As filed with the Securities Exchange Commission on January 12, 2001
Registration No. 333-52506
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
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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Proposed Proposed
Title of Amount to be Maximum Maximum Amount of
Securities to Registered (1) Offering Price Aggregate Registration
be Registered Per Security Offering Fee
(2) Price (2)
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Mortgage Pass
Through $2,500,000,000 100% $2,500,000,000 $625,000 (3)
Certificates
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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
$2,500,000,000 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) $185,254,959 aggregate principal amount of Mortgage Pass-Through
Certificates registered by the registrant under Registration Statement No.
333-95447 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.
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EXPLANATORY NOTE
This Registration Statement contains (i) a base prospectus to be used for
transactions involving mortgage loans secured by multifamily and commercial
properties and (ii) a form of prospectus supplement to be used for transactions
involving mortgage loans secured by multifamily and commercial properties.
<PAGE>
Prospectus
PNC Mortgage Acceptance Corp.
Depositor
Mortgage Pass-Through Certificates
(issuable in series)
Our name is PNC 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,
o have its own series or 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
established by us, and are 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 9 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 January 12, 2001.
<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.
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TABLE OF CONTENTS
IMPORTANT NOTICE ABOUT THE INFORMATION PRESENTED
IN THIS PROSPECTUS..........................................2
SUMMARY OF PROSPECTUS...........................................4
RISK FACTORS....................................................9
DESCRIPTION OF THE TRUST ASSETS................................32
YIELD AND MATURITY CONSIDERATIONS..............................37
PNC MORTGAGE ACCEPTANCE CORP...................................41
DESCRIPTION OF THE CERTIFICATES................................42
DESCRIPTION OF THE GOVERNING DOCUMENT..........................48
DESCRIPTION OF CREDIT SUPPORT..................................59
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS........................61
FEDERAL INCOME TAX CONSEQUENCES................................70
STATE AND OTHER TAX CONSEQUENCES..............................102
ERISA CONSIDERATIONS..........................................102
LEGAL INVESTMENT..............................................105
USE OF PROCEEDS...............................................107
METHOD OF DISTRIBUTION........................................107
WHERE YOU CAN FIND MORE INFORMATION..........................108
LEGAL MATTERS.................................................108
FINANCIAL INFORMATION.........................................108
RATINGS.......................................................109
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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 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
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
"Ratings."
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.
If the trust assets include mortgage-backed securities, the
parties to the governing document(s)
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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 Document."
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
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mortgage-backed securities, that evidence an interest 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
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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 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 Assets" 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."
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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
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;
o salons; and
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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.
Retail properties may also face competition from sources outside a given
real estate market or
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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.
Factors affecting the economic performance of a hospitality property
include:
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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 franchiser 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 disposable income that potential patrons may have for
gambling;
o the existence or construction of competing casinos;
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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 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
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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:
(4) ceiling heights;
(5) column spacing;
(6) number and depth of loading bays;
(7) divisibility;
(8) floor loading capacities;
(9) truck turning radius;
(10) overall functionality; and
(11) 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;
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;
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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 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
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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;
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;
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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.
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.
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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:
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.
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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
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
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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--Foreclosure--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;
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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, 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.
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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 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
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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:
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:
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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;
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.
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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 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
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also affect the rate of prepayment. As prevailing 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 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 Document--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.
If we so specify in the related prospectus supplement, one or more
designated parties will be
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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 Clearstream
Banking, societe anonyme, Luxembourg, 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.
Clearstream Banking
Clearstream Banking is incorporated under the laws of Luxembourg as a
professional depository. Clearstream 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 Clearstream in any of 28 currencies, including United States dollars.
Clearstream provides safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing to its
participants. Clearstream interfaces with domestic markets in several countries.
The Luxembourg Monetary Institute regulates Clearstream as a professional
depository. Clearstream 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 Clearstream is also available to others, such as banks, brokers,
dealers, and trust companies that maintain a clearing or custodial relationship
with a Clearstream 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
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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 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.
Each mortgage asset included in one of the trusts will be identified in a
schedule appearing as an
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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) themortgage 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 permitted, in its discretion, to waive any default charge
in connection with collecting a late payment on any defaulted mortgage loan.
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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;
o reimburse the master servicer, the special servicer, the trustee and us for
certain expenses; and
o provide indemnification to the master servicer, the special servicer, the
trustee 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 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
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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; 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.
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 federally designated
special flood hazard area, the master servicer will also use its reasonable
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 lesser 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
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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 on each REO property in such amounts as are
specified in the related Governing Document. 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.
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 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
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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 generally 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 Governing Document may provide for other events of default or
additional cure periods to the extent required or permitted 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 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
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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 approved as a master servicer or special servicer, as
applicable, 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.
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
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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--Foreclosure--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 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:
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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
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
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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 maintain the ratings assigned to each class of the certificates for
that series;
4) 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;
5) 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;
6) 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;
7) 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;
8) 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
9) for any other purpose.
However, no amendment of the Governing Document for any series of offered
certificates covered by clauses (4), (5), (6) or (9) may:
o be inconsistent with the provisions of the Governing document;
o adversely affect in any material respect the interests of any holders of
offered or non-offered certificates of that series; or
o 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 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
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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 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
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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.
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
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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 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
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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 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-
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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.
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 "--Foreclosure--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 a portion of the trust electing to be treated as a REMIC fails to comply
with one or more of the ongoing requirements of the Code for REMIC status during
any taxable year, the Code provides that its REMIC status may be lost for that
year and thereafter. In that event, the trust may be taxable as a
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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 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 REMIC 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.
Characterization of Investments in REMIC Certificates
The REMIC Certificates will qualify for the corresponding status set forth
below in the same proportion for any calendar year that the assets of the REMIC
qualify for any of the following characterizations at all times during a
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)).
Moreover, if more than 95% of the assets of the REMIC qualify for either of the
characterizations at all times during a calendar year, the REMIC Certificates,
in their entirety, will qualify for the same status for that calendar year.
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 a REMIC 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:
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o REMIC Certificates held by a regulated investment company will not
constitute "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 method 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 that 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. Adjustments
must 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 the REMIC Regular Certificates. 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, no one 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 IRS will not
challenge the prepayment assumption 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.
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 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.
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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 described below.
As to each "accrual period", a calculation will be made of the portion of
the original issue discount that accrued during that 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
payments remaining to be made on the REMIC Regular Certificate,
if any, in future periods; and
(B) the payments 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 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 present value of the remaining distributions referred to in (A), above,
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
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 remaining stated redemption
price will also be required to include in gross income the daily portions
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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. A
certificateholder must 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 that the IRS would apply the same rule with respect
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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. This 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 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 under Section 171 of the Code. These rules
will require use of a Prepayment Assumption in accruing
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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 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 any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. Ordinary income derived
from the REMIC
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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". Therefore, the REMIC Residual Certificates are
expected to have negative "value." See "Risk Factors--Residual Interests in a
'Real Estate Mortgage Investment Conduit' Have Adverse Tax Consequences".
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, but reduced by any premium on issuance on the Regular
Certificates;
2. amortization of any premium with respect to mortgage loans; and
3. 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. This method is the constant yield method taking into account the
applicable prepayment assumption. However, a REMIC that acquires loans at a
market discount must include that 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, which allows such deductions only to
the extent they exceed in the aggregate 2% of the holder's adjusted gross
income. See "--Pass-Through of Non-Interest Expenses of the REMIC as 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
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Residual Certificate and decreased, but not below zero, by distributions
made, and by net losses allocated, to that holder.
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 a holder 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. A holder's basis in a REMIC
Residual Certificate 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, these increases in tax basis 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 Certificateholder's
initial basis is less than the distributions to such REMIC Residual
Certificateholder (and increases in such initial basis either occur after such
distributions or, together with its initial basis, are less than the amount of
such distributions), gain will be recognized to a REMIC Residual
Certificateholder on such distributions and will be treated as gain from the
sale of its 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 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
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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. Treasury
regulations yet to be issued could apply a similar rule to regulated investment
companies, common trust funds and certain cooperatives.
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.
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.
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
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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 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.
On December 8, 2000, the IRS released an advance copy of Revenue Procedure
2001-12, which provides safe harbors to establish that transferors lack improper
knowledge when transferring a noneconomic residual interest in a REMIC. Under
Revenue Procedures 2001-12, a transferor is presumed to not have improper
knowledge if:
o at the time of the transfer, the transferor conducted a reasonable
investigation of the transferee's financial condition and as a result,
found that the transferee had historically paid its debts as they came due
and found no significant evidence to indicate that the transferee would not
continue to do so in the future;
o the transferee represents to the transferor that it understands that it may
incur tax liabilities in excess of any cash flows generated by the interest
as the holder of the residual interest and that it intends to pay the taxes
as they become due; and
o either the "Formula Test" (described below) or the "Asset Test" (described
below) is satisfied.
The "Formula Test" is meet if the present value of the anticipated tax
liabilities associated with holding the interest does not exceed the sum of:
o the present value of any consideration paid to the transferee to take
ownership of the interest;
o the present value of expected future distributions on the interest; and
o the present value of the anticipated tax savings associated with holding
the interest while the REMIC generates losses.
With respect to the "Formula Test", the transferee is assumed to pay tax at
the highest marginal corporate tax rate, currently 35%. In addition, present
values are computed using a discount rate equal to the applicable Federal rate
prescribed by Section 1274(d) of the Code compounded semiannually. However, a
lower discount rate may be used if the transferee can demonstrate that it
regularly borrows, in the course of its trade or business, substantial funds at
such lower rate from unrelated third parties.
Alternatively, under the new "Asset Test", the following three criteria
must be fulfilled:
o at the time of the transfer, and at the close of each of the transferee's
two fiscal years preceding the year of the transfer, for financial
reporting purposes, the transferee's gross assets exceeded $100 million and
its net assets exceeded $10 million;
o the transferee is an "eligible corporation" as defined in Section
860L(a)(2) of the Code that agrees in writing to make any subsequent
transfer of the interest only to another eligible corporation in a safe
harbor transaction (i.e., a fully taxable domestic corporation); and
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o the facts and circumstances known to the transferor, including the price
paid by the transferee for the residual interest, on or before the date of
the transfer must not reasonably indicate that the taxes associated with
the residual interest will not be paid (the "facts and circumstances
test").
With respect to the "facts and circumstances test", the consideration given
to the transferee to acquire the noneconomic residual interest in the REMIC is
only one factor to be considered. However, if the amount of consideration is so
low that under any set of reasonable assumptions a reasonable person would
conclude that the taxes associated with holding the residual interest will not
be paid, then the transferor is deemed to know that the transferee cannot or
will not pay. The specific terms of the "Formula Test" do not need to be used in
determining whether the amount of consideration is too low.
With respect to the "Asset Test" described above, the gross assets and net
assets of a transferee do not include any obligation of a person related to the
transferee as described in Section 860L(g) of the Code or any other asset if a
principal purpose for holding or acquiring the asset is to permit the transferee
to satisfy the "Asset Test". In addition, a transfer fails to meet the
requirements of the "Asset Test" if the transferor knows, or has reason to know,
that the transferee will not honor the restrictions on subsequent transfers of
the residual interest. Furthermore, the second condition of the "Asset Test"
above fails to be satisfied in the case of any transfer or assignment of the
interest to a foreign branch of an eligible corporation or any other arrangement
by which the interest is at any time subject to net tax by a foreign country or
possession of the United States.
Revenue Procedure 2001-12 applies to all transfers of noneconomic residual
interests in REMICs and all transfers of FASIT ownership interests occurring on
or after February 4, 2000. The related Governing Document will require that all
transferees of Residual Certificates furnish an affidavit as to the
applicability of one of the safe harbors of Revenue Procedure 2001-12, unless
the transferor has waived the requirement that the transferee do so.
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
Regulations under Section 475 of the Code (the "Mark-to-Market
Regulations") require 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
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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.
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:
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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 REMIC Regular Certificate received by
that certificateholder, amortized premium and realized losses allocated
to the certificates and previously deducted by the Certificateholder.
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. 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".
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.
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.
The Taxpayer Relief Act of 1997 added a provision to the Internal Revenue
Code that requires the recognition of gain upon the "constructive sale of an
appreciated financial position." A constructive sale of an appreciated financial
position occurs if a taxpayer enters into certain transactions or series of such
transactions that have the effect of substantially eliminating the taxpayer's
risk of loss and opportunity for gain with respect to the financial instrument.
Debt instruments that:
o entitle the holder to a specified principal amount,
o pay interest at a fixed or variable rate, and
o are not convertible into the stock of the issuer or a related party,
cannot be the subject of a constructive sale for this purpose. Accordingly, only
the interest only certificates, which do not have principal balances, could be
subject to this provision and only if a holder
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of those certificates engages in a constructive sale 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.
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 which is not in default;
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 (which breach constitutes negligence or willful
misconduct of such person). 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;
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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 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;
o any State or political subdivision thereof;
o any foreign government;
o any international organization;
o 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.
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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 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
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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 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. To avoid withholding of tax, the holder must comply 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
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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.
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 consisting of the assets specified below, it is unclear whether the
Grantor Trust Strip Certificates, and the income therefrom, will be treated as
being of the same character as these assets:
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o 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 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.
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.
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 receive 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:
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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.
See "--REMICs--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" below 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 "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates--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:
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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 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.
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
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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
"--REMICs--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
"--REMICs--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.
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 of 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
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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 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 "--REMICs--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:
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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--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
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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 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
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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 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.
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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 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,
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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. The IRS has issued proposed regulations that cover making and
terminating a FASIT election, assets permitted to be held by a FASIT, and
taxation of FASITs. 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.
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, such as:
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 such 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 rescind 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
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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.
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.
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.
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 underlying assets will not be included if the equity participation in
the entity by benefit plan investors 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 not only benefit plans subject to ERISA but also
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 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.
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
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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 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 or 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 Section III of 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 U.S. Department of Labor issued a
final regulation on January 5, 2000, providing guidance for determining, in
cases where insurance policies supported by an insurer's general account are
issued to or for the benefit of an ERISA Plan on or before December 31,
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1998, which general account assets are Plan Assets. That regulation generally
provides that if certain specified requirements are satisfied with respect to
insurance policies issued on or before December 31, 1998, the assets of an
insurance company general account will not be Plan Assets.
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 requirements set forth in
the final regulation 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
and the regulation issued under Section 401(c) of ERISA do 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 an insurance company 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
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one structure. Until September 23, 2001, any state 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
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constitute legal investments or are subject to investment, capital or other
restrictions.
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
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offering and any agreements to be entered into between us and purchasers of
offered certificates of the series.
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.
109
<PAGE>
Information in this preliminary prospectus supplement is not complete and may be
changed. These securities may not be sold nor may offers to buy be accepted
prior to the time a final prospectus is delivered. This preliminary prospectus
supplement 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, solicitation or sale
is not permitted.
SUBJECT TO COMPLETION, DATED JANUARY 12, 2001
PROSPECTUS SUPPLEMENT
(To Prospectus dated _____________, 20__)
$______________ (Approximate)
PNC Mortgage Acceptance Corp.
as Depositor
Midland Loan Services, Inc. and
--------------------------------------
as Mortgage Loan Sellers and
Midland Loan Services, Inc.
as Master Servicer
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES _____-____
-------------------------
PNC Mortgage Acceptance Corp. is offering [five] classes of its series
_____-____ commercial mortgage pass-through certificates, which represent
beneficial ownership interests in a trust. The trust's assets will primarily be
mortgage 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 offered to you involves risks. See "Risk
Factors" beginning on page S-15 of this prospectus supplement and page 9 of the
prospectus.
The following classes of the series ____-__ certificates are being offered
by this prospectus supplement.
Scheduled
Initial Approximate Description Final
Principal Initial Pass- of Pass- Distribution
Class Balance Through Rate Through Rate Date Ratings
----- ------- ------------ ----------- ------- -------
[Class A-1 $___________ ____% ______/20__ ___/___
Class A-2 $___________ ____% ______/20__ ___/___
Class B $___________ ____% ______/20__ ___/___
Class C $___________ ____% ______/20__ ___/___
Class D] $___________ ____% ______/20__ ___/___
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. ___________ is acting as sole bookrunner and as
co-lead manager with PNC Capital Markets on this offering. 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 Clearstream Banking, societe anonyme,
Luxembourg, or the Euroclear System, in Europe, against payment therefor on or
about __________________, 200_.
---------------------------------
[Underwriters] PNC CAPITAL MARKETS
---------------------------------
The date of this Prospectus Supplement is _________, _______
<PAGE>
[INSERT MAP]
S-2
<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-4
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 are defined under the caption "Index of Definitions" on
page S-96 in this prospectus supplement.
If you are viewing an electronic copy of this prospectus supplement or the
prospectus, references to internet addresses for web pages contained in this
prospectus supplement or the related prospectus are for informational purposes
only and are intended to be inactive URLs. The depositor and the underwriters
make no representation as to the truth or accuracy of any statements contained
on such web pages.
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 90 days after the date of this prospectus supplement, 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-3
<PAGE>
TABLE OF CONTENTS
SUMMARY......................................................................5
RISK FACTORS................................................................15
DESCRIPTION OF THE MORTGAGE POOL............................................32
General..................................................................32
Security for the Mortgage Loans..........................................33
Underwriting Standards...................................................34
Certain Terms and Conditions of the Mortgage Loans.......................34
Certain Characteristics of the Mortgage Pool.............................39
Other Information........................................................41
The Sellers..............................................................42
Changes in Mortgage Pool Characteristics.................................43
Representations and Warranties; Repurchase...............................43
MASTER SERVICER AND SPECIAL SERVICER........................................46
Background...............................................................46
Midland's Servicing Portfolio............................................46
DESCRIPTION OF THE CERTIFICATES.............................................48
General..................................................................48
Principal Balances.......................................................48
Pass-Through Rates.......................................................49
Distributions............................................................50
Treatment of REO Properties..............................................53
Appraisal Reductions of Loan Balances....................................54
Application of Realized Losses and Expense Losses to Principal Balances..55
Prepayment Interest Excesses and Shortfalls..............................56
Scheduled Final Distribution Date........................................57
Subordination............................................................58
Optional Termination.....................................................58
Voting Rights............................................................58
Delivery, Form and Denomination..........................................59
Registration and Transfer of Definitive Certificates.....................60
YIELD AND MATURITY CONSIDERATIONS...........................................61
Rate and Timing of Principal Payments....................................61
Weighted Average Life....................................................64
THE POOLING AND SERVICING AGREEMENT.........................................68
Assignment of the Mortgage Loans.........................................68
Servicing of the Mortgage Loans; Collection of Payments..................69
Collection Activities....................................................70
Advances.................................................................70
Accounts.................................................................72
Enforcement of "Due-on-Sale" Clauses....................................74
Enforcement of "Due-on-Encumbrance" Clauses.............................75
Inspections..............................................................75
Realization Upon Mortgage Loans..........................................76
Amendments, Modifications and Waivers....................................78
The Trustee..............................................................79
The Fiscal Agent.........................................................80
Servicing Compensation and Payment of Expenses...........................80
Special Servicing........................................................81
The Operating Adviser....................................................83
Sub-Servicers............................................................84
Reports to Certificateholders; Where You Can Find More Information.......85
MATERIAL FEDERAL INCOME TAX CONSEQUENCES ...................................87
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS LOCATED IN ___________
AND ____________ ...........................................................88
ERISA CONSIDERATIONS........................................................89
Senior Certificates......................................................89
Subordinate Certificates.................................................91
Insurance Company Purchasers.............................................92
LEGAL INVESTMENT............................................................92
PLAN OF DISTRIBUTION........................................................93
USE OF PROCEEDS.............................................................94
LEGAL MATTERS...............................................................94
RATINGS.....................................................................95
INDEX OF DEFINITIONS........................................................96
APPENDIX I - Mortgage Pool Information.....................................I-1
APPENDIX II - Certain Characteristics of the Mortgage Loans...............II-1
APPENDIX III -- Significant Loan Summaries...............................III-1
TERM SHEET.................................................................T-1
FORM OF MONTHLY DISTRIBUTION STATEMENT.....................................R-1
S-4
<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.
o All numerical information about the mortgage loans is provided on an
approximate basis.
o Unless we tell you otherwise, all percentages of the mortgage loans, or
any group of mortgage loans, referred to in this prospectus supplement
are based on the principal balances as of the cut-off date and not the
number of mortgage loans.
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Approximate Approximate
Percent Percent
of of Weighted Description Approximate
Initial Rating Initial Credit Average Principal of Initial
Principal by Pool Support Life Window Pass-Through Pass-Through
Class Balance ____/____ Balance (Years) (Months) Rate Rate
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------------
Senior Certificates
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
[A-1] $___________ _______% _______% _______% ____-___ _______%
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
[A-2] $___________ _______% _______% _______% ____-___ _______%
-----------------------------------------------------------------------------------------------------------------------------------
[X] $___________ -- N/A N/A N/A N/A -- --
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
Subordinate Certificates
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
[B] $___________ _______% _______% _______% ____-___ _______%
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
[C] $___________ _______% _______% _______% ____-___ _______%
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
[D] $___________ _______% _______% _______% ____-___ _______%
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
[E-O] $___________ -- _______% -- -- -- -- --
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
[ ] Offered certificates. [ ] These certificates are not
offered by this prospectus
supplement. They constitute
"privately offered certificates".
The initial principal balances and notional amounts for each class of
certificates may vary by up to [5%.]
The percentages indicated under the column "Approximate Percent of Credit
Support" with respect to the class [A-1 and class A-2] certificates represent
the approximate credit support for the class [A-1 and class A-2] certificates
in the aggregate.
The column entitled "Principal Window" lists the months following the closing
during which certificateholders would receive distributions of principal. The
weighted average life and principal window figures for the offered certificates
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 date.
For any distribution date, the pass-through rate for the [class B, class C and
class D] certificates may not exceed the weighted average of the net mortgage
rates.
The privately offered certificates will also include the following classes of
certificates that are not shown above: [class V, 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-5
<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 Corp." 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 (____%).
Book-running Lead Manager
-------------------------------.
Underwriters
______________________________ and PNC Capital Markets, Inc.
Master Servicer
Midland Loan Services, Inc. or any successor master servicer. See "Master
Servicer and Special Servicer".
Special Servicer
Midland Loan Services, Inc., or any successor special servicer. See "Master
Servicer and Special Servicer".
Trustee
________________________________. See "The Pooling and Servicing
Agreement--The Trustee".
Fiscal Agent
_________________________________. See "The Pooling and Servicing
Agreement--The Fiscal Agent".
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.
Operating Adviser
The holders of a simple majority of the controlling class, may appoint an
operating adviser as their representative. The master servicer and the special
servicer must notify the operating adviser before taking certain actions. The
operating adviser may replace the special servicer without cause. See "The
Pooling and Servicing Agreement--Special Servicing--Ability of Operating
Adviser to Remove Special Servicer" and "--The Operating Adviser".
S-6
<PAGE>
Significant Dates
Cut-off Date
_____________________, 200__.
Closing Date
On or about ________, 200__.
Distribution Date
The _____ of each month, or if the ____ is not a business day, the next
business day, beginning in _________200__.
Scheduled Final Distribution Date
For each class of offered certificates, the distribution date on which
that class's principal balance would become zero if there is:
o no early termination of the trust;
o no default or delinquency on any loan;
o no prepayment of any kind, except that it is assumed that
hyper-amortization loans will pay on their anticipated repayment dates;
and
o no modification or extension of any loan.
Please note that it is very unlikely that these assumptions will hold
true. See "Description of the Certificates--Scheduled Final Distribution Date".
Rated Final Distribution Date
The distribution date in _________________, which is the distribution date
occurring three years after the latest maturity date for any of the mortgage
loans as of the closing date. See "Ratings".
Record Date
For each distribution date, the close of business on the last 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 _______ business day before the
distribution date.
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.
S-7
<PAGE>
Information About the Certificates
Offered Certificates
We are offering the following classes of PNC Mortgage Acceptance Corp.
Commercial Mortgage Pass-Through Certificates, Series ____-__.
[class A-1
class A-2
class B
class C
class D]
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-5.
Certificate Designations
In this prospectus supplement, we will refer to the following groups of
certificates by the indicated designations:
--------------------------------------
Designation Related Classes
--------------------------------------
--------------------------------------
Offered Classes [A-1, A-2,
certificates B, C and D]
--------------------------------------
--------------------------------------
Privately Classes [X, E, F,
offered G, H, J, K, L, M,
certificates N, O, V, R-I, R-II
and R-III]
--------------------------------------
--------------------------------------
Senior Classes [A-1, A-2
certificates and X]
--------------------------------------
--------------------------------------
Principal [A-1, A-2, B, C,
balance D, E, F, G, H, J,
certificates K, L, M, N and O ]
--------------------------------------
--------------------------------------
Interest only Class [X]
certificates
--------------------------------------
--------------------------------------
Subordinate Classes [B, C, D,
certificates E, F, G, H, J, K,
L, M, N and O ]
--------------------------------------
--------------------------------------
Deferred Class [V]
interest
certificates
--------------------------------------
--------------------------------------
Residual Classes [R-I, R-II
certificates and R-III]
--------------------------------------
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 of the particular class outstanding
immediately prior to the related distribution date, and
o the assumption that each year consists of 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 pro rata to the holders
--------------------------------
of the senior certificates in an amount equal to their interest entitlement.
Principal on [Class A-1 and Class A-2] Certificates: to pay principal
---------------------------------------------------
from the funds available for principal distributions to the holders of the
[class A-1 and class A-2] certificates, in that order, until reduced to zero.
If the principal amount of each class of principal balance certificates other
than the class [A-1 and class A-2] certificates has been reduced to zero, funds
available for principal distributions will be distributed to the holders of the
[class A-1 and class A-2] certificates, pro rata, rather than sequentially.
Reimbursement of [Class A-1 and Class A-2] Losses: to reimburse the
--------------------------------------------------
holders of the class [A-1 and class A-2] certificates, pro rata, for any losses
on the mortgage loans that resulted in an unreimbursed reduction of the
principal balances of such certificates.
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 order of class designation. In the case of each
class of subordinate certificates, the 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-1 and class A-2]
certificates and each other class of subordinate certificates, if any,
with an earlier alphabetical class designation has been reduced to zero;
and
S-8
<PAGE>
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.
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 class designation.
Distribution of Prepayment Premiums
Any prepayment premium collected on a mortgage loan during a
collection period will be distributed on the next distribution date as and to
the extent 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 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 class designations.
After the balances of all subordinate certificates have been reduced
to zero, losses are allocated to the [class A-1 and class A-2] certificates in
proportion to their class principal balances.
The certificates have no other form of credit enhancement.
Interest Shortfalls and Excesses Due to Prepayments and Balloon Payments
If a borrower prepays a loan or makes a balloon payment on a loan
before the determination date in any calendar month and pays interest which
accrued on the prepayment or balloon payment from the beginning of the calendar
month, then that interest, net of related master servicer fees, is a
"prepayment/balloon payment interest excess".
If a borrower prepays a loan or makes a balloon payment on a loan
after the determination date in a calendar month and does not pay interest on
the prepayment or balloon payment through the end of the calendar month, then
this interest shortfall, net of related master servicer fees, is a
"prepayment/balloon payment interest shortfall".
Prepayment/balloon payment interest excesses collected during a
collection period will first offset prepayment/balloon payment interest
shortfalls during the collection period. The master servicer retains any
remaining amount as additional servicing compensation. The master servicer must
cover prepayment/balloon payment interest shortfalls not offset by
prepayment/balloon payment interest excesses from its own funds up to certain
maximum amounts.
If and to the extent there are prepayment/balloon payment interest
shortfalls not offset by prepayment/balloon payment interest excesses or
covered by the master servicer from its own funds, then those
prepayment/balloon payment 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".
S-9
<PAGE>
Advances
The master servicer must make advances for delinquent payments of
principal (except for delinquent balloon payments) and/or interest on the
loans The master servicer must also make advances to cover certain servicing
expenses. The special servicer must make advances to cover certain servicing
expenses that need to be paid on an emergency basis.
If the special servicer fails to make a required emergency advance, the
master servicer must make it. If the master servicer fails to make a required
advance, the trustee must make it. If the trustee fails to make a required
advance, the fiscal agent 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 mortgage loan or mortgaged property.
All advances will accrue interest at the "prime rate".
To the extent not offset by collected late payment charges or default
interest on the related 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 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 certain reserves pledged as collateral for the loan, 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 of Loan Balances".
S-10
<PAGE>
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%]). In making this count,
where a single indebtedness is secured by mortgages over multiple separate
properties, each of those separate properties was generally counted as a
separate loan created by allocating a pro rata portion of the cut-off date
principal balance secured by the separate properties.
A first lien on a fee simple or leasehold estate in a mortgaged property
secures each loan.
o Fee -____loans (______%).
o Leasehold - __ loans (______%).
o Fee and Leasehold - ___ loans (____%).
In making this count, loans secured by both a borrower's leasehold interest in a
mortgaged property and the fee interest of the owner of all or a part of that
property are deemed secured by a fee interest.
The mortgage pool includes __ separate sets of cross-collateralized loans.
The largest of these sets constitutes ____% of the initial pool balance.
No person or entity insures or guarantees any of the loans. You should
consider all of the loans to be non-recourse loans.
____ loans (____%) are "balloon loans" that are expected to have more
than [____%] of their original principal balance remaining unpaid at their
maturity date. __ of these balloon loans (____%) are hyper-amortization loans
and provide for an increase in their interest rate and/or principal
amortization prior 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 retail -____ loans (____%).
o office - ____ loans (____%).
o multifamily -____ loans (____%).
o industrial - ____ loans (____%).
o hospitality - ____ loans (____%).
o manufactured housing - ____ loans (____%).
o self storage - ____ loans (____%).
o other - ____ loans (____%).
Loans secured by properties located in _____________ and _____________
each represent more than [10%] of the initial pool balance. Also, loans secured
by properties located in _____________ and _____________ each represent at
least [5%], but less than [10%], of the initial pool balance. None of the
remaining ____ jurisdictions have mortgaged properties securing loans
representing [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.
____ loans (____%) are secured by properties 100% occupied by a single
tenant or the borrower. An additional ____ loans (____%) are secured by
properties at least 50% occupied by a single 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 may remain constant or decline over time. The "Prepayment
Restriction Analysis" table included in Appendix I analyzes 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 a yield
maintenance payment 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;
S-11
<PAGE>
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 debt service coverage ratio of ______x; and
o a weighted average cut-off date loan to value ratio of ____%.
The characteristics of the loans are more fully described under
"Description of the Mortgage Pool" and in the Appendices.
-------------------------
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
of the certificate;
o appraisal reductions;
o expense losses; and
o realized losses.
See "Description of the Certificates--Distributions--Applying Available
Funds" and "--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.
S-12
<PAGE>
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 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 of the loans 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 [class A-l and A-2] certificates in minimum
denominations of [$25,000] initial principal balance and in any higher
whole-dollar denomination. You may purchase [class B, class C and class D]
certificates in minimum denominations of [$50,000] initial principal balance
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 Clearstream Banking, societe
anonyme, Luxembourg, or the Euroclear System. DTC, Clearstream or Euroclear
rules and operating procedures govern transfers within the system.
ERISA Considerations
Subject to important considerations described under "ERISA Considerations"
in this prospectus supplement and in the accompanying prospectus, the [class A-1
and class A-2] certificates are eligible for purchase by persons investing
assets of employee benefit plans or individual retirement accounts.
The [class B, class C and class D] 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 (although they may
be permitted to be purchased on the secondary market pursuant to a pending
published prohibited transaction exemption). 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.
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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 ___________________________________(or its
successors and assigns) and _________________________ (or its successors and
assigns).
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
None of the classes of offered certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984.
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 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 received on and other recoveries with
respect to 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.
____ 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;
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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
o a 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.
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Each of these risks is more significant if a mortgaged property is leased
to a single tenant.
In ____ loans (____%), a single tenant or the borrower occupies 100% of
the related mortgaged property. In an additional ____ loans (____%), a single
tenant or the borrower occupies at least 50% of the related mortgaged property.
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 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 ____ largest of these
groups represent ____%, ____% and ____% of the initial pool balance.
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. Loans secured
by mortgaged properties located in each of __________ and __________ represent
approximately ____% and ____% of the initial pool balance. Loans secured by
mortgaged properties located in each of __________ and __________ each
represent at least [5%], but less than [10%], of the initial pool balance.
None of the
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remaining ____ jurisdictions have mortgaged properties securing loans
representing [5%] or more of the initial pool balance. See "Description of the
Mortgage Pool".
Large Concentrations of Retail Properties Securing Loans Will Subject Your
Investment to the Special Risks of These Properties
Retail properties secure ____ of the loans (____%). 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 retail properties 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
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 loans (____%).
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
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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 Multifamily Properties Securing Loans Will Subject Your
Investment to the Special Risks of These Properties
Multifamily properties secure ____ of the loans (____%).
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 government assistance/rent subsidy programs.
Large Concentrations of Industrial Properties Securing Loans Will Subject Your
Investment to the Special Risks of Such Properties
Industrial properties secure ____ of the loans (____%). 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 loans (____%). 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
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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.
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
All ____ 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 ____ loan (____%) secured by a mortgaged
property operated as a --------------------------.
Large Concentrations of Manufactured Housing Properties Securing Loans Will
Subject Your Investment to the Special Risks of These Properties
Manufactured Housing properties secure ____ of the loans (____%).
Since the borrower often does not own the manufactured housing located
upon the property, the borrower (and the lender following foreclosure) may face
additional costs and delays in obtaining tenant evictions and the removal of
manufactured housing upon default or abandonment by the tenant.
Large Concentrations of Self Storage Properties Securing Loans Will Subject
Your Investment to the Special Risks of These Properties
Self storage properties secure ____ of the loans (____%).
Tenant privacy, anonymity and unsupervised access may heighten
environmental risks in a loan secured by a self storage property. The
environmental site assessments discussed in this prospectus supplement did not
include an inspection of the contents of the individual self-storage units.
Thus, there is no assurance that these individual units are free from hazardous
substances or other pollutants or contaminants or will remain so in the future.
As leases for individual self storage units are typically short term, these
properties also may be subject to more volatility than loans secured by other
types of properties.
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
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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.
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 Mortgage Loans" in the prospectus.
Environmental Issues Relating to Specific Properties May Have an Adverse Effect
on the Payment of Your Certificates
The mortgaged properties securing ____ of the loans (____%) have been
subject to Phase I environmental site assessments in connection with the
origination or acquisition of the loans. 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 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:
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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 the environmental issue from causing any material and adverse
consequences.
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, an environmental insurance policy has been obtained to cover
potential clean-up costs or an indemnity was obtained from a culpable party:
o [describe known environmental problems.]
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.
No environmental site assessments were obtained for the mortgaged
properties securing ____ loans (____%). However, the related originator
obtained a secured creditor impaired property policy covering certain
environmental matters with respect to such mortgaged properties.
Each environmental insurance policy obtained with respect to a mortgaged
property contains certain coverage limits, and reporting and notice
requirements. 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
insurance proceeds or escrowed funds will be sufficient to complete remediation
of any environmental conditions affecting the related mortgaged property.
The environmental assessments 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.
The 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
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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.
See "Description of the Mortgage Pool - Certain Terms and Conditions of
the Mortgage Loans".
Borrowers That Are Organized as Special Purpose Entities Are Subject to the
Risk of Substantive Consolidation
Some of the borrowers are organized as special purpose entities with an
independent director whose consent is required if the borrower were to file a
voluntary bankruptcy petition.
In the event of the bankruptcy of their parent, these borrowers have been
organized so as to minimize the risk of a substantive consolidation into their
parent's bankruptcy estate. However, despite this organizational structure,
there is nevertheless the risk that a bankruptcy court could consolidate the
borrower into its parent's bankruptcy if the separateness criteria put in place
at the borrower's formation are not observed.
Borrowers That Are Not Special-Purpose Entities May be More Likely to Pursue
a Bankruptcy
The organizational documents of some of the borrowers 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.
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. For ____ loans (____%),
the related borrower is permitted, subject to specified restrictions, to grant
a subordinate mortgage over the related mortgaged property.
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.
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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 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;
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<PAGE>
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 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 __________, __________
and along the ___________ 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. Earthquake insurance was required for all loans where the estimated
probable maximum loss exceeded 20%.
As a result of any of the foregoing, the amount available to make
distributions on the certificates could be reduced.
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 Appendix I, Appendix II and Appendix III 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 certificates that have a later alphabetical designation or a
lower payment priority are more likely to be exposed to this concentration risk
than are classes with an earlier alphabetical 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 A-1 or class A-2] 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 principal balance certificates with
an earlier alphabetical designation and the interest only certificates. See
"Description of the Certificates--Distributions", "--Application of Realized
Losses and Expense Losses to Principal Balances" and "--Subordination" in this
prospectus supplement and "Description of Credit Support--Subordinate
Certificates" in the prospectus.
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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 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 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 __________ and __________, 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 loans (____%) are secured solely by mortgages encumbering a
borrower's leasehold interest in the property under a ground lease. ____ of the
loans (____%) are secured by a mortgage encumbering a borrower's leasehold
interest in a portion of the property and that borrower's fee interest in the
remainder 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:
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<PAGE>
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.
Mortgages on a Ground Lessor's Fee Interest May Be Challenged as Fraudulent
Conveyances
____ of the loans (____%) are secured by a mortgage encumbering both a
borrower's leasehold interest in the related mortgaged property under a ground
lease and the fee interest of the owner of all or a part of the property. Each
of these loans is deemed secured by a fee mortgage in this prospectus
supplement. 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 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
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<PAGE>
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.
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 operating adviser 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 operating adviser. 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.
The special servicer or an affiliate may acquire certain of the most
subordinated certificates, including those that have the right to appoint the
initial operating adviser. 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
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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.
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 in the future acquire the certificates entitled
to appoint the operating adviser. Decisions made by the operating adviser 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.
Servicers May Have Conflicts of Interest. 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 value
of the loan or the interests of the trustee or the certificateholders and such
defect or breach is not cured as required. The ability of Midland to perform
its obligations as master servicer or 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 agreement requires the master servicer or the special servicer, as
applicable, 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.
Yield Considerations
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.
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;
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<PAGE>
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.
In addition, some of the loans permit the borrower to make prepayments
other than on the first day of a month. If a borrower were to make a prepayment
after the determination date and did not pay interest on the loan through the
end of the month, there might be a shortfall in the amount of interest available
for distribution to certificateholders. The trustee would allocate any shortfall
to each class of certificates on a pro rata basis. See "Description of the
Certificates--Prepayment Interest Excesses and Shortfalls".
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:
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 or balloon payments;
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 class designation. See
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<PAGE>
"Description of the Certificates - Distributions". Losses on the loans will be
allocated to the [class O, class N, class M, class L, class K, class J, class H,
class G, class F, class E, class D, class C and class B] certificates, in that
order, reducing amounts otherwise payable to each class. Any remaining losses
would then be allocated to the [class A-1 and class A-2] 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 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, the trustee and the fiscal agent 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.
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 each
of the underwriters 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. The
market value of your certificates also may be affected by many other factors,
including the then prevailing interest rates. 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 B, class C and class D] certificates may
not exceed the weighted average of the 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 could have the effect of reducing the interest rate of the offered
certificates.
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, where a single indebtedness is secured by mortgages over
multiple separate properties, each of those separate properties was generally
counted as a separate loan (collectively, the "Multiple Property Loans"),
created by allocating a pro rata portion of the cut-off date principal balance
secured by the separate properties. However, for purposes of sevicing the
Multiple Property Loans and preparing monthly reports, the master servicer and
the special servicer will treat each note secured by multiple separate
properties as a single Mortgage 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" for the Mortgage Loans is ___________, 200__. The
"Cut-off Date Principal Balance" of each Mortgage Loan is its unpaid principal
balance as of the Cut-off Date, after application of all principal payments due
on or before such date, whether or not received. The Cut-off Date Principal
Balance for ____ Mortgage Loan has also been reduced to reflect a principal
prepayment made in connection with the lender's application of certain leasing
escrow funds to this Mortgage Loan after the Cut-off Date.
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.
Brief summaries of some of the terms of the Mortgage Loans, or groups of
Cross-Collateralized Loans, with Cut-off Date Principal Balances greater than
$__________ are set forth in Appendix III.
Each Mortgage Loan is evidenced by one or more separate promissory notes.
Each Mortgage Loan is secured by a mortgage, deed of trust or other similar
security instrument (all of the foregoing are individually a "Mortgage" and
collectively the "Mortgages"). Each Mortgage 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
Appendix I 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 fiscal agent, 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 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 value of the Mortgage Loan or the interests of the trustee
or 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
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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
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.
The Mortgaged Property securing ____ Mortgaged Loan (____%), is part of a
development district created by an applicable redevelopment agency. This
redevelopment agency has issued its development bonds to provide financing for
certain public infrastructure improvements and environmental remediation. The
development bonds are to be repaid through a special tax levied on the real
properties located in the development district. The annual installments of such
tax apportioned to this Mortgaged Property are included as a separate line item
on its normal real property tax bill.
Ground Leases
____ Mortgage Loans (____%) are secured solely by a first lien encumbering
the related borrower's leasehold interest in the related Mortgaged Property.
____ additional Mortgage Loans (____%) are secured by a first lien encumbering
the related borrower's leasehold interest in a portion of the related Mortgaged
Property and that borrower's fee interest in the remainder of the 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 ____ Mortgage Loans (____%) secured by Mortgages encumbering both the
related borrower's leasehold interest and the fee interest of the owner/landlord
in all or a part of the related Mortgaged Property are deemed secured by a fee
interest, and not included in the above count. See Appendix II and "Risk
Factors-- Mortgages on a Ground Lessor's Fee Interest May Be Challenged as
Fraudulent Conveyances".
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 Appendix II for more
information regarding the Cross-Collateralized Loans.
Multiple Property Loans
Except as described below, Multiple Property Loans were created whenever
a single indebtedness is secured by Mortgages over multiple separate Mortgaged
Properties. The Multiple Property Loans were created by allocating a pro rata
portion of the Cut-off Date Principal Balance secured by the related Mortgaged
Properties based upon:
o relative appraised value;
o relative underwritable cash flow; or
o prior allocations reflected in the related loan documents.
In those instances where a single indebtedness is secured by Mortgages
over multiple separate Mortgaged Properties that are contiguous or located in a
concentrated geographic area, and where these Mortgaged Properties are generally
treated as a single property by the related borrower for financial purposes,
this indebtedness is deemed to be a single Mortgage Loan secured by one
Mortgaged Property, and is not considered a Multiple Property Loan.
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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 obtained.
Except as otherwise described in this prospectus supplement, third party Phase I
environmental site assessments were also obtained.
Factors typically analyzed in connection with a prospective borrower
include:
o credit history;
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, the trustee or the fiscal agent.
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
remaining ____ 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 such balloon 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
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actual/360 basis, there will be a remaining balance or a larger balloon payment
due upon maturity.
The weighted average Balloon LTV Ratio of the mortgage pool is ____%.
____ Mortgage Loan (____%) requires interest-only payments through and
including ________, 200__. After that date, equal monthly principal and
interest payments are required.
For ____ Mortgage Loan (____%), the grace period for the payment of
Monthly Payments expires on the ____ of each month.
____ 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
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%].
However, for ____ Hyper-Amortization Loans (____%), the Revised Interest
Rate is equal to the greater of the Initial Interest Rate plus [5%] or the yield
rate on the applicable U.S. Treasury obligation plus [5%], and for ____
Hyper-Amortization Loan (____%), the Revised Interest Rate is equal to the
greater of the Initial Interest Rate plus [5%] or the yield rate on the
applicable U.S. Treasury obligation plus [5%] plus ____ basis points.
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.
Prepayment Provisions
All ____ 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 (including Defeasance
Loans) generally provide for a specified period prior to maturity during which
a prepayment may be made without a prepayment premium (the "Open Period").
Other than as described below or during any such Open Period, the Mortgage
Loans prohibit any borrower from making a partial prepayment.
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<PAGE>
____ Mortgage Loan (____%) allows the borrower to obtain a release of any
of the ____ separate Mortgaged Properties securing such Mortgage Loan. In order
to obtain this release, the borrower must, among other things:
o satisfy the requirements for a defeasance of this Mortgage Loan, provided
that the amount of substitute collateral must be related to [125%] of the
Mortgage Loan balance allocated to the Mortgaged Property being released;
o provide acceptable evidence to the lender that the combined debt service
coverage ratio of the Mortgaged Properties not being released is not less
____ to ____; and
o provide acceptable evidence to the lender that the combined loan-to-value
ratio of the Mortgaged Properties not being released is not greater than
[75%].
____ of the Cross-Collateralized Loans (____%) allow the
cross-collateralization to be terminated if the debt service coverage ratio for
the remaining Mortgaged Property (after giving effect to the release) is not
less than ____ to ____ for the trailing twelve months. The borrower's ability to
obtain such release is dependent upon certain other conditions, including there
being no existing default, and the borrower providing the lender with 30 days'
prior written notice, an acceptable title insurance policy endorsement and
payment of all costs and expenses incurred by the lender in connection with the
release.
A borrower does not have to pay a prepayment premium if it pays a
Hyper-Amortization Loan on or after its Anticipated Repayment Date.
For Mortgage Loans other than the Defeasance Loans, the applicable
prepayment premium is generally calculated 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.
Appendix II contains more specific information about the prepayment
premiums for each Mortgage Loan, including the method of calculation of the
prepayment premiums.
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
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 "Prepayment Restriction Analysis" table included in Appendix I sets
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
yield maintenance payment.
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 United States government securities 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.
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A borrower's ability to obtain a release is in each case subject to the
lender's consent or to the satisfaction of certain conditions specified in the
related loan documents, including that:
o defeasance may not occur prior to the time permitted by applicable REMIC
provisions (if applicable);
o the replacement collateral consist of U.S. government securities in an
amount sufficient to make all scheduled payments under the related note
when due;
o the holder of the Mortgage Loan determines the replacement collateral is
sufficient to make the payments;
o the Mortgage be assumed by a single purpose entity acceptable to the holder
of the Mortgage Loan; and
o counsel provides an opinion that the trustee has a perfected first priority
security interest in the replacement collateral.
The costs and expenses associated with obtaining a defeasance will not be
an expense of the trust.
"Due-on-Encumbrance" and "Due-on-Sale" Provisions
The Mortgages generally contain "due-on-encumbrance" clauses that permit
the holder of the Mortgage to accelerate the maturity of the related Mortgage
Loan if the borrower encumbers the related Mortgaged Property without the
consent of the mortgagee. The special servicer 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 or waive its right to exercise any right the mortgagee may
have under any such clause to accelerate payment of a Mortgage Loan upon 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 special servicer 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 or waive its right to exercise any right the mortgagee may have to
accelerate payment of a Mortgage Loan upon 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.
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
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insurance has been made available, a flood insurance policy in an amount
equal to the lease 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 approve the blanket insurance
policy, including the amount of insurance and the number of properties covered
by the policy.
Casualty and Condemnation
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.
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.
Appendix II contains more specific information about the Reserve Accounts
for each Mortgage Loan.
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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 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 Appendix
II for further information regarding these Mortgage Loans.
Environmental Risks
Phase I environmental site assessments were obtained for ____ of the
Mortgaged Properties securing Mortgage Loans as follows:
o ____ (____%) during the 18-month period ending on the Cut-off Date;
o ____ (____%) during the period from 18 months to 24 months prior to the
Cut-off Date;
o ____ (____%) during the period from 24 months to 30 months prior to the
Cut-off Date; and
o ____ (____%) during the period prior to 30 months prior to the Cut-off Date.
No environmental site assessments were obtained for the Mortgaged
Properties securing ____ Mortgage Loans (____%). However, the related originator
obtained a secured creditor impaired property policy covering certain
environmental matters with respect to these Mortgaged Properties.
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 the environmental issue from causing any material and adverse
consequences.
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 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:
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o refinance the Mortgage Loan using the Mortgaged Property as collateral, or
o sell the Mortgaged Property to a third party.
The presence of such contamination or potential contamination 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.
Geographic Concentration
Mortgage Loans secured by Mortgaged Properties located in __________ and
__________ respectively represent approximately ____% and ____% of the Initial
Pool Balance. Additionally, Mortgage Loans secured by Mortgaged Properties
located in __________ and __________ each represent 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 such Mortgage Loans
or the value of the related 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 Appendix I.
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 Appendix I. 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 insurance over the improvements thereon and maintain
the physical condition of such improvements. In ____ of the Mortgage Loans
(____%), a single tenant or the borrower occupies 100% of the related Mortgaged
Property. In an additional ____ of the Mortgage Loans (____%), a single tenant
or the borrower occupies [50%] or more of the related Mortgaged Property.
Other Information
Each of the tables in Appendix I 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 Appendix I 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 Appendix II. For brief summaries of
certain of the terms of the Mortgage Loans, or groups of Cross-
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Collateralized Loans, with Cut-off Date Principal Balances greater than
$_________, see Appendix III.
For purposes of the tables in Appendix I and for the information included
in this prospectus supplement and in Appendix II and Appendix III, 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
Appendix I and the information in Appendix II and Appendix III, the "Debt
Service Coverage Ratio" or "DSCR" for any Mortgage Loan (or group of
Cross-Collateralized Loans) is the ratio of "Underwritable Cash Flow" estimated
to be produced by the related Mortgaged Property or Properties to the annualized
amount of debt service payable under that Mortgage Loan (or that 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
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 cases, lease rentals were adjusted to take into
account rent reviews 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.
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.
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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.
Cut-off Date 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 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.
References to "Balloon LTV" or "Balloon LTV Ratio" are references to the
ratio, expressed as a percentage of 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) 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.
No representation is made that any such value would approximate either
the value that would be determined in a current appraisal of the related
Mortgaged Property or the amount that would be realized upon a sale.
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, the
trustee or the fiscal agent or any other entity has prepared or obtained a
separate independent appraisal or reappraisal, unless such person was the
originator of the Mortgage Loan. There can be no assurance that another
appraiser would have arrived at the same opinion of value. No representation
is made that any appraised value would approximate either the value that would
be determined in a current appraisal of the 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.
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. All of the loans to be sold
by Midland were originated either by Midland or PNC Bank, N.A. Midland is an
affiliate of PNC Capital Markets, Inc. See "Master Servicer and Special
Servicer".
____ of the Mortgage Loans (____%) will be sold by Midland to the
depositor on the closing date. An additional ____ Mortgage Loans (____%) were
originated by Midland or PNC Bank, N.A. and sold to various Delaware owner
trusts established by Midland. The holders of the certificates for the owner
trusts will sell their certificates to ___________________________ on the
closing date. On the closing date, ____________________ intends to terminate
the owner trusts and transfer to the depositor the Mortgage Loans that were in
the owner trusts. Since Midland will be the only person responsible to the
trust for breaches of the representations and warranties that relate to these
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Mortgage Loans and for defects in documentation related to these Mortgage
Loans, it is referred to in this prospectus supplement as the seller of these
Mortgage Loans.
[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 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
pledges, liens or security interests.
3. No scheduled payment of principal and interest under any Mortgage Loan is 30
days or more past due as of the Cut-off Date 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 limitations 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 for fixtures, equipment and other
personal property,
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 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.
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8. The proceeds of the Mortgage Loan have been fully disbursed 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. We
refer to any such non-conformance as a "defect". See "The Pooling and
Servicing Agreement--Assignment of the Mortgage Loans".
The applicable mortgage loan purchase agreement provides that, if a
breach or defect that materially and adversely affects the value of the
Mortgage Loan or the interests of the trustee or the certificateholders is not
cured within the applicable cure period, 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 the
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 the standby special servicing fee) 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.
Each of the mortgage loan purchase agreements provides that certain
defects are conclusively presumed to materially and adversely affect the value
of the Mortgage Loan or the interests of the trustee and the certficateholders.
If the Mortgage Loan continues to be a "qualified mortgage" within the
meaning of the REMIC provisions of the Internal Revenue Code of 1986, the
applicable cure period will be 90 days commencing when 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
master servicer and the trustee 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 within the 90 day
period,
and
o stating that the Mortgage Loan continues to be a "qualified mortgage" within
the meaning of the REMIC provisions of the Internal Revenue Code of 1986.
Furthermore, with respect to document defects for a defaulted Mortgage Loan,
such additional cure period may not be permitted or may be shortened to end no
later than 90 days after the applicable seller receives
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notice of or discovers that the Mortgage Loan is in default.
If the breach or defect causes the Mortgage Loan to no longer be a
"qualified mortgage" within the meaning of the REMIC provisions of the Internal
Revenue Code of 1986, the applicable cure period will be 60 days commencing when
the applicable seller, the depositor, the custodian, the master servicer, the
special servicer or the trustee discovers such breach or defect, and no
extension of the 60-day period will be permitted.
If the seller is required to repurchase the Mortgage Loan or substitute a
Qualified Substitute Mortgage Loan for the Mortgage Loan because of a breach or
defect and such Mortgage Loan is one of a cross-collateralized group of Mortgage
Loans, the seller will also be required to repurchase or substitute all of the
other Mortgage Loans in the cross-collateralized group at the same time.
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 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 operating
adviser has approved the substitution based upon, among other things, an
engineering report and the environmental report obtained for the Qualified
Substitute Mortgage Loan, which approval may not be unreasonably withheld.
If two or more mortgage loans are substituted for one or more deleted
Mortgage Loans, then:
o the amounts described in clause (1) above 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.
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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.
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.
If a seller defaults on its obligation to substitute, repurchase or cure,
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 provisions 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 initial master servicer and special servicer
for the trust fund. In addition, Midland and its affiliates are the seller with
respect to ____ of the Mortgage Loans (____%). See "Description of the Mortgage
Pool--The Sellers".
Midland is approved as a master servicer, special servicer and primary
servicer for investment-grade rated commercial and multifamily mortgage-backed
securities by Standard & Poor's, Moody's and Fitch. Midland has received the
highest rankings as a master, primary, and special servicer from both S&P and
Fitch. S&P ranks Midland as "Strong" and Fitch ranks Midland as "1" for each
category. Midland is also a HUD/FHA-approved mortgagee and a FannieMae-approved
multifamily loan servicer.
Midland's Servicing Portfolio
As of _______, 200__, 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.
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DESCRIPTION OF THE CERTIFICATES
General
The certificates are issued under the pooling and servicing agreement and
will consist of [20] classes:
o [Class A-1 Certificates
o Class A-2 Certificates
o Class X Certificates
o Class B Certificates
o Class C Certificates
o Class D Certificates
o Class E Certificates
o Class F Certificates
o Class G Certificates
o Class H Certificates
o Class J Certificates
o Class K Certificates
o Class L Certificates
o Class M Certificates
o Class N Certificates
o Class O Certificates
o Class V Certificates
o Class R-I Certificates
o Class R-II Certificates
o Class R-III Certificates]
We are only offering the class [A-1, A-2, B, C and D] 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.
The class V 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
Upon initial issuance, each class of principal balance certificates will
have the class principal balance set forth in the table on page S-5, which may
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:
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o amounts distributed to the class as principal, and
o any Realized Losses and Expense Losses allocated to the class.
Pass-Through Rates
The rate per annum at which any class of certificates accrues interest
from time to time is its "pass-through rate".
The pass-through rate for each class of the offered certificates is fixed
at the per annum rate set forth on the table on page S-5 of this prospectus
supplement. However, the pass-through rates for the [class B, class C and class
D] certificates may not exceed 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 "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.
The "Net Mortgage Rate" for each Mortgage Loan is the interest rate for
the Mortgage Loan minus the "administrative cost rate" for the Mortgage Loan.
The administrative cost rate is the sum of the rates at which the master
servicer fee, the standby special servicer fee and the trustee fee are computed.
See Appendix II for a listing of the administrative cost rate for each Mortgage
Loan. The Net Mortgage Rate for any Mortgage Loan will be determined:
o without regard to any post-closing date modification, waiver or amendment
of the Mortgage Loan's terms for purposes of calculating pass-through
rates, and
o without giving effect to any Revised Interest Rate or any default rate.
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 a fraction, expressed as a percentage:
o 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__ less the administrative cost rate,
and
o the denominator of which is the Stated Principal Balance of the Mortgage
Loan immediately prior to that distribution date.
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 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 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".
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Distributions
Method, Timing and Amount
Distributions on the certificates will be made on the ____ day of each
month or, if the ____ is not a business day, then on the next business day,
beginning in __________ 200__.
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 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 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 offered certificates are allocated among the
outstanding certificates of the class based on their principal 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 the 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, the trustee or the fiscal agent 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. Excess Liquidation Proceeds, and
6. 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 __________ 200__ 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 fifth business day
before the distribution date.
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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-1] certificates; and
o second to the holders of the [class A-2] 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-1 and class A-2]
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
3. to reimburse the holders of the [class A-1 and class A-2] 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-1 and class A-2] certificates and for which no
reimbursement has previously been paid.
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 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-1 and class A-2] certificates and
each other class of subordinate certificates, if any, with an earlier
alphabetical 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.
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.
Distribution of Excess Liquidation Proceeds
If the trust receives any Excess Liquidation Proceeds, those proceeds
will be deposited into the Excess Liquidation Proceeds Account. On each
distribution date, amounts on deposit in the Excess Liquidation Proceeds
Account will be used to reimburse the holders of the principal balance
certificates (in order of alphabetical class designation) for, and to the
extent of, unreimbursed Realized Losses or Expense Losses previously allocated
to them. Distributions will be made to the holders of the [class
A-1 and class A-2] certificates pro rata as between such classes in accordance
with the respective then-outstanding aggregate certificate balances of such
certificates. The depositor does not expect that certificateholders will receive
any
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distributions of Excess Liquidation Proceeds. See "The Pooling and Servicing
Agreement--Accounts--Excess Liquidation Proceeds Account".
"Excess Liquidation Proceeds" means the excess of:
o all liquidation proceeds from the sale or liquidation of a Mortgage Loan or
related REO Property, net of any related liquidation expenses, interest on
any related Advances and any related Servicing Advances, over
o the amount needed to pay off the Mortgage Loan in full.
Reimbursement of previously allocated Realized Losses or 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 closing date),
o reduced (to not less than zero) by the class's allocable share of any Net
Aggregate Prepayment/Balloon Payment 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 Excesses and 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 excess, if any, of:
1. all Distributable Certificate Interest for the class on the preceding
distribution date,
over
2. all distributions of interest made for the class on the preceding
distribution date.
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
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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 the
[class A, class B, class C, class D, class E, class F and class G] certificates
receiving principal distributions on such distribution date will be entitled to
a total amount equal to the lesser of:
o the prepayment premium, and
o the prepayment premium multiplied by a fraction:
1. the numerator of which equals the excess, if any, of:
o the pass-through rate applicable to the most senior class of the
outstanding [class A, class B, class C, class D, class E, class F and
class G] certificates (or, if both classes of class [A] certificates
are still outstanding, the class [A-1] certificates),
over
o 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.
If more than one of the class [A-1, class A-2, class B, class C, class D,
class E, class F and class G] certificates is entitled to principal
distributions on the distribution date, the amount described in the preceding
sentence will be allocated among the classes in proportion to the principal
distributions to which they are entitled on the distribution date. Some
certificates that receive principal may not receive prepayment premiums based
on the above fraction.
All prepayment premiums not distributed to holders of these principal
balance certificates will be distributed to the holders of the interest only
certificates.
The "Discount Rate" is the rate which, when compounded monthly, is
equivalent to the Treasury Rate when compounded semi-annually.
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
Anticipated Repayment 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.
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
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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, the trustee and the fiscal agent 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 90 days after an uncured delinquency occurs on a Mortgage Loan,
o 30 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 sum of:
(a) the appraised or otherwise estimated value of the related Mortgaged
Property or Properties, plus
(b) the amount of all reserves and escrows that are pledged as collateral
for the Mortgage Loan (other than those that are for taxes and
insurance), but only to the extent that such amounts are not taken
into account in determining the appraised or otherwise estimated
value of the related Mortgaged Property or Properties
over
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
Rate), but only if not previously advanced by the master servicer,
the trustee or the fiscal agent,
(b) all unreimbursed Advances for the Mortgage Loan, plus interest at
the Advance Rate,
(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 or the subject of
an Advance), and
(d) unpaid special servicing compensation.
Within 60 days (or such longer period as the special servicer is (as
certified thereby to the Trustee in writing) diligently and in good faith
proceeding to obtain such appraisal or internal valuation) 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 an amount determined by the Rating Agencies,
which will be specified in the pooling and servicing agreement.
Each of the above is referred to as an "Updated Appraisal". If the special
servicer has completed or obtained an appraisal or internal
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valuation during theprior 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. However, if the
Updated Appraisal is not obtained within 120 days after the Appraisal Reduction
Event (determined without regard to the 30 and 90 day periods specified in the
second and third bullet points of the definition of Appraisal Reduction Event),
the Appraisal Reduction will be 25% of principal balance of the Mortgage Loan
until the Updated Appraisal is received.
The special 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
special 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 operating adviser may at any time
request the special servicer to obtain (at the operating adviser's expense) an
Updated Appraisal. The special servicer will recalculate the Appraisal Reduction
each time an Updated Appraisal is obtained. The special servicer will deliver a
copy of each Updated Appraisal to the master servicer, the trustee and the
operating adviser within 15 days after it receives the Updated Appraisal.
The Appraisal Reduction will be eliminated upon full payment or
liquidation of the Mortgage Loan or if the Mortgage Loan is no longer a
Specially Serviced Mortgage Loan.
An Appraisal Reduction:
o will reduce the master servicer's, the trustee's and the fiscal agent'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 order
beginning with the [class O] certificates. The principal balance of the
lowest class will be reduced until:
1. the deficit is reduced to zero; or
2. 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 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-1 and class A-2] certificates will be
reduced, in proportion to their remaining class principal balances, until:
o the deficit is reduced to zero; or
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o the principal balances of the [class A-1 and class A-2] certificates are
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.
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.
"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 or late payment
charges on the related Mortgage Loan as and to the extent described in
"The Pooling and Servicing Agreement - Advances",
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 fiscal agent,
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 or makes a balloon
payment on a Mortgage Loan on or before the Determination Date in any calendar
month and pays interest which accrued on the prepayment or balloon payment
from the beginning of the calendar month through the day preceding the
prepayment date or balloon payment date, then such interest (less related
master servicer fees), is a "Prepayment/Balloon Payment Interest Excess".
If a borrower prepays all or part of a Mortgage Loan or makes a balloon
payment on a Mortgage Loan after the Determination Date in a calendar month and
does not pay interest on the prepayment or balloon payment through the end of
the calendar month, then this shortfall in a full month's interest on the
prepayment (less related master servicer fees) is a "Prepayment/Balloon Payment
Interest Shortfall".
Prepayment/Balloon Payment Interest Excesses collected during a
Collection Period will be used to offset Prepayment/Balloon Payment Interest
Shortfalls during the Collection Period. The master servicer will retain any
remaining amount as additional servicing compensation.
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The master servicer must pay out of its own funds, without right of
reimbursement, any Prepayment/Balloon Payment Interest Shortfalls in respect of
the Mortgage Loans that are not offset by Prepayment/Balloon Payment 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/Balloon Payment Interest Shortfalls remaining
in a Collection Period after offsetting Prepayment/Balloon Payment Interest
Excesses and applying Compensating Interest Payments, is the "Net Aggregate
Prepayment/Balloon Payment Interest Shortfall" for the distribution date.
The trustee will allocate any Net Aggregate Prepayment/Balloon Payment
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 offered
certificates is the distribution date on which its principal balance 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
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-1 and class A-2]
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 offered
certificates will timely receive all of the Distributable Certificate Interest
payable on their
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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 order.
Realized Losses and Expense Losses are allocated to the [class A-1 and
class A-2] certificates in proportion to their principal balances.
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 loans to the due date in the
Collection Period when the termination occurs,
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 ___% to the holders of the classes of principal balance certificates in
proportion to the principal balances of those classes, and
o ___% 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 Clearstream
Banking, societe anonyme, Luxembourg or Euroclear (in Europe), if they are
participants in those systems or indirectly through organizations that are
participants in those systems. Clearstream and Euroclear will hold omnibus
positions on behalf of their participants through customers' certificates
accounts in Clearstream's and Euroclear's names on the books of their
respective depositaries, which in turn will hold such positions in customers'
certificates accounts in the depositaries' names on the books of DTC.
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Transfers between DTC participants will occur in accordance with DTC
rules. Transfers between Clearstream 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 Clearstream or
Euroclear, on the other, will be effected in DTC in accordance with DTC rules
through Clearstream's or Euroclear's depositary. Clearstream participants and
Euroclear participants may not deliver instructions directly to these
depositaries.
Because of time-zone differences, credits of certificates received in
Clearstream 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 Euroclear or Clearstream participant on such business
day. Cash received in Clearstream or Euroclear as a result of sales of
certificates by or through a Clearstream 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 Clearstream 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, the fiscal
agent 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.
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.
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
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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:
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.
Denominations
The trust will issue [class A-1 and class A-2] certificates in minimum
denominations of [$25,000] initial principal balance (and any larger whole
dollar amount). The trust will issue the remaining classes of offered
certificates in minimum denominations of [$50,000] initial principal balance (or
any larger whole dollar amount). 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.
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 any 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 of those certificates. As described in
this prospectus supplement, the Principal Distribution Amount for
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each distribution date generally will be distributed to the holders of the
class [A-1] 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 order of class
designation, in each case until the principal balance of each class of
certificates is, in turn, reduced to zero.
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 Mortgage Loans--
Foreclosure" in the prospectus.
The rate and timing of principal payments and defaults and the severity
of losses on the Mortgage Loans may be affected by a number of factors,
including, without limitation:
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 Mortgage Loans--Default Interest and Limitations
on Prepayments" in the prospectus.
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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 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,
principal payments on the Mortgage Loans are faster than you anticipated.
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, 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.
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.
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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 Appendix I 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/
Balloon Payment Interest Shortfalls) will generally be borne by holders of
each class of principal balance certificates in reverse alphabetical 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-1 and class A-2]
certificates on a pro rata basis.
Realized Losses and Expense Losses will be:
o allocated to the principal balance certificates in reverse alphabetical
order of their class designation, and
o applied to reduce the principal balance of each affected class.
As a result, a loss on any one of the Mortgage Loans could cause a
significant loss, even a complete loss, of an investor's investment in any
class, but especially the subordinate certificates with the latest alphabetic
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.
Pass-Through Rates
The pass-through rates for the [class B, class C and class D]
certificates may not exceed the weighted average of the Net Mortgage Rates.
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 B, class C and
class D] certificates may be adversely affected.
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.
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.
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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 following tables, 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 "3%", "5%", "7%", "10%" and "15%" assume that no prepayments
are made on any Mortgage Loan during the Mortgage Loan's Lock-out Period or
Yield Maintenance Period or, with respect to Defeasance Loans, prior to their
Open 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 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 or, with respect to Defeasance Loans, prior to
their Open Period) will conform to any particular CPR,
o all the Mortgage Loans will prepay in accordance with the assumptions at the
same rate,
o Mortgage Loans that are in a Lock-out Period or Yield Maintenance Period
will not prepay, or
o Defeasance Loans will not prepay prior to their Open Period.
The tables 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 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 Appendix II,
o all Monthly Payments are due and timely received on the first day of each
month commencing in _______ 20__,
o there are no delinquencies or losses on the Mortgage Loans,
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 or, with respect to Defeasance
Loans, prior to their Open 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/Balloon Payment 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 issued on ________, 20__,
o the only expenses payable out of the trust are the master servicer fees, the
standby special servicer fees 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".
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To the extent that the Mortgage Loans have characteristics that differ
from those assumed in preparing the tables set forth below, the offered
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 until maturity 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 following tables. 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 following tables
indicate:
o the weighted average life of each class of the offered certificates, and
o the percentages of the initial principal balance of each class of the
offered 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.
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Percentage of Initial Certificate Balance
of the [Class A-1] Certificates
at the Specified CPRs
Prepayment Assumption (CPR)
Distribution Date 0% 3% 5% 7% 10% 15%
-- -- -- -- --- ---
Closing Date
Weighted average life
(years)
Percentage of Initial Certificate Balance
of the [Class A-2] Certificates
at the Specified CPRs
Prepayment Assumption (CPR)
Distribution Date 0% 3% 5% 7% 10% 15%
-- -- -- -- --- ---
Closing Date
Weighted average life
(years)
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Percentage of Initial Certificate Balance
of the [Class B] Certificates
at the Specified CPRs
Prepayment Assumption (CPR)
Distribution Date 0% 3% 5% 7% 10% 15%
-- -- -- -- --- ---
Closing Date
Weighted average life
(years)
Percentage of Initial Certificate Balance
of the [Class C] Certificates
at the Specified CPRs
Prepayment Assumption (CPR)
Distribution Date 0% 3% 5% 7% 10% 15%
-- -- -- -- --- ---
Closing Date
Weighted average life
(years)
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Percentage of Initial Certificate Balance
of the [Class D] Certificates
at the Specified CPRs
Prepayment Assumption (CPR)
Distribution Date 0% 3% 5% 7% 10% 15%
-- -- -- -- --- ---
Closing Date
Weighted average life
(years)
THE POOLING AND SERVICING AGREEMENT
The certificates will be issued under a pooling and servicing agreement
to be dated as of _______, 200_, among the depositor, the master servicer, the
special servicer, the trustee and the fiscal agent.
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:
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;
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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;
o an assignment in favor of the trustee of each effective UCC financing
statement; and
o in those cases where applicable, a copy of the related ground lease.
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. The failure to receive a recorded document due to delays of a
public recording office will not cause a Mortgage Loan to be a defective
Mortgage Loan.
The trustee is obligated to review the documents delivered to it for each
Mortgage Loan within 60 days after the later of delivery or the closing date and
report any missing documents or certain types of defects to the depositor. 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 fiscal agent, 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 (as determined by the master
servicer or the special servicer, as applicable, in its good faith and
reasonable judgment) in accordance with applicable law, 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 may not take into account:
o any other relationship that the master servicer or the special servicer or
their affiliates, as the case may be, may have with any borrower;
o the ownership of any certificate by the master servicer or the special
servicer, as the case may be, or their respective affiliates;
o any obligation to make Advances or incur servicing expenses;
o the master servicer's or the special servicer's right to receive
compensation for its services;
o the ownership or 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 the obligation, if any, of the master servicer, the special servicer, any
sub-servicer or any of their affiliates to replace or repurchase any Mortgage
Mortgage Loan that it sold to the trust fund.
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To the extent consistent with the foregoing and subject to terms of the
pooling and servicing agreement, the master servicer and the special servicer
must use reasonable efforts to seek to maximize the timely recovery of principal
and interest on a net present value basis on the Mortgage Loans or Specially
Serviced Mortgage Loans, as applicable, and in the best interests of the trust
and the certificateholders (as a collective whole), as determined by the master
servicer or the special servicer, as the case may be, in its reasonable
judgment.
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 willful misfeasance, bad faith 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, less the related master servicer fee (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 ("Servicing Advances" and together with P&I Advances,
"Advances") to pay:
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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.
However, the special servicer will be obligated to make any Servicing
Advance that needs to be paid on an emergency basis.
If the special servicer fails to make a required emergency Advance, the
master servicer must make the Advance. If the master servicer fails to make a
required Advance, the trustee must make the Advance. If the trustee fails to
make a required Advance, the fiscal agent must make it. Any Advance by the
fiscal agent will cure the trustee's failure to make an Advance.
However, each of the master servicer, the special servicer, the trustee
and the fiscal agent 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. None of the master servicer, the special
servicer, the trustee or the fiscal agent is required to make any Advance that
it determines is not so recoverable.
If the master servicer or the special servicer makes such a
nonrecoverability determination, it must deliver to the trustee (and, with
respect to the special servicer, the master servicer) 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
sevicer, the special servicer, the trustee or the fiscal agent, such as:
o property operating statements,
o rent rolls,
o property inspection reports, and
o engineering reports.
Both the trustee and the fiscal agent will be entitled to rely
conclusively on a nonrecoverability determination by the master servicer or the
special servicer. The master servicer will be entitled to rely conclusively on
a nonrecoverability determination by the special 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 special servicer, the master
servicer, the trustee or the fiscal agent previously advanced, and the special
servicer, the master servicer, the trustee or the fiscal agent determines that
no other source of payment or reimbursement for such Advances is available to
it, such Advances will be deemed to be nonrecoverable.
The master servicer, the trustee and the fiscal agent 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, the trustee or the fiscal agent 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. If Advance
interest is outstanding on a Mortgage Loan at the time a late payment charge or
default interest is collected for that Mortgage Loan, then those amounts will be
used to pay such outstanding Advance interest. 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, late payment
charges 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
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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,
any prepayment premiums and any late fees and late payment charges;
o any amounts required to be deposited by the master servicer for:
1. losses realized on permitted investments of funds in the Collection
Account, and
2. Prepayment/Balloon Payment 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 two business days 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 are all revenues received by the
special servicer on the REO Property other than liquidation proceeds.
"Net REO Proceeds" for any REO Property 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 trustee 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 trustee 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 less the rates
at which the related master servicer fee, the standby special servicer fee and
the trustee fee are computed on its Stated Principal Balance as of the due date
in the month in which the distribution date occurs (the "Interest Reserve
Amount"). The trustee will not make the deposit if the applicable Monthly
Payment has not been paid or advanced. The trustee 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 trustee will
deposit the Interest Reserve Amounts into the Distribution Account and include
these amounts as part of the Available Funds for the distribution date.
Excess Liquidation Proceeds Account
If any Excess Liquidation Proceeds are received, the trustee will
establish and maintain a
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segregated account or accounts (the "Excess Liquidation Proceeds Account") in
the name of the trustee, in trust for the benefit of the certificateholders.
On the business day before each distribution date, the master servicer will
remit to the trustee from the Collection Account and for deposit into the
Excess Liquidation Proceeds Account all Excess Liquidation Proceeds received
during the related collection period. The trustee will distribute Excess
Liquidation Proceeds to the certificateholders in the manner set forth in
"Description of the Certificates--Distributions--Distributions of Excess
Liquidation Proceeds".
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, which will be determined without regard to Interest
Reserve Amounts),
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, Distribution Account, Interest Reserve Account
and Excess Liquidation Proceeds 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 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 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; or
o an account or accounts maintained with PNC Bank, National Association so
long as PNC Bank's long term unsecured debt rating is at least "______" from
______________________ and _____________________________.
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 Documents--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,
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o to remit Excess Liquidation Proceeds to the Excess Liquidation Proceeds
Account,
o to pay or reimburse itself, the special servicer, the trustee or the fiscal
agent for Advances and interest on Advances, those payments or
reimbursements to be made from the sources described under "--Advances"
above,
o to pay the unpaid portion of the master servicing fee, the standby special
servicing fee and the 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/Balloon Payment 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, the depositor
and/or the fiscal agent 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 special servicer will exercise or waive its right to exercise
"due-on-sale" clauses in Mortgage Loan documents in accordance with the
servicing standard. However, with respect to any Mortgage Loan that has a then
outstanding principal balance equal to or greater than the lesser of $20
million and 2% of the then outstanding principal balance of all of the Mortgage
Loans, the special servicer may waive a "due-on-sale" clause only if it first
obtains written confirmation from each Rating Agency 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 costs and expenses associated with obtaining such a Rating Agency
confirmation will not be an expense of the Trust. For purposes of determining
whether such a Rating Agency confirmation is required, all Mortgage Loans in a
set of Cross-Collateralized Loans and all Mortgage Loans in a group with the
same or affiliated borrowers will be aggregated and treated as one. See "--The
Operating Adviser" for additional limitations on the ability of the special
servicer to waive "due-on-sale" clauses.
If 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 special servicer will enter into an
assumption or substitution agreement only if the credit status of the
prospective new owner is in compliance with:
o the special servicer's regular commercial mortgage origination or servicing
standards and criteria,
o the terms of the Mortgage Loan, and
o any other standards set by the special servicer 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".
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The master servicer will receive [____%] and the special servicer will
receive [____%] of assumption fees on non-Specially Serviced Mortgage Loans paid
by the borrower or the new owner as additional servicing compensation. The
master servicer will receive [____%] and the special servicer will receive
[____%] of the assumption fees on Specially Serviced Mortgage Loans as
additional servicing compensation.
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
Most of 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 special servicer may in accordance with the servicing standard either
exercise or waive its right to exercise the trust fund's rights under the
"due-on-encumbrance" clauses in the Mortgage Loan documents. However, the
special servicer 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 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 Operating Adviser" for additional limitations on the ability
of the special servicer to waive "due-on-encumbrance" clauses.
The special servicer may forbear from enforcing any "due-on-encumbrance"
provision in connection with any junior or senior lien on a Mortgaged Property
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.
Each Mortgaged Property and REO Property will be inspected at least once every
two years and within 60 days after it becomes a Specially Serviced Mortgage
Loan. If a Mortgage Loan has a then current principal balance of at least
[$________ or ____%] of the then outstanding principal balance of all Mortgage
Loans in the trust fund or is a Specially Serviced Mortgaged
Loan, the related Mortgaged Property will be inspected at least once every year.
The annual and bi-annual inspections described above will be done at the expense
of the servicer performing the inspection. The inspection done at the time a
Mortgage Loan becomes a Specially Serviced Mortgage Loan will be an expense of
the trust. 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 operating adviser 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
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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.
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, as the holder of the REMIC I certificates and as trustee for the
holders of the certificates. 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 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 extensions 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. The special
servicer must hire the independent contractor within 90 days after the trust
fund acquires the Mortgaged Property. 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
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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--REMICs--Taxation of Owners of REMIC Regular Certificates" and
"--Taxation of Owners 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 in accordance with the servicing standard
that the sale would be in the best economic interests of the trust fund.
The special servicer must give the trustee and the operating adviser at
least 10 business days prior written notice of its intention to sell any
Specially Serviced Mortgage Loan or REO Property The operating adviser may
purchase the loan or property, directly or through an affiliate, for cash equal
to the Repurchase Price.
If the operating adviser (or a designated affiliate) fails to purchase the
loan or property within 10 business days after the operating advisor receives
notice, either the special 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 operating adviser, 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.
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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 of
any loan that is not a Specially Serviced Mortgage Loan, if the amendment:
o does not affect the maturity date, interest rate, principal balance,
amortization term or payment frequency of the loan (each, a "Money Term"), or
o cures any ambiguity in the loan, or corrects or supplements any provisions of
the loan that are inconsistent with any other provisions of the loan or
corrects any error in the loan.
The term "Money Term" does not include any provisions relating to late fees,
Deferred Interest or Default Interest. However, the master servicer must obtain
the consent of the special servicer to amend, modify or waive:
o any event of default provision,
o any obligation of the borrower to pay any assumption fee, modification fee or
any other fees or expenses, all or part of which the special servicer may be
entitled to as servicing compensation, or
o any term relating to the release or substitution of collateral.
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.
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, or
o ______ years before the expiration of any ground lease that secures the loan,
unless the special servicer determines that making such an extension is in
accordance with the servicing standard described under "--Servicing of the
Mortgage Loans; Collection of Payments".
If the terms of a Mortgage Loan having one of the ten largest current
outstanding principal balances of all Mortgage Loans in the trust fund require
the related borrower to obtain the Mortgagee's consent before changing any
franchise with respect to any hotel or motel located on the related Mortgaged
Property, the master servicer or special servicer, as applicable, may consent
to any such change only if it first obtains written confirmation from each
Rating Agency that the consent will not result in a qualification, downgrade or
withdrawal of the rating then assigned by that Rating Agency to any class of
certificates. For purposes of determining whether such a Rating Agency
confirmation is required, all Mortgage Loans in a set of Cross-Collateralized
Loans and all Mortgage Loans in a group with the same or affiliated borrowers
will be aggregated and treated as one. In addition, the master servicer may
grant such consent only if it first receives the consent of the special
servicer. The master servicer or the special servicer, as applicable, shall use
its reasonable efforts to cause the borrower to pay the costs of obtaining any
required Rating Agency confirmation. If such costs are not paid by the borrower,
the master servicer will advance such costs as a Servicing Advance, unless such
Advance would be a Nonrecoverable Advance.
Modifications of a Mortgage Loan that forgive principal or interest (other
than Deferred Interest and, in some cases, default interest) will
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cause Realized Losses on the loan. Such Realized Losses will be allocated
among the classes of certificates as described under "Description of the
Certificates--Application of Realized Loses and Expense Losses and Principal
Balances" and "--Subordination" in this prospectus supplement.
The Trustee
_____________________ will act as trustee. The address of the trustee's
corporate trust office is:
________________________
________________________
________________________
Attn: __________________
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 trustee's
resignation will also remove the fiscal agent. The master servicer will appoint
the successor trustee and fiscal agent. Before appointing a successor trustee,
the master servicer must obtain confirmation from the Rating Agencies that the
successor trustee's appointment will not adversely affect the rating then
assigned by the Rating Agencies to any of the certificates. If any successor
fiscal agent is not rated by each rating agency in one of its two highest
long-term unsecured debt rating categories and written confirmation will be
obtained from each Rating Agency that the successor fiscal agent's appointment
will not adversely affect the rating then assigned by the Rating Agency to any
certificates. The resigning trustee must pay any cost of obtaining the Rating
Agency confirmations. If the successor trustee and successor fiscal agent are
not appointed within 30 days after the notice of resignation, the resigning
trustee and departing fiscal agent may petition a court of competent
jurisdiction to appoint a successor trustee and successor fiscal agent.
The depositor or the master servicer may remove the trustee and the fiscal
agent if, among other things:
o the trustee becomes ineligible to continue as such under the pooling and
servicing agreement,
o the trustee or the fiscal agent becomes incapable of acting,
o the trustee or the fiscal agent is adjudged bankrupt or insolvent,
o a receiver is appointed for the trustee, the fiscal agent or their property,
or
o any public officer takes charge or control of the trustee, the fiscal agent
or their property.
The holders of certificates evidencing a majority of the total voting
rights may remove the trustee and the fiscal agent upon written notice to the
master servicer, the special servicer, the depositor, the trustee and the fiscal
agent. If such removal is without cause, the reasonable costs and expenses of
the removed trustee and fiscal agent in connection with such removal shall be
paid as an Additional Trust Fund Expense.
Resignation or removal of the trustee and the fiscal agent is effective
only when the successor trustee (and fiscal agent, if necessary) accepts the
appointment.
Trustee Fee
The pooling and servicing agreement entitles the trustee to a monthly fee
from amounts in the Collection Account. The trustee fee is calculated at the
rate specified in the pooling and servicing agreement and is based
on the then outstanding principal balance of each Mortgage Loan and in the same
manner as interest is calculated on the Mortgage Loan. Any trustee fee rate
calculated on an Actual/360 basis will be recomputed on a 30/360 basis for
purposes of calculating the Net Mortgage Rate.
Indemnification of Trustee
The trust fund will indemnify the trustee, the fiscal agent and their
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, 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
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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, the fiscal agent and their directors, officers, employees, agents and
affiliates for similar losses related to the willful misconduct, 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 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, the trustee must
make the Advance unless it deems the Advance nonrecoverable. See "--Advances".
Except for funds held by the trustee, the trustee and the fiscal agent
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 fiscal agent, 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.
The Fiscal Agent
____________________ will act as fiscal agent for the trustee. The
fiscal agent must make any Advance the trustee is required to make but does not
make. However, the fiscal agent need not make any Advance that it deems
nonrecoverable. See "--Advances".
If the trustee resigns or is removed, the fiscal agent will resign or will
be removed. The initial fiscal agent need not act in such capacity at any time
that _______________________ is not the trustee.
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 on the then outstanding principal balance
of the Mortgage Loan and in the same manner as interest is calculated on the
Mortgage Loan. The master servicing fee for each Mortgage Loan is included in
the "administrative cost rate" listed for that Mortgage Loan on Appendix II. Any
master servicing fee rate calculated on an Actual/360 basis will be recomputed
on a 30/360 basis for purposes of calculating the Net Mortgage Rate.
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 will 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 or
default interest (other than amounts used to pay
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Advance interest), loan service transaction fees, demand fees, beneficiary
statement charges and similar fees and charges (but excluding prepayment
premiums),
o ____% of any extension fees, modification fees, consent fees and assumption
fees collected on the Mortgage Loans,
o all insufficient funds check charges (including insufficient funds check
charges arising from Specially Serviced Mortgage Loans), and
o any Prepayment/Balloon Payment Interest Excess (to the extent not offset
against any Prepayment/Balloon Payment 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 Operating Adviser to Remove Special Servicer
The operating advisor 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 cost of obtaining the Rating Agency confirmation, and the reasonable
out-of-pocket costs and expenses of any such transfer will be paid as an
Additional Trust Fund Expense, unless the special servicer is removed as a
result of a default by the special servicer under the pooling and servicing
agreement. The removed special servicer may receive all amounts accrued and
owing to it on or prior to the effective date of the removal, including the
right to receive workout fees and disposition fees as and to the extent
described under "--Special Servicer Compensation."
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 any other obligation (regardless of whether P&I Advances have been
reimbursed), or
o the borrower has failed to make a balloon payment, except where either
o 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, or
o on or before the date of the default, the borrower has delivered to the
master servicer a firm commitment to refinance the related Mortgage Loan
within 60 days of the 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.
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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 become the subject of any bankruptcy, insolvency or similar proceeding,
admitted in writing the inability to pay its debts as they come due or made
an assignment for the benefit of creditors, 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 and reasonable
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 Non-monetary Defaults
o The master servicer or the special servicer has notice that a non-monetary
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 for purposes of determining
whether a Mortgage Loan is a Specially Serviced Mortgage Loan.
Special Servicer Compensation
The special servicer is entitled to a monthly standby special servicing
fee and a monthly special servicing fee. The standby special servicing fee will
accrue with respect to each Mortgage Loan (including each Specially Serviced
Mortgage Loan and each Mortgage Loan as to which the related Mortgaged Property
has become an REO Property) in the same manner as the master servicing fee, at a
rate equal to _____% per annum. The special servicing fee is an amount equal to
_____% per annum 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 [1%] of:
o the proceeds of the sale, liquidation or condemnation of, or any partial or
unscheduled payment with respect to, any Specially Serviced Mortgage Loan or
REO Property
less
o any broker's commission and related brokerage referral fees.
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 operating adviser, 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 [1.0%] 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.
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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 receive:
o any workout fees payable on--
o Mortgage Loans that became Corrected Mortgage Loans while it acted as special
servicer; and
o Specially Serviced Mortgage Loans for which the terminated special
servicer had cured the event of default through a modification,
restructuring or workout negotiated by the special servicer and evidenced
by a signed writing, but which had not as of the time the special servicer
was terminated become a Corrected Mortgage Loan solely because the
borrower had not made three consecutive timely monthly payments and which
subsequently becomes a Corrected Mortgage Loan as a result of the borrower
making such three consecutive timely monthly payments; and
o a portion of any disposition fee that becomes payable with respect to a
Specially Serviced Mortgage Loan or related REO Property that was being
administered by the special servicer at the time of termination. The
terminated special servicer and the successor special servicer will apportion
the disposition fee between themselves in a manner that reflects their
relative contributions in earning the fee.
The special servicer will also retain as additional servicing
compensation:
o all investment income earned on amounts on deposit in any REO Account,
o if permitted under the Mortgage Loan, late payment charges or late fees or
default interest (other than amounts used to pay Advance interest), loan
service transaction fees, beneficiary statement charges or similar items that
are collected on Specially Serviced Mortgage Loans, and
o if permitted under the Mortgage Loan, [____%] of any extension fees,
modification fees, consent fees and assumption fees collected on Mortgage
Loans.
Additional special servicing compensation does not include prepayment
premiums or any other amount required to be deposited or retained in the
Collection Account.
The Operating Adviser
Selection
The holders of more than [50%] of the principal balance of the Controlling
Class may appoint an operating adviser to represent their interests. If the
holders of more than [50%] of the principal balance of the Controlling Class
cannot agree on the election of the operating adviser, then Midland Loan
Services, Inc. will be the operating adviser.
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 operating adviser may advise the special servicer about the following
matters:
o foreclosure or similar conversion of the ownership of properties securing
Specially Serviced Mortgage Loans that are in default, including acquiring an
REO Property,
o amendment, waiver or modification of a Money-Term or any other material
non-monetary term of a Specially Serviced Mortgage Loan,
o proposed sale of a defaulted Mortgage Loan or REO Property for less than the
Repurchase Price, except upon termination of the trust fund as described
under "Description of the Certificates--Optional Termination",
o acceptance of a discounted payoff,
o 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,
o release of collateral, other than in accordance with the terms or upon
satisfaction of a loan,
o acceptance of substitute or additional collateral, other than in accordance
with the terms of a loan,
o any waiver of a "due-on-sale" or "due-on-encumbrance" clause,
o acceptance of an assumption agreement releasing a borrower from liability
under a loan, and
o any release of a letter of credit or debt service reserve,
provided that, in the event that the special servicer determines that immediate
action is necessary to protect the interest of the certificateholders (as a
collective whole), the special servicer may take any such action without waiting
for the operating adviser's response.
The operating adviser may object to the above actions in writing within 10
business days after being notified of the proposed action and provided with all
reasonably requested information. The operating adviser will be considered to
have approved any such action if it does not object within 10 days. If the
proposed action relates to the waiver of a "due-on-sale" or "due-on-encumbrance"
clause, the 10 business day period is reduced to 5 business days. Furthermore,
the special servicer shall not be obligated to obtain the approval of the
operating adviser for any actions to be taken with respect to any particular
Mortgage Loan if the special servicer has notified the operating adviser in
writing of the various actions that the special servicer proposes to take with
respect to such Mortgage Loan and, for 60 days following the first such notice,
the operating adviser has objected to all of those proposed actions and has
failed to suggest any alternative actions that the special servicer considers to
be consistent with the servicing standard.
The operating adviser also may advise the special servicer to take, or to
refrain from taking, such other actions as the operating adviser deems
advisable. However, the operating adviser may never require the special servicer
to violate the pooling and servicing agreement, including its obligation to act
in accordance with the servicing standard.
Limitation on Liability of Operating Adviser
The operating adviser 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. By accepting certificates, each
certificateholder agrees that the operating adviser:
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 operating adviser
because it acted solely in the interests of the Controlling Class.
Sub-Servicers
The master servicer and special servicer may each delegate its servicing
obligations to one or more third-party sub-servicers. 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. ___ Mortgage Loans (____%) are currently serviced by
third-party servicers that are expected to continue to service such loans as
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.
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The sub-servicing agreements 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 its 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
Based solely on information provided in Commercial Mortgage Securities
Association periodic loan update reports and certain other reports provided by
the master servicer and the special servicer and delivered to the trustee, the
trustee will prepare and make available electronically (or, upon request,
provide by first class mail) on each distribution date to each certificateholder
a reporting statement substantially in the form of, and containing the
information set forth in, the report form attached to this prospectus
supplement.
The master servicer will provide the trustee with the Commercial Mortgage
Securities Association Loan Set-up File and the following portions of the
Commercial Mortgage Securities Association Investor Reporting Package reports
and files:
o Loan Periodic Update File,
o Financial File,
o Property File,
o Servicer Watch List,
o Delinquent Loan Status Report,
o REO Status Report,
o Comparative Financial Status Report,
o Historical Loan Modification Report,
o Historical Liquidation 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 (other than the Loan Periodic Update File) before the
distribution date in _______ 200_.
If you hold your certificates in book-entry form through DTC, you may
obtain direct access to the monthly reports of the trustee as if you were a
direct certificateholder, provided that you deliver a written certification to
the trustee confirming your beneficial ownership in those certificates.
Otherwise, until definitive certificates are issued in respect of your
certificates, the information contained in thetrustee's monthly reports will be
available to you only to the extent that it is made available through DTC and
the DTC participants or is available on the trustee's internet website. See
"Description of the Certificates--Delivery, Form and Denomination--Book-Entry
Certificates".
The trustee will make available each month on the trustee's internet
website the trustee's report and any files comprising the CMSA Investor
Reporting Package that it has received from the master servicer or the special
servicer. The trustee's internet website is currently located at www.lnbabs.com.
In addition, bond factor information may be obtained from the Trustee by calling
___________. The Trustee will make available through its electronic bulletin
board system, on a confidential basis, certain information related to the
Mortgage Loans. The bulletin board is located at ___________. Investors that
have an account on the bulletin board may retrieve the loan level data file for
each transaction in the directory.
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.
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CMBS Surveillance Inquiries
The master servicer currently maintains an Internet-based investor
reporting system, CMBS Investor Insightsm, that contains updated performance
information at the portfolio, loan and property levels on the various
commercial mortgage-backed securities transactions that it services.
Certificateholders, prospective transferees and other appropriate parties may
obtain access to CMBS Investor Insightsm through the master servicer's website,
www.midlandls.com. The master servicer may require registration and the
execution of an access agreement in connection with providing access to CMBS
Investor Insightsm. Specific questions about portfolio, loan and property
performance may be sent to the master servicer via e-mail at
[email protected].
Other Available Information
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 operating adviser,
the trustee and the Rating Agencies. The master servicer and the special
servicer will also make such information available to any person that the
trustee at the request of the master servicer or special servicer certifies is
a certificateholder or potential certificateholder. The trustee may base the
certification on any information from the certificateholder or the potential
certificateholder that it may require in its sole discretion. Such person will
be required to pay any expenses incurred by the trustee in making such
certification. 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.
Unless the pooling and servicing agreement specifically specifies a
particular method of delivery, the master servicer and the special servicer may
each satisfy their obligation to deliver any statement, report or information
to certificateholders by:
o physically delivering a paper copy of such statement, report or information,
o delivering such statement, report or information in a commonly used
electronic format, or
o making such statement, report or information available on the master
servicer's internet website or the trustee's internet website.
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.
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 all modifications, waivers and amendments of the Mortgage Loans,
o officer's certificates and other evidence supporting a determination that an
Advance is nonrecoverable, and
o upon request, the property inspection reports.
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 operating adviser 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 or the filing of which is
otherwise desirable. 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
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the closing date, a Form 8-K together with the pooling and servicing agreement.
The trustee, the fiscal agent, 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.
The trust fund will indemnify and hold harmless the master servicer, the
special servicer, the trustee and the fiscal agent against any loss, liability
or expense incurred in connection with any legal action relating to any
statement or omission or alleged statement or omission in any information
supplied by a borrower or other third party, including any liability related to
the inclusion of the information in any report filed with the SEC.
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;
o the [class A-1, class A-2, class X, class B, class C, class D, class E, class
F, class G, class H, class J, class K, class L, class M, class N and class O]
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 V] 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 offered certificates are
not expected to be treated as having been issued with original issue discount
for federal income tax reporting purposes.
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.
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 Dates. No representation is made
as to whether the Mortgage Loans will prepay at that rate or any other rate. 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 Holders of REMIC
Regular Certificates" in the prospectus.
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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 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, 19.6% 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.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS LOCATED IN _______ AND _________
The following discussion summarizes certain legal aspects of Mortgage
Loans secured by real property in ______ (____%) and _______ (_____%), which are
general in nature. These summaries do not purport to be complete and are
qualified in their entirety by reference to the applicable federal and state
laws governing the Mortgage Loans.
[Add state law summaries.]
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
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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. See "ERISA Considerations" in the accompanying
prospectus.
Senior Certificates
The Department of Labor has issued to some of the underwriters an
individual prohibited transaction exemption (_______________________
__________________, and Prohibited Transaction Exemption No. 98-08 issued 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. ___________________________, for purposes of Prohibited Transaction
Exemption _________ _______, and PNC Capital Markets, Inc., for purposes of
Prohibited Transaction Exemption No. 98-08,
2. any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with _______________
__________________ or PNC Capital Markets, as applicable, 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 any of the other underwriters.
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:
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, Moody's Investors Service or Fitch, Inc. (or
their successors and assigns).
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.
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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 "____" by _________
and "_____" by ____________, 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 and fifth
conditions will be satisfied. A Plan's authorizing fiduciary will be deemed to
make a representation regarding satisfaction of the sixth general condition set
forth above in connection with the purchase of a senior certificate.
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, 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.
If the above conditions are satisfied, they may provide an exemption from
the restrictions imposed by Sections 406 (a) and 407 (a) of ERISA, as well as
the excise taxes imposed by Sections 4975 (a) and (b) of the Internal Revenue
Code of 1986 by reason of Sections 4975 (c) (1) (A) through (D) of the Internal
Revenue Code of 1986, in connection with:
o the direct or indirect sale, exchange or transfer of senior certificates
acquired by a Plan upon initial issuance,
o the direct or indirect acquisition or disposition in the secondary market
of senior certificates by a Plan, or
o the continued holding of senior certificates by a Plan.
However, no exemption is provided from the restrictions of Sections 406 (a)
(1) (E), 406 (a) (2)
and 407 of ERISA for the acquisition or holding of a senior certificate on
behalf of a Plan sponsored by any member of the Restricted Group, by any person
who has discretionary authority or renders investment advice with respect to the
assets of that Plan.
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;
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
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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.
Subordinate Certificates
The characteristics of each class of the subordinate certificates do not
meet the requirements of the second condition for the underwriters' individual
prohibited transaction exemptions because they are subordinated to the [class A]
certificates. 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,
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), or
5. an insurance company that is using assets of any insurance company separate
account or general account in which the assets of any Plan or Other Plans are
invested (or which are deemed pursuant to ERISA or any similar law to include
assets of any Plan or Other Plans) other than an insurance company using the
assets of its general account whereby such general account is able to rely on
Section III of Prohibited Transaction Class Exemption 95-60 or the final
regulation issued by the Department of Labor under Section 401 (c) of ERISA
(both of which are discussed in the prospectus under "ERISA
Considerations--Insurance Company General Accounts") under circumstances
whereby the assets of the trust fund will not be treated as "plan assets"for
purposes of applying the fiduciary responsiblitity and the prohibited
transactions provisions of ERISA, the Internal Revenue Code of 1986 or any
similar law.
Each prospective transferee of a definitive subordinate certificate must
deliver to the depositor, the certificate registrar and the trustee either:
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, 4 or 5 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 of
this paragraph.
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.
In addition, the Department of Labor has published in the Federal
Register, a proposed prohibited transaction exemption, which would be
retroactively effective as of August 23, 2000, and which would amend each of the
individual prohibited transaction exemptions described above under "--Senior
Certificates" as follows:
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o the first condition (which provides that the certificates acquired by a Plan
may not be subordinated to the rights and interests evidenced by the other
certificates of the same trust) would not apply to the certificates, and
o the third condition (which provides that the certificates at the time of
acquisition by the Plan must be rated in one of the three highest generic
ratings categories by either Standard & Poor's, Moody's or Fitch) would be
extended to include the four highest generic ratings categories.
If the proposed prohibited transaction exemption is adopted, a Plan would be
eligible to acquire any class of subordinate certificates that is rated in one
of the four highest generic ratings categories at the time of acquisition
provided that the other conditions discussed above under "--Senior Certificates"
are satisfied. The pooling and servicing agreement will permit the certificate
registrar to waive the requirements in the second paragraph of this section if
the proposed prohibited transaction exemption is adopted so as to amend the
first and third conditions of the individual prohibited transaction exemptions
as described above.
However, it is not certain if and when the proposed amendments will be
issued in final form, and it is not certain that, if finalized, the proposed
amendments will contain the same relief as is currently proposed. Fiduciaries of
Plans should, and other potential investors who may be analyzing the potential
liquidity of their investment may wish to, consult with their advisors regarding
the proposed amendments.
-----------------------------
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. See also "ERISA Considerations--Insurance Company General
Accounts" in the accompanying prospectus.
-----------------------------
LEGAL INVESTMENT
The offered certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984.
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 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.
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-----------------------------
PLAN OF DISTRIBUTION
Subject to the underwriting agreement, each underwriter has agreed to
purchase the principal amounts of offered certificates set forth opposite its
name below:
Underwriter [Class A-1] [Class A-2] [Class B]
PNC Capital Markets, Inc.
------------------------
Total $ $ $
=========== ========== ========
Underwriter [Class C] [Class D]
PNC Capital Markets, Inc.
------------------------
Total $ $
=========== ===========
The underwriting agreement imposes conditions on the obligations of the
underwriters. The underwriters must purchase all of the offered certificates if
they purchase any.
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. 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 underwriters intend to make a secondary 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,
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.
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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
-----------------------------
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RATINGS
It is a condition of the issuance of the offered certificates that they
receive the following credit ratings from _________________________
_______________________ and _______________ _______________ (with their
successors and assigns, the "Rating Agencies"):
Class __________ ___________
[Class A-1
Class A-2
Class B
Class C
Class D]
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 latest maturity date for any of the mortgage loans as of
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/Balloon
Payment Interest Shortfalls will be realized, or
o the yield to maturity that investors may experience.
The ratings thus address credit risk and not prepayment risk.
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
by ___________ and ___________.
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INDEX OF DEFINITIONS
Additional Trust Fund Expenses....56
Advance Rate......................71
Advances..........................70
Anticipated Repayment Date........35
Appraisal Reduction...............54
Appraisal Reduction Estimate......55
Appraisal Reduction Events........54
ARD...............................35
Assumed Monthly Payment...........52
Available Funds...................50
Balloon LTV.......................42
Balloon LTV Ratio.................42
Class Interest Shortfall..........52
Collection Account................72
Collection Period.................50
Compensating Interest Payment.....57
Constant Prepayment Rate..........64
Controlling Class.................83
Corrected Mortgage Loan...........83
CPR...............................64
Cross-Collateralized Loans........33
Cut-off Date......................32
Cut-off Date Loan-to-Value........42
Cut-off Date LTV..................42
Cut-off Date Principal Balance....32
Debt Service Coverage Ratio.......41
Defeasance Loans..................37
Deferred Interest.................35
Determination Date................50
Discount Rate.....................53
Distributable Certificate Interest52
Distribution Account..............73
DSCR..............................41
ERISA.............................89
Excess Liquidation Proceeds.......52
Excess Liquidation Proceeds
Account........................73
Expense Losses....................56
Hyper-Amortization Loans..........35
Initial Interest Rate.............35
Initial Pool Balance..............32
Interest Reserve Account..........72
Interest Reserve Amount...........72
Interest Reserve Loans........49, 72
Lock-out Period...................36
Maturity Assumptions..............64
Money Term........................78
Monthly Payment...................52
Mortgage..........................32
Mortgage Loans....................32
Mortgaged Property................32
Mortgages.........................32
Multiple Property Loans...........32
Net Aggregate Prepayment/Balloon
Payment Interest Shortfall.....57
Net Collections...................83
Net Mortgage Rate.................49
Net REO Proceeds..................72
Open Period.......................36
Other Plans.......................91
P&I Advance.......................70
Plan..............................89
Prepayment/Balloon Payment
Interest Shortfall.............56
Principal Distribution Amount.....52
Principal Prepayments.............50
Qualified Substitute Mortgage
Loan...........................45
Rated Final Distribution Date.....95
Rating Agencies...................95
Realized Loss.....................56
Record Date.......................50
REMIC.............................87
REO Account.......................48
REO Mortgage Loan.................53
REO Proceeds......................72
REO Property......................48
Repurchase Price..................44
Reserve Accounts..................38
Restricted Group..................89
Revised Interest Rate.............35
Scheduled Final Distribution Date.57
Servicing Advances................70
Specially Serviced Mortgage Loan..81
Stated Principal Balance..........49
Treasury Rate.....................53
Underwritable Cash Flow...........41
Updated Appraisal.................54
Yield Maintenance Period..........36
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APPENDIX I
Mortgage Pool Information
I-1
<PAGE>
APPENDIX II
Certain Characteristics of the Mortgage Loans
II-1
<PAGE>
APPENDIX III
Significant Loan Summaries
III-1
<PAGE>
TERM SHEET
T-1
<PAGE>
FORM OF MONTHLY DISTRIBUTION STATEMENT
R-1
<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 $833 million each), other than underwriting compensation, are as
set forth below. All such expenses, except for the SEC registration and filing
fees, are estimated:
SEC Registration Fee..................................$ 625,000
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....................................$5,000,000
Miscellaneous.........................................$ 300,000
----------
Total.................................................$7,300,000
==========
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.
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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 (included on signature page).
---------------------
*Incorporated by reference from the registrant's Form S-3, File No. 333-95447,
filed with the SEC on January 24, 2000.
**Previously filed with the SEC on December 21, 2000.
***Filed herewith.
(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.
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The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement; and
(iii)To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
section 13 or section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(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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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 January 12, 2001.
PNC MORTGAGE ACCEPTANCE CORP.
By: /s/ Lawrence D. Asley
--------------------------------------
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 January 12, 2001
---------------------------- (Principal Executive Officer)
Douglas D. Danforth, Jr.
*/s/ Vince Beckett Chief Financial Officer January 12, 2001
---------------------------- (Principal Financial and
Accounting Officer)
*/s/ Cathrine E. Nix Director January 12, 2001
----------------------------
Cathrine E. Nix
*/s/ Jeffrey E. Johnson Director January 12, 2001
----------------------------
Jeffrey E. Johnson
*By: /s/ Lawrence D. Ashley
------------------------------
Lawrence D. Ashley
Attorney-in-Fact
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