mortgaged Property owned by REMIC I does not constitute "rents
from real property." Finally, any income from the sale of REO Property that is
held by REMIC I as a dealer in property is not considered "rent from real
property."
If the REO Property remains "foreclosure property", any income that is not
"rent from real property" is subject to tax at the highest corporate rate
(currently [35%]). REMIC I may also be subject to state and local taxes on such
amounts. In addition, certain income from REO Property may be subject to a
"prohibited transactions" tax. Any such income would be subject to a 100% tax;
however, REMIC I does not expect any income from any REO Property to be subject
to this 100% tax. See "Federal Income Tax Consequences--Prohibited Transactions
Tax and Other Taxes" in the prospectus.
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. The pooling and servicing agreement allows the special servicer to
cause the trust fund to earn "net income from foreclosure property" that is
subject to tax, if it determines that the net after-tax benefit to
certificateholders is greater than what would be realized under another method
of operating or leasing the Mortgaged Property. See "Federal Income Tax
Consequences--Taxation of Owners of REMIC Regular Certificates", "--Taxation of
Holders of REMIC Residual Certificates" in the prospectus.
Sale of Specially Serviced Mortgage Loans and REO Properties
The special servicer may offer to sell a Specially Serviced Mortgage Loan
or an REO Property, if it determines that:
o no satisfactory arrangements can be made to collect delinquent
payments, and
o the sale would be in the best economic interests of the trust fund.
The special servicer must give the trustee and the controlling class
representative written notice that it is contemplating a sale at least [10]
business days before considering any further action. The controlling class
representative may purchase the loan or property, directly or through an
affiliate, for cash equal to the Repurchase Price.
If the controlling class representative (or a designated affiliate) fails
to purchase the loan or property within [30] days after the controlling class
representative receives notice, either the special
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servicer or the master servicer, in that order of priority, may purchase the
loan or property, directly or through an affiliate, for cash equal to the
Repurchase Price.
If none of the forgoing purchases the loan or property, the special
servicer may then offer to sell the loan or property if and when the special
servicer determines that the sale would be in the best economic interests of the
trust fund. The special servicer must sell the loan or property within the
period specified in the pooling and servicing agreement, including extensions.
The controlling class representative, the master servicer and the special
servicer may offer to purchase any such loan or property. The special servicer
will accept any offer received from any person:
o that it determines to be a fair price, unless the highest offeror is
the special servicer or one of its affiliates, or
o that the trustee determines to be a fair price, if the highest offeror is the
special servicer or one of its affiliates.
In making such a fairness determination, the special servicer or trustee
may rely upon an updated independent appraisal. Any offer from the depositor,
the master servicer, the special servicer, any borrower, the manager of a
Mortgaged Property or any of their affiliates in the amount of the Repurchase
Price shall be deemed to be a fair price.
Neither the trustee (in its individual capacity) nor any of its affiliates
may purchase or offer to purchase the loan or property.
The special servicer may accept an offer other than the highest offer if
it determines that accepting the offer would be in the best interests of the
certificateholders. For example, the person making the lower offer could be more
likely to perform its obligations or the lower offer may have more favorable
terms.
Amendments, Modifications and Waivers
Subject to any restrictions applicable to REMICs, and to limitations under
the pooling and servicing agreement, the master servicer may amend any term that
does not affect the maturity date, interest rate, principal balance,
amortization term or payment frequency (each, a "Money Term") of, or materially
impair the collateral securing, any loan that is not a Specially Serviced
Mortgage Loan.
Subject to restrictions applicable to REMICs and to limitations in the
pooling and servicing agreement, the special servicer may agree to a
modification, waiver or amendment of the terms of any Specially Serviced
Mortgage Loan if, in the special servicer's reasonable judgment:
o the related borrower is in default or default is reasonably
foreseeable, and
o the modification, waiver or amendment would increase the recovery to
certificateholders on a net present value basis.
See, however, "--The Controlling Class Representative".
Examples of the types of modifications, waivers or amendments to which the
special servicer may agree include:
o reducing the amounts owing under the loan by forgiving principal,
accrued interest and/or any prepayment premium,
o reducing the amount of the monthly payment on the loan, including a
reduction in the interest rate,
o not enforcing any right granted under any note or mortgage relating
to the loan,
o extending the maturity date of the loan, and/or
o accepting a principal prepayment during a Lock-out Period.
However, the special servicer may not permit a borrower to extend the
maturity date to a date later than:
o ___ years before the Rated Final Distribution Date,
o __ years before any ground lease that secures the loan expires, or
o __ months after the original
maturity date for the Mortgage Loan.
Modifications of a Mortgage Loan that forgive principal or interest (other
than Deferred Interest and, in some cases, default interest) will cause Realized
Losses on the loan. Such Realized Losses will be allocated among the classes of
certificates as described under "Description of the Certificates--Realized
Losses and Allocations of Certain Expenses".
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The Trustee
______________ will act as trustee. The address of the trustee's
corporate trust office is:
[
]
All requests relating to the transfer of certificates should be delivered
to the trustee at:
[
]
Resignation and Removal of Trustee
The trustee may resign at any time by notifying the depositor, the master
servicer, the special servicer and the Rating Agencies in writing. The master
servicer will appoint the successor trustee. Before appointing a successor
trustee, the master servicer must obtain confirmation from _____ that the
successor trustee's appointment will not adversely affect the rating then
assigned by _____ to any of the certificates. The resigning trustee must pay any
cost of obtaining the confirmation from _____. However, if the
certificateholders remove the trustee without cause, the costs and expenses of
the trustee incurred in connection with the removal and the cost of obtaining
the confirmation from _____ will be paid as an Additional Trust Fund Expense. If
the successor trustee is not appointed within 30 days after the notice of
resignation, the resigning trustee may petition a court of competent
jurisdiction to appoint a successor trustee.
The depositor or the master servicer may remove the trustee if, among
other things:
o the trustee becomes ineligible to continue as such under the pooling
and servicing agreement,
o the trustee becomes incapable of acting,
o the trustee is adjudged bankrupt or insolvent,
o a receiver is appointed for the trustee or its property, or
o any public officer takes charge or control of the trustee or its
property.
The holders of certificates evidencing a majority of the total voting
rights may remove the trustee upon written notice to the master servicer, the
special servicer, the depositor and the trustee.
Resignation or removal of the trustee is effective only when the successor
trustee accepts the appointment.
Trustee Fee
The pooling and servicing agreement entitles the trustee to a monthly fee
from amounts in the Collection Account. The fee is equal to _____% of the then
outstanding principal balance of each Mortgage Loan calculated on the basis of a
360-day year consisting of twelve 30-day months.
Indemnification of Trustee
The trust will indemnify the trustee and its directors, officers,
employees, agents and affiliates against any and all losses, liabilities,
damages, claims or expenses (including reasonable attorneys' fees) arising under
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). However, the
indemnification will not apply to matters resulting from the negligence,
misrepresentation, fraud, bad faith or willful misconduct of the indemnified
person or for any expense or liability specifically required to be borne by the
trustee in the pooling and servicing agreement. The trustee need not expend or
risk its own funds or otherwise incur financial liability in performing its
duties under the pooling and servicing agreement, or in exercising its rights or
powers, if in the trustee's opinion the repayment of such funds or adequate
indemnity against the risk of liability is not reasonably assured.
The master servicer and the special servicer will each indemnify the
trustee and its directors, officers, employees, agents and affiliates for
similar losses related to the willful misconduct, fraud, misrepresentation, bad
faith and/or negligence in the performance or negligent disregard by the master
servicer or the special servicer, as the case may be, of its duties under the
pooling and servicing agreement.
Duties of 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 must perform only those duties specifically imposed under the
pooling and servicing agreement. If an event of default has occurred and has not
been cured, the trustee will be required to use the same degree of skill and
care in exercising its rights and
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powers under the pooling and servicing agreement that a prudent person would
use in its own personal affairs under similar circumstances. Upon receipt of the
various certificates, reports or other documents required to be furnished to it,
the trustee must examine the documents and determine whether they conform on
their face to the requirements of the pooling and servicing agreement.
If the master servicer fails to make a required Advance and the trustee is
aware of the failure, the trustee must make the Advance unless it deems the
Advance nonrecoverable. See "--Advances".
Except for funds held by the trustee, the trustee will not be accountable
for:
o the use or application by the depositor of any certificates or the
proceeds of the certificates,
o the use or application of funds paid to the depositor, the master
servicer or the special servicer relating to the Mortgage Loans, or
o the use or application of funds deposited in or withdrawn from the Collection
Account or the Distribution Account by the depositor, the master servicer or
the special servicer.
The trustee, the special servicer and master servicer will make no
representation as to:
o the validity or sufficiency of the pooling and servicing agreement,
the certificates, this prospectus supplement or the prospectus, or
o the validity, enforceability or sufficiency of the Mortgage Loans or
related documents.
Servicing Compensation and Payment of Expenses
The master servicer will be entitled to a monthly servicing fee for each
Mortgage Loan. The fee is calculated at the per annum rate listed in Exhibit A-1
based on the then outstanding principal balance of the loan. The master
servicing fee is calculated on a 30/360 basis.
The master servicing fee for each loan will be retained by the master
servicer from payments and collections (including insurance proceeds and
liquidation proceeds) on the loan. The master servicer may also retain as
additional servicing compensation:
o all investment income earned on amounts in the Reserve Accounts (to the
extent consistent with applicable law and the related Mortgage Loan
documents) and the Collection Account,
o all amounts collected on the Mortgage Loans (except Specially Serviced
Mortgage Loans) in the nature of late payment charges or late fees (to the
extent not offset against advance interest on the related Mortgage Loan),
loan service transaction fees, extension fees, demand fees, modification
fees, assumption fees, beneficiary statement charges and similar fees and
charges (but excluding prepayment premiums or default interest),
o all insufficient funds check charges (including insufficient funds check
charges arising from Specially Serviced Mortgage Loans), and
o any Prepayment Interest Excess (to the extent not offset against any
Prepayment Interest Shortfall).
If Midland resigns or is terminated as the master servicer and the
successor master servicer agrees to perform the services of the master servicer
for an amount less than the master servicing fee, the certificateholders will
not receive any portion of the excess master servicing fee.
The master servicer will pay all expenses incurred by it in connection
with its responsibilities under the pooling and servicing agreement (subject to
reimbursement as provided in the agreement), including all fees of any
sub-servicers retained by it.
Special Servicing
Ability of Controlling Class Representative to Remove Special Servicer
Midland will be the initial special servicer. The controlling class
representative may at any time remove the special servicer without cause and
appoint a successor special servicer. The removal of the special servicer and
appointment of a successor special servicer will be effective only when:
o 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, and
o each Rating Agency 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 the Rating Agency
to any class of certificates.
The controlling class representative must pay the cost of obtaining such
Rating Agency
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confirmation. The removed special servicer may receive all amounts accrued and
owing to it on or prior to the effective date of the removal.
Duties of Special Servicer
The duties of the special servicer relate primarily to Specially Serviced
Mortgage Loans and to any REO Property. A "Specially Serviced Mortgage Loan" is
any Mortgage Loan for which at least one of the following conditions exist:
Loans with Monetary Defaults
o The borrower is at least 60 days delinquent in paying principal and interest
or other obligation(regardless of whether P&I Advances have been reimbursed),
or
o the borrower has failed to make a balloon payment (except where the master
servicer and the special servicer agree in writing that the loan is likely to
be paid in full within 30 days after such default);
however, such loans cease to be Specially Serviced Mortgage Loans when:
o the borrower brings the loan current (under workout terms agreed to by the
special servicer for a balloon payment default),
o the borrower makes three consecutive full and timely monthly
payments, and
o no other circumstances exist that would cause the loan to be characterized as
a Specially Serviced Mortgage Loan.
Loans that are likely to have Monetary Defaults
o The borrower has expressed to the master servicer an inability to
pay or a hardship in paying the loan in accordance with its terms,
o the master servicer has received notice of a foreclosure or
threatened foreclosure of any lien on the property securing the loan,
o the master servicer or special servicer has received notice that the borrower
has:
1. become the subject of any bankruptcy, insolvency or similar
proceeding,
2. admitted in writing the inability to pay its debts as they come due, or
3. made an assignment for the benefit of creditors, or
o the master servicer proposes to commence foreclosure or other workout
arrangements;
however, such loans cease to be Specially Serviced Mortgage Loans when:
o the above circumstances cease to exist in the good faith judgment of
the special servicer, and
o no other circumstances exist that would cause the loan to be characterized as
a Specially Serviced Mortgage Loan.
Loans with Nonmonetary Defaults
o The master servicer or the special servicer has notice that a nonmonetary
default that materially and adversely affects the interests of the
certificateholders has occurred and the default remains uncured after the
specified grace period (or, if no grace period is specified, after 60 days);
however, such loans cease to be Specially Serviced Mortgage Loans when:
o the default is cured, and
o no other circumstances exist that would cause the loan to be characterized as
a Specially Serviced Mortgage Loan.
A default requiring a Servicing Advance will be deemed to materially and
adversely affect the interests of certificateholders.
The special servicer will prepare an asset status report within 30 days
after a loan becomes a Specially Serviced Mortgage Loan. The asset status report
will be delivered to the controlling class representative and each Rating
Agency.
Special Servicer Compensation
The special servicer is entitled to a monthly special servicing fee. The
special servicing fee is an amount equal to 1/12th of ____% of the Stated
Principal Balance of each Specially Serviced Mortgage Loan. The special servicer
will also receive a disposition fee on any Specially Serviced Mortgage Loan or
REO Property sold, transferred or otherwise liquidated equal to __% of:
o the proceeds of the sale or liquidation of any Specially Serviced
Mortgage Loan or REO Property
less
o any broker's commission and related brokerage referral fees.
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No disposition fee will be paid in connection with:
o the repurchase of a Mortgage Loan as described under "Description of
the Mortgage Pool--Representations and Warranties; Repurchase",
o the termination of the trust as described under "Description of the
Certificates--Optional Termination", or
o the purchase of any defaulted Mortgage Loan by the controlling class
representative, the master servicer or special servicer as described under
"The Pooling and Servicing Agreement--Realization Upon Mortgage Loans--Sale
of Specially Serviced Mortgage Loans and REO Properties".
Each of these fees, plus certain special servicing expenses, will be paid
from funds that would otherwise be used to pay principal and interest on the
certificates.
The special servicer is also entitled to a workout fee equal to ___% of
the Net Collections received by the master servicer or the special servicer on
each Corrected Mortgage Loan. "Net Collections" means all payments of interest
and principal and all prepayment premiums.
A loan which has ceased to be a Specially Serviced Mortgage Loan by virtue
of a cure resulting from a modification, restructuring or workout negotiated by
the special servicer evidenced by a signed writing is a "Corrected Mortgage
Loan".
If any Corrected Mortgage Loan again becomes a Specially Serviced Mortgage
Loan, any right to the workout fee terminates for the initial modification,
restructuring or workout. However, the special servicer will receive a new
workout fee for the loan upon resolution or workout of a subsequent event of
default under the loan. If the special servicer is terminated for any reason, it
will retain the right to receive any workout fees payable on Mortgage Loans that
became Corrected Mortgage Loans while it acted as special servicer. The
successor special servicer will not be entitled to any portion of such workout
fees.
The special servicer may also retain as additional servicing compensation:
o all investment income earned on amounts on deposit in any REO
Account, and
o if permitted under the Mortgage Loan, late payment charges or late fees (to
the extent not offset against advance interest on the related Mortgage Loan),
assumption fees, loan modification fees, extension fees, loan service
transaction fees, beneficiary statement charges or similar items that are
collected on Specially Serviced Mortgage Loans.
Additional special servicing compensation does not include default
interest or prepayment premiums or any other amount required to be deposited or
retained in the Collection Account.
The Controlling Class Representative
Selection
Holders of more than [50%] of the principal balance of the Controlling
Class may appoint a controlling class representative to represent their
interests. If at any time the holders of the Controlling Class have not
appointed a controlling class representative, the holder owning the largest
percentage of the principal balance of the Controlling Class will be the
controlling class representative.
The "Controlling Class" is the most subordinate class of principal balance
certificates that still has at least [25%] of its original principal balance
outstanding. If no class has at least [25%] of its initial principal balance
still outstanding, the most subordinate class of principal balance certificates
still outstanding will be the controlling class.
Rights and Powers
[The controlling class representative has the right to direct the special
servicer (and the master servicer solely with respect to clause 2 below) about
the following matters:
1. foreclosure or similar conversion of the ownership of properties securing
Specially Serviced Mortgage Loans that are in default, including acquiring an
REO Property,
2. any material amendment, waiver or modification of any Mortgage Loan
and any amendment, waiver or modification of a Specially Serviced
Mortgage Loan,
3. proposed sale of a defaulted Mortgage Loan or REO Property, except upon
termination of the trust fund as described under "Description of the
Certificates--Optional Termination",
4. acceptance of a discounted payoff,
5. determination to bring an REO Property into compliance with environmental
laws or to
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address hazardous materials located at an REO Property,
6. release of collateral, other than in accordance with the terms or upon
satisfaction of a loan,
7. acceptance of substitute or additional collateral, other than in accordance
with the terms of a loan,
8. any waiver of a "due-on-sale" or "due-on-encumbrance" clause, and
9. acceptance of an assumption agreement releasing a borrower from
liability under a loan.
The special servicer or the master servicer, as applicable, may not take
any of the above actions unless the controlling class representative has
approved such action in writing within [10] business days after being notified
of the proposed action and provided with all reasonably requested information.
The controlling class representative will be considered to have approved any
such action if the controlling class representative does not notify the special
servicer or the master servicer, as applicable, within [10] business days.
In addition, except as otherwise described below, the controlling class
representative may direct the special servicer to take, or refrain from taking,
such actions as the controlling class representative may consider advisable or
as to which provision is otherwise made in the pooling and servicing agreement.
Notwithstanding the foregoing, no advice, direction or objection given or
made by the controlling class representative, as contemplated by either of the
two preceding paragraphs, may:
o require or cause the special servicer or the master servicer to violate
applicable law, the terms of any Mortgage Loan or any other provision of
the pooling and servicing agreement including the special servicer's or
the master servicer's obligation to act in accordance with the servicing
standard described in this prospectus supplement;
o a result in certain adverse tax consequences for the trust;
o expose the trust, the depositor, the master servicer, the special
servicer, the trustee or any of their respective affiliates,
directors, officers, employees or agents, to any material claim,
suit or liability; or
o materially expand the scope of the master servicer's or special servicer's
responsibilities under the pooling and servicing agreement.
The special servicer and the master servicer are to disregard any such advice,
direction or objection that does so. In addition, unless the pooling and
servicing agreement provides otherwise, the special servicer will not be
required to seek approval from the controlling class representative for any
actions listed in clauses 1, 2 (but only for a waiver, modification or amendment
involving a Money Term) and 3 above that it seeks to take with respect to any
particular Specially Serviced Mortgage Loan if:
o the special servicer has, as described above, notified the controlling
class representative in writing of various actions that the special
servicer proposes to take with respect to the workout or liquidation of
that Mortgage Loan, and
o for [60] days following the first notice, the controlling class
representative has objected to all of those proposed actions and has
failed to suggest any alternative actions that the special servicer
reasonably considers to be consistent with the servicing standard.
You should consider the effects that the rights and powers of the
controlling class representative discussed above could have on the actions of
the special servicer.]
Limitation on Liability of Controlling Class Representative
The controlling class representative and its officers, directors,
employees and owners will have no liability to certificateholders for any action
taken, or for refraining from the taking of any action, in good faith or for
errors in judgment. By accepting certificates, each certificateholder agrees
that the controlling class representative:
o may have special relationships and interests that conflict with
those of holders of one or more classes of certificates,
o may act solely in the interests of the holders of the Controlling
Class,
o has no duties to certificateholders, except for holders of the
Controlling Class,
o may act to favor the interests of the Controlling Class over the
interests of other classes, and
o will violate no duty and incur no liability by acting solely in the interests
of the Controlling Class.
No certificateholder may take legal action against the controlling class
representative because it
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acted solely in the interests of the Controlling
Class. The special servicer generally must keep confidential all advice,
directions, recommendations and/or objections received from the controlling
class representative.
Sub-Servicers
The master servicer and special servicer may each delegate its servicing
obligations to one or more third-party sub-servicers. However, the special
servicer must obtain the approval of _____ before it may retain sub-servicers
for Mortgage Loans with outstanding principal balances greater than or equal to
25% or more of the then outstanding principal balance of all the Mortgage Loans.
Despite any such delegation, the master servicer or special servicer remains
directly responsible for the delegated duties and for the acts and omissions of
any sub-servicer. The master servicer or the special servicer must monitor the
performance of any sub-servicer that it uses. On the closing date, _____Mortgage
Loans (__%) will be serviced by sub-servicers. Except for the sub-servicing
agreements related to these Mortgage Loans, each sub-servicing agreement must
provide that if the master servicer or the special servicer is no longer acting
in such capacity under the pooling and servicing agreement, the trustee or any
successor to the master servicer or special servicer may:
o assume the master servicer's or special servicer's rights under the
sub-servicing agreement, and/or
o terminate the sub-servicer without payment of a termination fee.
The sub-servicing agreement for the ____ Mortgage Loans that will be
sub-serviced on the closing date provide that the related sub-servicer may only
be terminated if it is in default under the sub-servicing agreement.
The master servicer and special servicer are solely responsible for the
fees owed to any sub-servicer they retain, even if those fees are more than the
fees they are receiving under the pooling and servicing agreement. Generally,
each sub-servicer will be reimbursed for any expenses for which the master
servicer or special servicer would be reimbursed under the pooling and servicing
agreement. See "-- Servicing Compensation and Payment of Expenses".
Reports to Certificateholders; Where You Can Find More Information
Monthly Reports
On each distribution date, the trustee will issue a statement based on
information that the master servicer furnishes. The trustee will mail upon
request and otherwise make available electronically the statement to the
certificateholders, the depositor, the paying agent, the underwriters, the
master servicer, the controlling class representative and each Rating Agency.
The trustee will use the form of monthly distribution statement included as
Exhibit C to this prospectus supplement. The information will include the
following:
o For each class of certificates and for each $1,000 of initial principal
balance or notional amount of the class:
1. the Principal Distribution Amount and the amount of Available Funds
allocable thereto;
2. Distributable Certificate Interest and the amount of Available Funds
allocable thereto;
3. any Class Interest Shortfall allocable to the class;
4. the principal balance after giving effect to the distribution of
amounts in respect of the Principal Distribution Amount on the
distribution date; and
5. the amount of any prepayment premiums received during the related
Collection Period and distributed to the class;
o The pass-through rate applicable to each class of offered certificates for
the distribution date, other than the [class A-1A] certificates;
o The amount of any P&I Advances by the master servicer or the trustee
included in the amounts distributed to the certificateholders;
o Realized Losses and Expense Losses and their allocation to the
principal balance of any class of certificates;
o The Stated Principal Balance of the Mortgage Loans as of the due
date preceding the distribution date;
o The number and aggregate principal balance of Mortgage Loans:
1. delinquent 30-59 days,
2. delinquent 60-89 days,
3. delinquent 90 or more days, and
4. as to which foreclosure proceedings have been commenced;
o For each delinquent Mortgage Loan:
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1. the amount of the P&I Advances made on the distribution date; and
2. the aggregate amount of unreimbursed Servicing Advances and P&I
Advances for such loan;
o For 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;
o For any REO Property sold during the related Collection Period:
1. the date on which the special servicer determined that it has
collected all amounts that it expects to recover on the REO Property;
2. the amount of the proceeds of such sale deposited into the
Collection Account; and
3. 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 for each REO Property during the related Collection
Period and credited to the Collection Account;
o The outstanding principal balance of each REO Mortgage Loan as of
the close of business on the preceding due date;
o The appraised value of each REO Property as shown on the most recent
appraisal;
o The amount of the servicing compensation and additional servicing
compensation paid to the master servicer for the distribution date;
o The amount of any special servicing fee, disposition fee or workout
fee paid to the special servicer for the distribution date;
o The amount of default interest received during the related
Collection Period;
o The amount of any Appraisal Reductions effected during the related Collection
Period on a loan-by-loan basis and the total Appraisal Reductions as of the
distribution date; and
o Any other information required under the pooling and servicing
agreement.
The master servicer will provide the trustee with the following Commercial
Mortgage Securities Association Standard Investor Package reports for inclusion
in the monthly distribution statement:
o Property File,
o Watch List Report,
o Delinquent Loan Status Report,
o REO Status Report,
o Comparative Financial Status Report,
o Historical Loan Modification Report,
o Historical Loss Estimate Report,
o Operating Statement Analysis Report, and
o NOI Adjustment Worksheet.
Due to the time required to collect all the necessary data and enter it
onto the master servicer's computer system, the master servicer is not required
to provide these reports before the distribution date in _________________,
200_.
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
owned an offered certificate a statement listing the amount of principal and
interest paid to the person during the year. The Trustee may satisfy this
obligation by delivering substantially comparable information pursuant to any
requirements of the Internal Revenue Code of 1986.
In addition, the trustee will forward or make available to each
certificateholder any additional information 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, which information the
trustee may attach to the monthly distribution statement.
The distribution date statements referred to above may be obtained
electronically from the trustee as follows:
1. by facsimile through the trustee's fax-on-demand service by calling
__________; or
2. on the Internet at ____________________.
For assistance with the above mentioned services, you may call
___________. The Trustee may require registration and the acceptance of a
disclaimer in connection with providing access to its internet website.
Loan Portfolio Analysis System
The master servicer maintains a computerized database that has information
on the various commercial mortgage-backed securities transactions that it
services. The master servicer commonly refers to the database as the "Loan
Portfolio Analysis System". The master servicer will provide electronic, on-line
access to the database to certificateholders, prospective transferees and other
appropriate persons. You may contact Brad Hauger at (816) 435-5175 to arrange
access.
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Other Available Information
The master servicer or special servicer will notify or report to the
trustee and the controlling class representative about any other occurrences of
which the master servicer or special servicer is aware that it determines may
materially affect a Mortgage Loan or REO Property, including all loan
extensions.
In addition to the other reports and information made available and
distributed under the pooling and servicing agreement by the trustee, the master
servicer and the special servicer will also make available any other information
relating to the Mortgage Loans, the Mortgaged Properties or the borrowers for
review by the depositor, the underwriters, the controlling class representative,
the trustee and the Rating Agencies. The master servicer and the special
servicer will also make such information available to any person that certifies
to the trustee that it is a certificateholder, an owner of a beneficial interest
in a book entry certificate, or a potential owner of a certificate or an
interest in a certificate. The master servicer and the special servicer are not
required to provide the information if doing so is prohibited by applicable law
or by any documents related to a Mortgage Loan. The master servicer and the
special servicer may adopt reasonable rules and procedures governing access to
the information, which may include a requirement that the person requesting such
information execute an agreement governing the availability, use and disclosure
of such information. The agreement may provide for the indemnification of the
master servicer or the special servicer for any liability or damage that may
arise from the use or disclosure of the information.
The following are available for your review at the trustee's offices
during normal business hours:
o the pooling and servicing agreement,
o all monthly statements to certificateholders,
o annual compliance statements, and
o annual accountants' reports.
See "Description of the Governing Document" in the prospectus.
Unless prohibited by applicable law or the Mortgage Loan documents, the
following will be available for your review at the trustee's offices during
normal business hours:
o the property inspection reports,
o all modifications, waivers and amendments of the Mortgage Loans, and
o officer's certificates and other evidence supporting a determination
that an Advance is nonrecoverable.
The master servicer, the special servicer and the trustee may impose a
reasonable charge for expenses of providing copies or access to the above
information. The Rating Agencies and the controlling class representative will
not have to pay any such charge.
Filings with the SEC
The master servicer will, on behalf of the trust fund, prepare, sign and
file with the Securities and Exchange Commission all reports, statements and
information respecting the trust fund that the master servicer or the depositor
determines are required to be filed with the SEC. The master servicer will file
each report, statement and information on or prior to the required filing date.
However, the depositor will file with the SEC, within 15 days of the closing
date, a Form 8-K together with the pooling and servicing agreement.
The trustee, the master servicer and the special servicer are not
responsible for the accuracy or completeness of any information supplied to it
by a borrower or other third party for inclusion in any notice, report or
information furnished or provided by the master servicer, the special servicer
or the trustee under the pooling and servicing agreement.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, three separate "real estate mortgage
investment conduit" ("REMIC") elections will be made with respect to respective
portions of the trust fund, creating three 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:
o each pool of assets with respect to which a REMIC election is made will
qualify as a REMIC under the Internal Revenue Code of 1986;
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o the class [A-1A, class A-1B, class S, class A-2, class A-3, class A-4, class
B-1, class B-2, class B-3, class B-4, class B-5, class B-6, class B-7, class
B-8, class C and class D] certificates will be, or will represent ownership
of, REMIC "regular interests";
o the [class R-I, class R-II and class R-III] certificates, respectively, will
be the sole "residual interest" in the related REMIC; and
o the [class E ]certificates will represent beneficial interests in the portion
of the trust assets consisting of Deferred Interest, which portion will be
treated as a grantor trust for federal income tax purposes.
The certificates representing regular interests generally will be treated
as newly originated debt instruments for federal income tax purposes. Holders of
those certificates will be required to include in income all interest on the
certificates in accordance with the accrual method of accounting, regardless of
a certificateholder's usual method of accounting. The [class A-1A, class A-1B,
class A-2, class A-3 and class A-4] certificates are not expected to be treated
as having been issued with original issue discount for federal income tax
reporting purposes. The [class B-1] certificates are expected to be treated as
having been issued with de minimis original issue discount for federal income
tax purposes. The [class S and class B-2] certificates are expected to be deemed
to have been issued with original issue discount.
The IRS has issued regulations under Sections 1271 to 1275 of the Internal
Revenue Code of 1986 generally addressing the treatment of debt instruments
issued with original issue discount. Holders of the offered certificates should
be aware, however, that those regulations and Section 1272(a)(6) of the Internal
Revenue Code of 1986 do not adequately address certain issues relevant to, or
are not applicable to, prepayable securities such as the offered certificates.
We recommend that holders consult with their own tax advisor concerning the tax
treatment of the offered certificates.
The trust intends to treat the [class S] certificates as having no
"qualified stated interest". Accordingly, the [class S] certificates will be
considered to be issued with original issue discount in an amount equal to the
excess of all distributions of interest expected to be received on the [class S]
certificates over their respective issue prices (including interest accrued
prior to the closing date, if any, unless the holder elects on its federal
income tax return to exclude such amount from the issue price and to recover it
on the first distribution date). Certificateholders will not be able to deduct
currently any "negative" amounts of original issue discount on the [class S]
certificates attributable to rapid prepayments on the Mortgage Loans, but they
may offset these amounts against future positive accruals of original issue
discount, if any. However, holders of a [class S] certificate may be entitled to
a loss deduction if it becomes certain that such holder will not recover a
portion of its basis in the certificate. No representation is made as to the
timing, amount or character of such loss, if any.
See "Federal Income Tax Consequences--REMICS--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount", "---Premium" and "--Realized
Losses" in the prospectus.
For the purposes of determining the rate of accrual of market discount,
original issue discount and premium for federal income tax purposes, the
Prepayment Assumption (as defined in the prospectus) is that the Mortgage Loans
will prepay at the rate of 0% CPR, except that Hyper-Amortization Loans are
assumed to pay on their Anticipated Repayment Date. No representation is made as
to whether the Mortgage Loans will prepay at that rate or any other rate.
Although it is unclear whether the [class A-1B, class A-2, class A-3, class A-4,
class B-1 and class B-2] certificates will qualify as "variable rate
instruments" under treasury regulations, the trustee will assume for purposes of
determining the original issue discount for these certificates that the
certificates so qualify. See "Federal Income Tax Consequences--REMICS--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount and "--Premium"
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 the 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 "Federal Income Tax Consequences--REMICS --Taxation of Owners of REMIC
Regular Certificates" in the prospectus.
Generally, the offered certificates will be "real estate assets" within
the meaning of Section 856(c)(5)(B) of the Internal Revenue Code of 1986. In
addition, interest (including original issue
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discount, if any) on the offered certificates will be interest described in
Section 856(c)(3)(B) of the Internal Revenue Code of 1986.
As of the closing date, ____% of the Mortgage Loans are secured by real
estate used for residential or certain other purposes prescribed in Section
7701(a)(19)(C) of the Internal Revenue Code of 1986, and consequently the
offered certificates will be treated as assets qualifying under that section to
only a limited extent. Accordingly, investment in the offered certificates may
not be suitable for thrift institutions seeking to be treated as a "domestic
building and loan association" under Section 7701(a)(19)(C) of the Internal
Revenue Code of 1986. The determination as to the percentage of the REMIC's
assets that constitute assets described in the foregoing sections of the
Internal Revenue Code of 1986 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 times required by applicable Treasury
regulations.
Finally, the offered certificates will be treated as "qualified mortgages"
for another REMIC under Section 860G(a)(3)(C) of the Internal Revenue Code of
1986 and "permitted assets" for a "financial asset securitization investment
trust" under Section 860L(c) of the Code.
If the trust collects a prepayment premium on a mortgage loan, it is
anticipated that the prepayment premium will be reported as ordinary income and
allocated to the class of certificates entitled to the premium. For federal
income tax reporting purposes, the premium or charge will be reported as income
upon actual receipt by the master servicer. The correct characterization of and
timing for recognition of, prepayment premiums is not entirely clear.
Certificateholders should consult their tax advisors concerning the tax
treatment of prepayment premiums.
For more information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICS -- Taxable Income 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 you consult your own tax advisors regarding the tax
treatment of your acquisition, ownership and disposition of the certificates.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or other retirement plan or
arrangement that is subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or Section 4975 of the Internal Revenue Code of 1986
(each a "Plan") and any entity whose assets include assets of a Plan should
carefully review with its legal advisers whether the purchase or holding of
offered certificates could give rise to a transaction that is prohibited or is
not otherwise permitted either under ERISA or Section 4975 of the Internal
Revenue Code of 1986 or whether there exists any applicable statutory or
administrative exemption. Examples of the types of Plans that are subject to
these rules include:
o individual retirement accounts,
o annuity plans,
o Keogh plans, and
o collective investment funds, separate accounts and general accounts in which
such plans, accounts or arrangements are invested.
Certain employee benefit plans, such as governmental plans and church
plans (if no election has been made under section 410(d) of the Internal Revenue
Code), are not subject to the restrictions of ERISA. Accordingly, assets of such
plans may be invested in the offered certificates without regard to the ERISA
considerations described below, subject to other applicable federal and state
law. However, any such governmental or church plan which is qualified under
section 401(a) of the Internal Revenue Code of 1986 and exempt from taxation
under section 501(a) of the Internal Revenue Code of 1986 is subject to the
prohibited transaction rules set forth in Section 503 of the Internal Revenue
Code of 1986.
In accordance with ERISA's general fiduciary standards, before investing
in an offered
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certificate a Plan fiduciary should determine whether to do so is:
o permitted under the governing Plan instruments, and
o 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".
Certain fiduciary and prohibited transaction issues arise only if the
assets of the trust fund are "plan assets" for the purposes of Part 4 of Title I
of ERISA and Section 4975 of the Internal Revenue Code of 1986. Whether the
assets of the trust fund will be plan assets at any time will depend on a number
of factors, including the portion of any class of certificates (as discussed
below under "--Plan Asset Regulation") that is held by "benefit plan investors"
(as defined in U.S. Department of Labor Regulation Section 2510.3-101).
Plan Asset Regulation
The United States Department of Labor has issued a final regulation
determining when assets of an entity in which a Plan makes an equity investment
will be treated as assets of the investing Plan. If the certificates are treated
as debt with no substantial equity features under applicable local law, the
assets of the trust fund would not be treated as assets of the Plans that become
certificateholders. In the absence of treatment of the certificates as debt, and
unless the final regulation provides an exemption from this "plan asset"
treatment, an undivided portion of the assets of the trust fund will be treated,
for purposes of applying the fiduciary standards and prohibited transactions
rules of ERISA and Section 4975 of the Internal Revenue Code of 1986, as an
asset of each Plan that acquires and holds the offered certificates.
The final regulation provides an exemption from "plan asset" treatment for
securities issued by an entity if, immediately after the most recent acquisition
of any equity interest in the entity, less than 25% of the value of each class
of equity interests in the entity are held by "benefit plan investors". Benefit
plan investors could include Plans, governmental, foreign and other plans not
subject to ERISA and entities holding assets deemed to be "plan assets".
Interests held by any person who has discretionary authority or control with
respect to the assets of the entity or any person who provide investment advice
directly or indirectly for a fee with respect to the assets of the entity (or
any affiliate of either such person) are excluded from the calculation. Because
the availability of this exemption to the trust fund depends upon the identity
of the holders of the offered certificates at any time, there can be no
assurance that any class of the offered certificates will qualify for this
exemption.
Individual Exemption
The Department of Labor has issued to each of the underwriters an
individual prohibited transaction exemption (Prohibited Transaction Exemption
No. _____, as amended by Prohibited Transaction Exemption No. 97-34, to
________________________________________, and Prohibited Transaction Exemption
No. 98-07 to PNC Capital Markets, Inc.). These exemptions generally exempt from
the application of the prohibited transaction provisions of Section 406(a) and
(b) and 407(a) of ERISA, and the excise taxes imposed on such prohibited
transactions pursuant to Section 4975(a) and (b) of the Internal Revenue Code of
1986, certain transactions, among others, relating to:
o the servicing and operation of mortgage loans, such as the Mortgage
Loans, and
o the purchase, sale and holding of mortgage pass-through certificates, such as
the senior certificates, underwritten by an "underwriter".
For purposes of this discussion, the term "underwriter" includes:
1. __________________________________,
2. any person directly or indirectly, through one or more
intermediaries, controlling, controlled by or under common control with
_______________________________, and
3. any member of the underwriting syndicate or selling group of which a person
described in (1) or (2) is a manager or co-manager with respect to the senior
certificates, including PNC Capital Markets, Inc.
Each of the individual prohibited transaction exemptions sets forth six
general conditions that must be satisfied for a transaction involving the
purchase, sale and holding of senior certificates to be covered by the
exemption:
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o First, the acquisition of the senior certificates by a Plan must be on terms
that are at least as favorable to the Plan as they would be in an
arm's-length transaction with an unrelated party.
o Second, the rights and interests evidenced by the senior certificates must
not be subordinated to the rights and interests evidenced by the other
certificates of the same trust.
o Third, at the time of acquisition by the Plan the senior certificates must be
rated in one of the three highest generic rating categories by Standard &
Poor's Ratings Services, Duff & Phelps Credit Rating Co., Moody's Investors
Service or Fitch IBCA.
o Fourth, the trustee cannot be an affiliate of any other member of the
"Restricted Group," which, in addition to the trustee, consists of:
o the underwriters,
o the depositor,
o the master servicer,
o the special servicer,
o any sub-servicer,
o any mortgagor with respect to a Mortgage Loan constituting more than 5% of
the aggregate unamortized principal balance of the Mortgage Loans as of
the date of initial issuance of the senior certificates, and
o any and all affiliates of any of the above persons.
o Fifth, the sum of all payments made to and retained by:
o the underwriters must represent not more than reasonable
compensation for underwriting the senior certificates;
o the depositor pursuant to the assignment of the Mortgage Loans to
the trust fund must represent not more than the fair market value of
those obligations; and
o the master servicer, the special servicer or any sub-servicer must
represent not more than reasonable compensation for that person's services
under the pooling and servicing agreement and reimbursement of that
person's reasonable expenses in connection therewith.
o Sixth, the investing Plan must be an accredited investor as defined in Rule
501(a)(1) of Regulation D under the Securities Act of 1933.
Because the senior certificates are not subordinated to any other class of
certificates, the second condition is satisfied for the senior certificates.
Since the senior certificates must be rated not lower than "AAA" by each of the
Rating Agencies, on the closing date, the third condition will be satisfied for
the senior certificates on the closing date. As the initial trustee is not an
affiliate of any other members of the restricted group, the fourth condition
will also be satisfied on the closing date. A Plan fiduciary contemplating
purchasing a senior certificate in the secondary market must determine that the
senior certificates continue to satisfy the third and fourth conditions on the
date of purchase. A Plan fiduciary contemplating the purchase of a senior
certificate must decide for itself whether the first, fifth and sixth conditions
will be satisfied.
Each of the individual prohibited transaction exemptions also requires
that the trust fund meet the following requirements:
o the trust fund must consist solely of assets of the type that have been
included in other investment pools;
o certificates in those other investment pools must have been rated in one of
the three highest categories of Standard & Poor's, Duff & Phelps, Moody's or
Fitch for at least one year prior to the Plan's acquisition of the senior
certificates; and
o certificates in those other investment pools must have been purchased by
investors other than Plans for at least one year prior to any Plan's
acquisition of senior certificates.
Moreover, the exemptions provide relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when any person who has
discretionary authority or renders investment advice with respect to the
investment of plan assets causes a Plan to acquire senior certificates, provided
that, among other requirements:
o the person (or its affiliate) is an obligor with respect to 5% or less of the
fair market value of the obligations or receivables contained in the trust;
o the Plan is not a plan with respect to which any member of the Restricted
Group is the "plan sponsor" (as defined in Section 3(16)(B) of ERISA);
o in the case of an acquisition in connection with the initial issuance of a
class of senior certificates, at least 50% of that class is acquired by
persons independent of the Restricted Group and at least 50% of the aggregate
interest in the trust fund is acquired by persons independent of the
Restricted Group;
S-86
<PAGE>
o the Plan's investment in senior certificates does not exceed 25% of all of
the certificates of that class outstanding at the time of the acquisition;
and
o immediately after the acquisition, no more than 25% of the assets of the Plan
with respect to which the person has discretionary authority or renders
investment advice are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same entity.
Finally, if certain specific conditions of the individual prohibited
transaction exemptions are satisfied, they may provide an exemption from the
restrictions imposed by Sections 406(a), 406(b) and 407(a) of ERISA, and the
taxes imposed by Sections 4975(a) and (b) of the Internal Revenue Code of 1986
by reason of Section 4975(c) of the Internal Revenue Code of 1986 for
transactions in connection with the servicing, management and operation of the
Mortgage Loans. The depositor expects that the specific conditions of the
exemptions required for this purpose will be satisfied with respect to the
senior certificates.
You should be aware, however, that even if the conditions specified in one
or more parts of the individual prohibited transaction exemptions are satisfied,
they may not cover all acts that may be considered prohibited transactions.
Before purchasing a senior certificate, a Plan fiduciary should itself
confirm that all of the conditions of the individual prohibited transaction
exemptions would be satisfied. The Plan fiduciary should also consider whether
any other prohibited transaction exemptions are available.
Other Exemptions
The characteristics of each class of the subordinate certificates do not
meet the requirements of the underwriters' individual prohibited transaction
exemptions. Accordingly, subordinate certificates may not be acquired by, on
behalf of or with assets of:
1. a Plan,
2. a governmental plan subject to any federal, state or local law that is, to a
material extent, similar to the provisions of ERISA or the Internal Revenue
Code of 1986 ("Other Plans"),
3. a collective investment fund in which Plans or Other Plans are invested, or
4. other persons acting on behalf of any Plan or Other Plans or using the assets
of any Plan or Other Plans or any entity whose underlying assets include plan
assets by reason of a Plan's or Other Plan's investment in the entity (within
the meaning of the Department of Labor regulations Section 2510.3-101).
Each prospective transferee of a definitive subordinate certificate must
deliver to the depositor, the certificate registrar and the trustee:
o a transferee representation letter, substantially in the form attached as an
exhibit to the pooling and servicing agreement, stating that the prospective
transferee is not a person referred to in clause 1, 2, 3, or 4 of the first
paragraph of this section, or
o an opinion of counsel which establishes to the satisfaction of the depositor,
the trustee and the certificate registrar that the purchase or holding of the
certificate will not:
o constitute or result in a prohibited transaction within the meaning of
Section 406 or 407 of ERISA, Section 4975 of the Internal Revenue Code of
1986 or any similar law, and
o 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
Internal Revenue Code of 1986.
If you purchase a beneficial interest in a book-entry subordinate certificate,
you will be deemed to have made the representation in the first bullet point
above.
The 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.
Insurance Company Purchasers
Purchasers that are insurance companies should consult their legal
advisers with respect to the applicability of Section III of Prohibited
Transaction Class Exemption 95-60, regarding transactions by insurance company
general accounts.
In addition, the Small Business Job Protection Act of 1996 added a new
Section 401(c) to ERISA, which provides certain exemptive relief from the
provisions of Part 4 of Title I of ERISA and Section 4975 of the Internal
Revenue Code of 1986,
S-87
<PAGE>
including the prohibited transaction restrictions imposed by ERISA and the
related excise taxes imposed by the Internal Revenue Code of 1986, for
transactions involving an insurance company general account. This exemption is
in addition to any exemption that may be available under Prohibited Transaction
Class Exemption 95-60 for the purchase and holding of offered certificates by
an insurance company general account.
Section 401(c) of ERISA required the Department of Labor to issue final
regulations no later than December 31, 1997. The Department of Labor issued
proposed regulations under Section 401(c) on December 22, 1997, but the required
final regulations have not been issued as of the date of this prospectus
supplement. The purpose of the 401(c) regulations is to provide guidance for the
purpose of determining which general account assets constitute plan assets, in
cases where insurance policies or annuity contracts supported by an insurer's
general account were issued to or for the benefit of a Plan on or before
December 31, 1998. Section 401(c) of ERISA generally provides that, until the
date that is 18 months after the 401(c) regulations become final, no person will
be subject to liability under Part 4 of Title I of ERISA and Section 4975 of the
Internal Revenue Code on the basis of a claim that the assets of an insurance
company general account constitute plan assets of any plan, unless:
o as otherwise provided by the Secretary of Labor in the 401(c)
regulations to prevent avoidance of the regulations, or
o an action is brought by the Secretary of Labor for certain breaches of
fiduciary duty which would also constitute a violation of federal or state
criminal law.
Any assets of an insurance company general account that support insurance
policies or annuity contracts issued to Plans:
o after December 31, 1998, or
o on or before December 31, 1998, for which the insurance company does
not comply with the 401(c) regulations,
may be treated as plan assets. In addition, because Section 401(c) does not
relate to insurance company separate accounts, separate account assets are still
treated as plan assets of any Plan invested in such separate account. Insurance
companies contemplating the investment of general account assets in the
certificates should consult their legal counsel with respect to the
applicability of Section 401(c) of ERISA.
LEGAL INVESTMENT
[The [class S, A-1A, A-1B and A-2] certificates will be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization.] The [class A-3, A-4, B-1 and B-2] certificates will not be
"mortgage related securities" for purposes of SMMEA.
The appropriate characterization of the certificates under various legal
investment restrictions may be subject to significant interpretive
uncertainties. As a result, the depositor is unable to determine whether
investors subject to these restrictions may purchase the certificates.
The depositor makes no representations as to:
o the proper characterization of the offered certificates for legal investment
purposes, financial institution regulatory purposes or other purposes, or
o the ability of particular investors to purchase the offered certificates
under applicable legal investment restrictions.
In addition, some states have enacted legislation overriding the legal
investment provisions of SMMEA.
All depository institutions considering investment in the offered
certificates should review the Federal Financial Institutions Examination
Council's Supervisory Policy Statement on the Selection of Securities Dealers
and Unsuitable Investment Practices (to the extent adopted by their respective
regulatory authorities), setting forth, in relevant part, certain investment
practices deemed to be unsuitable for an institution's investment portfolio, as
well as guidelines for investing in certain types of mortgage related
securities.
There may be other restrictions on the ability of certain investors to
purchase the offered certificates or to purchase offered certificates
representing more than a specified percentage of the
S-88
<PAGE>
investor's assets. All institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or
review by regulatory authorities should consult 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.
S-89
<PAGE>
PLAN OF DISTRIBUTION
Subject to the underwriting agreement, each underwriter has agreed to
purchase the principal or notional amounts of offered certificates (expressed,
in the case of each class thereof, as a percentage of the total principal
balance or notional amount) set forth opposite its name below:
Underwriter [Class S Class A-1A Class A-1B Class A-2]
- --------------------------- -----% -----% -----% -----%
PNC Capital Markets, Inc.
-- -- -- --
Total 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Underwriter [Class A-3 Class A-4 Class B-1 Class B-2]
- --------------------------- -----% -----% -----% -----%
PNC Capital Markets, Inc.
-- -- -- --
Total 100% 100% 100% 100%
==== ==== ==== ====
The underwriting agreement provides that the obligation of the
underwriters to pay for and accept delivery of the offered certificates is
subject to, among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the depositor's
registration statement shall be in effect, and that no proceeding for the
purpose of obtaining a stop order shall be pending before or threatened by the
Securities and Exchange Commission.
The underwriters have advised the depositor that they propose to offer the
offered certificates from time to time for sale in one or more negotiated
transactions or otherwise at prices to be determined at the time of sale. The
underwriters may effect such transactions by selling such classes of offered
certificates to or through dealers and such dealers may receive compensation in
the form of underwriting discounts, concessions or commissions from the
underwriters and/or from purchasers for whom they act as agent.
The offered certificates are offered by the underwriters when, as and if
issued by the depositor, delivered to and accepted by the underwriters and
subject to their right to reject orders in whole or in part.
It is expected that delivery of the offered certificates to the
underwriters will be made in book-entry form through the facilities of DTC
against payment therefor on or about ___________, 200_, which is the ____
business day following the date of pricing of the certificates. The underwriters
intend to settle with investors on __________, 200_. Under Rule 15c6-1 adopted
by the Securities and Exchange Commission under the Securities Exchange Act of
1934, trades in the secondary market generally are required to settle in three
business days, unless the parties to any trade expressly agree otherwise.
Accordingly, purchasers who wish to trade offered certificates in the secondary
market prior to such delivery should specify a longer settlement cycle, or
should refrain from specifying a shorter settlement cycle, if failing to do so
would result in a settlement date that is earlier than the delivery date of the
offered certificates.
The underwriters and any dealers that participate with the underwriters in
the distribution of the offered certificates may be deemed to be underwriters,
and any discounts or commissions received by them and any profit on the resale
of such classes of offered certificates by them may be deemed to be underwriting
discounts or commissions, under the Securities Act of 1933.
The depositor has agreed to indemnify the underwriters against civil
liabilities, including liabilities under the Securities Act of 1933 or
contribute to payments the underwriters may be required to make in respect
thereof.
The depositor also has been advised by _____________________ and PNC
Capital Markets, Inc., that they presently intend to make a market in the
offered certificates. They have no obligation to do so, however, and any market
making may be discontinued at any time.
If and to the extent required by applicable law or regulation, this
prospectus supplement and the prospectus may be used by PNC Capital Markets,
S-90
<PAGE>
Inc., in connection with market-making transactions in the Offered Certificates.
PNC Capital Markets, Inc., may act as principal or as agent in such
transactions. Sales may be made at negotiated prices determined at the time of
sale.
USE OF PROCEEDS
The depositor will use the net proceeds from the sale of the offered
certificates to pay part of the purchase price for the Mortgage Loans and to pay
the costs of structuring, issuing and underwriting the offered certificates.
LEGAL MATTERS
The legality of the offered certificates and the material federal income
tax consequences of investing in the offered certificates will be passed upon
for the depositor by Morrison & Hecker, L.L.P., Kansas City, Missouri. Certain
legal matters with respect to the offered certificates will be passed upon for
the underwriters by ________________.
RATINGS
It is a condition of the issuance of the offered certificates that they
receive the following credit ratings from _______________and
_____________________ (the "Rating Agencies"):
Class _____ _____
[Class S
Class A-1A
Class A-1B
Class A-2
Class A-3
Class A-4
Class B-1
Class B-2]
The ratings of the offered certificates address the likelihood of the
timely receipt by the holders of all payments of interest to which they are
entitled and the ultimate receipt by the holders of all payments of principal to
which they are entitled, if any, by the distribution date in __________ ____
(the "Rated Final Distribution Date"). This date is the distribution date
occurring three years after the end of the amortization term for the mortgage
loan with the longest remaining amortization term on the closing date. The
ratings take into consideration:
o the credit quality of the Mortgage Loans in the Mortgage Pool,
o structural and legal aspects associated with the certificates, and
o the extent to which the payment stream from the Mortgage Pool is adequate to
make the required payments on the certificates.
The ratings on the offered 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.
The ratings of the certificates do not represent any assessment of:
o the tax attributes of the offered certificates or of the trust,
o the likelihood or frequency of principal prepayments on the Mortgage
Loans,
o the degree to which such prepayments might differ from those
originally anticipated,
o whether and to what extent prepayment premiums, Deferred Interest and default
interest will be received or Net Aggregate Prepayment Interest Shortfalls
will be realized,
S-91
<PAGE>
o the yield to maturity that investors may experience, or
o the possibility that the holders of the interest only certificates
might fail to recover their investment if prepayments are rapid, including
both voluntary and involuntary prepayments.
The ratings thus address credit risk and not prepayment risk.
As described in this prospectus supplement, the amounts payable on the
interest only certificates consist only of interest and prepayment premiums. If
all of the Mortgage Loans were to prepay in the initial month, then the interest
only certificateholders would receive only a single month's interest and suffer
a nearly complete loss of their investment despite having received all amounts
"due" under their certificates. This outcome is consistent with the ratings
received on the interest only certificates from ______________________ and
_______________. The total notional amount used to calculate interest on the
interest only certificates are reduced by allocations of Realized Losses,
Expense Losses and voluntary or involuntary principal prepayments. The ratings
do not address the timing or magnitude of reductions of such total notional
amount, but only the obligation to pay interest timely on whatever the proper
notional amount may be from time to time. Accordingly, potential purchasers of
the interest only certificates should evaluate the ratings of the interest only
certificates differently from similar ratings on other types of securities.
[Standard & Poor's assigns the additional symbol of "r" to highlight
classes of securities that Standard & Poor's believes may experience high
volatility or high variability in expected returns due to non-credit risks. The
absence of an "r" symbol should not be taken as an indication that a class will
exhibit no volatility or variability in total return.]
It is possible that a rating agency other than ______________________ and
_______________ could issue an unsolicited rating for one or more of the classes
of certificates. These unsolicited ratings could be lower than the ratings
issued ______________________ and ______________________.
S-92
<PAGE>
INDEX OF DEFINITIONS
Additional Trust Fund Expenses.................S-54
Advance Rate...................................S-68
Advances.......................................S-68
Anticipated Repayment Date.....................S-32
Appraisal Reduction............................S-52
Appraisal Reduction Estimate...................S-53
Appraisal Reduction Events"....................S-52
ARD............................................S-32
Assumed Monthly Payment........................S-51
Available Funds................................S-49
Class Interest Shortfall.......................S-50
Collection Account.............................S-68
Collection Period..............................S-49
Compensating Interest Payment..................S-55
Constant Prepayment Rate.......................S-64
Controlling Class..............................S-78
Corrected Mortgage Loan........................S-78
CPR............................................S-64
Cross-Collateralized Loans.....................S-31
Cut-off Date...................................S-30
Cut-off Date Loan-to-Value.....................S-40
Cut-off Date LTV...............................S-40
Cut-off Date Principal Balance.................S-30
Debt Service Coverage Ratio....................S-39
Defeasance Loans...............................S-34
Deferred Interest..............................S-32
Determination Date.............................S-49
Discount Rate..................................S-51
Distributable Certificate Interest.............S-50
Distribution Account...........................S-69
DSCR...........................................S-39
ERISA..........................................S-84
Euroclear Operator.............................S-59
Expense Losses.................................S-54
Hyper-Amortization Loans.......................S-32
Initial Interest Rate..........................S-32
Initial Pool Balance...........................S-30
Interest Reserve Account"......................S-69
Interest Reserve Amount........................S-69
Interest Reserve Loans...................S-48, S-69
Lock-out Period................................S-33
Maturity Assumptions...........................S-64
Maturity/ARD Balance...........................S-40
Maturity/ARD LTV...............................S-40
Maturity/ARD LTV Ratio.........................S-40
Money Term.....................................S-74
Monthly Payment................................S-51
Mortgage.......................................S-30
Mortgage Loans.................................S-30
Mortgaged Property.............................S-30
Mortgages......................................S-30
Most Recent DSCR...............................S-39
Multiple Property Loans........................S-31
Net Aggregate Prepayment Interest Shortfall....S-55
Net Collections................................S-78
Net Mortgage Rate..............................S-48
Net REO Proceeds...............................S-69
Other Plans....................................S-87
P&I Advance....................................S-67
Plan...........................................S-84
Prepayment Interest Excess.....................S-54
Prepayment Interest Shortfall..................S-55
Principal Distribution Amount..................S-51
Principal Prepayments..........................S-49
Qualified Substitute Mortgage Loan.............S-44
Rated Final Distribution Date..................S-91
Rating Agencies................................S-91
Realized Loss..................................S-54
Record Date....................................S-48
REMIC..........................................S-82
REO Account....................................S-46
REO Mortgage Loan..............................S-52
REO Proceeds...................................S-69
REO Property...................................S-46
Repurchase Price...............................S-44
Reserve Accounts...............................S-36
Restricted Group...............................S-86
Revised Interest Rate..........................S-32
Scheduled Final Distribution Date..............S-55
Servicing Advances.............................S-68
SMMEA..........................................S-88
Specially Serviced Mortgage Loan...............S-77
Stated Principal Balance.......................S-47
Treasury Rate..................................S-52
Underwritable Cash Flow........................S-39
Underwritable Debt Service Coverage Ratio......S-39
Updated Appraisal..............................S-53
U/W DSCR.......................................S-39
Yield Maintenance Period.......................S-33
S-93
<PAGE>
EXHIBIT A-1
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS AND MORTGAGED PROPERTIES
See this Exhibit for tables titled:
Managers and Locations of the Mortgaged Properties
Descriptions of the Mortgaged Properties
Characteristics of the Mortgage Loans
Additional Mortgage Loan Information
Engineering Reserves and Recurring Replacement Reserves
Major Tenants of the Commercial Properties
Multifamily Schedule
A-1-1
<PAGE>
EXHIBIT A-2
MORTGAGE POOL INFORMATION
See this Exhibit for tables titled:
Mortgage Interest Rates
Cut-off Date Principal Balances
Original Amortization Terms
Original Terms to Stated Maturity
Remaining Amortization Terms
Remaining Terms to Stated Maturity
Years Built/Years Renovated
Occupancy Rates at Underwriting
U/W Debt Service Coverage Ratios
Cut-off Date Loan-to-Value Ratios
Mortgaged Properties by State
Mortgage Loans by Amortization Type
Mortgaged Properties by Property Type
Mortgaged Properties by Property Sub-Type
Prepayment Provision as of Cut-off Date
Prepayment Option
Mortgage Pool Prepayment Profile
A-2-2
<PAGE>
EXHIBIT B
SIGNIFICANT LOAN SUMMARIES
[To be provided]
B-1
<PAGE>
EXHIBIT C
FORM OF TRUSTEE REPORT
[To be provided]
C-1
<PAGE>
EXHIBIT D
D-1
<PAGE>
EXHIBIT E
E-1
<PAGE>
EXHIBIT F
SUMMARY TERM SHEET
[To be provided]
F-1
<PAGE>
The attached diskette contains one spreadsheet file (the "spreadsheet file")
that can be put on a user-specified hard drive or network drive. This file is
"PNC______.XLS". The file "PNC_______.XLS" is a Microsoft Excel(1), Version 5.0
spreadsheet. The file provides, in electronic format, certain statistical
information that appears under the caption "Description of the Mortgage Pool"
in, and on Exhibits A-1 and A-2 to, this prospectus supplement. Defined terms
used, but not otherwise defined, in the spreadsheet file will have the
respective meanings assigned to them in this prospectus supplement. All the
information contained in the spreadsheet file is subject to the same limitations
and qualifications contained in this prospectus supplement. Prospective
investors are strongly urged to read this prospectus supplement and accompanying
prospectus in its entirety prior to accessing the spreadsheet file.
----------------
(1) Microsoft Excel is a registered trademark of Microsoft Corporation.
<PAGE>
===========================================================================
TABLE OF CONTENTS
Page
Prospectus Supplement
Important Notice About Information Presented in
this Prospectus Supplement and the
Accompanying Prospectus..............................S-2
Summary................................................S-4
Risk Factors..........................................S-13
Description of the Mortgage Pool......................S-30
Master Servicer and Special Servicer..................S-45
Description of the Certificates.......................S-46
Yield and Maturity Considerations.....................S-60
The Pooling and Servicing Agreement...................S-65
Material Federal Income Tax Consequences..............S-82
ERISA Considerations..................................S-84
Legal Investment......................................S-88
Plan of Distribution..................................S-90
Use of Proceeds.......................................S-91
Legal Matters.........................................S-91
Ratings...............................................S-91
Index of Definitions..................................S-93
Exhibit A-1--Certain Characteristics of the
Mortgage Loans and Mortgaged Properties............A-1-1
Exhibit A-2--Mortgage Pool Information...............A-2-1
Exhibit B--Significant Loan Summaries..................B-1
Exhibit C--Form of Trustee Report......................C-1
Exhibit D--Decrement Tables for the Certificates
of the [Class A-1A, A-1B, A-2, A-3, A-4, B-1
and B-2 Certificates]................................D-1
Exhibit E--Price/Yield Tables for the Class S
Certificates.........................................E-1
Exhibit F--Summary Term Sheet..........................F-1
Prospectus
Important Notice About The Information
Presented in this Prospectus...........................1
Summary of Prospectus....................................1
Risk Factors.............................................6
Description of the Trust Assets.........................29
Yield and Maturity Considerations.......................34
PNC Mortgage Acceptance Corp............................38
Description of the Certificates.........................38
Description of the Governing Documents..................44
Description of Credit Support...........................51
Certain Legal Aspects of Mortgage Loans.................53
Federal Income Tax Consequences.........................62
State and Other Tax Consequences........................92
Legal Investment........................................96
Use of Proceeds.........................................97
Method of Distribution..................................98
Legal Matters...........................................99
Financial Information...................................99
Rating..................................................99
Where You Can Find More Information.....................99
===========================================================================
===========================================================================
$--------------------
(Approximate)
PNC Mortgage Acceptance Corp.
(Depositor)
Midland Loan Services, Inc.
and
--------------------
(Mortgage Loan Sellers)
[Class S, Class A-1A, Class A-1B,
Class A-2, Class A-3, Class A-4,
Class B-1 and Class B-2]
Commercial Mortgage Pass-
Through Certificates,
Series ____-___
---------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
---------------------------------------------------------------------------
_____[Underwriter]____________
PNC Capital Markets, Inc.
_________________, 20__
===========================================================================
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The expenses expected to be incurred in connection with the issuance and
distribution of the securities being registered (assuming three take-downs of
approximately $600 million each), 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................................ $482,486
NASD Filing Fee..................................... N/A
Legal Fees and Expenses............................. $700,000
Accounting Fees and Expenses........................ $210,000
Trustee's Fees and Expenses (including counsel fees) $180,000
Blue Sky Qualification Fees and Expenses............ $15,000
Printing and Engraving Fees......................... $270,000
Rating Agency Fees.................................. $3,600,000
Miscellaneous....................................... $300,000
--------
Total............................................... $5,757,486
Item 15. Indemnification of Directors and Officers
Section 355 of the General and Business Corporation Law of Missouri
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he or she is or was a director, officer, employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise.
Depending on the character of the proceeding, a corporation may indemnify
against expenses, costs and fees (including attorney's fees), judgements, fines
and amounts paid in settlement actually and reasonably incurred in connection
with such action, suit or proceeding if the person indemnified acted in good
faith and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his or her conduct was
unlawful. If the person indemnified is not wholly successful in such action,
suit or proceeding, but is successful, on the merits or otherwise, in one or
more but less than all claims, issues or matters in such proceeding, he or she
may be indemnified against expenses actually and reasonably incurred in
connection with each successfully resolved claim, issue or matter. In the case
of an action or suit by or in the right of the corporation, no indemnification
may be made in respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the court in which such action or suit was brought shall determine
that despite the adjudication of liability such person is fairly and reasonably
entitled to indemnity for such expenses which the court shall deem proper.
Section 355 provides that to the extent a director, officer, employee or agent
of a corporation has been successful in the defense of any action, suit or
proceeding referred to above or in the defense of any claim, issue or matter
therein, he or she shall be indemnified against expenses (including attorney's
fees) actually and reasonably incurred by him or her in connection therewith.
Section 355 of the General and Business Corporation Law of Missouri
further provides that a corporation may give any further indemnity, in addition
to the indemnity set forth above to any person who is or was a director,
officer, employee or agent, or to any person who is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, provided
such further indemnity is either (i) authorized, directed, or provided for in
the 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.
II-1
<PAGE>
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 underwriters 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 underwriters
specifically for use in connection with the preparation of the documents
referred to in the foregoing indemnity.
Unless otherwise specified, the Governing Documents 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 Governing Documents, 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 Government Documents 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 Governing Documents 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 Governing Documents 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.
Item 16. Exhibits and Financial Statements
(a) Exhibit
1.1* Form of Underwriting Agreement.
3.1* Restated Articles of Incorporation of the registrant.
3.2* Restated bylaws of the registrant.
4.1* Form of Pooling and Servicing Agreement.
5.1* Opinion of Morrison & Hecker L.L.P. as to legality.
8.1* Opinion of Morrison & Hecker L.L.P. as to certain tax matters.
23.1* Consent of Morrison & Hecker L.L.P. (included in Exhibits 5.1 and
8.1).
24.1* Power of Attorney.
__________________
* previously filed
(b) Financial Statements
All financial statements, schedules and historical financial information have
been omitted as they are not applicable.
Item 17. Undertakings
A. Undertaking pursuant to Rule 415.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
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(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(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.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 (including that the security rating
requirement will be met by the time of sale of any securities registered
hereunder) and has duly caused this Amendment No. 1 to Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Kansas City, State of Missouri, on March 3, 2000.
PNC MORTGAGE ACCEPTANCE CORP.
By: /s/ Lawrence D. Ashley
__________________________
Lawrence D. Ashley
Senior Vice President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed by the following
persons in the capacities and as of the dates indicated.
Signature Position
Date
*/s/ Douglas D. Danforth Jr. Director and President March 3, 2000
____________________________ (Principal Executive Officer)
Douglas D. Danforth Jr.
*/s/ Vince Beckett Chief Financial Officer March 3, 2000
____________________________ (Principal Financial and
Vince Beckett Accounting Officer)
*/s/ Cathrine Nix Director March 3, 2000
____________________________
Cathrine Nix
*/s/ Jeffrey E. Johnson Director March 3, 2000
____________________________
Jeffrey E. Johnson
*By: /s/ Lawrence D. Ashley
_________________________
Lawrence D. Ashley
Attorney-in-Fact
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