<PAGE>
Information contained herein is subject to completion. These securities may
not be sold nor may offers to buy be accepted prior to the time a final
prospectus is delivered. This prospectus supplement shall not constitute
an offer to sell or the solicitation of an offer to buy nor shall there be
any sale of these securities in any State in which such offer, solicitation
or sale would be unlawful prior to registration or qualification under the
securities laws of such State.
Filed pursuant to Rule 424(b)(3)
Registration No. 33-99502
SUBJECT TO COMPLETION, DATED NOVEMBER 27, 1996
PROSPECTUS SUPPLEMENT DATED DECEMBER , 1996
(TO PROSPECTUS DATED NOVEMBER 27, 1996)
$859,388,670 (APPROXIMATE)
ASSET SECURITIZATION CORPORATION, DEPOSITOR
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1996-MD VI
The Commercial Mortgage Pass-Through Certificates, Series 1996-MD VI (the
'Certificates') will represent beneficial ownership interests in a trust fund
(the 'Trust Fund') to be created by Asset Securitization Corporation (the
'Depositor'). The Trust Fund will consist primarily of a pool (the 'Mortgage
Pool') of five mortgage loans, with original terms to maturity of not more than
30 years (the 'Mortgage Loans'), secured by first liens on 41 commercial
properties (the 'Mortgaged Properties'). The Mortgaged Properties consist of
factory outlet centers, hotels, office buildings and retail properties. The
Mortgage Loans were originated by Nomura Asset Capital Corporation (the
'Originator') and will be sold to the Depositor on or prior to the date of
initial issuance of the Certificates.
The Certificates will consist of nineteen classes, designated as the Class
A-1A Certificates, Class A-1B Certificates, Class A-1C Certificates, Class CS-1
Certificates, Class CS-2 Certificates, Class CS-3 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5
Certificates, Class A-6 Certificates, Class A-7 Certificates, Class P-IO
Certificates, Class B-1 Certificates, Class B-1H Certificates, Class V-1
Certificates, Class V-2 Certificates, Class R and Class LR Certificates. Only
the Class A-1A, Class A-1B, Class A-1C, Class CS-1, Class CS-2, Class CS-3,
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Certificates
(collectively, the 'Offered Certificates') are offered hereby; Class P-IO, Class
B-1, Class B-1H, Class V-1, Class V-2, Class R and Class LR Certificates
(collectively, the 'Private Certificates') are not offered hereby.
The characteristics of the Mortgage Loans and the Mortgaged Properties are
more fully described herein under 'Description of the Mortgage Pool' and
'Description of the Mortgage Loans and Mortgaged Properties.'
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION 'RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS' HEREIN COMMENCING ON
PAGE S-32 AND 'SPECIAL CONSIDERATIONS' IN THE PROSPECTUS COMMENCING ON PAGE 11.
(cover page continued)
------------------------------
<TABLE>
<CAPTION>
INITIAL CLASS CERTIFICATE BALANCE PASS-THROUGH
OR NOTIONAL BALANCE(1) RATE
--------------------------------- ------------
<S> <C> <C>
Class A-1A........................................ $ 94,311,998 %
Class A-1B........................................ 333,473,178
Class A-1C........................................ 171,996,502
Class CS-1(2)(3).................................. 94,311,998
Class CS-2(2)(3).................................. 333,473,178
Class CS-3(2)(3).................................. 431,603,494
Class A-2(2)...................................... 35,807,861
Class A-3(2)...................................... 35,807,861
Class A-4(2)...................................... 44,759,826
Class A-5(2)...................................... 22,379,913
Class A-6(2)...................................... 49,235,809
Class A-7(2)...................................... 71,615,722
</TABLE>
- ------------
(1) Approximate, subject to adjustment as described herein.
(2) The Pass-Through Rates shown on the table above for the Class CS-1, Class
CS-2, Class CS-3, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and
Class A-7 Certificates are the rates for the Distribution Date occurring in
January, 1997. The Pass-Through Rate for such class for each subsequent
Distribution Date will be calculated as provided herein. See 'Summary of
Prospectus Supplement--Pass-Through Rates on the Offered Certificates'
herein.
(3) The Class CS-1, Class CS-2 and Class CS-3 Certificates will not have
Certificate Balances and will not be entitled to receive distributions of
principal. Interest will accrue on such classes of Certificates, or the
components of such classes, at the Pass-Through Rates thereof on the
Notional Balances thereof. The Notional Balance of the Class CS-1
Certificates is initially $94,311,998 and will be equal to the Component
Balance of the Class A-1A Component, which is initially equal to the
Certificate Balance of the Class A-1A Certificates. The Notional Balance of
the Class CS-2 Certificates is initially $333,473,178 and will be equal to
the Component Balance of the Class A-1B Component, which is initially equal
to the Certificate Balance of the Class A-1B Certificates. The Notional
Balance of the Class CS-3 Certificates is initially $431,603,494 and will be
equal to the sum of the Component Balances of the Class A-1C, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Components, which
are initially equal to the Certificate Balances of the Class A-1C, Class
A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Certificates,
respectively.
------------------------------
THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE DEPOSITOR,
THE ORIGINATOR, THE SERVICER, THE TRUSTEE, THE FISCAL AGENT OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING
MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR INSTRUMENTALITY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------------
The Offered Certificates will be purchased by Nomura Securities
International, Inc. (the 'Underwriter') from the Depositor and will be offered
by the Underwriter from time to time to the public in negotiated transactions or
otherwise at varying prices to be determined at the time of sale. Proceeds to
the Depositor from the sale of the Offered Certificates will be % of the
initial aggregate principal balance thereof as of December 17, 1996 (the
'Cut-off Date') plus accrued interest, if any, from the Cut-off Date before
deducting expenses payable by the Depositor.
There is currently no secondary market for the Offered Certificates. The
Underwriter currently expects to make a secondary market in the Offered
Certificates, but has no obligation to do so. There can be no assurance that
such a market will develop or, if it does develop, that it will continue. See
'Method of Distribution' herein.
The Offered Certificates are offered by the Underwriter subject to prior
sale, when, as and if issued, delivered to and accepted by the Underwriter. It
is expected that delivery of the Offered Certificates will be made through the
facilities of The Depository Trust Company ('DTC') in the United States and
Centrale de Livraison de Valeurs Mobiliers S.A. ('CEDEL') and The Euroclear
System ('Euroclear') in Europe, on or about December 17, 1996.
NOMURA SECURITIES INTERNATIONAL, INC.
<PAGE>
(continuation of cover page)
Distributions on the Offered Certificates will be made, to the extent of
Available Funds (as defined herein), on the 13th day of each month, or, if any
such day is not a business day, on the next succeeding business day, beginning
in January 1997 (each, a 'Distribution Date'); provided, however, that in any
month the Distribution Date will be no earlier than the second business day
following the 11th day of such month and, provided further, that if the 11th day
of any month is not a business day, the Distribution Date shall be the third
business day following the 11th day of such month. As more fully described
herein, distributions allocable to interest on the Certificates on each
Distribution Date will be based on the pass-through rate for the respective
class or component of a class as described herein (the 'Pass-Through Rate') and
the aggregate principal balance (the 'Certificate Balance'), notional balance
(the 'Notional Balance') or component balance ('Component Balance'), as
applicable, of such class or component thereof outstanding immediately prior to
such Distribution Date. Distributions in respect of principal of the Offered
Certificates will be made as described herein under 'Description of the Offered
Certificates--Distributions--Priorities.'
THE YIELD TO MATURITY ON EACH CLASS OF THE OFFERED CERTIFICATES WILL BE
SENSITIVE TO, AND THE YIELD TO MATURITY OF THE CLASS CS-1, CLASS CS-2 AND CLASS
CS-3 CERTIFICATES WILL BE EXTREMELY SENSITIVE TO, THE RATE AND TIMING OF
PRINCIPAL PAYMENTS (INCLUDING BOTH VOLUNTARY AND INVOLUNTARY PREPAYMENTS,
DELINQUENCIES, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS AND PAYMENTS
WITH RESPECT TO REPURCHASES THEREOF THAT ARE APPLIED IN REDUCTION OF THE
CERTIFICATE BALANCE OR NOTIONAL BALANCE, AS THE CASE MAY BE, OF SUCH CLASS. A
RAPID RATE OF SUCH PRINCIPAL PAYMENTS COULD RESULT IN THE FAILURE OF INVESTORS
IN THE CLASS CS-1, CLASS CS-2 AND CLASS CS-3 CERTIFICATES TO RECOVER THEIR
INITIAL INVESTMENT. THE YIELD TO INVESTORS, IN PARTICULAR THE INVESTORS IN
SUBORDINATE CLASSES, WILL BE SENSITIVE TO THE TIMING AND MAGNITUDE OF
DELINQUENCIES AND LOSSES ON THE MORTGAGE LOANS DUE TO LIQUIDATIONS. IN ADDITION,
WITH RESPECT TO ANY CLASS OF CERTIFICATES, TO THE EXTENT LOSSES ON THE MORTGAGE
LOANS EXCEED THE PRINCIPAL BALANCE OF ALL CLASSES OF CERTIFICATES SUBORDINATE TO
SUCH CLASS, SUCH CLASS WILL BEAR A LOSS EQUAL TO THE AMOUNT OF SUCH EXCESS. NO
REPRESENTATION IS MADE AS TO THE RATE OF PREPAYMENTS ON OR RATE OR AMOUNT OF
LIQUIDATIONS OR LOSSES ON THE MORTGAGE LOANS OR AS TO THE ANTICIPATED YIELD TO
MATURITY OF ANY OFFERED CERTIFICATE. SEE 'PREPAYMENT AND YIELD CONSIDERATIONS'
HEREIN.
AMRESCO Management, Inc., a Texas corporation, and a wholly-owned subsidiary
of AMRESCO, INC., will act as servicer of the Mortgage Loans (the 'Servicer').
The obligations of the Servicer with respect to the Certificates will be limited
to its contractual servicing obligations and the obligation under certain
circumstances to make Advances (as defined herein) in respect of the Mortgage
Loans. See 'The Pooling and Servicing Agreement--Advances' herein. The Servicer
will not act as an insurer or credit enhancer of the Mortgage Pool. If the
Servicer fails to make a required Advance, LaSalle National Bank (the
'Trustee'), as acting or successor servicer, acting in accordance with the
servicing standard, will be required to make such Advance. If the Trustee fails
to make a required Advance, ABN AMRO Bank N.V., as the fiscal agent of the
Trustee (the 'Fiscal Agent'), acting in accordance with the servicing standard,
will be required to make the Advance.
It is a condition to issuance of the Certificates that each of the Class
A-1A, Class A-1B and Class A1-C Certificates be rated 'Aaa' by Moody's Investors
Service, Inc. ('Moody's') and 'AAA' by Standard & Poor's Ratings Group, a
division of The McGraw-Hill Companies, Inc. ('S&P'); the Class CS-1 and Class
CS-2 Certificates be rated 'Aaa' by Moody's and 'AAAr' by S&P; the Class CS-3
Certificates be rated 'Aaa' by 'Moody's'; the Class A-2 Certificates be rated
'Aa1' by Moody's and 'AA' by S&P; the Class A-3 Certificates be rated 'Aa2' by
Moody's; the Class A-4 Certificates be rated 'A2' by Moody's and 'A' by Fitch
Investors Service, L.P. ('Fitch' and, together with Moody's and S&P, the 'Rating
Agencies'); the Class A-5 Certificates be rated 'A3' by Moody's and 'A-' by
Fitch; the Class A-6 Certificates be rated 'Baa2' by Moody's and 'BBB' by Fitch
and S&P; and the Class A-7 Certificates be rated 'BBB-' by Fitch.
Elections will be made to treat designated portions of the Trust Fund,
exclusive of the Reserve Accounts, Lock Box Accounts, Cash Collateral Accounts,
the Certificate Distribution Account, the Floor Agreements, the Excess Interest
and the Default Interest (each as defined herein) (such portions of the Trust
Fund, the 'Trust REMICs'), and the Trust REMICs will qualify, as two separate
'real estate mortgage investment conduits' (each, a 'REMIC' or, alternatively,
the 'Upper-Tier REMIC' and the 'Lower-Tier REMIC,' respectively) for federal
income tax purposes. The Class A-1A, Class A-1B, Class A-1C, Class CS-1, Class
CS-2, Class CS-3, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class
A-7, Class P-IO, Class B-1 and Class B-1H Certificates will constitute interests
in a grantor trust and will represent beneficial interests in 'regular
interests' in the Upper-Tier REMIC and in the corresponding Floor Agreements.
The Class R and Class LR Certificates will constitute the sole classes of
'residual interests' in the Upper-Tier REMIC and the Lower-Tier REMIC,
respectively. The Offered Certificates, together with the Class P-IO, Class B-1
and Class B-1H Certificates, are sometimes collectively referred to herein as
the 'Regular Certificates.' The Class V-1 Certificates will represent the right
to receive Default Interest and the Class V-2 Certificates will represent the
right to receive Excess Interest, which portions of the Trust Fund will be
treated as part of the grantor trust for federal income tax purposes. See
'Certain Federal Income Tax Consequences' herein and in the Prospectus.
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE
PART OF A SEPARATE SERIES OF CERTIFICATES ISSUED BY THE DEPOSITOR AND ARE BEING
OFFERED PURSUANT TO ITS PROSPECTUS DATED NOVEMBER 27, 1996, OF WHICH THIS
PROSPECTUS SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS
SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS
OFFERING WHICH IS NOT CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO
READ THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT IN FULL. SALES OF THE OFFERED
CERTIFICATES MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
The distribution of this Prospectus Supplement dated December , 1996 and
the Prospectus dated November 27, 1996, and the offer or sale of Certificates
may be restricted by law in certain jurisdictions. Persons into whose possession
this Prospectus Supplement and the Prospectus or any Certificates come must
inform themselves about, and observe, any such restrictions. In particular,
there are restrictions on the distribution of this Prospectus Supplement and the
Prospectus and the offer or sale of Certificates in the United Kingdom (see
'Method of Distribution' herein).
The Depositor does not intend to register the Certificates under the
Securities and Exchange Law of Japan (the 'SEL'). Accordingly, the Certificates
may not be offered or sold directly or indirectly in Japan, and this Prospectus
Supplement and the Prospectus may not be distributed or circulated in Japan,
except in circumstances that do not constitute an offer to the public within the
meaning of the SEL.
S-2
<PAGE>
EXECUTIVE SUMMARY
Prospective investors are advised to carefully read, and should rely solely
on, the detailed information appearing elsewhere in this Prospectus Supplement
and the Prospectus relating to the Offered Certificates in making their
investment decision. The following Executive Summary does not include all
relevant information relating to the securities and collateral described herein,
particularly with respect to the risks and special considerations involved with
an investment in such securities and is qualified in its entirety by reference
to the detailed information appearing elsewhere in this Prospectus Supplement
and the Prospectus. Prior to making any investment decision, a prospective
investor should carefully review this Prospectus Supplement and the Prospectus.
Capitalized terms used and not otherwise defined herein have the respective
meanings assigned to them in this Prospectus Supplement and the Prospectus.
<TABLE>
<CAPTION>
Approximate Approximate
Percent of Credit CERTIFICATE SUMMARY
Total Support
<S> <C> <C> <C> <C> <C>
89.5%
% CLASS CS-1
$94,311,998
(Notional)
10.5 CLASS A-1A $94,311,998 (Aaa/n/a/AAA) (Aaa/n/a/AAAr)
% CLASS CS-2
$333,473,178
(Notional)
37.2 52.3% CLASS A-1B $333,473,178 (Aaa/n/a/AAA) (Aaa/n/a/AAAr)
19.3 % 33.0% CLASS A-1C $171,996,502 (Aaa/n/a/AAA)
4.0 % 29.0% CLASS A-2 $35,807,861 (Aa1/n/a/AA)
CLASS CS-3
$431,603,494
4.0 % 25.0% CLASS A-3 $35,807,861 (Aa2/n/a/n/a)
(Notional)
(Aaa/n/a/n/a)
5.0 % 20.0% CLASS A-4 $44,759,826 (A2/A/n/a)
2.5 % 17.5% CLASS A-5 $22,379,913 (A3/A-/n/a)
5.5 % 12.0% CLASS A-6 $49,235,809 (Baa2/BBB/BBB)
8.0 % 4.0% CLASS A-7 $71,615,722 (n/a/BBB-/n/a)
CLASS B-1 $35,807,865 (n/a/BB/n/a)
AND (approx.)
4.0 % n/a CLASS B-1H
</TABLE>
/ / PUBLIC CERTIFICATES RATING AGENCIES: (MOODY'S/FITCH/S&P)
/ / PRIVATE CERTIFICATES P-IO, V-1, V-2, R AND LR CLASSES ARE NOT LISTED
S-3
<PAGE>
<TABLE>
<CAPTION>
CERTIFICATE SUMMARY
INITIAL
AGGREGATE % OF PASS-THROUGH AVG. PRINCIPAL
CLASS RATINGS CERTIFICATE TOTAL DESCRIPTION RATE AS LIFE* WINDOW*
PRINCIPAL OR OF CUT-OFF DATE (YRS.)
NOTIONAL AMOUNT
<S> <C> <C> <C> <C> <C>
Investment Grade Certificates
A-1A Aaa/Moody's; $ 94,311,998 10.5% Fixed Rate % 3.94 1/97
AAA/S&P to
11/03
A-1B Aaa/Moody's; $ 333,473,178 37.2% Fixed Rate % 6.91 11/03
AAA/S&P to
11/03
A-1C Aaa/Moody's; $ 171,996,502 19.3% Fixed Rate % 9.56 11/03
AAA/S&P to
10/07
A-2 Aa1/Moody's; $ 35,807,861 4.0% Weighted Average Coupon % 10.82 10/07
AA/S&P to
10/07
A-3 Aa2/Moody's $ 35,807,861 4.0% Weighted Average % 10.82 10/07
Coupon to
10/07
A-4 A2/Moody's; $ 44,759,826 5.0% Weighted Average % 10.82 10/07
A/Fitch Coupon to
10/07
A-5 A3/Moody's; $ 22,379,913 2.5% Weighted Average % 10.82 10/07
A-/Fitch Coupon to
10/07
A-6 Baa2/Moody's; $ 49,235,809 5.5% Weighted Average % 10.87 10/07
BBB/S&P, Fitch Coupon to
12/07
A-7 BBB-/Fitch $ 71,615,722 8.0% Weighted Average % 13.15 12/07
Coupon to
8/11
CS-1 Aaa/Moody's; $ 94,311,998 n/a Interest Only: Weighted % 2.48** n/a
AAAr/S&P Average Coupon
CS-2 Aaa/Moody's; $ 333,473,178 n/a Interest Only: Weighted % 3.51** n/a
AAAr/S&P Average Coupon
CS-3 Aaa/Moody's; $ 431,603,494 n/a Interest Only: Weighted % 5.44** n/a
AAAr/S&P Average Coupon
Non-Investment Grade Certificates***
B-1 and Ba2/Moody's $ 35,807,865 4.0%
Class (approx.)
B-1H
</TABLE>
Classes P-IO, V-1, V-2, R and LR are not represented in this table.
* Based on Scenario 1.
** Calculated on a cash flow basis.
*** Not offered hereby.
MORTGAGE LOAN SUMMARY
<TABLE>
<CAPTION>
LOAN # PROPERTIES CUT-OFF ANTICIPATED AMORTIZATION MORTGAGE DSCR 'ARD' CUT-OFF
DATE REPAYMENT (MONTHS) RATE LTV DATE
BALANCE DATE LTV
('ARD')
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Columbia/Sussex II Pool 12 $135,230,640 8/11/11 240 8.810% 1.71 26% 57%
HGI II Pool 5 99,217,643 10/11/06 360 9.060% 1.76 51% 55%
MPH II Pool 4 266,000,000 10/11/07 240 8.220% 2.06 35% 49%
Palmer Square 4 36,000,000 12/11/07 300 8.090% 2.04 41% 51%
Prime Retail II Pool 16 358,748,252 11/11/03 360 7.782% 2.03 46% 50%
TOTAL/WTD. AVER. 41 895,196,535 304 8.231% 1.96 40% 51%
</TABLE>
The terms 'Anticipated Repayment Date,' 'DSCR,' 'Anticipated Repayment date
LTV,' and 'Cut-off Date LTV' are defined in this Prospectus Supplement in the
explanatory notes set forth prior to the tables under: 'Description of the
Mortgage Pool.'
S-4
<PAGE>
PROSPECTUS SUPPLEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Summary of Prospectus Supplement................................. S-7
Risk Factors and Other Special Considerations.................... S-32
The Mortgage Loans............................................. S-32
The Certificates............................................... S-48
Description of the Mortgage Pool................................. S-52
General........................................................ S-52
Security for the Mortgage Loans................................ S-53
Certain Characteristics of the Mortgage Loans.................. S-53
Underwriting Standards......................................... S-73
Additional Information......................................... S-74
Description of the Mortgage Loans and Mortgaged Properties....... S-74
Columbia Sussex II Pool Loan and Properties.................... S-74
The HGI II Pool Loan and Properties............................ S-85
The MHP II Pool Loan and Properties............................ S-93
The Palmer Square Loan and Properties.......................... S-108
The Prime Retail II Pool Loan and Properties................... S-116
Description of the Offered Certificates.......................... S-129
General........................................................ S-129
Distributions.................................................. S-130
Subordination.................................................. S-141
Appraisal Reductions........................................... S-142
Delivery, Form and Denomination................................ S-143
Book-Entry Registration........................................ S-144
Definitive Certificates........................................ S-146
Transfer Restrictions.......................................... S-146
The Interest Rate Floor Agreements............................... S-147
The Floor Counterparty........................................... S-150
Prepayment and Yield Considerations.............................. S-152
Yield.......................................................... S-152
Yield on the Class CS-1, Class CS-2 and Class CS-3
Certificates................................................ S-153
Rated Final Distribution Date.................................. S-155
Weighted Average Life of the Offered Certificates.............. S-155
The Pooling and Servicing Agreement.............................. S-166
General........................................................ S-166
Assignment of the Mortgage Loans............................... S-166
Representations and Warranties; Repurchase..................... S-166
Servicing of the Mortgage Loans; Collection of Payments........ S-171
Advances....................................................... S-172
Accounts....................................................... S-174
Withdrawals from the Collection Account........................ S-176
Successor Manager.............................................. S-176
Enforcement of 'Due-on-Sale' and 'Due-on-Encumbrance'
Clauses..................................................... S-177
Inspections.................................................... S-177
Evidence as to Compliance...................................... S-178
Certain Matters Regarding the Depositor, the Servicer and the
Special Servicer............................................ S-178
Events of Default.............................................. S-179
Rights Upon Event of Default................................... S-180
Amendment...................................................... S-181
Realization Upon Mortgage Loans; Modification.................. S-181
Optional Termination........................................... S-184
The Trustee.................................................... S-185
Duties of the Trustee.......................................... S-185
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----------
The Fiscal Agent............................................... S-186
<S> <C>
Duties of the Fiscal Agent..................................... S-186
The Servicer................................................... S-186
Servicing Compensation and Payment of Expenses................. S-187
Special Servicing.............................................. S-187
Servicer and Special Servicer Permitted to Buy Certificates.... S-189
Reports to Certificateholders.................................. S-189
Use of Proceeds.................................................. S-190
Certain Federal Income Tax Consequences.......................... S-190
Taxation of Offered Certificates............................... S-190
Taxation of Upper-Tier REMIC Regular Interests................. S-191
Taxation of Floor Agreements................................... S-192
Application of Straddle Rules.................................. S-193
Taxation of Foreign Investors.................................. S-193
ERISA Considerations............................................. S-193
Legal Investment................................................. S-195
Method of Distribution........................................... S-196
Experts.......................................................... S-196
Legal Matters.................................................... S-197
Rating........................................................... S-197
Index of Significant Definitions................................. S-198
Financial Information
Marriott Hotel Properties II Limited Partnership............ Exhibit A-1
Santa Clara Marriott Hotel Limited Partnership..............
Prime Retail Properties..................................... Exhibit A-2
JMJ Acquired Properties.....................................
Global Clearance, Settlement and Tax Documentation Procedures.... Exhibit B
Mortgaged Property Characteristics............................... Annex A
</TABLE>
INDEX OF TABLES
<TABLE>
<S> <C>
Mortgage Loan Characteristics.................................... S-59
Cut-off Date Allocated Loan Balances............................. S-60
Property Type.................................................... S-60
Principal Balances as of the Cut-off Date........................ S-61
Range of Loan-to-Value Ratios.................................... S-61
Range of Loan-to-Value Ratios at Anticipated Repayment Date...... S-62
Remaining Term to Anticipated Repayment Date in Months........... S-62
Remaining Prepayment Lockout as of the Cut-off Date in months.... S-62
Mortgaged Properties by Property Type............................ S-63
Mortgaged Properties by State.................................... S-64
Hotel Properties by State........................................ S-65
Factory Outlet Centers By State.................................. S-65
Hotel Property Occupancy and Average Daily Rate.................. S-66
Annual Retail Lease Expiration--Palmer Square Loan............... S-67
Retail Tenants Based on Annualized Rent--Palmer Square Loan...... S-67
Annual Office Lease Expiration--Palmer Square Loan............... S-68
Office Tenants Based on Annualized Base Rent--Palmer Square
Loan........................................................... S-68
Retail Characteristics........................................... S-69
Annual Lease Expiration--Prime Retail II Pool Loan............... S-70
Tenants Based on Annualized Base Rent--Prime Retail II Pool
Loan........................................................... S-70
Annual Lease Expiration--HGI II Pool Loan........................ S-71
Tenants Based on Annualized Base Rent--HGI II Pool Loan.......... S-72
Parent Company Based on Annualized Base Rent--HGI Pool Loan...... S-72
</TABLE>
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<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Certain capitalized terms used in this Summary are
defined elsewhere in this Prospectus Supplement or in the Prospectus. An Index
of Significant Definitions included at the end of this Prospectus Supplement
sets forth the pages on which the definitions of certain principal terms appear.
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Title of Certificates......... Asset Securitization Corporation, Commercial Mortgage Pass- Through
Certificates, Series 1996-MD VI (the 'Certificates').
Certificate Balance and
Notional Balance............ Each class of Offered Certificates has the approximate aggregate
initial Certificate Balance or Notional Balance, as the case may be,
set forth on the cover page of this Prospectus Supplement, subject to
a permitted variance of plus or minus 5%. The Offered Certificates,
together with the Private Certificates, will be issued pursuant to a
Pooling and Servicing Agreement to be dated as of the Cut-off Date
(the 'Pooling and Servicing Agreement') among the Depositor, the
Servicer, the Trustee and the Fiscal Agent.
Depositor..................... Asset Securitization Corporation, a Delaware corporation and a wholly
owned subsidiary of Nomura Asset Capital Corporation, and an
affiliate of Nomura Securities International, Inc. (the
'Underwriter'). See 'The Depositor' in the Prospectus.
Servicer...................... AMRESCO Management, Inc. a Texas corporation and a wholly-owned
subsidiary of AMRESCO, INC. (the 'Servicer'). See 'The Pooling and
Servicing Agreement--The Servicer' herein and 'Description of the
Agreement--Sub-Servicers' in the Prospectus.
Trustee....................... LaSalle National Bank, a nationally chartered bank (the 'Trustee').
See 'The Pooling and Servicing Agreement--The Trustee' herein.
Fiscal Agent.................. ABN AMRO Bank N.V., a Netherlands banking corporation (the 'Fiscal
Agent'), and the indirect corporate parent of the Trustee.
Originator.................... Nomura Asset Capital Corporation, a Delaware corporation and an
affiliate of the Depositor and the Underwriter.
Cut-off Date.................. December 17, 1996.
Closing Date.................. On or about December 17, 1996.
Distribution Date............. The 13th day of each month, or if such 13th day is not a business
day, the business day immediately following such 13th day, commencing
in January 1997; provided, however, that in any month, the
Distribution Date will be no earlier than the second business day
following the 11th day of such month and, provided further, that if
the 11th day of any month is not a business day, the Distribution
Date will be the third business day following the 11th day of such
month.
Record Date................... With respect to each Distribution Date, the close of business on the
10th day of the month in the month in which such Distribution Date
occurs, or if such day is not a business day, the preceding business
day; provided, however, that with respect to the first Distribution
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Date, for all purposes other than receipt of the distribution on such
Distribution Date, the Record Date is the Closing Date.
Interest Accrual Period....... With respect to any Distribution Date other than the Distribution
Date occurring in January 1997, the period commencing on and
including the 11th day of the month preceding the month in which such
Distribution Date occurs and ending on and including the 10th day of
the month in which such Distribution Date occurs; the Interest
Accrual Period with respect to the Distribution Date occurring in
January 1997 is assumed to consist of 24 days. Each Interest Accrual
Period other than the Interest Accrual Period with respect to the
Distribution Date occurring in January 1997 is assumed to consist of
30 days.
Scheduled Final Distribution
Date........................ As to each class of Offered Certificates, November 13, 2026, the
Distribution Date occurring immediately after the latest maturity
date provided for in the Mortgage Loans.
Rated Final Distribution
Date........................ As to each class of Offered Certificates, November 13, 2029, the
Distribution Date occurring three years after the latest maturity
date provided for in the Mortgage Loans.
Collection Period............. With respect to a Distribution Date and each Mortgage Loan, the
period beginning on the day after the Due Date in the month preceding
the month in which such Distribution Date occurs (or, with respect to
the first Distribution Date, the Cut-off Date) and ending at the
close of business on the Due Date in the month in which such
Distribution Date occurs.
Due Date...................... With respect to any Distribution Date and/or any Mortgage Loan, as
the case may be, the 11th day (or in the case of certain of the
Mortgage Loans, if the 11th day is not a business day, either the
next business day or the first preceding business day) of the month
in which such Distribution Date occurs.
Denominations................. The Offered Certificates will be issuable in registered form, in
minimum denominations of Certificate Balance or Notional Balance, as
applicable, of $100,000 and multiples of $1 in excess thereof.
Clearance and Settlement...... Holders of Offered Certificates may elect to hold their Certificates
through any of The Depository Trust Company ('DTC') (in the United
States) or Centrale de Livraison de Valeurs Mobiliers S.A. ('CEDEL')
or The Euroclear System ('Euroclear') (in Europe). Transfers within
DTC, CEDEL or Euroclear, as the case may be, will be in accordance
with the usual rules and operating procedures of the relevant system.
Crossmarket transfers between persons holding directly or indirectly
through DTC, on the one hand, and counterparties holding directly or
indirectly through CEDEL or Euroclear, on the other, will be effected
in DTC through the relevant Depositories of CEDEL or Euroclear. The
Depositor may elect to terminate the book-entry system through DTC
with respect to all or any portion of any class of the Offered
Certificates. See 'Description of the Offered Certificates--Delivery,
Form and Denomination,' '--Book-Entry Registration' and '--Definitive
Certificates' herein and 'Description of the Certificates--Book-Entry
Registration and Definitive Certificates' in the Prospectus.
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The Mortgage Pool............. The 'Mortgage Pool' will consist of five Mortgage Loans, each
evidenced by one or more promissory notes (each, a 'Note') secured by
first mortgages, deeds of trust or similar security instruments
('Mortgages') on commercial properties (the 'Mortgaged Properties').
See 'Description of the Mortgage Loans and the Mortgaged Properties'
herein. The Mortgage Loans will be acquired by the Depositor on or
before the Closing Date. In connection with its acquisition of the
Mortgage Loans, the Depositor will be assigned (and will in turn
assign to the Trustee for the benefit of the holders of the
Certificates) certain rights in respect of certain representations
and warranties described herein that were made by the Originator to
the Depositor. As of the Cut-off Date, the Mortgage Loans had the
following characteristics:
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Aggregate Principal Balance..................... $895,196,535
Lowest Mortgage Loan Principal Balance.......... $36,000,000
Highest Mortgage Loan Principal Balance(1)...... $358,748,252
Average Mortgage Loan Principal Balance......... $179,039,307
Range of Term to Maturity ...................... 240 to 360
(as of date of origination) months
Weighted Average Term to Maturity
(as of date of origination)................... 304 months
Range of Remaining Term to Anticipated Repayment
Date.......................................... 83 to 176 months
Weighted Average Remaining Term to
Anticipated Repayment Date.................... 117 months
Range of Interest Rate ('Mortgage Rate') per 7.782% to
annum(2)...................................... 9.060%
Weighted Average Mortgage Rate(2)............... 8.231%
Range of Loan-to-Value ('LTV') Ratio............ 49% to 57%
Weighted Average LTV Ratio...................... 51%
Range of Debt Service Coverage Ratio............ 1.71 to 2.06
Weighted Average Debt Service Coverage
Ratio......................................... 1.96
- ------------------------
(1) Such amount includes the principal balance attributable to the
Prime Retail II Pool Loan Expansion Account (as described
herein).
(2) The Prime Retail II Pool Loan bears interest during the first
two years of its loan term at a Mortgage Rate equal to LIBOR (as
defined herein) plus 1.51%. However, the Prime Retail II Pool
Borrowers have entered into interest rate cap agreements which
obligate the counterparties thereof to pay LIBOR over 7.00%. See
'Description of the Mortgage Loans and Properties--The Prime
Retail II Pool Loan and Properties--Payment Terms.' Thereafter,
the Prime Retail II Pool Loan bears interest at a fixed rate per
annum equal to 7.782%. The Mortgage Rate of the Prime Retail II
Pool Loan as of the Cut-off Date is %.
Each of the Mortgage Loans substantially fully amortizes over its
respective term to maturity.
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<TABLE>
Description of the Mortgage Loans and Properties
<S> <C>
A. Columbia Sussex II Pool
Loan and Properties......... The Columbia Sussex II Pool Loan has a principal balance as of the
Cut-off Date of $135,230,640 and is secured by Mortgages (the 'CS II
Mortgages') encumbering twelve full-service hotels (the 'Columbia
Sussex II Pool Properties') located in Florida, New York, Kentucky,
New Jersey, Michigan, Ohio, Illinois, and Alabama. The interests of
the Columbia Sussex II Pool Borrower in two of the Columbia Sussex II
Pool Properties consist of leasehold interests. The CS II Mortgages
are cross-collateralized and cross-defaulted. The borrower under the
Columbia Sussex II Pool Loan is Grandview Hotel Limited Partnership
(the 'Columbia Sussex II Pool Borrower'). The Columbia Sussex II Pool
Loan is evidenced by a Note that bears interest at a fixed rate per
annum equal to 8.87% (the 'CS II Current Interest Rate') through and
including August 10, 2011. From and after August 11, 2011 (the 'CS II
Anticipated Repayment Date'), the Note accrues interest at a fixed
rate per annum equal to the greater of (i) 10.87% and (ii) the yield
as of the CS II Anticipated Repayment Date, calculated by linear
interpolation of the yields of U.S. Treasury Constant Maturities with
terms (one longer and one shorter) most nearly approximating that of
noncallable U.S. Treasury obligations having maturities as close as
possible to the CS II Maturity Date (as defined below), plus 2.0%
(the 'CS II Revised Interest Rate'). All interest accrued at the
excess of the CS II Revised Interest Rate over the CS II Current
Interest Rate will be deferred and will not be paid until the
principal balance of the Columbia Sussex II Pool Loan has been
reduced to zero. Interest on the Columbia Sussex II Pool Loan is
calculated on the basis of the actual number of days elapsed and a
360-day year.
The Columbia Sussex II Pool Loan is scheduled to mature on August 11,
2016 (the 'CS II Maturity Date'), but may be prepaid without payment
of a yield maintenance premium on or after the CS II Anticipated
Repayment Date. Commencing on September 11, 1996, the Columbia Sussex
II Pool Loan requires 240 constant monthly payments (the 'CS II
Monthly Debt Service Payment Amount') of principal and interest of
$1,212,279.81 (based on a 240-month amortization schedule and the CS
II Current Interest Rate). Payment of the balance of the principal,
if any, together with all accrued and unpaid interest is required on
the CS II Maturity Date. Additionally, commencing on the first
payment date after the CS II Anticipated Repayment Date, the Columbia
Sussex II Pool Borrower is required to apply 100% of the CS II Excess
Cash Flow (as defined below under 'Description of the Mortgage Loans
and Mortgaged Properties--The Columbia Sussex II Pool Loan and
Properties--The Loan--Payment Terms') for the month preceding the
month in which the payment date occurs towards the reduction of the
principal balance of the Columbia Sussex II Pool Loan. The scheduled
principal balance of the Columbia Sussex II Pool Loan as of the CS II
Anticipated Repayment Date is approximately $63,177,455.
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The Columbia Sussex II Pool Properties consist of five Holiday Inns,
four Radisson Hotels, one Best Western Hotel, one Sheraton Hotel and
one Marriott Hotel and the size of the hotels ranges from 121 rooms
to 501 rooms. The average occupancy rates for the 12 months ended
August 31, 1996 for the Columbia Sussex II Pool Properties, ranged
from 44% to 83%, with a weighted average occupancy rate of 67%. The
ADRs for the 12 month period ending August 31, 1996 for the Columbia
Sussex II Pool Properties ranged from approximately $41 to
approximately $108, with a weighted average of approximately $66. The
appraisals performed for the Columbia Sussex II Pool Properties as of
July 1, 1996 determined an aggregate value of approximately
$239,000,000.
B. The HGI II Pool Loan
and Properties............. The 'HGI II Pool Loan' has a principal balance as of the Cut-off Date
of $99,217,643 and is secured by five separate Mortgages (the 'HGI II
Pool Mortgages') on five factory outlet properties (the 'HGI II Pool
Properties') located in California, Maryland and Texas. The HGI II
Pool Mortgages are cross-collateralized and cross-defaulted. The
borrower under the HGI II Pool Loan is Second Horizon Group Limited
Partnership (the 'HGI II Pool Borrower'). The HGI II Pool Loan is
evidenced by a Note that bears interest at a fixed rate per annum
equal to 9.06% (the 'HGI II Current Interest Rate') through and
including October 10, 2006. From and including October 11, 2006 (the
'HGI II Anticipated Repayment Date'), the Note accrues interest at a
fixed rate per annum equal to 2% plus the greater of (i) the HGI II
Current Interest Rate and (ii) the yield as of the HGI II Anticipated
Repayment Date calculated by linear interpolation of U.S. Treasury
Constant Maturities with terms (one longer and one shorter) most
nearly approximating those of noncallable U.S. Treasury obligations
having maturities as close as possible to October 11, 2026 (the 'HGI
II Revised Interest Rate'). All interest accrued at the excess of the
HGI II Revised Interest Rate over the HGI II Current Interest Rate
will be deferred and will not be paid until after the principal
balance of the loan has been reduced to zero. Amounts so deferred
will accrue interest at the HGI II Revised Interest Rate. Interest on
the HGI II Pool Loan is computed on the basis of the actual number of
days elapsed and a 360-day year.
The HGI II Pool Loan is scheduled to mature on October 11, 2026 (the
'HGI II Maturity Date'), but may be prepaid without payment of a
yield maintenance premium on and after the HGI II Anticipated
Repayment Date. Commencing on November 11, 1996, the HGI II Pool Loan
requires 360 constant monthly payments (the 'HGI II Monthly Debt
Service Payment Amount') of principal and interest of $803,280.95
(based on a 360-month amortization schedule and the HGI II Current
Interest Rate). Payment of the balance of the principal, if any,
together with all accrued and unpaid interest is required on the HGI
II Maturity Date. Additionally, commencing on the first payment date
after the HGI II Anticipated Repayment Date, the HGI II Pool Loan
requires that all HGI II Excess Cash Flow (as defined below under
'Description of the Mortgage Loans and Mortgaged Properties--The HGI
II Pool Loan and Properties--The Loan--Payment Terms') be applied
towards the reduction of the
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principal balance of the loan. The scheduled principal balance of the
loan as of the HGI II Anticipated Repayment Date is approximately
$90,933,808.
The HGI II Pool Properties contain approximately 1,248,107 square
feet of GLA. As of September 13, 1996, the occupancy rate for the HGI
II Pool Properties ranged from approximately 92% to 100% and the
annualized base rent for such properties was approximately $15.60 per
square foot of GLA. Tenants include Bass Company Store, Bugle Boy,
Levi's Outlet, Nike, Mikasa Factory Store, Gap Outlet, Liz Claiborne
and Reebok Factory Store. Recent appraisals determined an aggregate
value of $179,000,000 for the HGI II Pool Properties.
C. The MHP II Pool Loan and
Properties................. The 'MHP II Pool Loan' has a principal balance as of the Cut-off Date
of $266,000,000 and is evidenced by three separate notes issued by
two related borrowers. The first two Notes (the 'MHPLP Notes'),
having principal balances of $195,405,904 and $27,094,096,
respectively, were issued by Marriott Hotel Properties II Limited
Partnership (the 'MHPLP Borrower') and are secured by (a) first
Mortgages encumbering three full service hotels (the 'MHPLP
Properties') located in New Orleans, Louisiana (the 'Louisiana
Property'), San Antonio, Texas and San Ramon, California and (b) a
pledge of the 50% limited partnership interest in the Santa Clara
Borrower (as defined below) owned by the MHPLP Borrower. The third
Note (the 'Santa Clara Note,' and together with the MHPLP Notes, the
'MHP II Pool Notes'), having a principal balance of $43,500,000, was
issued jointly by Santa Clara Marriott Hotel Limited Partnership (the
'Santa Clara Borrower,' and together with the MHPLP Borrower, the
'MHP II Pool Borrowers') and the MHPLP Borrower and is secured by a
first Mortgage encumbering a full service hotel owned by the Santa
Clara Borrower (the 'Santa Clara Property,' and together with the
MHPLP Properties, the 'MHP II Pool Properties') located in Santa
Clara, California and second Mortgages on the MHPLP Properties. The
interests of the MHP II Pool Borrowers in each of the MHP II Pool
Properties other than the Louisiana Property consist of leasehold
interests. All of the MHP II Pool Notes are cross-defaulted, but have
only 'one-way' cross-collaterization in that the MHPLP Properties
secure the Santa Clara Note, but the Santa Clara Property does not
secure the MHPLP Notes. (However, the MHPLP Borrower is entitled to
receive certain amounts with respect to the Santa Clara Property
through its 50% limited partnership interest in the Santa Clara
Borrower.) Each of the MHP II Pool Notes bears interest at a fixed
rate per annum equal to 8.22% (the 'MHP II Current Interest Rate')
through and including October 10, 2007. From and after October 11,
2007 (the 'MHP II Anticipated Repayment Date'), the MHP II Pool Notes
accrue interest at a fixed rate per annum equal to the greater of (i)
10.22% and (ii) the yield as of the MHP II Anticipated Repayment
Date, calculated by linear interpolation of the yields of U.S.
Treasury Constant Maturities with terms (one longer and one shorter)
most nearly approximating that of noncallable U.S. Treasury
obligations having maturities as close as possible to the tenth
anniversary of the MHP II Anticipated
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Repayment Date, plus 2.00% (the 'MHP II Revised Interest Rate'). All
interest accrued at the excess of the MHP II Revised Interest Rate
over the MHP II Current Interest Rate will be deferred and will not
be paid until the principal balances of the MHP II Pool Notes have
been reduced to zero. Interest on the MHP II Pool Notes is calculated
on the basis of the actual number of days elapsed and a 360-day year.
The MHP II Pool Notes are scheduled to mature on October 11, 2017
(the 'MHP II Maturity Date'), but may be repaid without the payment
of a yield maintenance premium on or after the MHP II Anticipated
Repayment Date. The MHP II Pool Notes require payments of interest
only until October 11, 1997. Commencing on November 11, 1997, each of
the MHP II Pool Notes requires 240 constant monthly payments of
principal and interest (based on a 240-month amortization schedule
and the MHP II Current Interest Rate). The amounts of the monthly
payments of principal and interest on the two MHPLP Notes are
$1,661,308.90 and $230,349.55, respectively, and the amount of the
monthly payment of principal and interest on the Santa Clara Note is
$369,829.85. Payment of the balance of the principal, if any,
together with all accrued and unpaid interest is required on the MHP
II Maturity Date. Additionally, commencing on the first payment date
after the MHP II Anticipated Repayment Date, the MHP II Pool
Borrowers are required to pay 100% of MHPLP Excess Cash Flow and the
MHPLP Borrower's 50% share of Santa Clara Excess Cash Flow for the
MHP II Accounting Periods (each such term as defined below under
'Description of the Mortgage Loans and the Mortgaged Properties--the
MHP II Pool Loan and Properties--The Loan--Payment Terms') ending
during the debt service period relating to the payment date be
applied towards the reduction of the outstanding principal balances
of the MHP II Pool Notes, pro rata. The scheduled principal balance
of the MHP II Pool Loan as of the MHP II Anticipated Repayment Date
is approximately $188,990,239.
The MHP II Pool Properties consist of four full service Marriott
Hotels, which range in size from 368 rooms to 1290 rooms. The average
occupancy rates for the 12 months ended September 6, 1996 for the MHP
II Pool Properties ranged from 77% to 85%, with a weighted average
occupancy rate of 81%. The ADRs for the 12 month period ending
September 6, 1996 for the MHP II Pool Properties ranged from
approximately $94 to approximately $131, with a weighted average of
approximately $121. The appraisals performed for the MHP II Pool
Properties as of August 1, 1996 determined an aggregate value of
approximately $540,400,000.
D. The Palmer Square Pool Loan
and Properties................The Palmer Square Loan has a principal balance as of the Cut-off Date
of $36,000,000 and is secured by a mortgage encumbering contiguous
parcels of land and buildings comprising a full-service hotel, office
buildings, retail stores and parking facilities (the 'Palmer Square
Properties'), which together constitute a portion of the planned
development known as Palmer Square, in Princeton, New Jersey. The
borrowers under the Palmer Square Loan are
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Nassau Inn Limited Partnership, Palmer Square Limited Partnership and
PSN Partners L.P. The Palmer Square Loan bears interest at a fixed
rate per annum equal to 8.09% (the 'Palmer Square Current Interest
Rate') through December 10, 2007. From and after December 11, 2007
(the 'Palmer Square Anticipated Repayment Date'), the Palmer Square
Loan accrues interest at a fixed rate per annum equal to the lesser
of (A) the maximum rate permitted by applicable law, and (B) the
greater of (x) the Palmer Square Current Interest Rate plus 2.00% and
(y) the yield as of the Palmer Square Anticipated Payment Date
calculated by linear interpolation of the yields of U.S. Treasury
Constant Maturities with terms (one longer and one shorter) most
nearly approximating that of noncallable U.S. Treasury Obligations
having maturities as close as possible to 14 years from the Palmer
Square Anticipated Repayment Date, plus 2.00% (the 'Palmer Square
Revised Interest Rate'). The interest accrued at the excess of the
Palmer Square Revised Interest Rate over the Palmer Square Current
Interest Rate will be deferred until December 11, 2021 (the 'Palmer
Square Maturity Date') (such accrued and deferred interest and
interest thereon at the Palmer Square Revised Interest Rate, the
'Palmer Square Excess Interest'). Interest on the Palmer Square Loan
is calculated on the basis of the actual number of days elapsed and a
360-day year.
The Palmer Square Loan is scheduled to mature on the Palmer Square
Maturity Date but may be prepaid in whole or in part without payment
of a yield maintenance premium on or after the third Due Date
preceding the Palmer Square Anticipated Repayment Date. Commencing on
the payment date in January 1997, the Palmer Square Loan requires 300
constant monthly payments of principal and interest (the 'Palmer
Square Monthly Debt Service Payment Amount') of $280,003.58 (based on
a 300-month amortization schedule and the Palmer Square Current
Interest Rate). Payment of the balance of the principal, if any,
together with all accrued and unpaid interest (including the Palmer
Square Excess Interest) is required on the Palmer Square Maturity
Date. Commencing on the first payment date after the Palmer Square
Anticipated Repayment Date, the Palmer Square Borrower is required to
apply 100% of the Palmer Square Excess Cash Flow (as defined below
under 'Description of the Mortgage Loans and Mortgaged Properties--
The Palmer Square Loan and Properties--The Loan--Payment Terms') for
the month preceding the month in which the payment date occurs
towards the reduction of the outstanding principal balance of the
Palmer Square Loan. The scheduled principal balance of the Palmer
Square Loan as of the Palmer Square Anticipated Repayment Date is
approximately $28,785,430.
The Palmer Square Properties contain approximately 102,485 square
feet of GLA of retail space, approximately 130,502 square feet of GLA
of office space, approximately 216 hotel rooms and 994 parking
spaces. The occupancy rate for the Palmer Square Properties was
approximately 93% for the retail space as of May 1996, approximately
97% for the office space as of May 1996 and approximately 66.5% for
the hotel property as of August 1996. The Palmer Square Properties
had an annualized base rent for retail and
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office space of $30 and $24 per square foot of occupied GLA,
respectively, and the ADR for the hotel property was $122.
E. The Prime Retail II Pool
Loan and Properties...........The 'Prime Retail II Pool Loan' has a principal balance as of the
Cut-off Date of $358,748,252 and is secured by Mortgages (the 'Prime
Retail II Pool Mortgages') encumbering 16 factory outlet center
properties located in Colorado, Florida, Georgia, Illinois, Indiana,
Mississippi, Missouri, Nebraska, North Carolina, Ohio, Pennsylvania
and Texas (the 'Prime Retail II Pool Properties'). The Prime Retail
II Pool Mortgages are cross-collateralized and cross-defaulted. There
are 16 borrowers under the Prime Retail II Pool Loan (the 'Prime
Retail II Pool Borrowers'), each of which are listed under
'Description of the Mortgage Loans and Properties--The Prime Retail
II Pool Loan and Properties--The Borrowers'. The Prime Retail II Pool
Loan is evidenced by a Note that bears interest at (a), through and
including the earlier to occur of (i) November 10, 1998 and (ii) the
occurrence of an event of default resulting from the failure by the
Prime Retail II Pool Borrowers to make a scheduled interest or
principal payment, a floating-rate per annum equal to LIBOR plus
1.51% and (b) thereafter, a fixed-rate per annum equal to 7.782%
through and including November 10, 2003 ((a) or (b), as in effect,
the 'Prime Retail Current Interest Rate'). However, the effect of the
Interest Rate Floor Agreements (as described herein) included in the
Trust Fund and the Class P-IO Certificates (which are not offered
hereby) is to effectively convert the Prime Retail Current Interest
Rate to a fixed rate equal to 7.782% for purposes of the Pass-Through
Rates on the Certificates (other than the Class P-IO Certificates).
See 'Description of the Offered Certificates' and 'Description of the
Floor Agreements' herein. As described herein, the Prime Retail II
Pool Borrowers have assigned payments under certain interest rate cap
agreements pursuant to which the counterparties have agreed to pay
any amounts in excess of (i) LIBOR over (ii) a per annum interest
rate equal to 7.00%. From and after November 11, 2003 (the 'Prime
Retail Anticipated Repayment Date'), the Note accrues interest at a
fixed rate per annum equal to the greater of (i) the Prime Retail
Current Interest Rate plus 2% and (ii) an interest rate equal to the
Treasury Constant Maturity Yield Index for United States Treasury
obligations having a maturity date of 7 years plus 2% determined as
of the Prime Retail Anticipated Repayment Date (the 'Prime Retail
Revised Interest Rate'). All interest accrued at the excess of the
Prime Retail Revised Interest Rate over the Prime Retail Current
Interest Rate will be deferred and will not be paid until the
principal balance of the Prime Retail II Pool Loan has been reduced
to zero. Interest on the Prime Retail II Pool Loan is computed on the
basis of the actual number of days elapsed and a 360-day year.
The Prime Retail II Pool Loan is scheduled to mature on November 11,
2026, but may be prepaid without payment of a yield maintenance
premium on or after the Prime Retail Anticipated Repayment Date. The
Prime Retail II Pool Loan requires payments of principal and interest
based on a 360-month amortization schedule and an assumed 7.782%
interest rate. The scheduled payment of principal and interest during
the first two years of the
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term of the loan will fluctuate due to the floating interest rate.
Thereafter, the Prime Retail II Pool Loan will require 336 constant
monthly payments of principal and interest equal to $2,579,863.
Payment of the balance of the principal, if any, together with all
accrued and unpaid interest is required on the Prime Retail Maturity
Date. Additionally, commencing on the first payment date after the
Prime Retail Anticipated Repayment Date, the Prime Retail II Pool
Loan requires that 100% of Prime Retail Excess Cash Flow (as defined
below under 'Description of the Mortgage Loans and Mortgaged
Properties--The Prime Retail II Pool Loan and Properties--The
Loan--Payment Terms') for the month preceding the month in which the
payment date occurs be applied towards the reduction of the principal
balance of the Prime Retail II Pool Loan. The scheduled principal
balance for the Prime Retail II Pool Loan on the Prime Retail
Anticipated Repayment Date is approximately $334,563,703.
The Prime Retail II Pool Properties range in size from approximately
126,595 square feet of GLA to approximately 419,126 square feet of
GLA and have, in the aggregate, approximately 4,446,984 square feet
of GLA. As of November 1, 1996, the occupancy rate for the Prime
Retail II Pool Properties was approximately 94%, and as of November
1, 1996, the annualized base rent for such properties was
approximately $13.23 per square foot of total GLA.
F. General.................... For a further description of the Loans and Properties, see
'Description of the Mortgage Loans and Mortgaged Properties' and
'Description of the Mortgage Pool' herein.
The Underwriter has made available an electronic version of this
Prospectus and Prospectus Supplement on the World Wide Web at
'http://www.nomurany.com'. The electronic version of this Prospectus
Supplement also contains photographs of certain of the Mortgaged
Properties.
Reserve Accounts.............. All of the Mortgage Loans require that the related borrowers deposit
specified amounts into one or more reserve accounts (the 'Reserve
Accounts') as more fully described herein under 'Description of the
Mortgage Loans and Mortgaged Properties.'
Prepayment, Sale, Substitution
and Release Provisions...... The Mortgage Loans generally prohibit the transfer or sale of the
Mortgage Properties (except in connection with a release) without the
Servicer's consent. However, the following exceptions apply.
The MHP II Pool Borrowers together have the right to sell all the MHP
II Pool Properties provided that (a) the Rating Agencies confirm that
such action will not result in the withdrawal, qualification or
reduction of the then existing ratings of the Certificates, (b) the
transferee is approved by the Servicer, whose approval will not be
unreasonably withheld, (c) no event of default has occurred and is
continuing and (d) the transferee executed new notes in a principal
amount equal to the then outstanding principal amounts of the MHP II
Pool Notes. See 'Description of the Mortgage Loans and Mortgaged
Properties--The MHP II Pool Loan
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and Properties--Transfer of Properties and Interest in Borrower;
Encumbrance'.
The Palmer Square Loan permits the transfer of all or a portion of
the Palmer Square Properties if the Rating Agencies have confirmed in
writing that such transfer will not result in a downgrade, withdrawal
or qualification of any Certificates, the Servicer has consented to
such transfer and the transferee has assumed in writing all
obligations of the transferor under the loan documents with respect
to that portion of the Palmer Square Properties transferred and has
executed and delivered such other documentation as may be required by
the Rating Agencies or reasonably required by the Servicer. See
'Description of the Mortgage Loans and Mortgaged Properties--the
Palmer Square Loan and Properties--Transfer of Properties and
Interest in Borrowers; Encumbrance.'
The Mortgage Loans provide that on and after the related Anticipated
Repayment Date (or, in the case of the Palmer Square Loan, on or
after the date that is three months prior to its Anticipated
Repayment Date), in connection with a prepayment, the related
borrower may obtain the release of one or more (or in the case of the
Palmer Square Loan and Columbia Sussex II Pool Loan, all) of the
Mortgaged Properties from the lien of the related Mortgage. Each of
the HGI II Pool Loan, MHP II Pool Loan and Prime Retail II Pool Loan
requires that the related borrower prepay an amount at least equal to
125% of the Allocated Loan Amount of any Mortgaged Property released
(or, if the MHP II Pool Property referred to herein as the Santa
Clara Property is to be released, the lesser of (i) 125% of the
Allocated Loan Amount and (ii) the sum of the Allocated Loan Amount
of the Santa Clara Property and the amount of proceeds of such sale
payable to the MHPLP Borrower pursuant to the Santa Clara Partnership
Agreement) in connection with a partial prepayment. The HGI II Pool
Loan and the Prime Retail II Pool Loan also require that the DSCR of
the remaining Mortgaged Properties, after taking such release into
account, be greater than each of the DSCR at origination as that term
is defined in the respective loan agreements and the DSCR prior to
the release. The MHP II Pool Loan requires that the DSCR of the
remaining MHPLP Properties, after taking such release into account,
be greater than each of the DSCR as that term is defined in the
related loan agreements at origination (or 1.7) and the DSCR of the
MHPLP Properties prior to the release. The Palmer Square Loan and the
Columbia Sussex II Pool Loan permit the release of the related
Mortgaged Properties only upon prepayment in full of the loan.
All of the Mortgage Loans provide that after a specified period (a
'Defeasance Lockout Period') and, with respect to the HGI II Pool
Loan, the MHP II Pool Loan and the Prime Retail II Pool Loan, prior
to the related Anticipated Repayment Date, the applicable borrower
may obtain the release of one or more Mortgaged Properties from the
lien of the related Mortgage upon the pledge to the Trustee of
noncallable U.S. Treasury or certain other noncallable U.S.
government obligations ('U.S. Obligations') which provide payments on
or prior to all successive scheduled payment dates upon which
interest and principal payments are due under the
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related Note through and including the respective Anticipated
Repayment Date and in amounts due on such dates (or scheduled to be
due on the Anticipated Repayment Date as if the related loans mature
on the applicable Anticipated Repayment Date) deemed attributable to
the Mortgaged Property or Properties to be released. In the event of
a release in connection with a partial defeasance, the Mortgage Loans
require that the principal amount defeased is equal to at least 125%
of the Allocated Loan Amount of the Mortgaged Property so released
(or if the MHP II Pool Property referred to herein as the Santa Clara
Property is to be released, the lesser of (i) 125% of the Allocated
Loan Amount and (ii) the sum of the Allocated Loan Amount of the
Santa Clara Property and the amount of proceeds of such sale payable
to the MHPLP Borrower pursuant to the Santa Clara Partnership
Agreement). The Mortgage Loans require that the DSCR of the remaining
Mortgaged Property or Properties, after taking such release into
account, is greater than both the DSCR at origination as such term is
defined in the related loan agreements and the DSCR prior to such
release (and in the case of a release of any MHP II Pool Property,
the DSCR of the MHPLP Properties prior to the release). The related
borrower will be permitted to transfer (or, with respect to certain
Mortgage Loans, the Servicer may require the transfer of) the pledged
U.S. Obligations together with the related Note or portion of the
related Note secured by such U.S. Obligations to a successor limited
purpose borrower and such successor borrower will assume the
obligations under the portion of the Mortgage Loan so transferred.
However, certain of the Mortgage Loans require that the entire
principal balance of the loan be defeased prior to such transfer to a
successor borrower.
All of the Mortgage Loans provide for mandatory prepayment under
certain circumstances such as certain casualties and condemnations.
The Columbia Sussex II Pool Borrower is permitted at any time after
the second anniversary of the Closing Date to substitute additional
hotel properties (each, a 'CS II Substitute Property') for one or
more of the Columbia Sussex II Pool Properties, provided that, among
other conditions, (a) the Rating Agencies have provided evidence in
writing to the effect that such substitution will not result in a
withdrawal, qualification or downgrade of the respective ratings of
the Certificates in effect immediately prior to such substitution,
(b) such substitution shall not be allowed more than three times, (c)
all Columbia Sussex II Pool Properties released in a single
substitution or related series of substitutions do not represent in
the aggregate more than 10% of (i) the aggregate net operating income
(for the immediately preceding 12-month period) of all of the
Columbia Sussex II Pool Properties as of the date of origination and
the date of substitution and (ii) the value of the Columbia Sussex II
Pool Properties as of the date of origination and the date of
substitution, (d) all Columbia Sussex II Pool Properties released do
not represent in the aggregate more than 25% of (i) the aggregate net
operating income (for the immediately preceding 12-month period) of
all of the Columbia Sussex II Pool Properties as of the date of
origination and the date of substitution and (ii) the value of the
Columbia Sussex II Pool Properties as of the date of origination and
the date of substitution, (e) after giving effect to the
substitution, the
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CS II Loan DSCR for all of the Columbia Sussex II Pool Properties is
not less than the CS II Loan DSCR for all of the Columbia Sussex II
Pool Properties as of the date of origination and as of the date
immediately preceding the substitution, (f) the net operating income
for the CS II Substitute Properties (adjusted, if necessary, to cap
the growth of departmental profit at 10% per annum for each of the
preceding three years) does not show a downward trend for any of the
preceding three years, and (g) the net operating income and CS II
Loan DSCR (for the twelve full calendar months immediately preceding
the substitution) for the CS II Substitute Properties is greater than
125% of the net operating income and CS II Loan DSCR (for the twelve
full calendar months immediately preceding the substitution) for the
Columbia Sussex II Pool Properties for which the CS II Substitute
Properties are being substituted. See 'Description of the Mortgage
Loans and Properties--The Columbia Sussex II Pool Loan and
Properties--Substitution of Mortgaged Properties.'
Each Prime Retail II Pool Borrower is permitted at any time prior to
the Prime Retail Anticipated Repayment Date, to substitute an
additional factory outlet center (each a 'Prime Retail Substitute
Property'), for one or more of the Prime Retail II Pool Properties,
provided that, among other conditions, (a) each Rating Agency has
delivered written confirmation that any rating of the Certificates
issued by such Rating Agency will not, as a result of the proposed
release and substitution of the Prime Retail Substitute Properties,
be downgraded from the then current ratings thereof, qualified or
withdrawn, (b) the Prime Retail II Pool Borrowers collectively will
not be entitled to replace more than two Mortgaged Properties in any
calendar year, (c) the fair market value for the proposed Prime
Retail Substitute Property is at least equal to the fair market value
of the Mortgaged Property proposed to be released, and (d) the net
operating income of the Prime Retail Substitute Property as of the
time of such release is at least equal to the net operating income of
the Mortgaged Property to be released. See 'Description of the
Mortgage Loans and Properties--The Prime Retail II Pool Loan and
Properties--Substitution of Mortgaged Properties.'
The sale, release, substitution and prepayment provisions are more
fully described herein under 'Description of the Mortgage Loans and
Mortgaged Properties.'
The Offered Certificates...... The Class A-1A Certificates will have an initial Certificate Balance
of $94,311,998.
The Class A-1B Certificates will have an initial Certificate Balance
of $333,473,178.
The Class A-1C Certificates will have an initial Certificate Balance
of $171,996,502.
The Class CS-1 Certificates will have an initial Notional Balance of
$94,311,998. The Notional Balance of the Class CS-1 Certificates is
comprised of one component: the Class A-1A Component. The Class A-1A
Component will have an initial Component Balance equal to the initial
Certificate Balance of the Class A-1A Certificates.
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The Class CS-2 Certificates will have an initial Notional Balance of
$333,473,178. The Notional Balance of the Class CS-2 Certificates is
comprised of one component: the Class A-1B Component. The Class A-1B
Component will have an initial Component Balance equal to the initial
Certificate Balance of the Class A-1B Certificates.
The Class CS-3 Certificates will have an initial Notional Balance of
$431,603,494. The Notional Balance of the Class CS-3 Certificates is
comprised of seven components: Class A-1C Component, Class A-2
Component, Class A-3 Component, Class A-4 Component, Class A-5
Component, Class A-6 Component and Class A-7 Component, which will
have initial Component Balances equal to the Certificate Balances of
the Class A-1C, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6
and Class A-7 Certificates, respectively.
The Component Balance of a component of the Class CS-3 Certificates
may be reduced, as described herein in 'Description of the Offered
Certificates--Delinquency Reduction Amounts and Appraisal Reduction
Amounts.' However, any such class will retain the right to receive
distributions of interest in respect of such reductions at a lower
priority.
The Class A-2 Certificates will have an initial Certificate Balance
of $35,807,861.
The Class A-3 Certificates will have an initial Certificate Balance
of $35,807,861.
The Class A-4 Certificates will have an initial Certificate Balance
of $44,759,826.
The Class A-5 Certificates will have an initial Certificate Balance
of $22,379,913.
The Class A-6 Certificates will have an initial Certificate Balance
of $49,235,809.
The Class A-7 Certificates will have an initial Certificate Balance
of $71,615,722.
The Private Certificates...... The Class P-IO Certificates will have an initial Notional Balance of
$358,748,252 (which is equal to the principal balance of the Prime
Retail II Pool Loan as of the Cut-off Date).
The Class B-1 and Class B-1H Certificates will have initial
Certificate Balances of approximately $35,806,865 and $1,000,
respectively.
The Class V-1, Class V-2, Class R and Class LR Certificates will not
have a Certificate Balance or a Notional Balance.
The Class P-IO, Class B-1, Class B-1H, Class V-1, Class V-2, Class LR
and Class R Certificates are not offered hereby.
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Pass-Through Rates............ The per annum rate at which interest accrues (the 'Pass-Through
Rate') on the Class A-1A, Class A-1B and Class A-1C Certificates
during any Interest Accrual Period will be equal to %, %
and %, respectively.
The Pass-Through Rate on the Class CS-1 Certificates is a per annum
rate equal to the Adjusted Weighted Average Net Mortgage Pass-Through
Rate minus % (the Pass-Through Rate of the Class A-1A
Certificates). The Pass-Through Rate on the Class CS-2 Certificates
is a per annum rate equal to the Adjusted Weighted Average Net
Mortgage Pass Through Rate minus % (the Pass-Through Rate of the
Class A-1B Certificates). The Pass-Through Rate on the Class CS-3
Certificates is a per annum rate equal to the weighted average of the
Pass Through-Rates on the Class A-1C Component, Class A-2 Component,
Class A-3 Component, Class A-4 Component, Class A-5 Component, Class
A-6 Component and Class A-7 Component, weighted on the basis of the
respective Component Balances (without giving effect to any Appraisal
Reduction Amounts or Delinquency Reduction Amounts). The Pass-Through
Rate of the Class A-1C Component is a per annum rate equal to the
Adjusted Weighted Average Net Mortgage Pass-Through Rate minus %
(the Pass-Through Rate of the Class A-1C Certificates). The
Pass-Through Rate on the Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6 and Class A-7 Components, respectively, is a per annum rate
equal to %, %, %, %, % and %,
respectively.
The Pass-Through Rate on the Class A-2 Certificates is a per annum
rate equal to the Adjusted Weighted Average Net Mortgage Pass-Through
Rate minus %.
The Pass-Through Rate on the Class A-3 Certificates is a per annum
rate equal to the Adjusted Weighted Average Net Mortgage Pass-Through
Rate minus %.
The Pass-Through Rate on the Class A-4 Certificates is a per annum
rate equal to the Adjusted Weighted Average Net Mortgage Pass-Through
Rate minus %.
The Pass-Through Rate on the Class A-5 Certificates is a per annum
rate equal to the Adjusted Weighted Average Net Mortgage Pass-Through
Rate minus %.
The Pass-Through Rate on the Class A-6 Certificates is a per annum
rate equal to the Adjusted Weighted Average Net Mortgage Pass-Through
Rate minus %.
The Pass-Through Rate on the Class A-7 Certificates is a per annum
rate equal to the Adjusted Weighted Average Net Mortgage Pass-Through
Rate minus %.
The 'Adjusted Weighted Average Net Mortgage Pass-Through Rate' with
respect to any Interest Accrual Period is the amount (expressed as a
percentage) (a) the numerator of which is the sum of (i) the products
of (A) the Net Mortgage Pass-Through Rate with respect to each
Mortgage Loan (other than the Prime Retail II Pool Loan) and (B) the
Stated Principal Balance of such Mortgage Loan
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and (ii) the product of (A) the Adjusted Net Mortgage Pass-Through
Rate with respect to the Prime Retail II Pool Loan and (B) the Stated
Principal Balance of such Mortgage Loan and (b) the denominator of
which is the sum of the Stated Principal Balances of all Mortgage
Loans, as of the Due Date occurring in the month preceding the month
in which the related Distribution Date occurs.
The 'Net Mortgage Pass-Through Rate' with respect to any Mortgage
Loan and any Interest Accrual Period is a per annum rate equal to the
Mortgage Pass-Through Rate (as such term is defined below) for such
Mortgage Loan minus the Servicing Fee Rate (as such term is defined
herein).
The 'Mortgage Pass-Through Rate' with respect to the Mortgage Loans
(other than the Prime Retail II Pool Loan) for any Interest Accrual
Period is equal to the Mortgage Rate thereof multiplied by a fraction
the numerator of which is the actual number of days in such Interest
Accrual Period and the denominator of which is 30.
[The 'Mortgage Pass-Through Rate' with respect to the
[ ] Loan and any Interest Accrual Period (a) commencing
in any January, February, April, June, September and November and in
any December occurring in a year immediately preceding any year which
is not a leap year, is equal the Mortgage Rate thereof and (b)
relating to any Interest Accrual Period commencing in any March, May,
July, August and October and in any December occurring in a year
immediately preceding a year which is a leap year, is equal to the
Mortgage Rate thereof multiplied by a fraction the numerator of which
is the actual number of days in such Interest Accrual Period and the
denominator of which is 30.]
The 'Adjusted Net Mortgage Pass-Through Rate' with respect to the
Prime Retail II Pool Loan and any Interest Accrual Period is a per
annum rate equal to the Adjusted Mortgage Pass-Through Rate (as such
term is defined below) for the Prime Retail II Pool Loan minus the
Servicing Fee Rate (as such term is defined herein).
The 'Adjusted Mortgage Pass-Through Rate' with respect to the Prime
Retail II Pool Loan and any Interest Accrual Period is equal to
7.782% multiplied by a fraction the numerator of which is the actual
number of days in such Interest Accrual Period and the denominator of
which is 30.
The 'Mortgage Rate' with respect to the Mortgage Loans is the
interest rate on each Mortgage Loan as stated in the related Note,
which does not include the Excess Rate.
The Mortgage Rate for purposes of calculating the Adjusted Weighted
Average Net Mortgage Pass-Through Rate will be the Mortgage Rate of
such Mortgage Loan without taking into account any reduction in the
interest rate by a bankruptcy court pursuant to a plan of
reorganization or pursuant to any of its equitable powers.
Distributions................. On each Distribution Date, each class (or component of a class) of
Offered Certificates will be entitled to receive interest
distributions in an amount equal to the Interest Distribution Amount
(and, in the case of the Class CS-3 Certificates, the Reduction
Interest
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Distribution Amount, if applicable) for such class (or component) and
Distribution Date, together with any Interest Shortfalls (and
Reduction Interest Shortfalls, if applicable) remaining from prior
Distribution Dates, in each case to the extent of Available Funds
(which excludes Class P-IO Available Funds (as defined herein)), if
any, remaining after (i) payment of the Interest Distribution
Amounts, Interest Shortfalls, Reduction Interest Distribution Amounts
and Reduction Interest Shortfalls for each other outstanding class of
Certificates (or component of a class), if any, bearing an earlier
sequential designation than such class (other than the Class P-IO
Certificates), and (ii), if applicable, payment of the Principal
Distribution Amount for such Distribution Date and an amount equal to
the aggregate unreimbursed Realized Losses previously allocated to
any such outstanding classes having an earlier sequential
designation. References herein to the earlier (or later) sequential
designation of these classes of Certificates (or, with respect to
Reduction Interest Distribution Amounts and Reduction Interest
Shortfalls, components thereof) means such classes (or components),
other than the Class P-IO Certificates, in alphabetical and numerical
order (or such classes or components in reverse alphabetical and
numerical order) (except in respect of the Class CS-1, Class CS-2 and
Class CS-3 Certificates, which (except in respect of Reduction
Interest Distribution Amounts and Reduction Interest Shortfalls) will
have the same priority as the Class A-1A, Class A-1B and Class A-1C
Certificates under the circumstances described herein).
The 'Interest Distribution Amount' with respect to any Distribution
Date and the Class A-1A, Class A-1B, Class A-1C, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Certificates is
equal to interest accrued during the related Interest Accrual Period
at the Pass-Through Rate on such class on the Certificate Balance of
such class.
The 'Interest Distribution Amount' with respect to any Distribution
Date and the Class CS-1, Class CS-2 and Class CS-3 Certificates is
equal to interest accrued during the related Interest Accrual Period
at the Pass-Through Rates on the related components on the Component
Balances thereof.
For purposes of calculating the Interest Distribution Amount for any
class of Offered Certificates and any Distribution Date, any
distributions in reduction of Certificate Balance or Component
Balance and reductions in Certificate Balance or Component Balance as
a result of allocations of Realized Losses, Appraisal Reduction
Amounts or Delinquency Amounts (if applicable) on the Distribution
Date occurring in the related Interest Accrual Period shall be deemed
to have been made on the first day of such Interest Accrual Period.
On each Distribution Date prior to the Cross-over Date, an amount
equal to the Principal Distribution Amount will be distributed,
first, to the Class A-1A Certificates, in reduction of the
Certificate Balance thereof, until the Certificate Balance of such
class is reduced to zero; second, to the Class A-1B Certificates, in
reduction of the Certificate Balance thereof, until the Certificate
Balance of
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such class is reduced to zero; third, to the Class A-1C Certificates,
in reduction of the Certificate Balance thereof, until the
Certificate Balance of such class is reduced to zero; fourth, to the
Class A-2 Certificates, in reduction of the Certificate Balance
thereof, until the Certificate Balance of such class is reduced to
zero; fifth, to the Class A-2 Certificates, for unreimbursed amounts
of Realized Losses previously allocated to such class; sixth, to the
Class A-3 Certificates, in reduction of the Certificate Balance
thereof, until the Certificate Balance thereof is reduced to zero;
seventh, to the Class A-3 Certificates for unreimbursed amounts of
Realized Losses previously allocated to such class; eighth, to the
Class A-4 Certificates, in reduction of the Certificate Balance
thereof, until the Certificate Balance thereof is reduced to zero;
ninth, to the Class A-4 Certificates for unreimbursed amounts of
Realized Losses previously allocated to such class; tenth, to the
Class A-5 Certificates, in reduction of the Certificate Balance
thereof, until the Certificate Balance thereof is reduced to zero;
eleventh, to the Class A-5 Certificates for unreimbursed amounts of
Realized Losses previously allocated to such class; twelfth, to the
Class A-6 Certificates, in reduction of the Certificate Balance
thereof, until the Certificate Balance thereof is reduced to zero;
thirteenth, to the Class A-6 Certificates for unreimbursed amounts of
Realized Losses previously allocated to such class; fourteenth, to
the Class A-7 Certificates, in reduction of the Certificate Balance
thereof, until the Certificate Balance thereof is reduced to zero;
fifteenth, to the Class A-7 Certificates for unreimbursed amounts of
Realized Losses previously allocated to such class, and sixteenth, to
the Private Certificates (other than the Class P-IO Certificates) in
accordance with the Pooling and Servicing Agreement, in each case to
the extent of Available Funds remaining after required distributions
of interest to such class. On each Distribution Date occurring on and
after the Cross-over Date, an amount equal to the Principal
Distribution Amount will be distributed, first, to the Class A-1A
Certificates, Class A-1B Certificates and Class A-1C Certificates,
pro rata, based on their respective Certificate Balances, in
reduction of their respective Certificate Balances, until the
Certificate Balance of each such class is reduced to zero; and
second, to the Class A-1A Certificates, Class A-1B Certificates and
Class A-1C Certificates, pro rata, based on their respective
Certificate Balances, for unreimbursed amounts of Realized Losses
previously allocated to such classes. The 'Cross-over Date' is the
Distribution Date on which the Certificate Balance of each class of
Certificates other than the Class A-1A, Class A-1B and Class A-1C
Certificates have been reduced to zero through the allocation of
Realized Losses. The Class CS-1, Class CS-2 and Class CS-3
Certificates will not be entitled to any distributions of principal.
The 'Principal Distribution Amount' for any Distribution Date is
equal to the sum, for all Mortgage Loans, of (i) the principal
component of all Monthly Payments due on the related Due Date (if
received or advanced, including any Subordinated Class Advance
Amounts allocable to principal), (ii) the principal component of all
Extended Monthly Payments due on the related Due Date (if received or
advanced, including any Subordinated Class Advance
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Amounts allocable to principal), (iii) to the extent not included in
the previous clauses, the principal component of any payment on any
Mortgage Loan received on and after the maturity date thereof, (iv)
the principal portion of all unscheduled collections in respect of a
Mortgage Loan that was liquidated in the related Collection Period,
(v) the Stated Principal Balance of each Mortgage Loan purchased from
the Trust Fund in connection with breaches of representations or
warranties or the exercise of the rights described under 'Optional
Termination' below, (vi) to the extent not included in any preceding
clause, all Principal Prepayments received in the related Collection
Period and, (vii) to the extent not included in any preceding clause,
any other full or partial recoveries of principal, including Net REO
Proceeds (as defined herein), net liquidation proceeds, net
condemnation proceeds and net insurance proceeds. Amounts received on
any Mortgage Loan that represent recoveries of any Subordinate Class
Advance Amount will not be included in the calculation of 'Principal
Distribution Amount.'
Except as described in the next sentence, the holders of the Class
V-1, Class V-2, Class R and Class LR Certificates will not be
entitled to distributions of interest or principal. The Class V-1
Certificates will be entitled to distributions of Default Interest
and the Class V-2 Certificates will be entitled to distributions of
Excess Interest, in each case, to the extent set forth in the Pooling
and Servicing Agreement. The holders of the Class R Certificates will
be entitled to receive any Available Funds remaining in the
Upper-Tier Distribution Account on any Distribution Date after all
distributions to which the regular interests in the Upper-Tier REMIC
are entitled on such Distribution Date. The Class LR
Certificateholders will be entitled to receive any funds remaining in
the Lower-Tier Distribution Account on any Distribution Date after
all distributions to which the regular interests in the Lower-Tier
REMIC are entitled on such Distribution Date have been made and the
proceeds of the remaining assets in the Trust Fund, if any, after the
Certificate Balances of the Regular Certificates have been reduced to
zero and the holders of the Regular Certificates have received all
other distributions to which they are entitled. It is not anticipated
that there will be any assets remaining in the Trust Fund on such
date.
See 'Description of the Offered Certificates Distributions.'
Advances...................... The Servicer is required to make advances ('P&I Advances') in respect
of delinquent Monthly Payments on the Mortgage Loans, subject to the
limitations described herein. P&I Advances will generally equal the
delinquent portion of the Monthly Payment as specified in the related
Note (with interest at the Mortgage Pass-Through Rate). If a borrower
defaults on its obligation to pay amounts due on the maturity date of
the related Mortgage Loan and the Servicer elects to extend the
payments on the Mortgage Loan as described in '--Realization Upon
Mortgage Loans' herein, the Servicer will be required to advance only
an amount in respect of the Extended Monthly Payment equal to the
lesser of (a) the Extended Monthly Payment or (b) to the constant
Monthly Payment or portion thereof that was due prior to the maturity
date. The Servicer will not be required to advance Default Interest,
Excess
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Interest or Prepayment Premiums. The amount required to be advanced
in respect of delinquent Monthly Payments on a Mortgage Loan that has
been subject to an Appraisal Reduction Event will equal the product
of (a) the amount required to be advanced by the Servicer without
giving effect to the related Appraisal Reduction Amount and (b) a
fraction, the numerator of which is (i) the Stated Principal Balance
of such Mortgage Loan minus (ii) any Appraisal Reduction Amount
thereof and the denominator of which is the Stated Principal Balance
thereof. The Servicer (i) will only make one P&I Advance for the
benefit of the most subordinate class of Certificates then
outstanding (for purposes of determining the most subordinate class,
(i) the Class B-1 and Class B-1H Certificates together and (ii) the
Class A-1A, Class A-1B, Class A-1C Certificates and the Coupon Strip
Certificates together will, in each case, be treated as one class and
the Class P-IO Certificates will not be considered a subordinate
class) and (ii) will not make any P&I Advance in respect of Reduction
Interest Distribution Amounts and Reduction Interest Shortfalls. See
'Description of the Pooling and Servicing Agreement--Advances' herein
and 'Description of the Certificates--Advances in Respect of
Delinquencies' in the Prospectus. If the Servicer fails to make a
required P&I Advance, the Trustee, as acting or successor servicer,
acting in accordance with the servicing standard, will be required to
make the P&I Advance, and if the Trustee fails to make a required P&I
Advance, the Fiscal Agent, acting in accordance with the servicing
standard, will be required to make such P&I Advance. See 'The Pooling
and Servicing Agreement--Advances' herein.
Subordination................. Except as described below, as a means of providing a certain amount
of protection to the holders of the Class A-1A, Class A-1B, Class
A-1C, Class CS-1, Class CS-2 and Class CS-3 Certificates against
losses associated with delinquent and defaulted Mortgage Loans, the
rights of the holders of the Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6 and Class A-7 Certificates and the Private
Certificates (other than the Class P-IO Certificates) to receive
distributions of interest and principal, as applicable, will be
subordinated to such rights of the holders of the Class A-1A, Class
A-1B, Class A-1C, Class CS-1, Class CS-2 and Class CS-3 Certificates,
except to the extent provided herein with respect to Reduction
Interest Distribution Amounts and Reduction Interest Shortfalls on
the Class CS-3 Certificates. The Class A-2 Certificates will be
likewise protected by the subordination of the Class A-3, Class A-4,
Class A-5, Class A-6 and Class A-7 Certificates and Private
Certificates (other than the Class P-IO Certificates). The Class A-3
Certificates will be likewise protected by the subordination of the
Class A-4, Class A-5, Class A-6 and Class A-7 Certificates and
Private Certificates (other than the Class P-IO Certificates). The
Class A-4 Certificates will be likewise protected by the
subordination of the Class A-5, Class A-6 and Class A-7 Certificates
and the Private Certificates (other than the Class P-IO
Certificates). The Class A-5 Certificates will be likewise protected
by the subordination of the Class A-6 Certificates and the Class A-7
Certificates and the Private Certificates (other than the Class P-IO
Certificates). The Class A-6 Certificates will be likewise protected
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by the subordination of the Class A-7 Certificates and the Private
Certificates (other than the Class P-IO Certificates). The Class A-7
Certificates will be likewise protected by the subordination of the
Private Certificates (other than the Class P-IO Certificates). This
subordination will be effected in two ways: (i) by the preferential
right of holders of a class of Certificates to receive on any
Distribution Date the amounts of interest and principal distributable
in respect of such Certificates (or with respect to Reduction
Interest Distribution Amounts and Reduction Interest Shortfalls,
components thereof) on such date prior to any distribution being made
on such Distribution Date in respect of any classes (or components)
of Certificates subordinate thereto and (ii) by the allocation of
Realized Losses (as defined herein), first, to the Private
Certificates (other than the Class P-IO Certificates); second, to the
Class A-7 Certificates; third, to the Class A-6 Certificates; fourth,
to the Class A-5 Certificates; fifth, to the Class A-4 Certificates;
sixth, to the Class A-3 Certificates; seventh, to the Class A-2
Certificates; and finally, to the Class A-1A, Class A-1B and Class
A-1C Certificates, pro rata, based on their respective outstanding
Certificate Balances. No other form of credit enhancement will be
available for the benefit of the holders of the Offered Certificates.
The Class P-IO Certificates will be subordinated to the other
Certificates only to the extent of losses associated with a
delinquency or default on the Prime Retail II Pool Loan and will be
protected by the subordination of any other Certificates only to the
extent of Prepayment Interest Shortfalls occurring with respect to
the Prime Retail II Pool Loan. See 'Description of the Offered
Certificates' herein.
Shortfalls in Available Funds resulting from Servicing Compensation
other than the Servicing Fee, interest on Advances (to the extent not
covered by Default Interest), extraordinary expenses of the Trust
Fund (other than indemnification expenses), a reduction on the
interest rate of a Mortgage Loan by a bankruptcy court pursuant to a
plan of reorganization or pursuant to any of its equitable powers,
certain Servicer Prepayment Interest Shortfalls not paid by the
Servicer, Prepayment Interest Shortfalls or otherwise will be
allocated in the same manner as Realized Losses. Shortfalls in
Available Funds resulting from indemnification expenses will be
allocated to each class of Certificates (other than the Class P-IO
Certificates), pro rata, based upon Certificate Balance and will be
allocated, first, in respect of interest and, second, in respect of
principal. See 'Description of the Offered Certificates--
Distributions--Priorities' herein.
Optional Termination.......... The Depositor, and if the Depositor does not exercise the option, the
Servicer and, if neither the Servicer nor the Depositor exercises the
option, the holders of the Class LR Certificates representing greater
than a 50% Percentage Interest of the Class LR Certificates, will
have the option to purchase at the purchase price specified herein,
all of the Mortgage Loans, and all property acquired through exercise
of remedies in respect of any Mortgage Loan, remaining in the Trust
Fund, and thereby effect termination of the Trust Fund and early
retirement of the then outstanding Certificates, on any Distribution
Date on which the aggregate Stated Principal Balance of the Mortgage
Loans remaining in the Trust Fund is less than 1%
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of the Initial Pool Balance. Additionally, the holders of the Class
LR Certificates representing greater than a 50% Percentage Interest
of the Class LR Certificates will have the option to purchase at the
purchase price specified herein any Mortgage Loan on its Anticipated
Repayment Date. See 'The Pooling and Servicing Agreement--Optional
Termination' herein and 'Description of the
Certificates--Termination' in the Prospectus.
Certain Federal Income Tax
Consequences................ Elections will be made to treat the portion of the Trust Fund
consisting of the Trust REMICs, and the Trust REMICs will qualify, as
two separate real estate mortgage investment conduits (each, a
'REMIC' or, in the alternative, the 'Upper-Tier REMIC' and the
'Lower-Tier REMIC,' respectively) for federal income tax purposes.
The Class A-1A, Class A-1B, Class A-1C, Class CS-1, Class CS-2, Class
CS-3, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6, Class
A-7, Class P-IO, Class B-1 and Class B-1H Certificates (collectively,
the 'Regular Certificates') will, collectively, represent beneficial
interests in the 'regular interests' in the Upper-Tier REMIC
(collectively, the 'Upper-Tier REMIC Regular Interests'), and the
Class R and Class LR Certificates (collectively, the 'Residual
Certificates') will be designated as the sole classes of 'residual
interests' in the Upper-Tier REMIC and Lower-Tier REMIC,
respectively. The Regular Certificates will also represent beneficial
interests in the related Floor Agreements. The Upper-Tier REMIC
Regular Interests and the Trustee's rights under the Floor Agreements
will constitute assets of the Trust Fund, which portion of the Trust
Fund will be treated as a grantor trust for federal income tax
purposes, and will not be assets of the Trust REMICs. The Class V-1
Certificates will represent the right to receive Default Interest and
the Class V-2 Certificates will represent the right to receive Excess
Interest, which portions of the Trust Fund will be treated as part of
the grantor trust for federal income tax purposes.
Beneficial owners of the Offered Certificates will be treated for
federal income tax purposes as having purchased an undivided
beneficial interest in the corresponding Upper-Tier REMIC Regular
Interest or Interests and as having entered into the corresponding
Floor Agreement or Agreements (to the extent of the Trustee's rights
thereunder), both to the extent of the owner's proportionate interest
in the Offered Certificates. The beneficial interests of owners of
the Offered Certificates with respect to the related Upper-Tier REMIC
Regular Interests will be treated as newly originated debt
instruments for federal income tax purposes. A beneficial owner
generally will recognize ordinary income equal to the owner's
proportionate share of interest or original issue discount accrued on
the corresponding Upper-Tier REMIC Regular Interest or Interests and
will take into account a proportionate share of any related payment
to the Trustee under the related Floor Agreement or Agreements.
Income on both an Upper-Tier REMIC Regular Interest and periodic
payments under the related Floor Agreement must be reported on the
accrual method of accounting, and an owner will be permitted to
amortize the portion of the purchase price of an Offered Certificate
allocable to such Floor Agreement. See 'Certain Federal Income Tax
Consequences--Taxation of Floor
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Agreements' herein. It is anticipated that the Upper-Tier REMIC
Regular Interest or Interests represented by the Class CS-1, Class
CS-2 and Class CS-3 Certificates will be treated as issued with
original issue discount for federal income tax purposes in an amount
equal to all distributions of interest expected to be received
thereon over their respective issue prices. The remaining classes of
Upper-Tier REMIC Regular Interests may be issued with original issue
discount to the extent the initial Certificate Balances thereof
exceed their respective allocable issue prices by more than a
statutory de minimis amount. See 'Certain Federal Income Tax
Consequences' herein and 'Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates'
in the Prospectus. Although not free from doubt, it is anticipated
that any Prepayment Premiums allocable to the Offered Certificates
will be ordinary income to a Certificateholder as such amounts
accrue. See 'Description of the Offered Certificates--Distributions'
herein.
ERISA Considerations.......... The United States Department of Labor has issued to the Underwriter
an individual prohibited transaction exemption, Prohibited
Transaction Exemption 93-32 (the 'Exemption'), which generally
exempts from the application of certain of the prohibited transaction
provisions of Sections 406 and 407 of the Employee Retirement Income
Security Act of 1974, as amended ('ERISA'), and the excise taxes
imposed by Sections 4975(a) and (b) of the Code and the civil
penalties imposed by 502(i) of ERISA, transactions relating to the
purchase, sale and holding of pass-through certificates such as the
Class A-1A, Class A-1B, Class A-1C, Class CS-1, Class CS-2 and Class
CS-3 Certificates by employee benefit plans and certain other
retirement arrangements, including individual retirement accounts and
Keogh plans, which are subject to Title I of ERISA and or Section
4975 of the Code (all of which are hereinafter referred to as
'Plans'), collective investment funds in which such Plans are
invested, and insurance companies using assets of separate accounts
or general accounts which include assets of Plans (or which are
deemed pursuant to ERISA to include assets of Plans) and the
servicing and operation of mortgage pools such as the Mortgage Pool,
provided that certain conditions are satisfied. See 'ERISA
Considerations' herein and in the Prospectus.
The Underwriter believes that the conditions to the applicability of
the Exemption will generally be met with respect to the Class A-1A,
Class A-1B, Class A-1C, Class CS-1, Class CS-2 and Class CS-3
Certificates, other than possibly those conditions which are
dependent on facts unknown to the Underwriter or which it cannot
control, such as those relating to the circumstances of the Plan
purchaser or the Plan fiduciary making the decision to purchase any
such class of Certificates. However, before purchasing an Offered
Certificate, a fiduciary of a plan should make its own determination
as to the availability of the exemptive relief provided by the
Exemption or the availability of any other exemption and whether the
conditions of any such exemption will be applicable to the Offered
Certificates.
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The Exemption does not apply to the purchasing or holding of
Certificates by Plans sponsored by the Depositor, the Underwriter,
the Trustee, the Servicer, any obligor with respect to Mortgage Loans
included in the Trust Fund constituting more than five percent of the
aggregate unamortized principal balance of the assets in the Trust
Fund, or any affiliate of such parties (the 'Restricted Group').
Borrowers who are acting on behalf of Plans, or who are utilizing
assets of Plans subject to ERISA and any affiliates of any such
borrowers should not purchase any of the Certificates.
THE CLASS A-2, CLASS A-3, CLASS A-4, CLASS A-5, CLASS A-6 AND CLASS
A-7 CERTIFICATES ARE SUBORDINATE TO ONE OR MORE OTHER CLASSES OF
CERTIFICATES, AND, ACCORDINGLY, SUCH CERTIFICATES SHOULD NOT BE
PURCHASED BY OR TRANSFERRED TO A PLAN OR PERSON ACTING ON BEHALF OF
ANY PLAN OR USING THE ASSETS OF ANY SUCH PLAN, UNLESS SUCH PERSON
USING PLAN ASSETS IS AN INSURANCE COMPANY AND THE PURCHASE AND
HOLDING OF ANY SUCH CERTIFICATE WOULD BE EXEMPT FROM THE PROHIBITED
TRANSACTION PROVISIONS OF ERISA AND THE CODE UNDER PROHIBITED
TRANSACTION EXEMPTION 95-60.
Ratings....................... It is a condition to the issuance of the Offered Certificates that
(i) each of the Class A-1A, Class A-1B and Class A-1C Certificates be
rated 'Aaa' by Moody's Investors Services, Inc. ('Moody's') and 'AAA'
by Standard & Poor's Ratings Group, a division of The McGraw Hill
Companies, Inc. ('S&P'); (ii) each of the Class CS-1 and Class CS-2
Certificates be rated 'Aaa' by Moody's and 'AAAr' by S&P; (iii) the
Class CS-3 Certificates be rated 'Aaa' by Moody's; (iv) the Class A-2
Certificates be rated 'Aa1' by Moody's and 'AA' by S&P; (v) the Class
A-3 Certificates be rated 'Aa2' by Moody's; (vi) the Class A-4
Certificates be rated 'A2' by Moody's and 'A' by Fitch Investors
Service, L.P. ('Fitch' and together with Moody's and S&P, the 'Rating
Agencies'); (vii) the Class A-5 Certificates be rated 'A3' by Moody's
and 'A-' by Fitch; (viii) the Class A-6 Certificates be rated 'Baa2'
by Moody's, and 'BBB' by Fitch and S&P; and (ix) the Class A-7
Certificates be rated 'BBB-' by Fitch. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the assigning rating
organization. A security rating does not address the frequency of
prepayments (both voluntary and involuntary) or the possibility that
Certificateholders might suffer a lower than anticipated yield, nor
does a security rating address the likelihood of receipt of
Prepayment Premiums, Net Default Interest or Excess Interest or the
tax treatment of the Certificates. A security rating does not
represent any assessment of the yield to maturity that investors may
experience or the possibility that the holders of the Class CS-1,
Class CS-2 and Class CS-3 Certificates might not fully recover their
initial investment in the event of delinquencies or rapid prepayments
of the Mortgage Loans (including both voluntary and involuntary
prepayments, application of Realized Losses, Appraisal Reduction
Amounts or Delinquency Reduction Amounts). S&P assigns the
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additional rating of 'r' to highlight classes of securities that S&P
believes may experience high volatility in expected returns due to
non-credit risks. The ratings do not address the fact that the Pass-
Through Rates of the Offered Certificates, to the extent that they
are based on the Weighted Average Net Mortgage Pass-Through Rate,
will be affected by changes therein. See 'Risk Factors and Other
Special Considerations' and 'Rating' herein and 'Yield
Considerations' in the Prospectus.
Legal Investment.............. The appropriate characterization of the Offered Certificates under
various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase the Offered
Certificates, may be subject to significant interpretative
uncertainties. The Offered Certificates will not be 'mortgage related
securities' within the meaning of the Secondary Mortgage Market
Enhancement Act of 1984. Accordingly, investors should consult their
own legal advisors to determine whether and to what extent the
Offered Certificates constitute legal investments for them. See
'Legal Investment' herein and in the Prospectus.
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RISK FACTORS AND OTHER SPECIAL CONSIDERATIONS
Prospective holders of Offered Certificates should consider, among other
things, the following factors in connection with the purchase of the Offered
Certificates.
THE MORTGAGE LOANS
Borrower Default; Nonrecourse Mortgage Loans. The Mortgage Loans are not
insured or guaranteed by any governmental entity, by any private mortgage
insurer, or by the Depositor, the Originator, the Servicer, the Trustee, the
Fiscal Agent or any of their respective affiliates. As more fully described
under 'The Pooling and Servicing Agreement--Representations and Warranties;
Repurchase,' the Originator will be obligated to repurchase a Mortgage Loan if
certain of its representations or warranties concerning such Mortgage Loan are
breached.
Each Mortgage Loan is a nonrecourse loan as to which, in the event of a
default under such Mortgage Loan, recourse generally may be had only against the
specific properties and other assets that have been pledged to secure the
Mortgage Loan. Consequently, payment on each Mortgage Loan prior to maturity is
dependent primarily on the sufficiency of the net operating income of the
related Mortgaged Property, and at maturity (whether at stated maturity or, in
the event of a default under the related Mortgage Loan, upon the acceleration of
such maturity) upon the then market value of the related Mortgaged Property or
the ability of the related borrower to refinance the Mortgaged Property.
Commercial Lending Generally. The Mortgage Loans are secured by factory
outlet centers, full service and convention hotels and a mixed-use retail,
office, hotel and parking facility center. Commercial lending is generally
viewed as exposing a lender to a greater risk of loss than residential
one-to-four family lending. Commercial lending typically involves larger loans
to a single obligor than residential one-to-four family lending.
Commercial property values and net operating income are subject to
volatility. The repayment of loans secured by income producing properties is
typically dependent upon the successful operation of the related real estate
project. The net operating income and value of the Mortgaged Properties may be
adversely affected by a number of factors, including but not limited to the
national, regional and local economic conditions (which may be adversely
impacted by plant closings, industry slowdowns and other factors); local real
estate conditions (such as an oversupply of housing, retail space, office space
or hotel rooms); changes or continued weakness in specific industry segments;
perceptions by prospective tenants and, in the case of retail properties,
retailers and shoppers, of the safety, convenience, services and attractiveness
of the property; the willingness and ability of the property's owner to provide
capable management and adequate maintenance; demographic factors; consumer
confidence, unemployment rates, customer tastes, and preferences, retroactive
changes to building or similar codes; and increases in operating expenses (such
as energy costs). Historical operating results of the Mortgaged Properties may
not be comparable to future operating results. In addition, other factors may
adversely affect the Mortgaged Properties' value without affecting their current
net operating income, including changes in governmental regulations, zoning or
tax laws; potential environmental or other legal liabilities; the availability
of refinancing; and changes in interest rate levels.
The age, construction quality and design of a particular property may
affect the occupancy level as well as the rents that may be charged for
individual leases. The effects of poor construction quality will increase over
time in the form of increased maintenance and capital improvements. Even good
construction will deteriorate over time if the property managers do not schedule
and perform adequate maintenance in a timely fashion. If, during the terms of
the Mortgage Loans, properties of a similar type are built in the areas where
the Mortgaged Properties of such type are located or other similar properties in
such areas are substantially updated and refurbished, the value and net
operating income of such Mortgaged Properties could be reduced. There is no
assurance that the value of any Mortgaged Property during the term of the
related Mortgage Loan will equal or exceed its appraised value at the date of
origination of such Mortgage Loan.
Additionally, some of the Mortgaged Properties may not readily be
convertible to alternative uses if such Mortgaged Properties were to become
unprofitable due to competition, age of the improvements, decreased demand or
other factors. The conversion of hotels to alternative uses would generally
require substantial capital expenditures. Thus, if the operation of any such
Mortgaged Properties becomes unprofitable such that the borrower becomes unable
to meet its obligations on the related loan, the liquidation value of any such
property
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may be substantially less, relative to the amount owing on the related loan,
than would be the case if such property were readily adaptable to other uses.
Other factory outlet centers, hotels, retail centers and office buildings
located in the areas of the Mortgaged Properties compete with the Mortgaged
Properties of such types to attract guests, retailers, customers and tenants. In
addition, retailers at the Mortgaged Properties face competition from discount
shopping centers and clubs, malls and other retail centers, direct mail and
telemarketing. Increased competition could adversely affect income from and
market value of the Mortgaged Properties. For example, competing factory outlet
centers have been proposed in the vicinity of the Prime Retail II Pool
Properties known as Coral Isle Factory Shops and Indiana Factory Shops. In
addition, potentially competing hotels have been proposed or are in the process
of construction or renovation in the vicinity of the Columbia Sussex II Pool
Properties known as the Holiday Inn Louisville South Airport, the Holiday Inn
Itasca and the Sheraton Newark Airport.
Management. The successful operation of a real estate project is dependent
on the performance and viability of the property manager of such project. The
property manager is responsible for responding to changes in the local market,
planning and implementing the rental structure or room rates, including
establishing levels of rent payments, and advising the borrowers so that
maintenance and capital improvements can be carried out in a timely fashion.
There is no assurance regarding the performance of any operators and/or managers
or persons who may become operators and/or managers upon the expiration or
termination of management agreements or following any default or foreclosure
under a Mortgage Loan. In addition, all of the property managers are operating
companies and unlike limited purpose entities, may not be restricted from
incurring debt and other liabilities in the ordinary course of business or
otherwise. There can be no assurance that the property managers will at all
times be in a financial condition to continue to fulfill their management
responsibilities under the related management agreements throughout the terms
thereof. However, all of the Mortgage Loans provide that the related property
management agreements may be terminated and the property managers replaced under
the circumstances described herein in 'Description of the Mortgage Loans and the
Mortgaged Properties.'
Each of the borrowers under the Mortgage Loans is either a limited
partnership or a general partnership which has at least two partners or members.
A dispute between such partners or members could disrupt the management of the
underlying property which may cause an adverse effect on cash flow.
Dependence on Tenants; Lease Expiration; Rent Abatements. Income from and
the market value of the Mortgaged Properties would be adversely affected if
space in the Mortgaged Properties could not be leased or re-leased, if tenants
were unable to meet their lease obligations, if a significant tenant were to
become a debtor in a bankruptcy case under the United States Bankruptcy Code, or
if for any other reason rental payments could not be collected. If the tenants'
sales in the Mortgaged Properties that contain retail space decline, percentage
rents may decline and tenants may be unable to pay their rent or other occupancy
costs. Upon the occurrence of an event of default by a tenant, delays and costs
in enforcing the lessor's rights could be experienced.
Repayment of the Mortgage Loans secured by retail and office properties
will be affected by the expiration of space leases and the ability of the
respective borrowers to renew the leases or relet the space on comparable terms.
One tenant, a law firm which represents approximately 18% of the annualized
base rent for aggregate office space and approximately 18% of the aggregate GLA
of office space at the Palmer Square Properties, has given notice that it will
terminate its lease in mid 1997. Such tenant is presently paying rent at rates
which the Depositor believes are below market rates and is obligated to pay rent
for six months following voluntary termination of the lease. The Palmer Square
Borrower has informed the Originator that certain replacement tenants have
already been identified for a substantial portion of the vacated space.
Cambridge Technology Partners, an existing tenant, has signed an expansion lease
for a portion of such space. Additionally, certain tenants at the Prime Retail
II Pool Properties and the HGI II Pool Properties have options to terminate
their leases prior to the stated expirations thereof upon the failure to meet
certain targets such as sales or occupancy targets. Tables containing
information regarding the expiration dates of certain leases are set forth under
'Description of the Mortgage Pool--Certain Characteristics of the Mortgage
Loans' herein.
Even if vacated space is successfully relet, the costs associated with
reletting, including tenant improvements and leasing commissions, could be
substantial and could reduce cash flow from the Mortgaged
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Properties. Each of the HGI II Pool Borrower, Palmer Square Borrowers and Prime
Retail II Pool Borrowers have established a capital reserve account or
replacement reserve account, the funds of which could be used for improvements
and repairs necessary for the re-leasing of space. There can be no assurance
that the reserve accounts in respect of such Mortgage Loans will be sufficient
to offset expenses or reductions of cash flow on the related properties.
In addition, certain tenants at some of the HGI II Pool Properties and
Prime Retail II Pool Properties are entitled to rent abatements in the event
that the overall occupancy percentages of such properties fall below certain
specified levels or certain other conditions are not satisfied.
Risks of Concentration of Tenants and Hotel Affiliations. Retail and
office properties may be adversely affected if there is an economic decline in
the businesses operated by their tenants. The risk of such an adverse effect is
increased if there is a significant concentration of tenants or concentration of
tenants in a particular business or industry. Similarly, to the extent that a
Mortgage Loan is secured by properties affiliated with one hotel chain, such
loans may be affected by an economic decline or a decline in the public's
perception of such hotel chain. All of the Mortgaged Properties securing the MHP
II Pool Loan are managed by Marriott Hotel Services, Inc. (an entity not
affiliated with the MHP II Pool Borrowers), a subsidiary of Marriott
International, Inc, as Marriott hotels. Of the 12 Mortgaged Properties securing
the Columbia Sussex II Pool Loan, 5 are Holiday Inns franchises and 4 are
Radisson Hotel franchises. See 'Descriptions of the Mortgage Loans and Mortgaged
Properties--The MHP II Pool Loan and Properties--The Properties and--The
Columbia Sussex II Pool Loan and Properties--The Properties.'
Risk of Bankruptcy of Major Tenants. In the case of office and retail
properties, the bankruptcy or insolvency of a major tenant or a number of
smaller tenants may have an adverse impact on the Mortgaged Properties affected
and the income produced by such Mortgaged Properties. Under bankruptcy law, a
tenant has the option of assuming (continuing), or rejecting (terminating) or,
subject to certain conditions, assigning to a third party any unexpired lease.
If the tenant assumes its lease, the tenant must cure all defaults under the
lease and provide the landlord with adequate assurance of its future performance
under the lease. If the tenant rejects the lease, the landlord's claim for
breach of the lease would (absent collateral securing the claim) be treated as a
general unsecured claim. The amount of the claim would be limited to the amount
owed for unpaid pre-petition lease payments unrelated to the rejection, plus the
greater of one year's lease payments or 15% of the remaining lease payments
payable under the lease (but not to exceed three years' lease payments). If the
tenant assigns its lease, the tenant must cure all defaults under the lease and
the proposed assignee must demonstrate adequate assurance of future performance
under the lease.
No assurance can be given that tenants in the Mortgaged Properties will
continue making payments under their leases or that other tenants will not file
for bankruptcy protection in the future or, if any tenants so file, that they
will continue to make rental payments in a timely manner. In addition, a tenant
may, from time to time, experience a downturn in its business, which may weaken
its financial condition and result in a reduction or failure to make rental
payments when due. If a tenant defaults in its obligations to a borrower, the
borrower may experience delays in enforcing its rights as lessor and may incur
substantial costs and experience significant delays associated with protecting
its investment, including costs incurred in renovating and reletting the
property.
Risks Associated with Factory Outlet Centers. The Prime Retail II Pool
Properties and the HGI II Pool Properties consist of 16 and 5 factory outlet
centers, respectively. Growth in this segment may be limited by certain
intrinsic characteristics of the factory outlet market. The factory outlet
center business depends, in part, on the pricing differential between goods sold
in the factory outlet centers and similar or identical goods sold in a
traditional department store or retailer. While this pricing differential
results, in part, because of lower operating costs resulting from the
elimination of distribution layers and the reduced rent and overhead at factory
outlet centers, there can be no assurance that traditional retailers will not
compete aggressively to regain sales nor can there be any assurance that the
factory outlet center business will not be adversely affected by other changes
in the distribution and sale of retail goods.
Factory outlet centers typically are located at least 25 miles from
suburban and center city shopping areas, allowing manufacturers to avoid direct
competition with their major customers, traditionally large department stores
and specialty stores. The amount of travel time creates a disincentive to
shopping at outlet centers. Further, newer outlet centers are being constructed
closer to metropolitan and suburban areas, thereby decreasing the
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economic viability of older centers that are located farther away. Numerous
factory outlet centers have been developed in recent years and are currently
being developed. As a result of this rapid growth, there exists a risk of
overdevelopment, and increased competition for tenants. The terms of leases of
stores in factory outlet centers typically are shorter than those in traditional
malls or shopping centers, thereby increasing the risks of tenants relocating to
competing centers.
Furthermore, the Prime Retail II Pool Properties and the HGI II Pool
Properties generally are located in relatively undeveloped areas and there may
be other sites in the areas where the Properties are located that may be
developed into factory outlet centers.
Some of the Prime Retail II Pool Properties and HGI II Pool Properties are
dependent in part on tourist traffic for their customer pool. Any factor that
reduces tourism in the applicable areas (such as an economic downturn), may have
an adverse effect on the Prime Retail II Pool Properties and HGI II Pool
Properties.
Risks Associated with Hotels. The MHP II Pool Loan and the Columbia Sussex
II Pool Loan are secured by 4 and 12 hotels, respectively. Additionally, one of
the Mortgaged Properties securing the Palmer Square Loan is a hotel. Various
factors, including location, quality and franchise or hotel management company
affiliation affect the economic performance of a hotel. Adverse economic and
social conditions, either local, regional or national, may limit the amount that
can be charged for a room and may result in a reduction in occupancy levels. The
construction of competing hotels or resorts can have similar effects. To meet
competition in the industry and to maintain economic values, continuing
expenditures must be made for modernizing, refurbishing, and maintaining
existing facilities prior to the expiration of their anticipated useful lives.
Because hotel rooms generally are rented for short periods of time, hotels tend
to respond more quickly to adverse economic conditions and competition than do
other commercial properties. Furthermore, the financial strength and
capabilities of the owner and operator of a hotel may have an impact on such
hotel's quality of service and economic performance. Additionally, the hotel and
lodging industry is generally seasonal in nature and this seasonality can be
expected to cause periodic fluctuations in a hotel property's room and other
hotel revenues, occupancy levels, room rates and operating expenses. The demand
for particular accommodations may also be affected by changes in travel patterns
caused by changes in access, energy prices, strikes, relocation of highways, the
construction of additional highways and other factors.
The Mortgaged Properties securing the MHP II Pool Loan are managed by
Marriott Hotel Services, Inc., as full-service Marriott hotels. The Mortgaged
Properties securing the Columbia Sussex II Pool Loan are operated under
franchise agreements with the following franchisors: Holiday Inns, Inc., (5),
Radisson Hotels International, Inc. (4), Best Western International (1),
Marriott International, Inc. (1), and Sheraton Hotel (1). The performance of any
hotel property which is affiliated with a franchise or hotel management company
depends in part on the continued existence, reputation and financial strength of
the franchisor or hotel management company, the public perception of the
franchise or hotel chain service mark and the duration of the franchise
licensing or management agreements. Eleven of the 12 franchise agreements for
the Columbia Sussex II Pool Properties terminate prior to the Anticipated
Repayment Date of the Columbia Sussex II Pool Loan. However, the Columbia Sussex
II Pool Borrower anticipates that it will be able to continue its arrangements
with existing franchisors after such expirations or enter into franchise
agreements with new franchisors. The management agreement with Marriott Hotel
Services, Inc. with respect to the MHP II Pool Loan expires after the maturity
date of the MHP II Loan. The hotel constituting one of the Palmer Square
Properties is not affiliated with a national franchise or management company.
Franchise licensing agreements may impose certain affirmative obligations on the
owners of the Mortgaged Properties with respect to the operation of such
properties. Upon a termination of the franchise for such hotels, it is possible
that a replacement franchise would require significantly higher fees. The
transferability of franchise license agreements is restricted and, in the event
of a foreclosure on any Mortgaged Property, such Mortgaged Property would not
have the right to use the franchise license without the franchisor's consent.
However, with respect to all of the Columbia Sussex II Pool Properties and the
MHP II Pool Properties, the franchisors have (or, with respect to the MHP II
Pool Loan, the manager has) agreed to permit, under specified terms and
conditions, the Trust Fund to continue the franchise arrangement (or, with
respect to the MHP II Pool Loan, continue the management agreements) if the
Trustee forecloses upon a Mortgaged Property. Conversely, a lender, in the case
of certain Mortgage Loans, may be unable to remove a franchisor or a hotel
management company that it desires to replace following a foreclosure. Moreover,
any provision in a franchise agreement or management agreement providing for
termination upon bankruptcy of a franchisor or manager may
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not be enforceable. No assurance can be given that the Servicer could renew a
franchise or management agreement or obtain a new franchise or management
contract. Further, in the event of a foreclosure on a Mortgaged Property, it is
unlikely that the Trustee (or Servicer) or purchaser of such Mortgaged Property
would be entitled to the rights under any liquor license for such Mortgaged
Property and such party would be required to apply in its own right for such
license or licenses. There can be no assurance that a new license could be
obtained. See '--Liquor License Considerations' herein.
Concentration of Mortgage Loans and Mortgaged Property Types. The average
principal balance of the Mortgage Loans as of the Cut-off Date is approximately
$179,039,307, which is equal to 20% of the aggregate principal balance as of the
Cut-off Date. The Prime Retail II Pool Loan, MHP II Loan, Columbia Sussex II
Pool Loan, HGI II Pool Loan and Palmer Square Loan represent approximately 40%,
30%, 15%, 11% and 4%, respectively, of the aggregate principal balance as of the
Cut-off Date of the Mortgage Pool. The aggregate principal balance as of the
Cut-off Date related to the Cut-off Date Allocated Loan Amounts of the Mortgaged
Properties (by Allocated Loan Amount) securing the Mortgage Loans are factory
outlet centers, hotels, retail and mixed-use properties representing 51%, 39%,
and 10% of the Cut-off Date aggregate principal balance of the Allocated Loan
Amounts, respectively.
A mortgage pool consisting of fewer loans each having a relatively higher
outstanding principal balance may result in losses that are more severe,
relative to the size of the pool, than would be the case if the pool consisted
of a greater number of mortgage loans each having a relatively smaller
outstanding principal balance. Losses on any one mortgage loan could have a
substantial negative effect on the securities. In addition, the concentration of
any mortgage pool in one or more loans that have outstanding principal balances
that are substantially larger than the other mortgage loans in such pool can
result in losses that are substantially more severe, relative to the size of the
pool, than would be the case if the aggregate balance of the pool were more
evenly distributed among the mortgage loans in such pool. The Servicer will have
the right to foreclose on some or all of the Mortgaged Properties securing any
Defaulted Mortgage Loan. Because there are only five Mortgage Loans, losses on
any one Mortgage Loan may have a substantial negative effect on the Offered
Certificates.
Tax Considerations Related to Foreclosure. If the Trust Fund were to
acquire a Mortgaged Property subsequent to a default on the related Mortgage
Loan pursuant to a foreclosure or deed in lieu of foreclosure, the Special
Servicer would be required to retain an independent contractor to operate and
manage the Mortgaged Property. Any net income from such operation and
management, other than qualifying 'rents from real property,' or any rental
income based on the net profits of a tenant or sub-tenant or allocable to a
service that is non-customary in the area and for the type of building involved,
will subject the Lower-Tier REMIC to federal (and possibly state or local) tax
on such income at the highest marginal corporate tax rate (currently 35%),
thereby reducing net proceeds available for distribution to Certificateholders.
See 'Certain Federal Income Tax Consequences--Federal Income Tax Consequences
for REMIC Certificates--Taxes That May Be Imposed on the REMIC Pool--Net Income
From Foreclosure Property' in the Prospectus.
Risk of Different Timing of Mortgage Loan Amortization. If and as
principal payments or prepayments are made on a Mortgage Loan, the remaining
Mortgage Pool will be subject to more concentrated risk with respect to the
diversity of properties, types of properties and property characteristics and
with respect to the number of borrowers. Because principal on the Offered
Certificates is payable in sequential order, and no class receives principal
until the Certificate Balance of the preceding class or classes has been reduced
to zero, classes that have a later sequential designation are more likely to be
exposed to the risk of concentration discussed in the second preceding sentence
than classes with higher sequential priority.
Geographic Concentration. Repayments by borrowers and the market value of
the Mortgaged Properties could be adversely affected by economic conditions
generally or in regions where the borrowers and the Mortgaged Properties are
located, conditions in the real estate markets where the Mortgaged Properties
are located, changes in governmental rules and fiscal policies, acts of nature
(which may result in uninsured losses), and other factors which are beyond the
control of the borrowers. The Mortgaged Properties are located in 20 states. See
the table entitled 'Mortgaged Properties by State' for a description of
geographic location of the Mortgaged Properties. Except as set forth in the
table below, no state contains more than 5% (by Cut-off Date Allocated Loan
Amount) of the Mortgaged Properties. The table below sets forth the states in
which a significant percentage of the Mortgage Properties, are located.
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SIGNIFICANT GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
PERCENT OF CUT-OFF
CUT-OFF DATE ALLOCATED DATE NUMBER
STATE LOAN AMOUNT ALLOCATED LOAN AMOUNT OF PROPERTIES
- -------------------- ---------------------- --------------------- -------------
<S> <C> <C> <C>
Texas............... $186,077,552 21% 4
California.......... 111,355,711 12% 5
Louisiana........... 106,000,000 12% 1
Florida............. 80,696,448 9% 6
New Jersey.......... 61,693,822 7% 5
Colorado............ 54,452,198 6% 2
</TABLE>
The principal balance of the Mortgage Loans secured by Mortgaged Properties
in each state was calculated based on the Cut-off Date Allocated Loan Amount of
each Mortgaged Property, as described below under 'Description of the Mortgage
Pool--Certain Characteristics of the Mortgage Loans.'
The economy of any state or region in which a Mortgaged Property is located
may be adversely affected to a greater degree than that of other areas of the
country by certain developments affecting industries concentrated in such state
or region. Moreover, in recent periods, several regions of the United States
have experienced significant downturns in the market value of real estate. To
the extent that general economic or other relevant conditions in states or
regions in which concentrations of Mortgaged Properties securing significant
portions of the aggregate principal balance of the Mortgage Loans are located
decline and result in a decrease in commercial property, housing or consumer
demand in the region, the income from and market value of the Mortgaged
Properties may be adversely affected.
Environmental Law Considerations. Under various federal, state and local
environmental laws, ordinances and regulations, a current or previous owner or
operator of real property may be liable for the costs of removal or remediation
of hazardous or toxic substances on, under, adjacent to, or in such property.
Such laws often impose liability whether or not the owner or operator knew of,
or was responsible for, the presence of such hazardous or toxic substances. The
cost of any required remediation and the owner's liability therefor as to any
property generally is not limited under such enactments and could exceed the
value of the property and/or the aggregate assets of the owner. In addition, the
presence of hazardous or toxic substances, or the failure to properly remediate
such property, may adversely affect the owner's or operator's ability to
refinance using such property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of such substances at the disposal or
treatment facility. Certain laws impose liability for release of
asbestos-containing materials ('ACMs') into the air or require the removal or
containment of ACMs, and third parties may seek recovery from owners or
operators of real properties for personal injury associated with ACMs or other
exposure to chemicals or other hazardous substances.
Under some environmental laws, such as the federal Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended
('CERCLA'), as well as certain state laws, a secured lender (such as the Trust
Fund) may be liable, as an 'owner' or 'operator,' for the costs of responding to
a release or threat of a release of hazardous substances on or from a borrower's
property, if (i) agents or employees of a lender are deemed to have participated
in the management of the borrower, or (ii) the lender actually takes possession
of a borrower's property, or control of its day-to-day operations, as, for
example, through the appointment of a receiver, in either case, regardless of
whether a previous owner caused the environmental damage.
All of the Mortgaged Properties have been subject to either Phase I site
assessments or updates of previously performed Phase I site assessments, within
twelve months preceding the date of the closing of the related Mortgage Loan.
Such assessments were intended to evaluate the environmental condition of and
potential environmental liabilities associated with the Mortgaged Properties,
and included a visual observation of the Mortgaged Properties during a site
visit, a review of certain records concerning the Mortgaged Properties, as well
as publicly-available information concerning known conditions at the Mortgaged
Properties or in the vicinity of the Mortgaged Properties, consideration of the
likely presence of ACMs or (except in the case of the Prime Retail II Pool
Properties) radon gas in the buildings on the Mortgaged Properties, and where
deemed necessary, the
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presence of elevated levels of lead in the drinking water, an inquiry into the
likely presence of polychlorinated biphenyls ('PCBs') in the electrical
transformers, the presence of underground or above-ground storage tanks and the
preparation of a written report. The assessments generally did not include
sampling or analysis of soil, groundwater or other environmental media or
subsurface investigations.
Certain of the Phase I reports identified environmental conditions
requiring corrective action, including the presence of ACMs, leaking chemical
storage tanks, spills and nearby sites of concern including leaking underground
storage tanks ('LUSTs'). Most of the issues raised in the environmental
assessments have been resolved or remediated, and the reports did not reveal any
continuing environmental condition which the Depositor expects to have a
material adverse effect on the revenues or value of the Mortgaged Properties.
The related borrowers have covenanted in the related loan agreements to
implement required operations and maintenance programs and, in some cases, have
made deposits into environmental reserve accounts to take corrective actions
with respect to such environmental conditions.
Friable and non-friable ACMs were found on certain Mortgaged Properties,
including seven Mortgaged Properties securing the Columbia Sussex II Pool Loan
and two Mortgaged Properties securing the MHP II Pool Loan. In each case,
required corrective action including the implementation of operations and
maintenance programs, as recommended by the environmental consultant, has been
undertaken, and in some cases, the related borrowers have made deposits into
environmental reserve accounts for such corrective actions. There can be no
assurance that the reserve amounts in the reserve accounts described above will
be sufficient to remediate the environmental conditions described above.
Certain of the Mortgaged Properties--the Marriott Melville Long Island, the
Sheraton Newark Airport and the Radisson Hotel Central-Birmingham securing the
Columbia Sussex II Pool Loan, the Pismo Beach Outlet Center securing the HGI II
Pool Loan and the Magnolia Bluff Factory Shops securing the Prime Retail II Pool
Loan--are in the vicinity of LUST sites or other sources of groundwater
contamination. CERCLA and many 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 Acquifers,' dated May 24, 1995, the
United States Environmental Protection Agency (the 'EPA') stated its position
that, with respect to federal enforcement actions and subject to certain
conditions specified therein, where 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, the EPA will not take enforcement
actions against the owner of such property to require the performance of
response actions or the payment of response costs. However, though the owners of
such Mortgaged Properties and the Trust Fund may not be liable for such
contamination, enforcement of the related borrower's or the Trust Fund's rights
against third parties may result in additional transaction costs and the
presence of such contamination or potential contamination may affect the related
borrower's ability to refinance using such property as collateral.
The Phase I report for the MHP II Pool Property known as the New Orleans
Marriott identified an underground storage tank previously used to store diesel
fuel which is on the LUST list of, and subject to a passive remediation program
supervised by, the Louisiana Department of Environmental Quality. To continue
such remediation and take additional corrective actions with respect to such
environmental conditions, if required, the related MHP II Pool Borrower has made
an initial deposit into a capital expenditures reserve account of 200% of the
cost estimated in the Phase I report therefor, as described below under
'Description of the Mortgage Loans and Mortgaged Properties--MHP II Pool
Loan--Reserves.' In addition, funds from reserve accounts are available to pay
for an operations and maintenance program including periodic air sampling
following the removal of ACMs, which was completed before the origination of the
related Mortgage Loan. There can be no assurance that the reserve amounts in the
reserve account described above will be sufficient to remediate the
environmental conditions described above.
Further investigation or remediation is also required with respect to other
issues raised by the environmental assessments; however, based on the
information currently available to the Depositor and a review performed by the
Originator's environmental consultants, the Depositor does not believe any of
such other issues would have a material negative effect on the related Mortgaged
Properties. There can be no assurance that all environmental conditions and
risks have been identified in such environmental assessments.
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The Pooling and Servicing Agreement requires that the Special Servicer
obtain an environmental site assessment of a Mortgaged Property prior to
acquiring title thereto on behalf of the Trust Fund or assuming its operation.
Such requirement may effectively preclude enforcement of the security for the
related Note until a satisfactory environmental site assessment is obtained (or
until any required remedial action is thereafter taken), but will decrease the
likelihood that the Trust Fund will become liable under any environmental law.
However, there can be no assurance that the requirements of the Pooling and
Servicing Agreement will effectively insulate the Trust Fund from potential
liability under environmental laws. See 'The Pooling and Servicing Agreement--
Servicing of the Mortgage Loans; Collection of Payments' herein and 'Certain
Legal Aspects of Mortgage Loans--Environmental Legislation' in the Prospectus.
Anticipated Repayment Date Principal Balances. All of the Mortgage Loans
have substantial scheduled principal balances as of their respective Anticipated
Repayment Dates. See 'Description of the Mortgage Pool--Certain Characteristics
of the Mortgage Loans' and 'Description of the Mortgage Loans and Mortgaged
Properties' herein. The ability of a borrower to repay a loan on the Anticipated
Repayment Date typically will depend upon its ability either to refinance the
loan or to sell the related Mortgaged Property at a price sufficient to permit
the borrower to repay the loan on the Anticipated Repayment Date. The ability of
a borrower to accomplish either of these goals will be affected by a number of
factors at the time of attempted sale or refinancing, including the level of
available mortgage rates, the fair market value of the related properties, the
borrower's equity in the related properties, the financial condition of the
borrower and operating history of the properties, tax laws, prevailing economic
conditions and the availability of credit for commercial properties generally.
Other Financing. All of the Mortgage Loans contain provisions that
generally prohibit the incurrence of subordinate debt without the lender's
consent, however, the following exceptions apply. The MHP II Pool Loan permits
each MHP II Pool Borrower (a) to place a subordinate mortgage on the related MHP
II Pool Property, provided that, among other things, (i) the Rating Agencies
confirm that the placement of the subordinate debt will not result in a
withdrawal, qualification or reduction of the then existing ratings of the
Certificates and (ii) the debt service coverage ratio with respect to such
subordinate mortgage (calculated by comparing the net operating income of such
MHP II Pool Borrower to debt service due on any indebtedness secured by the
assets of such MHP II Pool Borrower (other than Santa Clara Note in the case of
the MHPLP Borrower) minus payments from U.S. Treasury obligations then securing
the related MHP II Pool Note) will be not less than 2.25, (b) to incur purchase
money security interests with respect to the purchase of furnitures, fixtures
and equipment in amount not to exceed at any time $817,669 with respect to the
Santa Clara Note and $4,182,331 with respect to the MHPLP Notes (which latter
amount is to be reduced if any of the MHPLP Properties are released from the
lien on the related Mortgage and (c) to incur unsecured indebtedness incurred
(i) in connection with capitalized equipment leases, (ii) to provide working
capital, in an aggregate amount, which when added to the outstanding balance of
previous indebtedness incurred by such MHP II Pool Borrower and outstanding for
such purposes, will not exceed the average amount of certain operating and other
expenses with respect to the related MHP II Pool Properties for each of the
previous full thirteen MHP II Accounting Periods and to fund any shortfalls in
the related MHP II Monthly Debt Service Payment, provided that with respect to
clause (ii) the payee of such indebtedness agrees not to assert any remedies
with respect to the non-payment thereof so long as any of the MHP II Pool Notes
is outstanding.
The MHP II Borrowers are also permitted to incur debt in connection with a
hotel expansion with respect to any of the MHP II Pool Properties if, among
other things, (a) evidence in writing is delivered from each of the Rating
Agencies that such hotel expansion (and any related financing) will not result
in a downgrade, withdrawal or qualification of the then current ratings of the
Certificates, (b) the hotel expansion is not likely to have a material adverse
effect on (i) the related MHP II Pool Borrower's ability to enter into or
fulfill its material obligations under the related loan documents or to effect
the transactions contemplated thereby or (ii) the condition (financial or
otherwise), business, prospects, assets, liabilities, management, financial
position or results of operations of the related MHP II Pool Property, (c) any
secured or unsecured financing with respect to the expansion is consistent with
clauses (a), (b) or (c) of the previous paragraph, or is specifically covered in
the rating letter delivered to the lender as described in clause (a) above and
(d) the hotel expansion will become part of such MHP II Pool Property encumbered
by the lien of the applicable Mortgage. See 'Description of the
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Mortgage Loans and Properties--The MHP II Pool Loan and Properties--Transfer of
Properties and Interest in Borrower; Encumbrance.'
The Columbia Sussex II Pool Loan permits the Columbia Sussex II Pool
Borrower to obtain up to $7,500,000 of financing in connection with the purchase
of furniture, fixtures and equipment required by a franchisor, provided that
such debt (i) is secured only by the furniture, fixtures and equipment
purchased, (ii) fully amortizes within five years and (iii) results in an
overall Columbia Sussex II Pool Loan DSCR of at least 1.70 for each calendar
quarter in which such debt is outstanding. See 'Description of the Mortgage
Loans and Properties--The Columbia Sussex II Pool Loan and Properties--Transfer
of Properties and Interest in Borrowers; Encumbrance' herein.
Any Palmer Square Borrower may obtain an unsecured loan or extension of
credit (an 'Affiliate Loan') from its limited partner and/or its general partner
or, if applicable, the managing member of its general partner (each, an
'Affiliate Lender') if such Affiliate Loan meets the following requirements: (a)
in the case of an Affiliate Loan from a general partner or, if applicable, the
managing member of a general partner of the Palmer Square Borrower, the Rating
Agencies have given written confirmation that the Affiliate Loan will not result
in a downgrade, withdrawal or qualification of the then applicable ratings on
the Securities; (b) the proceeds of such Affiliate Loan are applied to refinance
all or a portion of the Palmer Square Properties, to pay any capital reserve
amount required under the loan documents, to pay transaction costs of the Palmer
Square Loan or to pay working capital shortfalls; (c) the amount of the
Affiliate Loan at any time does not exceed the excess of 80% of the appraised
value of the Palmer Square Properties over the then outstanding loan amount; (d)
the maturity date of the Affiliate Loan is at least 36 months after the Palmer
Square Maturity Date; (e) the Affiliate Loan requires level scheduled principal
and interest payments and is payable and prepayable only prior to the Palmer
Square Anticipated Repayment Date; (f) the Affiliate Lender has executed a
subordination agreement containing customary terms including, but not limited
to, its agreement (i) not to file a petition seeking to place the applicable
Palmer Square Borrower in insolvency or bankruptcy, (ii) not to accelerate the
Affiliate Loan or exercise any remedies or maintain any enforcement action
against such Palmer Square Borrower while the Palmer Square Loan is outstanding,
(iii) not to transfer the Affiliate Loan unless written confirmation from the
Rating Agencies has been received to the effect that such transfer will not
result in a downgrade, qualification or withdrawal of the then applicable
ratings on the Certificates, (iv) to waive any and all of such Affiliate
Lender's rights to enforce the Affiliate Loan against such Palmer Square
Borrower, as long as the Palmer Square Loan is outstanding and (v) to assign to
the Servicer all of such Affiliated Lender's enforcement rights and voting
rights in a bankruptcy of such Palmer Square Borrower and not to take any
actions that would interfere with or delay the Servicer's exercise of its rights
and remedies in the event of an insolvency or bankruptcy of such Palmer Square
Borrower. See 'Description of the Mortgage Loan and Mortgaged Properties--The
Palmer Square Loan and Properties--Transfer of Properties and Interest in
Borrowers; Encumbrance.
Additionally, the other Mortgage Loans generally permit the related
borrower to incur indebtedness in limited circumstances for the purchase of
certain items used in the ordinary course of business such as equipment. The
existence of such other indebtedness could adversely affect the financial
viability of the related borrowers. See also 'Certain Legal Aspects of the
Mortgage Loans--Subordinate Financing' in the Prospectus.
An affiliate of NACC has made a $53,290,000 loan and NACC has made a
$16,000,000 loan to the Prime Retail Operating Partnership. Such loans are not
obligations of the Prime Retail II Pool Borrowers and are not secured by the
Mortgaged Properties.
Limitations on Lock Boxes for MHP II Pool Loan and Palmer Square Loan. The
Mortgage Loans other than the MHP II Pool Loan and the Palmer Square Loan
provide throughout the term of such Mortgage Loan for collection of revenues
from the related Mortgaged Properties in collection accounts and the payment of
debt service and reserves through a lock box held by the Servicer. The MHP II
Pool Loan requires the related borrowers to establish a lock box triggered by
certain events and such lock box is limited as described below. No lock box is
required to be maintained under either the MHPLP Notes or the Santa Clara Note
prior to the occurrence of a MHP II Lock Box Event with respect to such MHPLP
Notes or Santa Clara Note. A 'MHP II Lock Box Event' with respect to the related
MHP II Pool Note(s) occurs if (a) (i) the MHP II Pool Properties are not managed
by the Marriott Hotel Services, Inc. (the 'MHP II Manager'), (ii) the MHP II
Manager is not MII (as defined herein) or a wholly-owned, direct or indirect,
subsidiary of MII, (iii) the S&P rating of MII's long
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term unsecured debt is not at least 'BBB+' or (iv) (A) at any time after March
11, 1997, S&P rates MII's long term unsecured debt at least 'A-' and the debt
service reserve account established with respect to such MHP II Pool Note(s)
contains less than one MHPLP Monthly Debt Service Payment or Santa Clara Monthly
Debt Service Payment, as applicable or (B) at any time after October 11, 1997,
S&P rates MII's long term unsecured debt 'BBB+' and the debt service reserve
account established with respect to such MHP II Pool Note(s) contains less than
two MHPLP Monthly Debt Service Payment Amount or Santa Clara Monthly Debt
Service Payments, as applicable and (C) in each case the related MHP II Pool
Borrower does not fund the shortfall therein within fifteen days' notice to such
effect from the Servicer and (b) the Servicer notifies the related MHP II Pool
Borrower that a lock box account is required to be put in effect.
If a Lock Box Event occurs under the MHPLP Notes or the Santa Clara Note,
after a phase-in period of up to 120 days, the related MHP II Pool Borrower will
be obligated to establish a lock box account for each related MHP II Pool
Property and cause all amounts received from credit card companies and amounts
received from hotel customers and others who pay on an accounts receivable basis
for the related MHP II Pool Property from the applicable collection period for
the MHP II Pool Loan to be deposited directly into such account. Cash and checks
received directly at the hotels may be deposited into local accounts. All such
funds for the related collection period with respect to the debt service payment
date for the MHP II Pool Loan are required to be swept to central deposit
accounts held by the Trustee for allocation as described in 'Description of the
Mortgage Loans and the Mortgaged Properties--The MHP II Pool Loan and
Properties--The Loan--Lock Box' herein. However, after funding certain reserves,
any funds collected in the collection period will be returned to the MHP II
Manager for payment of operating and certain other property related expenses
with respect to the related MHP II Pool Properties prior to the payment of debt
service on the MHP II Pool Notes. Prior to the monthly payment date for the MHP
II Pool Loan, the MHP II Manager will then be required to pay amounts remaining
for such collection period after payment of operating and certain other property
related expenses to the Servicer to pay the monthly debt service payments with
respect to the MHP II Pool Notes and pay other amounts required to be paid under
the MHP II Pool Loan.
The above procedures will be required to be maintained by the related MHP
II Pool Borrower until the Lock Box Event is cured in the manner provided in the
MHP II Pool Loan. See 'Description of the Mortgage Loans and the Mortgaged
Properties--The MHP II Pool Loan and Properties--The Loan--Lock Box' herein.
The Palmer Square Borrowers have funded at the closing of the loan, and are
obligated to make direct monthly payments to fund monthly in advance, (a) a
reserve account for taxes, insurance payments and condominium assessments, (b)
one month's debt service, (c) ground rents and (d) capital reserves (such
payments the 'Prefunding Amount'). The Palmer Square Loan provides for the
collection of rents in a lockbox (the 'Lockbox') from which funds are
transferred daily into accounts controlled by the Palmer Square Borrowers, and
such revenues are swept into a cash collateral account controlled by the lender
only if the Palmer Square Borrowers have not deposited the Prefunding Amount for
the following debt service period. During any period when the lender has given
notice of the failure of the Palmer Square Borrowers to remit the Prefunding
Amount, funds will be transferred daily from the Lockbox Account into collection
accounts from which (if certain minimum balances are attained) funds will be
swept daily into a cash collateral account held by the Trustee for the payment
of debt service and the funding of certain reserves. However, if the debt
service coverage ratio for the Palmer Square Loan is greater than 1.8, the
Palmer Square Borrowers may elect not to cause the deposit of revenues directly
into the Lockbox and not to pay the Prefunding Amount but instead (a) to fund
the cash collateral account in the amount of two months' payments of the amounts
specified in clause (b), if the debt service coverage ratio is greater than 1.8
but less than 3.0, and (b) to make direct monthly payments into the cash
collateral account for payment of taxes, insurance premiums and debt service and
(if the debt service coverage ratio is greater than 1.8 but less than 3.0) the
funding of capital reserves. See 'Description of the Mortgage Loans and the
Mortgaged Properties--The Palmer Square Pool Loan and Properties--The Loan--Lock
Box' herein.
One Action Considerations. Several states (including California) have laws
that prohibit more than one 'judicial action' to enforce a mortgage obligation,
and some courts have construed the term 'judicial action'
broadly. Accordingly, the Pooling and Servicing Agreement will require the
Servicer to obtain advice of counsel prior to enforcing any of the Trust Fund's
rights under any of the Mortgage Loans that include properties where the rule
could be applicable. In addition, the Servicer may be required to foreclose
first on properties located in
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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. See 'Certain Legal
Aspects of Mortgage Loans--Foreclosure' in the Prospectus.
Limitations of Appraisals. In general, appraisals represent the analysis
and opinion of qualified experts and are not guarantees of present or future
value. Qualified appraisers may reach a different conclusion than the conclusion
that would be reached if a different appraiser were appraising such property.
Moreover, 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 the Mortgaged
Properties as of the Cut-off Date is presented under 'Description of the
Mortgage Pool' herein for illustrative purposes only.
Conflicts of Interest. All of the Mortgaged Properties, except for the MHP
II Pool Properties, are managed by property managers affiliated with the
respective borrowers. Substantially all of such managers manage and/or franchise
additional properties, including properties that may compete with the Mortgaged
Properties. Moreover, affiliates of the managers, and certain of the managers
themselves, may also own or manage other properties, including competing
properties. Accordingly, the managers of the Mortgaged Properties may experience
conflicts of interest in the management of such properties.
The Originator and an affiliate currently own debt issued by an affiliate
of the Prime Retail II Pool Borrowers. The Originator or an affiliate may, in
the future, enter into other financing arrangements with affiliates of the
Borrowers. Certain officers and directors of the Originator and its affiliates
own equity interests in publicly traded affiliates of the Borrowers.
Ground Leases. The MHP II Pool Loan is secured by, among other things,
first leasehold mortgages on the related borrower's leasehold estate in the land
underlying three of the MHP II Pool Properties. The Prime Retail II Pool Loan is
secured by, among other things, a first leasehold mortgage on the related Prime
Retail II Pool Borrower's leasehold estate in the land underlying one of the
Prime Retail II Pool Properties and a first mortgage on both the related Prime
Retail II Pool Borrower's leasehold estate and the related ground lessor's fee
estate in one of the Prime Retail II Pool Properties. The Columbia Sussex II
Pool Loan is secured by, among other things, first leasehold mortgages on the
Columbia Sussex II Pool Borrower's leasehold estates in the land underlying two
of the Columbia Sussex II Pool Properties. The Palmer Square Loan is secured by,
among other things, a first leasehold mortgage on the Palmer Square Borrower's
leasehold estate in a portion of the land underlying one of the parking garages.
A discussion of the MHP II Loan, Prime Retail II Pool Loan, Columbia Sussex II
Pool Loan and Palmer Square Loan underlying leases is provided under
'Description of the Mortgage Loans and Properties--The MHP II Pool Loan and
Properties,' '--The Prime Retail II Pool Loan and Properties,' '--The Columbia
Sussex II Pool Loan and Properties' and '--The Palmer Square Loan and
Properties'.
On the bankruptcy of a lessor or a lessee under a ground lease, the debtor
entity has the right to assume (continue) or reject (terminate) the ground
lease. Pursuant to Section 365(h) of the Bankruptcy Code, as it is presently in
effect, a ground lessee whose ground lease is rejected by a debtor ground lessor
has the right to remain in possession of its leased premises under the rent
reserved in the lease for the term (including renewals) of the ground lease. The
leasehold mortgages provide that the borrower must remain in possession of the
leasehold if the ground lessor rejects the ground lease in a bankruptcy absent
Servicer's consent to the contrary or, in the case of certain of the Mortgage
Loans, that the borrower will assign all of its rights to make such a decision
to the lender. In the event a ground lessee/borrower in bankruptcy rejects any
or all of its ground leases, the leasehold mortgagee would have the right to
succeed to the ground lessee/borrower's position under the lease only if the
ground lessor had specifically granted the mortgagee such right. The ground
leases provide for the entry into new leases with the leasehold mortgagee on the
same terms as the old lease upon such a rejection, provided written notice has
been sent to the ground lessor and, inter alia, all defaults under the ground
lease are cured, other than with respect to the ground leases covering the Prime
Retail Pool II Properties known as (i) Magnolia Bluff Factory Shops which
provides that upon an event of default under the Prime Retail II Pool Loan
(which includes a bankruptcy of a borrower) the lender may foreclose on the
ground lessor's fee interest and (ii) Gulfport Factory Shops. In the event of
concurrent bankruptcy proceedings involving the ground lessor and the ground
lessee/borrower, the Trustee may be unable to enforce the bankrupt ground
lessee/borrower's obligation to refuse to treat a ground lease rejected by a
bankrupt ground lessor as terminated. In such
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circumstances, a ground lease could be terminated notwithstanding lender
protection provisions contained therein or in the mortgage.
The ground leases with respect to two of the MHP II Pool Properties contain
options to purchase the lender's interest in the related Mortgage if the
applicable MHP II Pool Borrower defaults on the MHP Pool Loan and foreclosure
proceedings have commenced at the purchase prices described herein under
'Description of the Mortgage Loans and Properties--The MHP II Pool Loan and
Properties--Ground Leases.'
Inspections. Inspections of the Mortgaged Properties were conducted by
licensed engineers to assess the structure, exterior walls, roofing interior
construction, mechanical and electrical systems and general condition of the
site, buildings and other improvements located on the Mortgaged Properties.
There can be no assurance that all property conditions have been identified in
such inspections. See 'Description of the Mortgage--Pool Underwriting
Standards--Property Condition Assessments' for information regarding the
inspections on the Mortgaged Properties.
Availability of Earthquake, Flood and Other Insurance. The Columbia Sussex
II Pool Borrower is required to maintain flood insurance with respect to any
part of a Columbia Sussex II Pool Property that is located in an area identified
by the Federal Emergency Management Agency as an area having special flood
hazards and in which such insurance is available under the National Flood
Insurance Program. The Columbia Sussex II Pool Loan requires the Columbia Sussex
II Pool Borrower to obtain the insurance described above from insurance carriers
having claims paying abilities rated not less than 'AA' by S&P. Holiday Inn
Louisville South is the only Columbia Sussex II Pool Property located in an area
identified by the Federal Emergency Management Agency as an area having special
flood hazards. Flood and earthquake insurance in the amount of (1) $3,500,000 of
the first $6,000,000 of loss is provided by Lexington Insurance Company, which
has a claims paying ability rating of 'AAA' by S&P and 'A++/XI' by A. M. Best
Company, Inc. ('Best's'), (2) $1,500,000 of the first $6,000,000 of loss by
Great Lakes UK, which is not rated by S&P or Best's and (3) $1,000,000 of the
first $6,000,000 of loss by Travelers Indemnity Company, which has a claims
paying ability rating of 'A+' by S&P and 'A/XV' by Best's. The next $4,000,000
of loss is covered by Zurich Insurance Company, which has a claims paying
ability rating of 'AA+' by S&P and 'A+/XV' by Best's. The remaining amount of
loss in excess of the $10,000,000 and up to $844,000,000 is covered by Allendale
Mutual Insurance Company, which has a claims paying ability rating of 'Aq' by
S&P and 'A++/XI' by Best's.
Each MHP II Pool Borrower is required to maintain (a) if the improvements
are located within an area designated as a flood hazard area or an area
designated as flood prone pursuant to the National Flood Insurance Act of 1968
and the Flood Disaster Protection Act of 1973, flood insurance as is available
through the National Flood Insurance Program; (b) with respect to the San Ramon
Property and the Santa Clara Property, earthquake insurance in an amount not
less than $65,000,000, which may be issued as part of a blanket policy with
seventeen other properties operated by affiliates of the MHP II Manager, (c)
such other insurance as is generally available on commercially reasonable terms
and is generally required by institutional lenders on loans secured by
properties similar to the related MHP II Pool Property. Such insurance (other
than earthquake insurance with respect to the two California properties)
generally is required to be maintained by insurance carriers having a rating of
at least 'AA-' by S&P. The San Ramon Property and the Santa Clara Property are
located within earthquake zones. None of the properties is located within an
area designated as a flood hazard area or an area designated as flood prone
pursuant to the National Flood Insurance Act of 1968 and the Flood Disaster
Protection Act of 1973. Primary earthquake insurance with respect to the San
Ramon Property and the Santa Clara Property for not less than $15,000,000 is
required to be maintained by Allendale Mutual Insurance Company or a comparable
insurance company and the additional earthquake insurance coverage with respect
to such properties is required to be maintained by insurers having a claims
paying rating of 'A-/10' or better by Best's or if such insurance is not
available from companies having such a rating, from the best rated insurance
companies then providing such insurance. Flood insurance in the amount of
$200,000,000 (with a deductible of $25,000 per occurrence per location) has been
provided by Allendale Mutual Insurance Company, which has a claims paying
ability rating of 'Aq' by S&P and 'A++/XI' by Best's. Primary earth movement
insurance in the amount of $15,000,000 for California and $200,000,000 outside
California (subject to 5% deductible per occurrence per location) has been
provided by Allendale Mutual Insurance Company, which has a claims paying
ability rating of 'Aq' by S&P and 'A++/XI' by Best's. Additional California
earthquake insurance is provided as follows: (a) $15,000,000 in excess of the
primary $15,000,000 limit is provided by (1) $2,500,000 of the $15,000,000
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excess of $15,000,000 is provided by Lexington Insurance Company, which has a
claims paying ability rating of 'AAA' by S&P and 'A++/XI' by Best's, (2)
$3,300,000 of the $15,000,000 excess of $15,000,000 is provided by Travelers
Indemnity Company of Illinois, which has a claims paying ability rating of 'A+'
by S&P and 'A/XV' by Best's, (3) $2,000,000 of the $15,000,000 excess of
$15,000,000 is provided by Royal Surplus Lines Insurance Company, which has a
claims paying ability rating of 'Aq' by S&P, and 'A/VII' by Best's, (4)
$4,000,000 of the $15,000,000 excess of $15,000,000 is provided by Westchester
Fire Insurance Company, which has a claims paying ability rating of 'A-' by S&P
and 'A/IX' by Best's, and (5) $3,200,000 of the $15,000,000 excess of
$15,000,000 is provided by RLI Insurance Company, which has a claims paying
ability rating of 'BBBq' by S&P and 'A/VIII' by Best's; (b) $15,000,000 in
excess of the $30,000,000 limit is provided by (1) $5,000,000 of the $15,000,000
excess of $30,000,000 is provided by Agricultural Insurance Company, which has a
claims paying ability rating of 'BBBq' by S&P and 'A/XI' by Best's, (2)
$2,500,000 of the $15,000,000 excess of $30,000,000 is provided by Aetna
Casualty & Surety Company, which has a claims paying ability rating of 'A+' by
S&P and 'A-/XV' by Best's, (3) $2,500,000 of the $15,000,000 excess of
$30,000,000 is provided by Essex Insurance Company, which has a claims paying
ability rating of 'A' by S&P and 'A/VI' by Best's, (4) $2,000,000 of the
$15,000,000 excess of $30,000,000 is provided by Pacific Insurance Co. Ltd.,
which has a claims paying ability rating of 'A-' by S&P and 'A+/XV' by Best's,
and (5) $3,000,000 of the $15,000,000 excess of $30,000,000 is provided by CIGNA
E&S, which is not rated by either S&P or Best's; $20,000,000 in excess of the
$45,000,000 limit is provided by United States Fidelity and Guaranty Co., which
has a claims paying ability rating of 'A' by S&P and 'A-/XIII' by Best's.
The Palmer Square Borrowers are required to acquire or maintain flood
insurance with respect to any part of a Palmer Square Property that is located
within a federally designated flood hazard zone in an amount equal to the lesser
of the full insurable value of the related property or the maximum amount
available, and such other customary insurance against loss or damage as is
requested by the Servicer. Such insurance is required to be provided by an
insurer with a claims paying ability of not less than 'AA' by S&P and 'AA' or
its equivalent by any one of the other Rating Agencies. None of the Palmer
Square Properties is located within a federally designated flood hazard zone.
Flood and earthquake insurance in the aggregate amount of $25,000,000 per
occurrence (with a deductible of $50,000) has been provided by Kemper National
Insurance Company, which has a claims paying ability rating of 'A+' by S&P and
'A/XIV' by Best's. Such insurance has been provided under a combined program for
Palmer Square Management Inc. and Nassau Inn Limited Partnership.
The HGI Pool Borrower is required to maintain flood or earthquake insurance
with respect to any portion of any of the HGI II Pool Properties that is located
within a federally designated flood or earthquake hazard zone, to the extent
that the occurrence of a flood or earthquake with respect to such portion of
such HGI II Pool Property would have a material adverse effect on such HGI II
Pool Property as a whole, and such other insurance as is reasonably requested by
the Servicer provided such insurance is of the kind from time to time
customarily insured against and in such amounts as are generally required by
institutional lenders for properties comparable to the applicable property. Any
such insurance may be effected under a blanket policy so long as, except in the
case of public liability insurance, the portion of the total policy that is
allocated to each of the HGI II Pool Properties is not less than the required
amount of such insurance. The HGI II Pool Loan requires the HGI II Pool Borrower
to obtain the insurance described above from insurance carriers having claims
paying abilities rated not less than 'AA' by S&P. In addition, such insurance
must be provided by insurers rated not less than 'AA' or its equivalent by any
one of the other Rating Agencies. The Lake Elsinore Outlet Center, the Tracy
Outlet Center and the Pismo Outlet Center are located in earthquake zones. None
of the properties is located within a federally designated flood hazard zone
that requires insurance. Primary flood and earthquake insurance for the Lake
Elsinore Outlet Center, the Tracy Outlet Center and the Pismo Outlet Center in
the amount of $5,000,000 (with a $25,000 deductible for flood and 10% of value
at time of loss) has been provided by Pacific Insurance Company, Ltd. which has
a claims paying ability rating of 'A-' by S&P and 'A+/XV' by Best's; $10,000,000
in excess of the primary $5,000,000 flood and earthquake insurance has been
provided by Western Re Managers, which consists of the following policies making
up the pool: 33.3% of $10,000,000 has been provided by each of (1) United Fire
and Casualty Insurance Company, which has a claims paying ability rating of
'BBBq' by S&P and 'A/VIII' by Best's; (2) Lloyds of London, which is not rated
by S&P or Best's; and (3) by the following four companies, each providing 25% of
33.3% of $10,000,000, namely, Sphere Drake of London, which is not rated by S&P
or Best's, Copenhagen, which is not rated by S&P or Best's, Terra Nova Insurance
Company, Ltd.
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of London, which has a claims paying ability rating of 'A-' by S&P and is not
rated by Best's, and St. Paul Surplus Lines Insurance Company, which has a
claims paying ability rating of 'AAA' by S&P and 'A+/XIV' by Best's; and
$5,000,000 in excess of the $15,000,000 flood and earthquake insurance coverage
has been provided by Agricultural Insurance Company, which has a claims paying
ability rating of 'BBBq' by S&P and 'A/XI' by Best's; and $5,000,000 in excess
of the $20,000,000 flood and earthquake insurance coverage has been provided by
Westchester Fire Insurance Company which has a claims paying ability rating of
'A-' by S&P and 'A/IX' by Best's. Primary flood and earthquake insurance for the
Southwest Outlet Center and Chesapeake Village Outlet Center in the amount of
$10,000,000 (with a deductible of $50,000) has been provided by Hartford Fire
Insurance Company, which has a claims paying ability rating of 'AA' by S&P and a
rating of 'A+/XV' by Best's.
Each of the Prime Retail II Pool Borrowers is required to maintain (a) if
the improvements are located in a federally designated flood hazard zone and if
flood insurance is available under the National Flood Insurance Act, flood
insurance, and (b) insurance against earthquakes, if commonly insured against
and generally available. The Prime Retail II Pool Borrowers are required to
maintain insurance coverage (other than with respect to (a) when such insurance
is placed with a governmental agency or instrumentation) with insurers having a
claims paying ability of not less than 'AA' from S&P, Fitch and DCR, or if not
rated by all of such rating agencies, then a claims paying ability rating of
'AA' from at least two nationally recognized statistical rating agencies (one of
which must be S&P), except that with respect to earthquake insurance, such
insurance must have a claims paying ability rating of not less than 'BBB' from
S&P, Fitch and DCR. The following Prime Retail II Pool Properties are located
within federally designated flood hazard zones: Triangle Factory Shops, Gulfport
Factory Shops, Magnolia Bluff Factory Shops, Coral Isle Factory Shops and
Florida Keys Factory Shops. Flood and earthquake insurance in the amount of
$25,000,000 (with a deductible of $25,000, except under the 100 year flood
plain, where the deductible is $100,000) is provided under the property
insurance policy by United States Fidelity and Guaranty Insurance Company, which
has a claims paying ability rating of 'A' by S&P and 'A/XIII' by Best's, with
cut through endorsement (providing direct coverage in the event of the
insolvency of the other insurer) to St. Paul Fire and Marine Insurance Company,
which has a claims paying ability rating by S&P of 'AAA' and 'A+/XV' by Best's.
Earthquake insurance coverage is often not obtainable from 'AA' or higher
rated insurers.
There can be no assurance that the amount of earthquake or flood insurance
currently required or provided would be sufficient to cover damages caused by an
earthquake or flood, or that such insurance would be commercially available in
future.
Most of the Mortgage Loans require that the property insurance carrier for
the applicable properties be rated 'AA' or higher by S&P except that with
respect to the MHP II Pool Properties, the current property insurer is rated
'Aq' by S&P, and may continue to provide coverage until April 1, 1997. However,
certain of the current property insurance carriers for the Mortgaged Properties
do not have a claims paying ability rating of at least 'AA' by S&P. The property
insurer for the Palmer Square Properties is rated 'A+' by S&P. Certain of the
property insurers for the Columbia Sussex II Pool Properties exceed the S&P
standard, but one of the property insurers for the Columbia Sussex II Pool
Properties is not rated by S&P, another has a rating of 'A+', and another has a
rating of 'Aq'. With respect to the Columbia Sussex II Pool Properties, the
Servicer will require, at the expiration of such policies, that such policies
will be replaced by insurance policies conforming with the requirements of the
Columbia Sussex II loan documents.
Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the 'ADA'), all public accommodations
are required to meet certain Federal requirements related to access and use by
disabled persons. To the extent the Mortgaged Properties do not comply with the
ADA, the borrowers are likely to incur costs of 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. In connection with the
origination of the related loan or otherwise, property inspection reports were
obtained which included limited information regarding compliance with the ADA. A
portion of funds in the capital reserve escrow accounts established by the MHP
II Pool Borrowers, the Prime Retail II Pool Borrowers and the HGI II Pool
Borrowers are required to be used for costs associated with complying with the
ADA. There can be no assurance that such
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Mortgaged Properties will comply with the ADA in all respects once the related
conditions are remedied or that such property inspection reports identified all
risks or conditions relating to the ADA.
Limited Cross-Collateralization; Limitations on Enforceability of
Cross-Collateralization. The Santa Clara Note (one of three Notes evidencing
the obligations under the MHP II Pool Loan) issued by the Santa Clara Borrower
is secured by, in addition to a first lien on the Santa Clara Property, a second
lien on the other MHP II Pool Properties owned by the other MHP II Pool
Borrower, the MHPLP Borrower. However, the MHPLP Notes (i.e. the other two Notes
evidencing the obligations under the MHP II Pool Loan) issued by the MHPLP
Borrower are not secured by the Santa Clara Property and are secured only by the
other three MHP II Pool Properties. Additionally, to some extent, cash flows
from the MHPLP Properties support payment of the obligations under the Santa
Clara Note and cash flows from the Santa Clara Property support payment of the
obligations under the MHPLP Notes. The Palmer Square Loan is comprised of a
joint and several obligation of the three Palmer Square Borrowers, each of which
owns separate Palmer Square Properties. The Palmer Square Properties are covered
by a single Mortgage and provide security for the entire indebtedness
represented by the Palmer Square Loan. The Prime Retail II Pool Loan is
comprised of the joint and several obligations of the sixteen Prime Retail II
Pool Borrowers, each of which owns separate Prime Retail II Pool Properties.
Each Prime Retail II Pool Property will provide security for the entire
indebtedness represented by the Prime Retail II Pool Loan, except that the three
Prime Retail II Pool Properties located in Florida secure only 125% of the sum
of the (i) initial Allocated Loan Amount with respect to such properties plus
(ii) a prorated portion of the $40,000,000 Expansion Account (as described
herein). These arrangements are designed primarily to ensure that all of the
collateral (subject to the exceptions above) pledged to secure the MHP II Pool
Loan, the Palmer Square Loan and the Prime Retail II Pool Loan, as applicable,
and the cash flow generated thereby, is available to support debt service on,
and ultimate repayment of, all of the aggregate indebtedness evidenced by the
Santa Clara Note (and to some extent the MHPLP Notes), the Palmer Square Loan or
the Prime Retail II Pool Loan, as applicable. The arrangements thus seek to
reduce the risk that the inability of one or more Mortgaged Properties securing
each such loan to generate net operating income sufficient to pay debt service
will result in defaults and ultimate losses.
Such arrangements, however, could be challenged as fraudulent conveyances
by creditors of a MHP II Pool Borrower, a Palmer Square Borrower or a Prime
Retail II Pool Borrower, as applicable, or by the representatives of a MHP II
Pool Borrower, a Palmer Square Borrower or a Prime Retail II Pool Borrower, as
applicable, in an action brought outside a bankruptcy case, or, if a MHP II Pool
Borrower or any of the Palmer Square Borrowers or the Prime Retail II Pool
Borrowers, as applicable, were to become a debtor in a bankruptcy case.
Generally, under federal and most state fraudulent conveyance statutes, the
incurring of an obligation or the transfer of property by a person will be
subject to avoidance under certain circumstances if the person did not receive
fair consideration or reasonably equivalent value in exchange for such
obligation or transfer and (a) was insolvent or was rendered insolvent by such
obligation or transfer, (b) was engaged in business or a transaction, or was
about to engage in business or a transaction, for which any property remaining
with the person was an unreasonably small capital, or (c) intended to, or
believed that it would incur, debts that would be beyond the person's ability to
pay as such debts matured. Accordingly, a lien (or right to receive credit
support) granted by a MHP II Pool Borrower, a Palmer Square Borrower or a Prime
Retail II Pool Borrower to secure repayment of a MHP II Pool Note, the Palmer
Square Loan or the Prime Retail II Pool Loan, as applicable, could be avoided if
a court were to determine that (a) such borrower was insolvent at the time of
granting the lien or right, was rendered insolvent by the granting of the lien
or right or was left with inadequate capital, or was not able to pay its debts
as they matured and (b) the borrower did not, when it allowed its Mortgaged
Properties to be encumbered by a lien securing the entire indebtedness
represented by the Santa Clara Note, the Palmer Square Loan or the Prime Retail
II Pool Loan, as applicable (or granted a right to credit support from revenues
from its properties), receive fair consideration or reasonably equivalent value
for pledging such Mortgaged Properties for the equal benefit of the Santa Clara
Borrower or the other Palmer Square Borrowers or other Prime Retail II Pool
Borrowers, as applicable (or granting such interest in its cash flow).
Risks Associated with Blanket Policies. Certain of the Mortgaged
Properties are covered by blanket insurance policies which also cover other
properties of the related borrower or its affiliates. In the event that such
policies are drawn on to cover losses on such other properties, the amount
available to cover losses on the related Mortgaged Properties may be
insufficient therefor.
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Attornment Considerations. Some of the tenant leases, including the anchor
tenant leases, contain provisions that require the tenant to attorn to (that is,
recognize as landlord under the lease) a successor owner of the property
following foreclosure. Some of the leases, may be either subordinate to the
liens created by the Mortgage Loans or else contain a provision that requires
the tenant to subordinate the lease if the mortgagee agrees to enter into a
non-disturbance agreement. All leases were not reviewed to ascertain the
existence of attornment or subordination provisions. In some states, if tenant
leases are subordinate to the liens created by the Mortgage Loans and such
leases do not contain attornment provisions, such leases may terminate upon the
transfer of the property to a foreclosing lender or purchaser at foreclosure.
Accordingly, in the case of the foreclosure of a Mortgaged Property located in
such a state and leased to one or more desirable tenants under leases that do
not contain attornment provisions, such Mortgaged Property could experience a
further decline in value if such tenants' leases were terminated (e.g., if such
tenants were paying above-market rents or could not be replaced). If a Mortgage
is subordinate to a lease, the lender will not (unless it has otherwise agreed
with the tenant) possess the right to dispossess the tenant upon foreclosure of
the property, and if the lease contains provisions inconsistent with the
Mortgage (e.g., provisions relating to application of insurance proceeds or
condemnation awards), the provisions of the lease will take precedence over the
provisions of the Mortgage.
Liquor License Considerations. Many of the Mortgaged Properties which are
hotel properties have liquor licenses. The liquor licenses for some of such
properties may be held by the property manager rather than by the related
borrower. In addition, some states do not permit liquor licenses to be held
other than by a natural person and, consequently, liquor licenses for hotel
properties located in such jurisdictions are held by an individual affiliated
with the related borrower or manager. Furthermore, the applicable laws and
regulations relating to such licenses generally prohibit the transfer of such
licenses to any person. In the event of a foreclosure of a hotel property, it is
unlikely that the Trustee (or Servicer) or purchaser in any such sale would be
entitled to the rights under the liquor license for such hotel property and such
party would be required to apply in its own right for such a license. There can
be no assurance that a new liquor license could be obtained.
Litigation and Other Issues. On April 18, 1996, Host Marriott Corporation
('Host Marriott'), through MHP II Acquisition Corporation (an acquisition
vehicle) ('MHP II Acquisition'), commenced a tender offer to purchase any and
all of the 745 outstanding units of the MHPLP Borrower (the 'Tender Offer'). On
April 23, 1996, MacKenzie Patterson Special Fund 2, L.P. ('MacKenzie
Patterson'), a limited partner of the MHPLP Borrower, filed a purported
class-action lawsuit in the Circuit Court for Montgomery County, Maryland,
against the MHPLP Borrower, as a nominal defendant, MHP II Acquisition, Host
Marriott, Marriott MHP Two Corporation, the general partner of the MHPLP
Borrower (the 'MHP II GP'), and the directors of the MHP II GP, alleging, among
other things, that the defendants had violated their fiduciary duties in
connection with the Tender Offer. The complaint sought certification as a
class-action, to enjoin the Tender Offer and the related consent solicitation
(the 'Consent Solicitation'), and damages. Subsequently, MacKenzie Patterson
dismissed the Montgomery County action and refiled in Delaware State Chancery
Court. In separate lawsuits, filed on April 24, 1996, in Delaware State Chancery
Court and on May 10, 1996, in the Circuit Court for Palm Beach County, Florida,
two other limited partners of the MHPLP Borrower sought similar relief. The
Chancery Court consolidated the two Delaware lawsuits and on June 12, 1996,
entered an order denying the Delaware plaintiffs' motion to enjoin the Tender
Offer and Consent Solicitation. The defendants have moved to dismiss this
consolidated action and to stay discovery. The Chancery Court has not yet set a
hearing on these motions. The defendants removed the Florida action to federal
court in Florida and filed motions to dismiss, or in the alternative, to stay
the action pending resolution of the Delaware action. The Florida Federal
District Court has not yet set a hearing on these motions.
Such litigation could potentially result in a monetary judgment against the
MHP II GP. Under such circumstances, although the Certificate of Incorporation
of the MHP II GP requires its directors to consider the interests of the MHP II
Pool Borrower's creditors in taking corporate action, there can be no assurance
that the MHP II GP would not seek protection under U.S. bankruptcy laws. Under
the partnership agreements of the MHP II Pool Borrowers, a bankruptcy of the
general partner would result in a technical dissolution of the MHP II Pool
Borrowers unless a remaining or substitute general partner continues the
business of the partnership. Among other results, a technical dissolution of a
MHP II Pool Borrower could result in a requirement that such MHP II Pool
Borrower sell the related MHP II Pool Properties and in a disruption in the
administration of such MHP II
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Pool Borrower. In the event of a dissolution of a MHP II Pool Borrower, the
limited partners of such borrower may choose to reconstitute MHP II Pool
Borrower and in any event, the MHP II Pool Properties would remain subject to
the lien of the Trustee, as mortgagee. According to the most recent quarterly
report of the MHPLP Borrower for the period ended September 6, 1996 filed on
Form 10-Q with the Commission, this litigation is not expected to have a
material adverse effect on the business, financial condition or results of
operations of the MHPLP Borrower.
S&P has informed the Depositor that its ratings of the Certificates do not
address the potential effect of this litigation or any monetary judgment on the
MHP II GP or the MHPLP Borrowers.
THE CERTIFICATES
Special Prepayment, Yield and Loss Considerations. The yield to maturity
on the Offered Certificates will depend, among other things, on the rate and
timing of principal payments (including both voluntary prepayments, in the case
of the Mortgage Loans that permit voluntary prepayment, and involuntary
prepayments, such as prepayments resulting from casualty or condemnation,
defaults and liquidations) on the Mortgage Loans and the allocation thereof to
reduce the Certificate Balances of the Certificates. In addition, in the event
of any repurchase of a Mortgage Loan by the Originator or the Depositor from the
Trust Fund under the circumstances described under 'The Pooling and Servicing
Agreement--Representations and Warranties; Repurchase' herein, the repurchase
price paid would be passed through to the holders of the Certificates with the
same effect as if such Mortgage Loan had been prepaid in full (except that no
Prepayment Premium would be payable with respect to any such repurchase). In
addition, with respect to any class of Offered Certificates, to the extent
losses on the Mortgage Loans exceed the principal balance of the classes of
Certificates subordinate to such class, such class will bear a loss equal to the
amount of such excess. No representation is made as to the anticipated rate of
prepayments (voluntary or involuntary) on or rate or amount of liquidations or
losses on the Mortgage Loans or as to the anticipated yield to maturity of any
Offered Certificate. See 'Prepayment and Yield Considerations' herein.
The rate at which voluntary prepayments occur on the Mortgage Loans will be
affected by a variety of factors, including, without limitation, the terms of
the Mortgage Loans, the level of prevailing interest rates, the availability of
mortgage credit and economic, demographic, tax, legal and other factors. In
general, however, if prevailing interest rates fall significantly below the
Mortgage Rates on the Mortgage Loans, such Mortgage Loans are likely to be the
subject of higher principal prepayments than if prevailing rates remain at or
above the rates borne by such Mortgage Loans. The rate of principal payments on
the Offered Certificates will correspond to the rate of principal payments on
the Mortgage Loans and is likely to be affected by the length of time during
which the Mortgage Loans may not be voluntarily prepaid (each a 'Prepayment
Lockout Period'), Defeasance Lockout Periods and yield maintenance premium
provisions applicable to the Mortgage Loans and by the extent to which the
Servicer is able to enforce such provisions. Mortgage Loans with a Prepayment
Lock-Out Period or yield maintenance premium provision, to the extent
enforceable, generally may be expected to experience a lower rate of principal
prepayments than otherwise identical mortgage loans without such provisions,
with shorter Prepayment Lockout Periods or with lower yield maintenance
premiums.
The Mortgage Loans may be prepaid, in whole or in part, without payment of
yield maintenance premium, on the dates, set forth in the following table:
<TABLE>
<CAPTION>
MORTGAGE LOAN
----------------------------------------
<S> <C>
Columbia Sussex II Pool Loan............ August 11, 2011
HGI II Loan............................. October 11, 2006
MHP II Pool Loan........................ October 11, 2007
Palmer Square Loan...................... September 11, 2007
Prime Retail II Pool Loan............... November 11, 2003
</TABLE>
S-48
<PAGE>
No yield maintenance premium will be required under the Mortgage Loans for
prepayments in connection with a casualty or condemnation unless, in the case of
most of the Mortgage Loans, an event of default has occurred and is continuing.
Provisions requiring yield maintenance premiums may not be enforceable in
some states and under federal bankruptcy law, and may constitute interest for
usury purposes. Accordingly, no assurance can be given that the obligation to
pay a yield maintenance premium will be enforceable under applicable state or
federal law or, if enforceable, that the foreclosure proceeds will be sufficient
to pay such yield maintenance premium. Additionally, although the collateral
substitution provisions related to defeasance are not intended to be, and do not
have the same effect on the Certificateholders as, prepayment, there can be no
assurance that a court would not interpret such provisions as requiring a yield
maintenance premium and thus not enforceable under applicable law or as being
usurious.
In general, if an Offered Certificate is purchased at a premium and
principal distributions thereon occur at a rate faster than anticipated at the
time of purchase, to the extent that the required yield maintenance premiums, if
any, are not received, the investor's actual yield to maturity will be lower
than that assumed at the time of purchase. Conversely, if an Offered Certificate
is purchased at a discount and principal distributions thereon occur at a rate
slower than that assumed at the time of purchase, the investor's actual yield to
maturity will be lower than assumed at the time of purchase.
Each Mortgage Loan requires that commencing on the first Due Date after
each Anticipated Repayment Date, certain cash flow in excess of that required
for debt service and other specified items with respect to the related Mortgaged
Properties (as described more fully herein) ('Excess Cash Flow') will be applied
towards the payment of principal until the principal balance of the related loan
has been reduced to zero. Each Mortgage Loan also provides that principal
outstanding after the Anticipated Repayment Date will bear interest at a higher
rate (the 'Revised Interest Rate') than previously in effect (the 'Current
Interest Rate'). While interest at the Current Interest Rate continues to accrue
and be payable on a current basis on such loans, interest at the excess of the
Revised Interest Rate over the Current Interest Rate for such loans ('Excess
Interest') will be deferred and will be paid only after the outstanding
principal balance of the related loan has been paid in full.
All of the Mortgage Loans provide that after the applicable Defeasance
Lock-Out Period and prior to the related Anticipated Repayment Date, the
borrower may obtain the release of the related Mortgaged Properties from the
lien of the related Mortgage upon the pledge to the Trustee of noncallable U.S.
Treasury or other noncallable U.S. government obligations which provide payments
on or prior to all successive payment dates and the amount of principal that
would be due on the Anticipated Repayment Date as if such date were the maturity
date, and upon which interest and principal payments are due on and prior to the
related Anticipated Repayment Date under the related Note in the amounts due on
such dates (or, in the case of a partial defeasance, due on the portion of the
Note defeased), and upon the satisfaction of certain other conditions. See
'Description of the Mortgage Loans and Mortgaged Properties Release in Exchange
for Substitute Collateral.'
See 'Prepayment and Yield Considerations' and 'Certain Federal Income Tax
Consequences' herein and 'Yield Considerations' and 'Certain Federal Income Tax
Consequences' in the Prospectus.
Effect of Mortgagor Defaults. The aggregate amount of distributions on the
Offered Certificates, the yield to maturity of the Offered Certificates, the
rate of principal payments on the Offered Certificates and the weighted average
life of the Offered Certificates will be affected by the rate and the timing of
delinquencies and defaults on the Mortgage Loans. If a purchaser of an Offered
Certificate of any class calculates its anticipated yield based on an assumed
rate of default and amount of losses on the Mortgage Loans that is lower than
the default rate and amount of losses actually experienced and such additional
losses are allocable to such class of Certificates, such purchaser's actual
yield to maturity will be lower than that so calculated and could, under certain
extreme scenarios, be negative. The timing of any loss on a liquidated Mortgage
Loan will also affect the actual yield to maturity of the Offered Certificates
to which a portion of such loss is allocable, even if the rate of defaults and
severity of losses are consistent with an investor's expectations. In general,
the earlier a loss borne by an investor occurs, the greater is the effect on
such investor's yield to maturity.
As and to the extent described herein, the Servicer, the Trustee or the
Fiscal Agent, as applicable, will be entitled to receive interest on
unreimbursed Advances and unreimbursed servicing expenses that (i) are recovered
S-49
<PAGE>
out of amounts received on the Mortgage Loan as to which such Advances were made
or such servicing expenses were incurred, which amounts are in the form of
reimbursement from the related borrower, liquidation proceeds, insurance
proceeds, condemnation proceeds or amounts paid in connection with the purchase
of such Mortgage Loan out of the Trust Fund or (ii) are determined to be
nonrecoverable Advances. Such interest will accrue from (and including) the date
on which the related Advance is made or the related expense incurred to (but
excluding) the first Servicer Remittance Date after the date on which such
amounts described in the preceding clause (i) are received or, in the case of
clause (ii), the first Servicer Remittance Date after a determination of non-
recoverability is made to the extent that there are funds available in the
Collection Account for reimbursement of such Advance. The Servicer's, the
Trustee's or the Fiscal Agent's right, as applicable, to receive such payments
of interest is prior to the rights of Certificateholders to receive
distributions on the Offered Certificates and, consequently, may result in
losses being allocated to the Offered Certificates that would not otherwise have
resulted absent the accrual of such interest. In addition, certain
circumstances, including delinquencies in the payment of principal and interest,
result in a Mortgage Loan being specially serviced. Any Special Servicer is
entitled to additional compensation for special servicing activities which may
result in losses being allocated to the Offered Certificates that would not
otherwise have resulted absent such compensation. If the Special Servicer (which
may be the Servicer) or an affiliate is the owner of more than 50% of the Voting
Rights of the most subordinate class of Certificates then outstanding, the
Special Servicer will be entitled to 50% of certain special servicing
compensation. See 'The Pooling and Servicing Agreement--Special Servicing'
herein.
Even if losses on the Mortgage Loans are not borne by an investor in a
particular class of Offered Certificates, such losses may affect the weighted
average life and yield to maturity of such investor's Certificates. Losses on
the Mortgage Loans, to the extent not allocated to such class of Offered
Certificates, may result in a higher percentage ownership interest evidenced by
such Certificates than would otherwise have resulted absent such loss. The
consequent effect on the weighted average life and yield to maturity of the
Offered Certificates will depend upon the characteristics of the remaining
Mortgage Loans.
Regardless of whether losses ultimately result, delinquencies and defaults
on the Mortgage Loans may significantly delay the receipt of payments by the
holder of an Offered Certificate, to the extent that Advances or the
subordination of another class of Certificates does not fully offset the effects
of any such delinquency or default. The Available Funds generally consist of, as
more fully described herein, principal and interest on the Mortgage Loans
actually collected or advanced. The Servicer's, the Trustee's or the Fiscal
Agent's obligation, as applicable, to make Advances in respect of a Mortgage
Loan that is delinquent as to its Balloon Payment is limited to the extent
described under 'The Pooling and Servicing Agreement--Advances' herein.
As described under 'Description of the Offered Certificates--Distributions'
herein, if the portion of Available Funds distributable in respect of interest
on the Offered Certificates on any Distribution Date is less than the Interest
Distribution Amount then payable for such class, the shortfall will be
distributable to holders of such class of Certificates on subsequent
Distribution Dates, to the extent of Available Funds.
Servicer or Special Servicer May Purchase Certificates. The Servicer or
Special Servicer may purchase all or part of one or more classes of
Certificates. Such a purchase by the Servicer or Special Servicer, as the case
may be, could cause a conflict between such entity's duties pursuant to the
Pooling and Servicing Agreement and its interest as a holder of a Certificate,
especially to the extent that certain actions or events have a disproportionate
effect on one or more classes of Certificates. The Pooling and Servicing
Agreement provides that the Mortgage Loans shall be administered in accordance
with the servicing standard set forth therein without regard to ownership of any
Certificate by the Servicer, Special Servicer, or any affiliate thereof. See
also 'The Pooling and Servicing Agreement--Amendment.'
Book-Entry Registration. Each class of Offered Certificates will be
initially represented by one or more certificates registered in the name of Cede
& Co., as the nominee for DTC, and will not be registered in the names of the
related holders of Certificates or their nominees. As a result, holders of
Offered Certificates will not be recognized as 'Certificateholders' for certain
purposes. Hence, those beneficial owners will be able to exercise the rights of
holders of Certificates only indirectly through DTC, Centrale de Livraison de
Valeurs Mobiliers S.A. ('CEDEL'), or The Euroclear System ('Euroclear') and
their participating organizations. See 'Description of the Offered
Certificates--Delivery, Form and Denomination' and '--Book-Entry Registration'
herein and 'Description of the Certificates--Book-Entry Registration and
Definitive Certificates'
S-50
<PAGE>
in the Prospectus. A beneficial owner holding a certificate through the
book-entry system will be entitled to receive the reports set forth in the
Pooling and Servicing Agreement to the extent that its name and address has been
provided to the Certificate Registrar (as defined herein). Additionally, certain
information made available on the monthly reports to Certificateholders can be
retrieved via facsimile through LaSalle National Bank's ASAP System by calling
(312) 904-2200, and requesting statement number 224.
Limited Liquidity and Market Value. There is currently no secondary market
for the Offered Certificates. While the Underwriter has advised that it
currently intends to make a secondary market in the Offered Certificates, it is
under no obligation to do so. Accordingly, there can be no assurance that a
secondary market for the Offered Certificates will develop. Moreover, if a
secondary market does develop, there can be no assurance that it will provide
holders of Offered Certificates with liquidity of investment or that it will
continue for the life of the Offered Certificates. The Offered Certificates will
not be listed on any securities exchange. Lack of liquidity could result in a
precipitous drop in the market value of the Offered Certificates. In addition,
the market
value of the Offered Certificates at any time may be affected by many factors,
including then prevailing interest rates, and no representation is made by any
person or entity as to the market value of any Offered Certificate at any time.
Pass-Through Rate Considerations. The Pass-Through Rates on the Class
CS-1, Class CS-2, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and
Class A-7 Certificates are based, and the Pass-Through Rate of the Class CS-3 is
based in part, on the Adjusted Weighted Average Net Mortgage Pass-Through Rate
of the Mortgage Loans. Because certain Mortgage Loans will amortize their
principal more quickly than others, such rate will fluctuate over the life of
such classes of Certificates. The Adjusted Weighted Average Net Mortgage
Pass-Through Rates for each Distribution Date, assuming that each Mortgage Loan
prepays on its Anticipated Repayment Date, is set forth in Exhibit C hereto. See
'Prepayment and Yield Considerations--Yield' herein.
RISK OF DEFAULT UNDER FLOOR AGREEMENTS
If a default occurs under a Floor Agreement (which may be caused by, among
other things, a downgrade of the Floor Counterparty's credit rating) or if a
Floor Agreement terminates prior to its stated termination date (which under the
terms thereof may occur in certain circumstances), the Floor Counterparty may be
required under the Cap Agreement to pay the Trustee a breakage fee. The amount
of such breakage fee, if any, will be based on prevailing market conditions for
an agreement such as such Floor Agreement. No party is obligated to fund the
purchase of a substitute floor contract should the amount paid by the Floor
Counterparty in respect of any such breakage fee be insufficient to purchase a
substitute floor agreement having substantially similar terms to such Floor
Agreement. See 'The Interest Rate Floor Agreements' herein. In any event, there
can be no assurance that the Trustee or Servicer would be able to acquire a
substitute floor agreement (utilizing the proceeds of a termination payment or
otherwise) or, if it is able to do so, that such agreement would be from a
sufficiently creditworthy counterparty. Accordingly, the occurrence of a default
under or any other termination of a Floor Agreement may adversely affect the
rating of the Certificates. Any shortfalls resulting from the absence of
substitute floor agreements will be allocated among the classes of Certificates
in the same manner as Realized Losses.
S-51
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of five Mortgage Loans with an
aggregate principal balance as of the Cut-off Date, after deducting payments of
principal due on such date, of $895,196,535. All of the numerical information
provided herein with respect to the Mortgage Loans is provided on an approximate
basis. The Mortgage Loans are evidenced by one or more promissory notes (each, a
'Note') and secured by one or more mortgages, deeds of trust or other similar
security instruments (each, a 'Mortgage') creating a first lien on the interests
of the related borrower's fee simple estate or leasehold estate in one or more
commercial properties (each, a 'Mortgaged Property') as set forth on the
following table:
<TABLE>
<CAPTION>
INTEREST IN PROPERTY ENCUMBERED NUMBER OF MORTGAGED PROPERTIES
- --------------------------------------------- ------------------------------
<S> <C>
Fee Simple Estate............................ 33
Leasehold Estate............................. 6
Borrower's Fee and Leasehold Estate(1)....... 1
Lessor's Fee and Borrower's Leasehold
Estate(2).................................. 1
</TABLE>
- ------------------
(1) 'Borrower's Fee and Leasehold Estate' means that the borrower's interest in
the Mortgaged Property consists of a fee interest in a portion of the
property and a leasehold interest in the remaining portion.
(2) 'Lessor's Fee and Borrower's Leasehold Estate' means the related Mortgage
encumbers both the lessor's fee interest and the borrower's leasehold
interest in the Mortgaged Property.
The Mortgaged Properties consist of factory outlet centers, full service
and convention hotels, and a mixed-use retail, office, parking facility and
hotel center. All of the Mortgage Loans are non-recourse loans so that, in the
event of a borrower default on any Mortgage Loan, recourse may generally be had
only against the specific Mortgaged Property or Mortgaged Properties securing
such Mortgage Loan and such limited other assets as have been pledged to secure
such Mortgage Loan, and not against the borrower's other assets. Pursuant to the
Mortgage Loan Purchase and Sale Agreement (defined below), the Originator may be
obligated to repurchase a Mortgage Loan in the event of a breach of a
representation or warranty of the Originator with respect to such Mortgage Loan
as described under 'The Pooling and Servicing Agreement--Representations and
Warranties Repurchase' herein. All percentages of the Mortgage Loans described
herein are approximate percentages (except as otherwise indicated) by Cut-off
Date Allocated Loan Amount (as defined below). All of the Mortgage Loans to be
included in the Trust Fund have been originated by Nomura Asset Capital
Corporation (the 'Originator' or 'NACC') and all of the Mortgage Loans were
underwritten in accordance with the underwriting criteria described herein. The
Depositor will purchase the Mortgage Loans to be included in the Mortgage Pool
on or before the Closing Date from the Originator pursuant to a Mortgage Loan
Purchase and Sale Agreement (the 'Mortgage Loan Purchase and Sale Agreement') to
be dated as of the Cut-off Date between the Originator and the Depositor. The
Depositor will cause the Mortgage Loans in the Mortgage Pool to be assigned to
LaSalle National Bank, as Trustee (the 'Trustee'), pursuant to the Pooling and
Servicing Agreement. AMRESCO Management, Inc., a wholly-owned subsidiary of
AMRESCO, INC., in its capacity as Servicer (the 'Servicer'), will service the
Mortgage Loans pursuant to the Pooling and Servicing Agreement.
Under the Mortgage Loan Purchase and Sale Agreement, the Originator, as
seller of the Mortgage Loans to the Depositor, will make certain
representations, warranties and covenants to the Depositor relating to, among
other things, the Mortgage Loans and the due execution and enforceability to the
Mortgage Loan Purchase and Sale Agreement. Under the Pooling and Servicing
Agreement the Depositor will assign all its right, title and interest in such
representations, warranties and covenants to the Trustee for the benefit of the
Trust Fund. Except as described under 'The Pooling and Servicing Agreement
Representations and Warranties; Repurchase,' the Depositor will make no
representations or warranties with respect to the Mortgage Loans and will have
no obligation to repurchase or substitute for Mortgage Loans with deficient
documentation or which are otherwise defective. The Originator, as seller of the
Mortgage Loans to the Depositor, is selling such Mortgage Loans without recourse
and, accordingly, in such capacity, will have no obligations with respect to the
Certificates other than pursuant to the limited representations, warranties and
covenants made by it to the Depositor and assigned by the Depositor to the
Trustee. See 'The Pooling and Servicing Agreement--Representations and
Warranties;
S-52
<PAGE>
Repurchase' herein and 'Description of the Agreements--Representations and
Warranties; Repurchases' in the Prospectus.
SECURITY FOR THE MORTGAGE LOANS
Each Mortgage Loan is generally non-recourse and is secured by a Mortgage
encumbering the related borrower's interest in the related Mortgaged Properties.
Each Mortgage Loan is also secured by an assignment of the related borrower's
interest in the leases, rents, issues and profits of the related Mortgaged
Properties. In certain instances, additional collateral exists in the nature of
partial indemnities or guaranties, or the establishment and pledge of one or
more reserve or escrow accounts for necessary repairs, replacements and
environmental remediation, real estate taxes and insurance premiums, deferred
maintenance and/or scheduled capital improvements (such accounts, 'Reserve
Accounts'). All of the Mortgage Loans provide for the indemnification of the
mortgagee by the borrower for the presence of any hazardous substances affecting
the Mortgaged Property.
Each Mortgage constitutes a first lien on one or more Mortgaged Properties,
subject generally only to (i) liens for real estate and other taxes and special
assessments and (ii) covenants, conditions, restrictions, rights of way,
easements and other encumbrances whether or not of public record as of the date
of recording of the related Mortgage, such exceptions having been acceptable to
the Originator in connection with the purchase or origination of the related
Mortgage Loan.
CERTAIN CHARACTERISTICS OF THE MORTGAGE LOANS
All of the Mortgage Loans have Due Dates that occur on the eleventh day of
each month, or, in some cases, if such eleventh day is not a business day, on
the business day immediately following such eleventh day. As of the Cut-off
Date, the Mortgage Loans had the following characteristics:
<TABLE>
<S> <C>
Aggregate Principal Balance....................... $895,196,535
Lowest Mortgage Loan Principal Balance............ $36,000,000
Highest Mortgage Loan Principal Balance........... $358,748,252
Average Mortgage Loan Principal Balance........... $179,039,307
Range of Term to Maturity (as of the date of
origination).................................... 240 to 360 months
Weighted Average Term to Maturity (as of the date
of origination)................................. 304 months
Range of Remaining Term to Anticipated Repayment
Date............................................ 83 to 176 months
Weighted Average Remaining Term to Anticipated
Repayment Date.................................. 117 months
Range of Interest Rate ('Mortgage Rate'), per
annum(1)........................................ 7.782% to 9.060%
Weighted Average Mortgage Rate(1)................. 8.231%
Range of Loan-to-Value ('LTV') Ratios............. 49% to 57%
Weighted Average LTV Ratio........................ 51%
Range of Debt Service Coverage Ratio.............. 1.71 to 2.06
Weighted Average Debt Service Coverage Ratio...... 1.96
</TABLE>
- ------------------
(1) The Prime Retail II Pool Loan bears interest during the first two years of
its loan term at a Mortgage Rate equal to LIBOR (as defined herein) plus
1.51%. Thereafter it bears interest at a fixed rate per annum. The Mortgage
Rate of the Prime Retail II Pool Loan as of the Cut-off Date was %.
All of the Mortgage Loans amortize substantially all of their principal
over their respective terms. Each Mortgage Loan requires that after a specified
date (each an 'Anticipated Repayment Date'), Excess Cash Flow (or, in the case
of the Santa Clara Property, approximately 50% of Excess Cash Flow) will be
applied towards the reduction of principal, as more fully described under
'Description of the Mortgage Loans and Mortgaged Properties--The Columbia Sussex
II Pool Loan and Properties,' '--The HGI II Pool Loan and Properties,' '--The
MHP II Pool Loan and Properties,' '--The Palmer Square Loan and Properties' and
'--The Prime
S-53
<PAGE>
Retail II Pool Loan and Properties.' The following chart lists the respective
Anticipated Repayment Dates for each of the Mortgage Loans:
<TABLE>
<CAPTION>
MORTGAGE LOAN ANTICIPATED REPAYMENT DATE
- ---------------------------------------- --------------------------
<S> <C>
Columbia Sussex II Pool Loan............ August 11, 2011
HGI II Pool Loan........................ October 11, 2006
MHP II Pool Loan........................ October 11, 2007
Palmer Square Loan...................... December 11, 2007
Prime Retail II Pool Loan............... November 11, 2003
</TABLE>
The Columbia Sussex II Pool Loan, the HGI II Pool Loan and the Palmer
Square Loan each require constant monthly principal and interest payments over
their respective remaining terms. The MHP II Pool Loan requires payments of
interest only for one year and then requires constant monthly payments of
principal and interest over its remaining term. The Prime Retail II Pool Loan
requires monthly payments of interest based on a floating rate, and principal
based on a 30 year amortization schedule (with such amortization schedule
determined using a fixed rate of 7.782%) for two years and then requires
constant monthly principal and interest payments over its remaining term.
All of the Mortgage Loans have Prepayment Lockout Periods (as defined
herein) to, but not including, their respective Anticipated Repayment Dates (or,
in the case of the Palmer Square Loan, to, but not including, 3 months prior to
its Anticipated Repayment Date). No yield maintenance premium will be required
for all voluntary prepayments on the Mortgage Loans after their respective
Prepayment Lockout Periods. No yield maintenance premium will be required under
the Mortgage Loans for prepayments in connection with a casualty or condemnation
unless, in the case of most of the Mortgage Loans, an event of default has
occurred and is continuing.
All of the Mortgage Loans provide that after the applicable Defeasance
Lockout Period (as defined herein) and prior to the related Anticipated
Repayment Date (or, with respect to the Columbia Sussex II Pool Loan and the
Palmer Square Loan, prior to its maturity) the borrower may obtain the release
of one or more (or, with respect to the Columbia Sussex II Pool Loan, all) of
the related Mortgaged Properties from the lien of the related Mortgage upon a
pledge to the Trustee of noncallable U.S. government obligations which provide
payments on or prior to all successive payment dates upon which interest and
principal payments are due under the related Note through and including the
respective Anticipated Repayment Dates and in amounts due on such dates (or
would be scheduled to be due on the Anticipated Repayment Dates if the related
loans were repaid on the applicable Anticipated Repayment Date deemed
attributable to the Mortgaged Property or Properties to be released (the funds
delivered to the Servicer sufficient to purchase such noncallable U.S.
government obligations is a 'Defeasance Deposit'), and upon the satisfaction of
certain other conditions, including, in the case of the Mortgage Loans that
permit release of less than all of the related Mortgaged Properties in
connection with a partial defeasance, the satisfaction of certain DSCR tests and
the defeasance of principal and interest equal to at least 125% of the Allocated
Loan Amount of such property so released (or, if the MHP II Pool Property
referred to herein as the Santa Clara Property is to be released, the lesser of
(i) 125% of the Allocated Loan Amount and (ii) the sum of the Allocated Loan
Amount of the Santa Clara Property and the amount of proceeds of such sale
payable to the MHPLP Borrower pursuant to the Santa Clara Partnership
Agreement). The Mortgage Loans also permit (or provide that the Servicer may
require) the related borrower, under certain circumstances, to transfer the
pledged U.S. Obligations together with the related Note or the portion of the
related Note secured by such U.S. Obligations to a successor mortgagor. See
'Risk Factors and Other Special Considerations--The Certificates--Special
Prepayment and Yield Considerations' and 'Description of the Mortgage Loans and
Mortgaged Properties' herein.
The following tables set forth certain information with respect to the
Mortgage Loans and Mortgaged Properties. The statistics in the following tables
were primarily derived from information provided to the Depositor by the
respective borrowers. Some of the calculations of the statistics in the tables
were not made with adjustments which would be required under generally accepted
accounting principles ('GAAP'). For purposes of the tables, the defined terms
have the meanings described below:
S-54
<PAGE>
(1) 'Total Revenues' as used herein with respect to any Mortgaged Property or
group of Mortgaged Properties generally means, for the year stated, total
revenue generated at such Mortgaged Property or Properties during the
twelve calendar months ended in 1996 on the date indicated in the column
with the heading 'As of Date', December 31, 1995, December 31, 1994 or
December 31, 1993 (During periods where less than 12 full months of
operating history is available, partial years may have been annualized)
(except as noted below).
(2) 'NOI' or 'Net Operating Income' as used herein with respect to any
Mortgaged Property or group of Mortgaged Properties means, for the year
stated, the excess of the Total Revenue for such Mortgaged Property or
Properties for the period referenced in note (1) above over the total
operating expenses of such Mortgaged Property or Properties incurred
during such period, without giving effect to any deductions for debt
service, depreciation, amortization, capital expenditures or reserves
therefor.
NOI and the revenues and expenditures used to determine NOI for each
Mortgaged Property are derived from information furnished by the
respective borrowers. There can be no assurance that the components of net
operating income for a Mortgaged Property (i.e., revenues and
expenditures) as determined under GAAP would be the same as those used in
computing the stated NOI for such Mortgaged Property. Moreover, NOI is not
a substitute for net income as determined in accordance with GAAP as a
measure of the results of a property's operations or a substitute for cash
flows from operating activities determined in accordance with GAAP as a
measure of liquidity.
(3) 'Net Cash Flow' as used herein with respect to any Mortgaged Property or
group of Mortgaged Properties generally means NOI for the twelve months
ended on the date indicated in the column with the heading 'As of Date'
after giving effect to the following adjustments:
a. Leases in Place: In calculating Net Cash Flow for all properties
other than hotel properties and parking facilities, base rent was
generally determined by using Annualized Base Rent and percentage
rent was generally determined by using the percentage rent that
was actually collected during the most recent 12 month time
period.
b. Management Fees: Management fees used in the calculation of Net
Cash Flow, which in all cases equal or exceed the contractual rate
under the management agreements currently in effect, are as
follows: Columbia Sussex II Pool Properties: 3% of Total Revenues;
HGI II Pool Properties: 4% of total revenues less any deductions
for additional vacancy; MHP II Pool Properties: 4.5% of Total
Revenues; Palmer Square Properties: 5% of total revenues for the
retail, office and hotel properties and 3.9% for the parking
property; Prime Retail II Pool Properties: 4% of total revenues
less any deductions for additional vacancy.
c. Franchise Fees: Franchise fees used in the calculation of Net
Cash Flow are as follows: for the Columbia Sussex II Pool
Properties and for the MHP II Pool Properties: the actual amounts
being paid to the franchisor, of if the related franchise
agreement provided for step-ups in franchise fees, franchise fees
were assumed to be at the highest rate. For the hotel included in
the Palmer Square Properties, franchise fees were not underwritten
as the Mortgaged Property does not have a franchise affiliation.
d. Capital Reserves: Annual reserves assumed in calculating Net Cash
Flow are as follows: Columbia Sussex II Pool Properties:
furniture, fixtures and equipment ('FFE') reserve of 5% of total
revenues; HGI II Pool Properties: capital expenditure reserve of
$0.15 per square foot ('psf'); MHP II Pool Properties: FFE reserve
of 5% of total revenues; Palmer Square Properties: capital
expenditure reserve of $0.30 psf for office, $0.15 retail space,
FFE reserve of 5% of total revenues for the hotel and $0.75 psf
for the parking facilities; Prime Retail II Pool Properties:
capital expenditures reserve of $0.15 psf of vacant GLA and $0.20
psf of occupied GLA.
S-55
<PAGE>
e. Rollover Expenses: Annual expenses of tenant rollover (i.e.,
tenant improvements and leasing commissions) assumptions used
in calculating Net Cash Flow are as follows:
<TABLE>
<CAPTION>
BASE RENT TENANT IMPROVEMENTS LEASING COMMISSIONS
PER SQUARE AVG. LEASE RENEWAL -------------------------- --------------------------
FOOT TERM (YRS.) PROBABILITY NEW TENANT RENEWAL TENANT NEW TENANT RENEWAL TENANT
---------- ----------- ----------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Prime Retail II...... $ 14 6.6 70% $ 8 $1 4% 0%
HGI II Palmer........ $ 16 6.5 75% $ 8 $1 4% 0%
Retail Palmer........ $ 30 8 75% $ 5 $2 4% 2%
Office............... $ 25 6 60% $ 10 $2 5% 2%
</TABLE>
g. Occupancy: In calculating Net Cash Flow, adjustments were made
to Total Revenues or Annualized Base Rent to reflect maximum
occupancies of 95% for retail, factory outlet centers, and office
properties. For hotel properties, occupancies were adjusted
downward to levels believed by the Originator to be sustainable
based on the underwritten ADR.
The management fees, franchise fees and reserves used in calculating Net
Cash Flow differ in many cases from the management fees, franchise fees
and reserves provided for under the loan documents for the Mortgage Loans.
Further, actual conditions at the properties will differ, and may differ
substantially, from the assumed conditions used in calculating Net Cash
Flow. In particular, the assumptions regarding tenant vacancies, renewal
rates, tenant improvements and leasing commissions and other conditions
used in calculating Net Cash Flow for the retail and office properties may
differ substantially from actual conditions. Such assumptions may also
differ from those used by the Rating Agencies or by investors. Each
investor should make its own determination of the appropriate assumptions
to be used by determining Net Cash Flow.
'Net Cash Flow' reflects the calculations and adjustments used by the
Originator and may or may not reflect the amounts calculated and adjusted
by the Rating Agencies for their own analysis. 'Net Cash Flow' and the
Debt Service Coverage Ratios derived therefrom are not a substitute for
cash flow as determined in accordance with generally accepted accounting
principles as a measure of the results of the property's operations or a
substitute for cash flows from operating activities determined in
accordance with generally accepted accounting principles as a measure of
liquidity.
Reletting costs and capital expenditures are crucial to the operation of
commercial properties. Each investor should make its own assessment of the
level of reletting costs and capital expenditures of the Mortgaged
Properties, and the consequent effect of such costs and expenditures on
the actual net operating income and debt service coverage ratios of the
Mortgage Loans.
No representation is made as to the future net cash flow of the
properties, nor is 'Net Cash Flow' set forth herein intended to represent
such future net cash flow.
(4) 'Value' means, for each of the Mortgaged Properties, the appraised value
of such property as determined by the appraisal thereof reviewed in
connection with the origination of the related Mortgage Loan. 'Total
Value' is the aggregate Value for all of the Mortgaged Properties.
(5) 'Allocated Loan Amount' means, for each Mortgaged Property, the portion of
the principal amount of the related Mortgage Loan allocated to such
Mortgaged Property for certain purposes (including, without limitation,
determining the release prices of properties, if the Mortgage Loan permits
such releases) under such Mortgage Loan. The Allocated Loan Amount for
each Mortgaged Property securing a Mortgage Loan was determined generally
based on the ratio of the Net Cash Flow or net operating income
(calculated as provided in the related Mortgaged Loan) or appraised value,
or some combination thereof, of such Mortgaged Property to the aggregate
Net Cash Flow or appraised value, or some combination thereof, of all the
Mortgaged Properties securing such Mortgage Loan. The Allocated Loan
Amount for each Mortgaged Property may be adjusted upon the payment of
principal of the related Mortgage Loan, whether upon amortization,
prepayment, defeasance or otherwise. 'Cut-off Date Allocated Loan Amount'
means for each Mortgaged Property the Allocated Loan Amount of such
property as of the Cut-off Date.
S-56
<PAGE>
(6) 'Annual Debt Service' means on any Mortgage Loan, the annual debt service
(interest, including interest allocable to payment of the Servicing Fee
and, if applicable, principal) on such Mortgage Loan. With respect to the
MHP II Pool Loan which has an initial one-year period during which only
payments of interest are required, the annual debt service for the first
twelve-month period in which such loan begins to amortize is set forth in
the tables. With respect to the Prime Retail II Pool Loan which has an
initial two year period during which payments of interest are based on a
floating interest rate, the annual debt service is calculated as if the
interest rate was fixed at 7.782% with an amortization of 30 years. In
such calculation the outstanding principal balance of the Expansion
Account is excluded.
(7) 'Anticipated Repayment Date' for each Mortgage Loan is the date on which
(i) such Mortgage Loan commences to accrue interest at the 'Revised
Interest Rate' for such Mortgage Loan, (ii) all 'Excess Cash Flow' for
such loan (or approximately 50% of Excess Cash Flow with respect to the
Santa Clara Property) is required to be applied to payment of principal of
such Mortgage Loan and (iii) such Mortgage Loan may be voluntarily repaid
by the borrower without payment of a yield maintenance premium. There can
be no assurance that any Mortgage Loan will be repaid on its Anticipated
Repayment Date.
(8) 'DSCR' means the aggregate Net Cash Flow for all of the related Mortgaged
Properties divided by (ii) annual debt service for the first twelve-month
period in which the loan pays interest at a fixed rate. In calculating
DSCR for the Prime Retail II Loan the portion of the annual debt service
attributable to the $40,000,000 Expansion Account was excluded.
The DSCRs set forth herein for the Mortgage Loans vary (and may vary
substantially) from the debt service coverage ratios for such loans and
properties (the 'Loan DSCR') calculated pursuant to the definition of the
term DSCR or Debt Service Coverage Ratio in such Mortgage Loans, which
definitions are used for various purposes under such Mortgage Loans. The
Loan DSCR definition for each applicable Mortgage Loan is set forth in the
description of such Mortgage Loan herein under the heading 'Description of
the Mortgage Loans and Mortgaged Properties.'
(9) 'Loan-to-Value Ratio' or 'LTV' or 'Cut-off Date LTV' means with respect to
any Mortgage Loan the principal balance of such Mortgage Loan as of the
Cut-off Date divided by the aggregate Value of the Mortgaged Properties
securing such Mortgage Loan. In calculating the LTV of Prime Retail II
Pool Loan the Expansion Account of $40,000,000 was excluded from the
principal balance.
(10) 'Anticipated Repayment Date Balance' for each of the Mortgage Loans is
equal to the outstanding principal amount of such Mortgage Loan as of its
respective Anticipated Repayment Date, taking into account scheduled
amortization, assuming no prepayments or defaults.
(11) 'Anticipated Repayment LTV' means with respect to any Mortgage Loan the
Anticipated Repayment Date Balance for such Mortgage Loan divided by the
aggregate Value of the Mortgaged Properties securing such Mortgage Loan.
Such calculation thus assumes that the appraised value of the Mortgaged
Property or Properties securing a Mortgage Loan on the Anticipated
Repayment Date is the same as the Value as of the Cut-off Date. There can
be no assurance that the value of any particular Mortgaged Property will
not have declined or increased from the Value as of the Cut-off Date. In
calculating the Anticipated Repayment LTV with respect to the Prime Retail
II Pool Loan the principal balance attributable to the $40,000,000
Expansion Account was excluded from the principal balance.
(12) 'SF/Units/Spaces' means, in the case of office, retail and factory outlet
properties, total square footage or GLA, in the case of hotel properties,
rooms and/or suites (in all cases regardless of the size of such hotel
rooms or suites) and in the case of parking, number of spaces.
(13) 'GLA' means the square footage of the gross leaseable area.
(14) 'Occupancy' means the percentage of SF/Units of the property that are
rented. With respect to the hotel properties, 'Occupancy' means the
occupancy for each twelve-month period ended December 31, 1994 or 1995 or
a twelve month period ending in 1996 calculated by dividing (i) the sum of
the number of rooms rented for all nights in such twelve-month period by
(ii) the sum of the number of rooms available to be rented for all nights
in such twelve-month period. With respect to other types of properties,
S-57
<PAGE>
'Occupancy' means the Occupancy at the end of the year referenced.
Bankrupt tenants were not included in the calculation of occupancy for the
factory outlet properties.
(15) 'Annualized Base Rent' is calculated by multiplying by twelve the monthly
base rent, as of the point in time for which 'Occupancy' was calculated
for the related property, as reflected in the rent rolls generally taking
into account any rate increases occurring prior to November 30, 1996 and
adjusting downward to reflect a minimum vacancy of 5%.
(16) 'Average Base Rent Per Square Foot' is calculated by dividing Annualized
Base Rent by total GLA as of the same date as of which the Annualized Base
Rent was calculated.
(17) 'Number of Retail Spaces' means, with respect to each property, the number
of tenant spaces, as of the point in time for which 'Occupancy' was
calculated for the related property. For the Palmer Square Loan, number of
Retail Spaces refers to number of tenants in occupancy.
(18) 'Average Daily Room Rate' with respect to each hotel property, for each
year shown, is calculated by dividing the total room revenue for such year
by the sum of the number of rooms rented for all nights in such year.
(19) Due to rounding, percentages may not add to 100% and amounts may not add
to the indicated total.
S-58
<PAGE>
In addition to the tables set forth below, a table of Mortgaged Property
Characteristics is attached as Annex A to this Prospectus Supplement.
The following table sets forth certain characteristics of the Mortgage
Loans.
MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
ANTICI-
PATED CUT-OFF ANTICIPATED
MORT- ANTICI- FIRST REPAY- ORIGINAL DATE REPAYMENT
GAGE AMORTI- PATED P&I MENT STATED PRINCIPAL PRINCIPAL DATE
LOAN RATE ZATION(1) TERM DATE DATE MATURITY BALANCE BALANCE BALANCE
- ---------------------- ----- --------- ------- -------- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Prime Retail II(4).... 7.782(2) 360 84 12/11/96 11/11/03 11/11/26 $359,000,000(4) $358,748,252 $334,563,703
MHP II................ 8.220 IO/240 132 11/11/97 10/11/07 10/11/17 266,000,000 266,000,000 188,990,239
Columbia Sussex II.... 8.870 240 180 09/11/96 08/11/11 08/11/16 136,000,000 135,230,640 63,177,455
HGI II................ 9.060 360 120 11/11/96 10/11/06 10/11/26 99,300,000 99,217,643 90,933,808
Palmer Square......... 8.090 300 132 01/11/97 12/11/07 12/11/21 36,000,000 36,000,000 28,785,430
----- --------- ------- ------------ ------------ ------------
Grand Total........... 8.231% 304 119 $896,300,000 $895,196,535 $706,450,634
----- --------- ------- ------------ ------------ ------------
----- --------- ------- ------------ ------------ ------------
<CAPTION>
ANTICI-
PATED
REPAY-
CUT-OFF MENT
ANNUAL DEBT NET CASH DATE DATE
LOAN VALUE SERVICE FLOW DSCR(2) LTV LTV
- ---------------------- -------------- ----------- ------------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Prime Retail II(4).... $ 642,530,000 $30,958,357 $ 55,811,194(2) 2.03 50% 46%
MHP II................ 540,400,000 27,137,860(3) 55,876,956 2.06 49 35
Columbia Sussex II.... 239,000,000 14,547,358 24,808,887 1.71 57 26
HGI II................ 179,000,000 9,639,371 16,946,108 1.76 55 51
Palmer Square......... 70,800,000 3,360,043 6,862,075 2.04 51 41
-- --
-------------- ----------- ------------ ------
Grand Total........... $1,671,730,000 $85,642,989 $160,305,219 1.96 51% 40%
-------------- ----------- ------------ ------- -- --
-------------- ----------- ------------ ------- -- --
</TABLE>
- ------------------
(1) The MHP II Pool Loan, which requires monthly payments of interest only for
a period after the cut-off date, is indicated as 'IO/' amortization.
Payments of principal and interest will be required beginning on the First
P&I Date.
(2) The Prime Retail II Pool Loan requires a payment consisting of interest
based on LIBOR plus 1.51% and principal based on an amortization schedule
of 360 months and an assumed interest rate of 7.782% during the first two
years of its loan term, after which the interest portion of the payment is
based on a fixed interest rate of 7.782% and the same principal
amortization schedule.
(3) The MHP II Pool Loan requires payment of interest only during the first 12
months of its loan term. Annual Debt Service for the MHP II Pool Loan is
for the twelve months commencing on the First P&I Date.
(4) The Prime Retail II Pool Loan includes an Expansion Account containing
$40,000,000. Value, Net Cash Flow, DSCR, Cut-off Date LTV and Anticipated
Repayment Date LTV with respect to the Prime Retail II Pool Loan exclude
the funds contained in the Expansion Account.
S-59
<PAGE>
[PIE CHART]
CUT-OFF DATE ALLOCATED LOAN BALANCES
Prime Retail II 40%
MHP II 30%
Columbia Sussex II 15%
HGI II 11%
Palmer Square 4%
[PIE CHART]
PROPERTY TYPE
Factory Outlet 51%
Hotel - Convention 23%
Hotel - Full Service 22%
Mixed 4%
S-60
<PAGE>
The following table sets forth the Mortgage Loans based on Principal
Balances as of the Cut-off Date.
PRINCIPAL BALANCES AS OF THE CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE WEIGHTED WEIGHTED WEIGHTED
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE AVERAGE AVERAGE
LOAN LOANS BALANCE BALANCE NOTE RATE DSCR LTV
- ------------------------- --------- ------------ ------------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Palmer Square............ 1 $ 36,000,000 4% 8.090% 2.04 51%
HGI II................... 1 99,217,643 12 9.060 1.76 55
Columbia Sussex II....... 1 135,230,640 16 8.870 1.71 57
MHP II................... 1 266,000,000 31 8.220 2.06 49
Prime Retail II.......... 1 318,748,252(1) 37 7.782 2.03 50
- ------------ --- --------- -------- --
Total............... 5 $855,196,535 100% 8.231% 1.96 51%
- ------------ --- --------- -------- --
- ------------ --- --------- -------- --
</TABLE>
- ------------------
(1) Excludes the $40,000,000 Prime Retail II Pool Loan Expansion Account.
The following table sets forth the range of Loan-to-Value Ratios as of the
Cut-off Date.
RANGE OF LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENT BY CUT-OFF
AGGREGATE AGGREGATE DATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE WEIGHTED WEIGHTED WEIGHTED
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE AVERAGE AVERAGE
LOAN-TO-VALUE RATIO LOANS BALANCE(1) BALANCE NOTE RATE DSCR(1) LTV(1)
- ------------------------- --------- ------------ ------------ --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
45%-49.9%................ 2 $584,748,252 68% 7.968% 2.04 49%
50%-54.9%................ 1 36,000,000 4 8.090 2.04 51
55%-59.9%................ 2 234,448,283 27 8.950 1.73 56
- --
------------ --- --------- --------
Total............... 5 $855,196,535 100% 8.231% 1.96 51%
- ------------ --- --------- -------- --
- ------------ --- --------- -------- --
</TABLE>
- ------------------
(1) Excludes the $40,000,000 Prime Retail II Pool Loan Expansion Account.
S-61
<PAGE>
The following tables sets forth the range of Loan-to-Value Ratios as of the
Anticipated Repayment Date.
RANGE OF LOAN-TO-VALUE RATIOS AT ANTICIPATED REPAYMENT DATE
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE WEIGHTED WEIGHTED WEIGHTED
MORTGAGE PRINCIPAL PRINCIPAL AVERAGE AVERAGE AVERAGE
LOAN-TO-VALUE RATIO LOANS BALANCE(1) BALANCE(1) NOTE RATE DSCR(1) LTV(1)
- ------------------------- --------- -------------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
25%-34.9%................ 2 $ 401,230,640 47% 8.439% 1.94 52%
35%-44.9%................ 1 36,000,000 4 8.090 2.04 51
45%-55% 2 417,965,895 49 8.059 1.96 51
--- -------------- ----- --------- ----- ---
Total............... 5 $ 855,196,535 100% 8.231% 1.96 51%
--- -------------- ----- --------- ----- ---
--- -------------- ----- --------- ----- ---
</TABLE>
(1) Excludes the $40,000,000 Prime Retail II Pool Loan Expansion Account.
The following table sets forth the range of Remaining Term to Anticipated
Repayment Date as of the Cut-off Date.
REMAINING TERM TO ANTICIPATED REPAYMENT DATE IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE WEIGHTED WEIGHTED
REMAINING TERM AS OF THE MORTGAGE PRINCIPAL PRINCIPAL AVERAGE WEIGHTED AVERAGE
CUT-OFF DATE IN MONTHS LOANS BALANCE BALANCE NOTE RATE AVERAGE DSCR LTV
- ------------------------- --------- ------------- ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
83....................... 1 $ 358,748,252 40% 7.782% 2.03 50%
118...................... 1 99,217,643 11 9.060 1.76 55
130...................... 1 266,000,000 30 8.220 2.06 49
132...................... 1 36,000,000 4 8.090 2.04 51
176...................... 1 135,230,640 15 8.870 1.71 57
--- ------------- ----- --------- ----- ---
Total............... 5 $ 895,196,535 100% 8.231% 1.96 51%
--- ------------- ----- --------- ----- ---
--- ------------- ----- --------- ----- ---
</TABLE>
The following table sets forth the Remaining Prepayment Lockout as of the
Cut-off Date.
REMAINING PREPAYMENT LOCKOUT AS OF THE CUT-OFF DATE IN MONTHS
<TABLE>
<CAPTION>
AGGREGATE PERCENT BY
CUT- OFF AGGREGATE
REMAINING LOCKOUT AS OF NUMBER OF DATE CUT-OFF DATE WEIGHTED WEIGHTED
THE MORTGAGE PRINCIPAL PRINCIPAL AVERAGE WEIGHTED AVERAGE
CUT-OFF DATE IN MONTHS LOANS BALANCE BALANCE NOTE RATE AVERAGE DSCR LTV
- ------------------------- --------- ------------ ------------ --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
82....................... 1 $358,748,252 40% 7.782% 2.03 50%
117...................... 1 99,217,643 11 9.060 1.76 55
128...................... 1 36,000,000 4 8.090 2.04 51
129...................... 1 266,000,000 30 8.220 2.06 49
175...................... 1 135,230,640 15 8.870 1.71 57
-- ------------ ----- --------- ----- ---
Total............... 5 $895,196,535 100% 8.231% 1.96 51%
-- ------------ ----- --------- ----- ---
-- ------------ ----- --------- ----- ---
</TABLE>
S-62
<PAGE>
The following table sets forth certain characteristics of the Mortgaged
Properties by property type.
MORTGAGED PROPERTIES BY PROPERTY TYPE
<TABLE>
<CAPTION>
AGGREGATE
PERCENT CUT-OFF
OF DATE
CUT-OFF ALLOCATED
PERCENT OF DATE LOAN
TOTAL CUT-OFF DATE ALLOCATED AMOUNT PER
NUMBER OF NUMBER OF ALLOCATED LOAN LOAN SF /
PROPERTY TYPE PROPERTIES PROPERTIES AMOUNT(1) AMOUNT(1) SF / UNITS VALUE(1) UNIT(1)
- ---------------------- --------- ---------- -------------- --------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
RETAIL
Factory Outlet........ 21 51% $417,937,845 49% 5,695,091 $ 821,530,000 $ 73
HOTEL
Hotel--Convention..... 2 5% 208,000,000 24% 2,289 403,600,000 90,869
Hotel--Full Service... 14 34 193,230,640 23 4,710 375,800,000 41,026
-- --- -------------- --- ---------- -------------- ----------
16 39% 401,230,640 47% 6,999 779,400,000 57,327
MIXED-USE
Mixed-use............. 4 10% 36,000,000 4% NA(2) 70,800,000 NA
-- --- -------------- --- ---------- -------------- ----------
41 100% $855,168,485 100% NA $1,671,730,000
-- --- -------------- --- ---------- --------------
<CAPTION>
PERCENT
MOST RECENT OF WEIGHTED WEIGHTED
PERIOD MOST RECENT NET CASH AVERAGE AVERAGE
PROPERTY TYPE REVENUE PERIOD NOI NET CASH FLOW FLOW DSCR(1) LTV(1)
- ---------------------- ------------ ------------ ------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
RETAIL
Factory Outlet........ $106,536,488 $ 80,278,312 $ 72,757,302 45% 1.96 51%
HOTEL
Hotel--Convention..... 128,679,614 48,767,470 41,114,918 26% 2.06 49%
Hotel--Full Service... 141,143,967 51,051,034 39,570,925 25 1.81 54
------------ ------------ ------------- --- --- --
269,823,581 99,818,504 80,685,843 50% 1.94 52%
MIXED-USE
Mixed-use............. 19,608,568 8,121,556 6,862,075 4% 2.04 51%
------------ ------------ ------------- --- --- --
$395,968,637 $188,218,371 $160,305,219 100% 1.96 51%
------------ ------------ ------------- --- --- --
</TABLE>
- ------------------
(1) Factory Outlet excludes the Prime Retail II Pool Loan $40,000,000 Expansion
Account.
(2) The mixed-use property is comprised of 102,485 sf of retail, 130,502 sf of
office, 216 hotel rooms and 994 parking spaces.
S-63
<PAGE>
The following table sets forth certain information regarding the Mortgaged
Properties by state.
MORTGAGED PROPERTIES BY STATE
<TABLE>
<CAPTION>
CUT-OFF DATE PERCENT OF
NUMBER OF ALLOCATED CUT-OFF DATE SUM OF NET PERCENT OF TOTAL PERCENT
STATE PROPERTIES LOAN AMOUNT PRINCIPAL BALANCE CASH FLOW NET CASH FLOW SUM OF VALUE OF TOTAL VALUE
- ------------------ --------- ------------ ----------------- ------------ ---------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Texas............. 4 $186,077,552 20.8% $ 33,128,756 20.7% $ 336,800,000 20.1%
California........ 5 111,355,711 12.4 24,346,005 15.2 239,300,000 14.3
Louisiana......... 1 106,000,000 11.8 22,222,690 13.9 218,300,000 13.1
Florida........... 6 80,696,448 9.0 14,880,080 9.3 148,000,000 8.9
New Jersey........ 5 61,693,822 6.9 11,266,619 7.0 113,400,000 6.8
Colorado.......... 2 54,452,198 6.1 9,560,404 6.0 107,000,000 6.4
Pennsylvania...... 1 36,168,249 4.0 6,315,022 3.9 78,300,000 4.7
New York.......... 1 27,205,223 3.0 5,020,244 3.1 52,300,000 3.1
Ohio.............. 2 26,411,505 3.0 4,635,275 2.9 47,400,000 2.8
Kentucky.......... 2 23,307,399 2.6 4,312,862 2.7 35,900,000 2.1
Illinois.......... 3 22,268,302 2.5 3,862,961 2.4 49,400,000 3.0
Georgia........... 1 22,180,528 2.5 3,583,869 2.2 45,500,000 2.7
Mississippi....... 1 17,484,651 2.0 3,143,492 2.0 30,000,000 1.8
Maryland.......... 1 17,385,569 1.9 2,797,614 1.7 30,000,000 1.8
Missouri.......... 1 12,788,773 1.4 2,335,213 1.5 39,500,000 2.4
Indiana........... 1 12,489,036 1.4 2,159,869 1.3 29,000,000 1.7
Michigan.......... 1 11,295,736 1.3 1,796,110 1.1 22,000,000 1.3
Nebraska.......... 1 10,290,966 1.1 1,842,044 1.1 18,630,000 1.1
North Carolina.... 1 9,491,667 1.1 1,813,056 1.1 20,000,000 1.2
Alabama........... 1 6,125,153 0.7 1,283,036 0.8 11,000,000 0.7
Expansion
Account......... NA 40,000,000 4.5 -- -- -- --
--- ------------ ------ ------------ ------ -------------- ------
Grand Total....... 41 $895,168,485 100.0% $160,305,219 100.0% $1,671,730,000 100.0%
--- ------------ ------ ------------ ------ -------------- ------
--- ------------ ------ ------------ ------ -------------- ------
</TABLE>
S-64
<PAGE>
The following table sets forth certain information regarding the hotel
properties (the MHP II Pool Properties and Columbia Sussex II Pool Properties)
by state.
HOTEL PROPERTIES BY STATE
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
CUT-OFF DATE PERCENT OF
DATE ALLOCATED SUM OF TOTAL PERCENT
NUMBER OF ALLOCATED LOAN NET CASH NET CASH SUM OF OF TOTAL
STATE PROPERTIES LOAN AMOUNT AMOUNT FLOW FLOW VALUE VALUE
- ------------------ --------- ------------ ---------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Texas 1 $102,000,000 25.4% $18,892,229 23.4% $185,300,000 23.8%
California 2 58,000,000 14.5 14,762,038 18.3 136,800,000 17.6
Florida 3 31,739,427 7.9 6,234,968 7.7 57,300,000 7.4
Ohio 1 3,181,897 0.8 600,371 0.7 5,400,000 0.7
Illinois 2 6,681,985 1.7 1,156,752 1.4 12,500,000 1.6
New York 1 27,205,223 6.8 5,020,244 6.2 52,300,000 6.7
New Jersey 1 25,693,822 6.4 4,404,544 5.5 42,600,000 5.5
Kentucky 2 23,307,399 5.8 4,312,862 5.3 35,900,000 4.6
Michigan 1 11,295,736 2.8 1,796,110 2.2 22,000,000 2.8
Alabama 1 6,125,153 1.5 1,283,036 1.6 11,000,000 1.4
Louisiana 1 106,000,000 26.4 22,222,690 27.5 218,300,000 28.0
-- ------------ ---------- ----------- ---------- ------------ --------
Total 16 $401,230,640 100.0% $80,685,843 100.0% $779,400,000 100.0%
-- ------------ ---------- ----------- ---------- ------------ --------
-- ------------ ---------- ----------- ---------- ------------ --------
</TABLE>
The following table sets forth certain information regarding the factory
outlet properties (the Prime Retail II Pool Properties and the HGI II Pool
Properties) by state.
FACTORY OUTLET CENTERS BY STATE
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
CUT-OFF DATE PERCENT OF
DATE ALLOCATED SUM OF TOTAL PERCENT
NUMBER OF ALLOCATED LOAN NET CASH NET CASH SUM OF OF TOTAL
STATE PROPERTIES LOAN AMOUNT AMOUNT FLOW FLOW VALUE VALUE
- ------------------ --------- ------------ ---------- ----------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Texas 3 $ 84,077,552 18.4% $14,236,527 19.6% $151,500,000 18.4%
Colorado 2 54,452,198 11.9 9,560,404 13.1 107,000,000 13.0
California 3 53,355,711 11.7 9,583,967 13.2 102,500,000 12.5
Florida 3 48,957,022 10.7 8,645,112 11.9 90,700,000 11.0
Pennsylvania 1 36,168,249 7.9 6,315,022 8.7 78,300,000 9.5
Ohio 1 23,229,607 5.1 4,034,904 5.5 42,000,000 5.1
Georgia 1 22,180,528 4.8 3,583,869 4.9 45,500,000 5.5
Mississippi 1 17,484,651 3.8 3,143,492 4.3 30,000,000 3.7
Maryland 1 17,385,569 3.8 2,797,614 3.8 30,000,000 3.7
Illinois 1 15,586,317 3.4 2,706,209 3.7 36,900,000 4.5
Missouri 1 12,788,773 2.8 2,335,213 3.2 39,500,000 4.8
Indiana 1 12,489,036 2.7 2,159,869 3.0 29,000,000 3.5
Nebraska 1 10,290,966 2.2 1,842,044 2.5 18,630,000 2.3
North Carolina 1 9,491,667 2.1 1,813,056 2.5 20,000,000 2.4
Expansion Account NA 40,000,000 8.7 -- 0.0 -- 0.0
--- ------------ ---------- ----------- ---------- ------------ --------
Total 21 $457,937,845 100.0% $72,757,302 100.0% $821,530,000 100.0%
--- ------------ ---------- ----------- ---------- ------------ --------
--- ------------ ---------- ----------- ---------- ------------ --------
</TABLE>
S-65
<PAGE>
HOTEL PROPERTY OCCUPANCY AND AVERAGE DAILY RATE
The following table shows the Occupancy and Average Daily Room Rate ('ADR')
of the hotel properties (the MHP II Pool Properties, Columbia Sussex II Pool
Properties and the hotel included in the Palmer Square Properties) for 1993,
1994, 1995 and the twelve months ended as indicated on Annex A for 1996 as of
period.
<TABLE>
<CAPTION>
1993 1994 1995 TTM96 UW 1993 1994 1995
HOTEL FRANCHISE UNITS OCC OCC OCC OCC OCC ADR ADR ADR
- ------------------------------ ------------- ----- ---- ---- ---- ----- ---- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MARRIOT HOTELS POOL II
1 Marriott A Marriott 1,290 75% 79% 78% text 77% $112.82 $117.38 $120.30
2 Marriott B Marriott 999 83 81 85 text 82 123.21 123.44 127.66
3 Marriott C Marriott 754 73 77 79 text 78 90.15 92.08 103.63
4 Marriott D Marriott 368 71 72 82 text 80 88.94 89.99 89.03
----- ---- ---- ---- ----- ---- ------- ------- -------
Total/Wtd. Avg. 3,411 76% 78% 81% text 79% $108.27 $110.61 $115.40
COLUMBIA SUSSEX II
1 Melville Marriott Marriott 371 50% 62% 70% 72 % 72% $ 91.69 $ 92.62 $102.08
2 Sheraton Hotel Newark
Airport Sheraton 501 75 77 70 83 75 60.16 65.91 72.44
3 Radisson Hotel Orlando
Airport Radisson 347 61 67 75 80 80 49.99 51.16 53.03
4 Radisson Hotel Cincinnati
Airport Radisson 214 64 70 66 73 73 57.83 62.28 66.21
5 Holiday Inn Louisville
South Airport Holiday Inn 405 61 61 55 58 58 51.25 55.69 59.25
6 Holiday Inn Southfield
(Detroit) Holiday Inn 417 36 42 48 44 44 54.60 57.53 61.06
7 Best Western Eastgate Best Western 403 66 54 70 71 70 39.62 38.99 37.18
8 Radisson Lake Buena Vista Radisson 200 79 65 74 75 75 61.66 62.83 61.12
9 Radisson Hotel Central
Birmingham Radisson 298 45 49 57 61 61 49.58 51.50 55.06
10 Holiday Inn Itasca Holiday Inn 161 52 55 58 58 58 54.44 58.24 61.97
11 Holiday Inn Springfield Holiday Inn 150 73 71 64 57 53 54.97 54.15 57.81
12 Holiday Inn Glen Ellyn Holiday Inn 121 48 56 57 56 56 44.46 46.21 53.62
----- ---- ---- ---- ----- ---- ------- ------- -------
Total/Wtd. Avg. 3,588 59% 61% 64% 67 % 66% $ 56.54 $ 59.01 $ 62.69
PALMER SQUARE
1 Palmer Square (Nassau
Inn) None 216 65% 66% 66% 67 % 66% $104.06 $109.35 $117.72
<CAPTION>
RECENT
PERIOD UW
HOTEL ADR ADR
- ------------------------------ ------- -------
<S> <C> <C>
MARRIOT HOTELS POOL II
1 Marriott A text $125.08
2 Marriott B text 131.21
3 Marriott C text 113.48
4 Marriott D text 94.47
------- -------
Total/Wtd. Avg. text $121.01
COLUMBIA SUSSEX II
1 Melville Marriott $107.60 $107.60
2 Sheraton Hotel Newark
Airport 69.26 69.26
3 Radisson Hotel Orlando
Airport 58.13 58.13
4 Radisson Hotel Cincinnati
Airport 66.40 66.40
5 Holiday Inn Louisville
South Airport 60.75 60.75
6 Holiday Inn Southfield
(Detroit) 65.75 65.75
7 Best Western Eastgate 41.04 41.04
8 Radisson Lake Buena Vista 70.19 70.19
9 Radisson Hotel Central
Birmingham 56.67 56.67
10 Holiday Inn Itasca 66.99 66.99
11 Holiday Inn Springfield 61.66 61.66
12 Holiday Inn Glen Ellyn 58.15 58.15
------- -------
Total/Wtd. Avg. $ 65.65 $ 65.65
PALMER SQUARE
1 Palmer Square (Nassau
Inn) $122.25 $122.25
</TABLE>
S-66
<PAGE>
The following table sets forth scheduled lease expirations at the retail
portion of the Palmer Square Properties for the twelve months ending December
31, 1997 and for each calendar year thereafter through 2006. The table assumes
that none of the tenants exercise early termination or renewal options.
ANNUAL RETAIL LEASE EXPIRATION--PALMER SQUARE LOAN
<TABLE>
<CAPTION>
SUM OF PERCENT PERCENT OF ANNUALIZED
NUMBER OF SQUARE OF TOTAL ANNUALIZED ANNUALIZED BASE RENT
YEAR ENDING DEC. 31 STORES FEET SF BASE RENT BASE RENT PER SF
- -------------------- --------- ------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1997................ 1 2,345 2% $ 79,788 3% $34.02
1998................ 6 8,692 8 277,796 10 31.96
1999................ 9 13,445 13 340,776 12 25.35
2000................ 10 15,824 15 524,808 18 33.17
2001................ 7 8,535 8 304,284 11 35.65
2002................ 3 9,398 9 207,576 7 22.09
2003................ 2 6,446 6 195,392 7 30.31
2004................ 3 10,929 11 392,616 14 35.92
2005................ 1 5,000 5 120,000 4 24.00
2006................ 3 14,962 15 430,584 15 28.78
Vacant.............. 4 6,909 7 -- 0 --
-- ------- --- ---------- --- ----------
Total.......... 49 102,485 100% $2,873,620 100% $28.04
-- ------- --- ---------- --- ----------
-- ------- --- ---------- --- ----------
</TABLE>
The following table sets forth certain information regarding the ten
largest tenants (based on GLA) of the retail portion of the Palmer Square
Properties and information regarding the remaining GLA of the retail portion of
such properties.
RETAIL TENANTS BASED ON ANNUALIZED BASE RENT--PALMER SQUARE LOAN
<TABLE>
<CAPTION>
PERCENT OF ANNUALIZED
NUMBER OF SUM OF PERCENT OF ANNUALIZED ANNUALIZED BASE RENT
TENANT STORES SQUARE FT TOTAL SF BASE RENT BASE RENT PER SF
- ------------------------- --------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ann Taylor............... 1 7,619 7% $ 243,804 8% $32.00
PNC Bank................. 1 6,041 6 227,160 8 37.60
The Gap.................. 1 5,539 5 177,252 6 32.00
Waverly/Schumacher....... 1 6,422 6 157,308 5 24.50
Carlyle & Co. (La
Vake).................. 1 3,837 4 133,920 5 34.90
Mediterra................ 1 5,000 5 120,000 4 24.00
Gap Kids................. 1 3,325 3 116,376 4 35.00
Kitchen Kapers........... 1 3,017 3 114,648 4 38.00
Banana Republic.......... 1 3,113 3 112,068 4 36.00
Talbots.................. 1 4,808 5 94,956 3 19.75
-- --------- --- ---------- --- ----------
Total (10
Largest).......... 10 48,721 48% $1,497,492 52% $30.74
-- --------- --- ---------- --- ----------
Remaining GLA....... 39 53,764 52% $1,376,128 48% $25.60
-- --------- --- ---------- --- ----------
Total............... 49 102,485 100% $2,873,620 100% $28.04
-- --------- --- ---------- --- ----------
-- --------- --- ---------- --- ----------
</TABLE>
S-67
<PAGE>
The following table sets forth scheduled lease expirations at the office
portion of the Palmer Square Properties for the 12 months ending December 31,
1996 and for each calendar year thereafter through 2005. The table assumes that
none of the tenants exercise early termination or renewal options.
ANNUAL OFFICE LEASE EXPIRATION--PALMER SQUARE LOAN
<TABLE>
<CAPTION>
PERCENT PERCENT OF
SUM OF OF ANNUALIZED ANNUALIZED
NUMBER OF SQUARE TOTAL ANNUALIZED BASE BASE RENT
YEAR ENDING DEC. 31 STORES FEET SF BASE RENT RENT PSF
- -------------------- --------- ------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996................ 2 5,026 4% $ 129,732 4% $25.81
1997................ 9 10,965 8 261,864 8 23.88
1998................ 8 32,884 25 828,960 27 25.21
1999................ 4 17,621 14 454,740 15 25.81
2000................ 4 9,743 7 235,656 8 24.19
2001................ 2 4,504 3 88,704 3 19.69
2002................ 2 28,553 22 690,252 22 24.17
2004................ 1 16,122 12 330,600 11 20.51
2005................ 1 -- 0 6,108 0 NA
MTM................. 2 2,506 2 56,400 2 22.51
Vacant.............. 3 2,578 2 -- 0 --
-- ------- ------- ---------- --- ----------
Total.......... 38 130,502 100% $3,083,016 100% $23.62
-- ------- ------- ---------- --- ----------
-- ------- ------- ---------- --- ----------
</TABLE>
The following table sets forth certain information regarding the ten
largest tenants of the retail portion of the Palmer Square Properties (by
Annualized Base Rent) and information regarding remaining GLA.
OFFICE TENANTS BASED ON ANNUALIZED BASE RENT--PALMER SQUARE LOAN
<TABLE>
<CAPTION>
PERCENT
OF PERCENT OF ANNUALIZED
NUMBER OF SUM OF TOTAL ANNUALIZED ANNUALIZED BASE RENT
TENANT STORES SQUARE FT SF BASE RENT BASE RENT PER SF
- ------------------------------ --------- --------- ------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Drinker, Biddle & Reath(1).... 1 22,889 18% 569,040 18% $24.86
Gallup Organization........... 1 23,056 18 552,828 18 23.98
PNC Bank...................... 1 16,122 12 330,600 11 20.51
Mt. Lucas Management.......... 1 7,371 6 180,588 6 24.50
Domain Association............ 1 5,196 4 137,688 4 26.50
Broadcast Architecture........ 1 5,497 4 137,424 4 25.00
PVI - PEB, Inc................ 1 5,273 4 126,552 4 24.00
Kom/Ferry..................... 1 4,623 4 124,824 4 27.00
Patterson & Swartz, Inc....... 1 4,419 3 117,096 4 26.50
Princeton Investment
Partners.................... 1 4,635 4 115,872 4 25.00
TOTAL (10 LARGEST)....... 10 99,081 76 $2,392,512 78 24.15
-- --------- ------- ---------- --- ----------
REMAINING GLA............ 28 31,421 24% $ 690,504 22% $21.98
-- --------- ------- ---------- --- ----------
TOTAL.................... 38 130,502 100% $3,083,016 100% $23.62
-- --------- ------- ---------- --- ----------
-- --------- ------- ---------- --- ----------
</TABLE>
S-68
<PAGE>
The following table sets forth certain characteristics of the retail
properties (the retail portion of the Palmer Square Properties, the Prime Retail
II Pool Properties and the HGI II Pool Properties).
RETAIL CHARACTERISTICS
<TABLE>
<CAPTION>
ANNUALIZED OCC. RATE
SALES PER AS OF ANNUALIZED
SF(MOST MOST NUMBER ANNUALIZED ANNUALIZED 1995
RECENT CURRENT OF RETAIL BASE RENT SQUARE BASE RENT SALES
PROPERTY TOTAL SF PERIOD) PERIOD SPACES PER SF MAJOR TENANTS FEET PER SF PSF
- -------------------- --------- --------- --------- --------- --------- -------------------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Grove City Factory
Outlet Center 415,670 100 % 115 $ 14.46 Levi's Outlet 11,776 $ 12.00
Nike 10,713 11.11
Polo/Ralph Lauren 8,914 10.00
J. Crew 7,028 14.00
San Marcos Factory
Shops 419,126 98 115 14.67 Off Saks 5th Ave. 22,176 9.50
Gap Outlet 10,060 12.00
Bugle Boy Outlet 10,593 13.93
Nike 9,113 10.00
Castle Rock Factory
Shops 369,220 99 108 15.25 Vanity Fair 23,796 8.00
Levi's Outlet 9,797 12.50
Reebok 5,977 15.50
Gulf Coast Factory
Shops 340,656 98 99 14.12 Vanity Fair 23,272 8.00
Off Saks 5th Ave. 19,804 9.50
Levi's Outlet 12,183 14.00
Liz Claiborne 10,100 10.00
Ohio Factory Shops 308,941 96 85 13.78 Levi's Outlet 11,796 12.00
Westport Ltd 9,013 12.00
Polo/Ralph Lauren 8,405 9.00
Loveland Factory
Outlet Center 328,358 100 82 14.44 Spiegel Outlet 25,550 11.00
Levi's Outlet 10,085 12.00
Reebok Factory Store 8,050 13.00
Magnolia Bluff
Factory Shops 299,249 82 86 12.39 Liz Claiborne 13,767 5.81
Ann Taylor 10,156 14.30
Reebok 9,908 13.50
Westport Ltd 8,008 14.50
Gainesville Factory
Shops 315,627 93 97 12.51 Ann Taylor 10,251 15.50
Westport Ltd 8,942 12.00
Reebok 8,734 13.00
Gulfport Factory
Shops 251,239 90 73 12.98 Saks 5th Ave. 20,061 --
Reebok 10,001 13.00
Westport Ltd 8,005 14.50
Huntley Factory
Shops 280,112 81 83 11.06 Reebok 10,469 13.00
Levi's Outlet 10,955 13.37
Westport Ltd 8,996 13.00
Florida Keys Factory
Shops 207,131 90 66 12.69 Levi's Outlet 11,920 12.34
Nike 9,012 11.20
Westport Ltd 9,008 13.00
KC Factory Outlet
Center 190,589 100 44 13.52 Spiegel Outlet Store 25,550 12.00
Reebok 8,000 13.00
Levi's Outlet 10,500 15.75
Westport Ltd 8,000 15.00
Indiana Factory
Shops 209,090 87 63 11.11 Westport Ltd 9,010 13.00
Mikasa Factory Store 8,486 11.11
Jones New York 2,384 14.50
Nebraska Crossing
Factory Shops 191,544 96 60 10.16 Mikasa Factory Store 7,500 10.00
Bugle Boy Outlet 5,966 10.00
Coral Isle Factory
Shops 126,595 99 41 14.36 Mikasa Factory Store 8,120 12.00
Westport Ltd 4,837 16.00
Jones New York 3,080 15.50
Triangle Factory
Shops 193,837 89 52 10.06 Off Saks 5th Ave. 20,659 9.50
Levi's Outlet 10,397 10.00
Lake Elsinore Outlet
Center 368,785 $ 232 91 100 16.13 VF Factory Outlet 26,000 10.00
Liz Claiborne 12,000 13.50
Nike 14,000 13.67
Bass Company Store 8,000 16.00
Southwest Outlet
Center 359,455 220 95 97 13.62 Off Saks 5th Ave. 15,000 8.00
Reebok 9,695 11.00
Liz Claiborne 9,000 10.00
Nike 8,200 10.40
Chesapeake Village 219,307 269 100 55 13.93 VF Factory Outlet 23,572 10.00
Nike 8,000 11.60
Liz Claiborne 8,000 11.00
Jones New York 4,200 17.00
Tracy Outlet Center 153,000 174 98 37 14.22 Liz Claiborne 12,000 10.00
Levi's 10,000 15.00
Reebok 10,000 14.00
Pismo Beach Outlet
Center 147,560 190 96 41 16.36 Levi's 10,000 13.00
Mikasa 7,500 14.00
Jones New York 4,500 18.00
Tommy Hilfiger 3,500 15.00
Palmer Square 102,485 466 93 45 30.07 Ann Taylor 7,619 32.00 $ 555
The Gap 5,539 32.00 387
Banana Republic 3,113 36.00 733
</TABLE>
S-69
<PAGE>
The following table sets forth scheduled lease expirations at the Prime
Retail II Pool Properties for the twelve months ending December 31, 1996 and for
each calendar year thereafter through 2016. The table assumes that none of the
tenants exercise early termination or renewal options.
ANNUAL LEASE EXPIRATION--PRIME RETAIL II POOL LOAN
<TABLE>
<CAPTION>
PERCENT OF ANNUALIZED
NUMBER OF PERCENT ANNUALIZED ANNUALIZED BASE RENT
YEAR ENDING DEC. 31 STORES SF OF SF BASE RENT BASE RENT PSF
- -------------------- --------- --------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996................ 14 30,864 0.7% $ 420,447 0.7% $13.62
1997................ 93 283,116 6.4 3,808,214 6.5 13.45
1998................ 142 447,809 10.1 6,692,747 11.4 14.95
1999................ 213 698,611 15.7 10,130,995 17.2 14.50
2000................ 291 929,270 20.9 14,006,454 23.8 15.07
2001................ 211 693,765 15.6 10,561,929 17.9 15.22
2002................ 77 255,195 5.7 3,701,651 6.3 14.51
2003................ 24 153,718 3.5 2,013,236 3.4 13.10
2004................ 37 224,123 5.0 2,716,648 4.6 12.12
2005................ 38 215,402 4.8 2,779,014 4.7 12.90
2006................ 5 76,213 1.7 868,910 1.5 11.40
2010................ 1 22,176 0.5 210,672 0.4 9.50
2011................ 3 60,524 1.4 384,399 0.7 6.35
2016................ 1 3,590 0.1 46,670 0.1 13.00
MTM................. 14 47,496 1.1 513,654 0.9 10.81
OWN PAD............. 2 -- -- -- -- --
VACANT.............. 103 305,112 6.9 -- 0.0 --
--------- --------- ------- ----------- ---------- ----------
Total............... 1,269 4,446,984 100.0% $58,855,639 100.0% $13.23
--------- --------- ------- ----------- ---------- ----------
--------- --------- ------- ----------- ---------- ----------
</TABLE>
The following table sets forth certain information regarding the ten
largest tenants of the Prime Retail II Pool Properties (by GLA) and information
regarding remaining GLA.
TENANTS BASED ON ANNUALIZED BASE RENT--PRIME RETAIL II POOL LOAN
<TABLE>
<CAPTION>
PERCENT % OF ANNUALIZED
NUMBER OF SUM OF OF TOTAL ANNUALIZED ANNUALIZED BASE RENT
TENANT STORES SQUARE FT SF BASE RENT BASE RENT PER SF
- ------------------------------ --------- --------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
WESTPORT LTD.................. 14 106,440 2.4% $ 1,421,790 2.4% $13.36
LEVI'S OUTLET................. 11 109,489 2.5 1,400,060 2.4 12.79
MIKASA FACTORY STORE.......... 14 112,032 2.5 1,376,034 2.3 12.28
BUGLE BOY OUTLET.............. 15 87,020 2.0 1,109,919 1.9 12.75
BASS COMPANY STORE............ 10 71,450 1.6 1,042,245 1.8 14.59
VAN HEUSEN.................... 15 67,489 1.5 1,001,318 1.7 14.84
GEOFFREY BEENE................ 15 67,513 1.5 997,459 1.7 14.77
SPRINGMAID-WAMSUTTA OUTLET.... 11 81,242 1.8 996,306 1.7 12.26
CASUAL CORNER................. 14 61,665 1.4 924,935 1.6 15.00
CORNING/REVERE FACTORY
STORE....................... 15 71,837 1.6 908,581 1.5 12.65
--------- --------- -------- ----------- ---------- ----------
Total Top 10.................. 134 836,177 18.8% $11,178,645 19.0% $13.37
--------- --------- -------- ----------- ---------- ----------
Remaining GLA................. 1,135 3,610,807 81.2% $47,676,994 81.0% $13.20
--------- --------- -------- ----------- ---------- ----------
Total......................... 1269 4,446,984 100.0% $58,855,639 100.0% $13.23
--------- --------- -------- ----------- ---------- ----------
--------- --------- -------- ----------- ---------- ----------
</TABLE>
S-70
<PAGE>
The following table sets forth certain information regarding the parent
companies for the ten largest tenants of the Prime Retail II Pool Loan (by
Annualized Base Rent) and information regarding remaining GLA properties and
vacant GLA in aggregate.
PARENT COMPANY BASED ON ANNUALIZED BASE RENT--PRIME RETAIL II POOL LOAN
<TABLE>
<CAPTION>
PERCENT % OF ANNUALIZED
NUMBER OF SUM OF OF TOTAL ANNUALIZED ANNUALIZED BASE RENT
TENANT STORES SQUARE FT SF BASE RENT BASE RENT PER SF
- ------------------------------ --------- --------- -------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PHILLIPS-VAN HEUSEN........... 61 258,943 5.8% 3,821,373 6.5% $14.76
DRESS BARN, INC............... 20 136,784 3.1 1,855,351 3.2 $13.56
CASUAL CORNER GROUP,
INC......................... 35 117,482 2.6 1,776,438 3.0 $15.12
LEVI'S/DOCKERS OUTLET......... 14 121,710 2.7 1,593,383 2.7 $13.09
MIKASA FACTORY STORE.......... 14 112,032 2.5 1,376,034 2.3 $12.28
SARA LEE...................... 28 101,077 2.3 1,356,218 2.3 $13.42
OSHKOSH B'GOSH/GENUINE KIDS... 20 82,915 1.9 1,220,684 2.1 $14.72
BUGLE BOY OUTLET.............. 15 87,020 2.0 1,109,919 1.9 $12.75
SPRINGMAID-WAMSUTTA OUTLET.... 11 81,242 1.8 996,306 1.7 $12.26
CARTER'S/CARTER'S
CHILDRENWEAR................ 12 60,179 1.4 911,471 1.5 $15.15
--------- --------- -------- ----------- ---------- ----------
Total Top 10.................. 230 1,159,384 26.1% 16,017,175 27.2% $13.82
--------- --------- -------- ----------- ---------- ----------
Remaining GLA................. 1039 3,287,600 73.9% 42,838,464 72.8% $13.03
--------- --------- -------- ----------- ---------- ----------
Total......................... 1269 4,446,984 100.0% 58,855,639 100.0% $13.23
--------- --------- -------- ----------- ---------- ----------
--------- --------- -------- ----------- ---------- ----------
</TABLE>
The following table sets forth scheduled lease expirations at the HGI II
Pool Properties for the twelve months ending December 31, 1996 and for each
calendar year thereafter through 2010. The table assumes that none of the
tenants exercise early termination or renewal options.
ANNUAL LEASE EXPIRATION -- HGI II LOAN
<TABLE>
<CAPTION>
PERCENT OF ANNUALIZED
NUMBER OF PERCENT ANNUALIZED ANNUALIZED BASE RENT
YEAR ENDING DEC. 31 STORES SF OF SF BASE RENT BASE RENT PSF
- -------------------- --------- --------- ------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
1996................ 11 35,480 3% $ 613,085 3% $17.28
1997................ 34 101,355 8 1,723,385 9 17.00
1998................ 35 109,694 9 1,873,774 10 17.08
1999................ 69 201,255 16 3,519,722 19 17.49
2000................ 73 232,271 19 3,911,878 21 16.84
2001................ 49 221,273 18 3,297,369 18 14.90
2002................ 14 66,845 5 978,710 5 14.64
2003................ 9 60,272 5 760,115 4 12.61
2004................ 6 29,032 2 413,498 2 14.24
2005................ 5 53,200 4 565,280 3 10.63
2006................ 5 47,500 4 593,500 3 12.49
2009................ 1 12,000 1 120,000 1 10.00
2010................ 1 15,000 1 120,000 1 8.00
vacant.............. 18 62,930 5 -- 0 --
--- --------- ------- ----------- --- ----------
Grand Total.... 330 1,248,107 100% $18,490,316 100% $14.81
--- --------- ------- ----------- --- ----------
--- --------- ------- ----------- --- ----------
</TABLE>
S-71
<PAGE>
The following table sets forth certain information regarding the ten
largest tenants of the HGI II Pool Properties (by Annualized Base Rent) and
information regarding remaining GLA.
TENANTS BASED ON ANNUALIZED BASE RENT -- HGI II LOAN
<TABLE>
<CAPTION>
SUM OF PERCENT OF PERCENT OF ANNUALIZED
NUMBER SQUARE TOTAL ANNUALIZED ANNUALIZED BASE RENT
TENANT OF STORES FT SF BASE RENT BASE RENT PER SF
- ------------------------------ --------- --------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Levi's........................ 4 35,600 3% $ 519,700 3% $14.60
VF Factory Outlet............. 2 49,572 4 495,720 3 10.00
Liz Claiborne................. 4 41,000 3 460,000 2 11.22
Mikasa........................ 4 30,000 2 390,000 2 13.00
Nike.......................... 4 30,200 2 369,480 2 12.23
Corning/Revere Factory
Store....................... 5 22,840 2 362,570 2 15.87
Geoffrey Beene................ 4 19,650 2 331,000 2 16.84
Famous Brands Housewares...... 5 17,577 1 316,332 2 18.00
Jones New York................ 5 17,325 1 310,519 2 17.92
Van Heusen.................... 4 17,470 1 293,043 2 16.77
--- --------- --- ----------- --- ----------
Total (10 Largest)....... 41 281,234 23% $ 3,848,364 21% $13.68
--- --------- --- ----------- --- ----------
Remaining GLA............ 289 966,873 77% $14,641,952 79% $15.14
--- --------- --- ----------- --- ----------
Total.................... 330 1,248,107 100% $18,490,316 100% $14.81
--- --------- --- ----------- --- ----------
--- --------- --- ----------- --- ----------
</TABLE>
The following table sets forth certain information regarding the parent
companies for the ten largest tenants of the HGI II Pool Loan (by Annualized
Base Rent) and information regarding the remaining GLA.
PARENT COMPANY BASED ON ANNUALIZED BASE RENT -- HGI II POOL LOAN
<TABLE>
<CAPTION>
SUM OF PERCENT OF PERCENT OF ANNUALIZED
NUMBER SQUARE TOTAL ANNUALIZED ANNUALIZED BASE RENT
PARENT COMPANY OF STORES FT SF BASE RENT BASE RENT PER SF
- ------------------------------ --------- --------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Phillips-Van Heusen........... 19 89,850 7.2% $ 1,282,133 6.9% $14.27
Levi's/Dockers Outlet......... 5 40,250 3.2 603,400 3.3 14.99
VF Corporation................ 3 51,972 4.2 548,816 3.0 10.56
Jones New York/Evan Picone.... 11 30,963 2.5 543,756 2.9 17.56
Liz Claiborne................. 4 41,000 3.3 460,000 2.5 11.22
Mikasa........................ 4 30,000 2.4 390,000 2.1 13.00
Nike.......................... 4 30,200 2.4 369,480 2.0 12.23
Dress Barn, Inc............... 4 22,530 1.8 368,100 2.0 16.34
Corning/Revere Factory
Store....................... 5 22,840 1.8 362,570 2.0 15.87
Famous Brands Housewares...... 5 17,577 1.4 316,332 1.7 18.00
--- --------- --- ----------- --- ----------
Total (10 Largest)....... 64 377,182 30% $ 5,244,587 28% $13.90
--- --------- --- ----------- --- ----------
Remaining GLA............ 266 870,925 70% $13,245,729 72% $15.21
--- --------- --- ----------- --- ----------
Total.................... 330 1,248,107 100% $18,490,316 100% $14.81
--- --------- --- ----------- --- ----------
--- --------- --- ----------- --- ----------
</TABLE>
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UNDERWRITING STANDARDS
General. The underwriting standards for the Mortgage Loans addressed, with
respect to each Mortgaged Property, environmental conditions, physical
conditions, property valuations and property financial performance, as described
below.
Environmental Assessments. All of the Mortgaged Properties have been
subject to either Phase I site assessments, updates of previously performed
Phase I site assessments, or other site assessments which were updated and
upgraded to comply with Phase I standards through follow up investigations,
within the last eighteen months. Additionally, all borrowers were required to
provide customary environmental representations and warranties and covenants
relating to the existence and use of hazardous substances on the Mortgaged
Properties. For a discussion of environmental issues identified on the Mortgaged
Properties, see 'Risk Factors and Other Special Considerations--Environmental
Law Considerations' herein.
Property Condition Assessments. Inspections of the related Mortgaged
Properties were conducted by licensed engineers prior to origination of the
Mortgage Loans. Such inspections were generally commissioned to assess the
structure, exterior walls, roofing, interior constructions, mechanical and
electrical systems and general conditions of the site, buildings and other
improvements located at each Mortgaged Property. The resulting reports (the
'Property Condition Reports') indicated a variety of deferred maintenance items
and recommended capital improvements with respect to each property. The
estimated cost of the necessary repairs or replacements at each Mortgaged
Property was included in each property condition assessment. In each instance,
the Originator either determined that the necessary repairs of replacements were
being addressed by the related borrowers in a satisfactory manner, or required
that they be addressed post-closing and, in some instances, that reserves be
established to cover the cost of such repairs of replacements. See 'Description
of the Mortgage Loans and Mortgaged Properties' for descriptions of the reserves
or other security provided for repairs and capital improvements to each
property.
There are violations of the ADA at some of the Mortgaged Properties that
are not expected to have a material impact on the value of or earnings from such
properties.
Appraisals. An appraisal of each of the related Mortgaged Properties was
performed. The appraisals were performed by independent MAI appraisers and, in
the case of the appraisals, determined that at the time of the appraisal the
aggregate value of the related Mortgaged Properties exceeded the original
principal amount of each Mortgage Loan.
In general, appraisals represent the analysis and opinion of qualified
experts and are not guarantees of present or future value. Moreover, appraisals
seek to establish the amount a 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 value of the Mortgaged Property as of the
Cut-off Date is presented under 'Description of the Mortgage Pool' herein for
illustrative purposes only.
Occupancy Statements, Operating Statements and Other Data. In connection
with the origination of the Mortgage Loans, the Originator reviewed rent rolls
and related information or statements of occupancy rates, census data, financial
data, operating statements, and, with respect to the Mortgage Loans secured by
office properties and retail properties, a selection of major tenant leases.
Zoning and Building Code Compliance. All of the borrowers have, under the
related Mortgage or loan agreement, generally represented as of the date on
which the Mortgage Loan was originated, or provided a legal opinion or other
evidence to the effect, that the use and operation of the related Mortgaged
Properties are in compliance in all material respects with all applicable
zoning, land-use, environmental, building, fire and health ordinances, rules,
regulations and orders applicable to the related Mortgaged Properties.
Property Management. A manager is responsible for responding to changes in
the local rental or lodging, planning and implementing the rental rate or
operating structure, which may include establishing levels of rent payments or
rates, and insuring that maintenance and capital improvements are carried out in
a timely fashion. Management errors may adversely affect the performance and
long-term viability of a project. The manager for each Mortgaged Property was
approved by the Originator in connection with the origination of the related
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Mortgage Loan. The Servicer may cause the borrower to terminate management
contracts upon certain events specified in certain of the Mortgage Loans and
generally any change in a manager must be approved by the Servicer. No change in
manager may be effected by the Servicer unless the Rating Agencies have
confirmed in writing that such change will not cause any withdrawal,
qualification or downgrade in the then current ratings of each class of
Certificates. For a discussion of the management contracts and the Servicer's
rights thereunder, see 'Description of the Mortgage Loans and Properties'
herein. The Servicer does not manage any of the Mortgaged Properties and will
not be expected to manage any REO Properties (as defined herein).
ADDITIONAL INFORMATION
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 the
scheduled principal payments due on the Mortgage Loans on or before the Cut-off
Date. The Depositor believes that the information set forth herein will be
representative of the characteristics of the Mortgage Pool, as it will be
constituted at the time the certificates are issued.
A Current Report on Form 8-K (the 'Form 8-K') will be available to
purchasers of the Offered Certificates and will be filed by the Depositor,
together with the Pooling and Servicing Agreement, with the Securities and
Exchange Commission within fifteen days after the initial issuance of the
Offered Certificates. However, there can be no assurance that one or more
Mortgaged Properties described herein will not be included in the Mortgage Pool,
but any change in the characteristics of the Mortgage Pool as of the Closing
Date will not be materially different from that described herein.
DESCRIPTION OF THE MORTGAGE LOANS AND MORTGAGED PROPERTIES
THE COLUMBIA SUSSEX II POOL LOAN AND PROPERTIES
The Loan. The Columbia Sussex II Pool Loan has a principal balance as of
the Cut-off Date of $135,230,640 and is secured by Mortgages encumbering twelve
full-service hotels (the 'Columbia Sussex II Pool Properties') located in
Florida, New York, Kentucky, New Jersey, Michigan, Ohio, Illinois, and Alabama.
The Mortgages encumbering the Columbia Sussex II Pool Properties are
cross-defaulted and cross-collateralized (subject to the limitation with respect
to the Marriott Melville Long Island described below).
The Borrower. Grandview Hotel Limited Partnership (the 'Columbia Sussex II
Pool Borrower') is a special purpose limited partnership formed solely for the
purpose of owning, operating and managing the Columbia Sussex II Pool
Properties. The Columbia Sussex II Pool Borrower has no material assets other
than the Columbia Sussex II Pool Properties and related interests. The general
partner of the Columbia Sussex II Pool Borrower is Grandview Hotel Corporation
(the 'CS II GP'), a special purpose Ohio corporation formed solely for the
purpose of acting as general partner of the Columbia Sussex II Pool Borrower.
The limited partner of the Columbia Sussex II Pool Borrower is Columbia Sussex
Corporation (the 'CS II LP'), a Kentucky corporation, which is also the property
manager for the Columbia Sussex II Pool Properties.
Security. The Columbia Sussex II Pool Loan is a non-recourse loan, secured
only by the fee estate, or in the case of two of the Columbia Sussex II Pool
Properties, the leasehold estate, of the Columbia Sussex II Pool Borrower in the
Columbia Sussex II Pool Properties and certain collateral therefor (including an
assignment of leases and rents and the funds in certain accounts), and, subject
to exceptions for, among other things, fraud, intentional misrepresentation,
gross negligence, willful misconduct, breach of any provision of a related
environmental indemnity agreement or misapplication of funds, neither the
Columbia Sussex II Pool Borrower nor any of its affiliates is personally liable
for payment thereof. Because New York law requires the payment of a mortgage
recording tax based on the principal amount of the debt secured by a mortgage,
the mortgage encumbering the Marriott Melville Long Island will secure an amount
of the loan equal to 150% of the initial Allocated Loan Amount with respect to
such property. The Columbia Sussex II Pool Borrower has agreed to indemnify the
Originator and its successors and assigns with respect to the liabilities
arising from and in connection with certain environmental matters. The Columbia
Sussex II Pool Borrower has represented that it owns good, marketable and
insurable fee simple title to (or leasehold interest in) the Columbia Sussex II
Pool Properties, subject only to encumbrances permitted by the lender. The
Originator is the named insured under title
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insurance policies (which will be assigned to the Trust Fund) which insure that
each of the related Mortgages constitutes a valid and enforceable first lien on
the applicable Columbia Sussex II Pool Properties, subject to certain exceptions
and exclusions from coverage set forth therein.
Payment Terms. The Columbia Sussex II Pool Loan was originated by the
Originator on August 8, 1996. The Columbia Sussex II Pool Loan matures on August
11, 2016 (the 'CS II Maturity Date') and bears interest at (a) a fixed rate per
annum equal to 8.87% (the 'CS II Current Interest Rate') through August 10,
2011, and (b) from August 11, 2011 (the 'CS II Anticipated Repayment Date'), at
a fixed rate per annum (the 'CS II Revised Interest Rate') equal to the greater
of (i) 10.87% and (ii) the yield as of the CS II Anticipated Repayment Date,
calculated by linear interpolation of the yields of U.S. Treasury Constant
Maturities with terms (one longer and one shorter) most nearly approximating
that of noncallable U.S. Treasury obligations having maturities as close as
possible to the CS II Maturity Date, plus 2.0%. The interest accrued at the
excess of the CS II Revised Interest Rate over the CS II Current Interest Rate
will be deferred until the CS II Maturity Date (such accrued and deferred
interest and interest thereon at the CS II Revised Interest Rate, the 'CS II
Excess Interest'). Interest on the Columbia Sussex II Pool Loan is calculated on
the basis of the actual number of days elapsed and a 360-day year.
Commencing on September 11, 1996, the Columbia Sussex II Pool Loan requires
240 constant monthly payments (the 'CS II Monthly Debt Service Payment Amount')
of principal and interest of $1,212,279.81 (based on a 240-month amortization
schedule and the CS II Current Interest Rate). Payment of the balance of the
principal, if any, together with all accrued and unpaid interest (including the
CS II Excess Interest) is required on the CS II Maturity Date. Commencing on the
first payment date after the CS II Anticipated Repayment Date, in addition to
the CS II Monthly Debt Service Payment Amount, the Columbia Sussex II Pool
Borrower is required to apply 100% of the CS II Excess Cash Flow (as defined
below) for the month preceding the month in which the payment date occurs in the
following order of priority: (a) to the outstanding principal balance of the
Columbia Sussex II Pool Loan until such principal is reduced to zero, (b) to the
CS II Excess Interest and (c) to any other amounts due under the loan documents.
'CS II Excess Cash Flow' means the amounts held as collected funds in the
Deposit Account after application of funds (a) to the amounts required to be
paid into the ground lease escrow fund as described below under '--Reserves,' if
deposits are then required, (b) to the amounts required to be paid into the tax
and insurance escrow fund as described below under '--Reserves,' (c) to the CS
II Monthly Debt Service Payment Amount, (d) to the amounts required to be paid
into the replacement reserve fund, as described below under '--Reserves,' (e) to
the amounts required to be paid into the rating surveillance fee escrow as
described below under '--Reserves,' (f) to pay for the Columbia Sussex II Pool
Borrower's (1) budgeted operating expenses, (2) capital expenditures (not
previously reserved for) and (3) approved non-budgeted operating and capital
expenses, in that order. The scheduled principal balance of the Columbia Sussex
II Pool Loan as of the CS II Anticipated Repayment Date is approximately
$63,177,455.
Upon the occurrence of an event of default, the entire unpaid principal sum
and any other amounts, will bear interest at a default rate equal to the lesser
of (a) the maximum rate permitted by applicable law and (b) the then applicable
interest rate on the Columbia Sussex II Pool Loan (i.e., the CS II Current
Interest Rate or the CS II Revised Interest Rate) plus 5%.
Prepayment. Voluntary prepayment is prohibited under the Columbia Sussex
II Pool Loan prior to the CS II Anticipated Repayment Date. Thereafter, the
Columbia Sussex II Pool Loan may be voluntarily prepaid in whole or in part
without payment of a yield maintenance premium. Principal prepayments on the
Columbia Sussex II Pool Loan may occur on payment dates if an Involuntary
Prepayment Shortfall occurs or after the CS II Anticipated Repayment Date
through application of the CS II Excess Cash Flow, as described herein under
'--Payment Terms' and '--Casualty and Condemnation.'
To the extent that the Columbia Sussex II Pool Borrower is not required to
apply any insurance proceeds or condemnation awards to the restoration of the
Columbia Sussex II Pool Property under the Columbia Sussex II Pool Loan, the
Servicer will be entitled to apply such proceeds to prepay the Columbia Sussex
II Pool Loan. Unless an event of default has occurred and is continuing, such
prepayment will be made without payment of a yield maintenance premium (as
described below). If an event of default has occurred and is continuing at the
time such proceeds are applied to the prepayment of the Columbia Sussex II Pool
Loan, such prepayment is required to be accompanied by a yield maintenance
premium that would be due in connection with a release of the
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<PAGE>
Columbia Sussex II Pool Property for substitute collateral, as described below
under '--Release in Exchange for Substitute Collateral.' Insurance proceeds and
condemnation proceeds in excess of amounts necessary for restoration or payment
of the Columbia Sussex II Pool Loan will be released to the Columbia Sussex II
Pool Borrower.
The Servicer may apply certain amounts to the prepayment of the Columbia
Sussex II Pool Loan in the event of a default thereunder.
Release in Exchange for Substitute Collateral. The Columbia Sussex II Pool
Borrower is permitted at any time after the second anniversary of the Closing
Date, provided no event of default has occurred and is continuing, to defease
all or a portion of the Columbia Sussex II Pool Loan, provided that, among other
conditions, the Columbia Sussex II Pool Borrower pays on any payment date (the
'CS II Defeasance Date') (a) all interest accrued and unpaid on the principal
balance of the Columbia Sussex II Pool Loan, (b) all other sums, excluding
scheduled interest or principal, due and payable under the Columbia Sussex II
Pool Loan and (c) the CS II Defeasance Deposit (as defined below). In addition,
the Columbia Sussex II Pool Borrower is required to deliver to the Servicer (a)
a security agreement in form and substance satisfactory to the Servicer creating
a first priority lien on the CS II Defeasance Deposit and the U.S. Obligations
purchased with the CS II Defeasance Deposit, (b) an opinion of counsel for the
Columbia Sussex II Pool Borrower in form satisfactory to the lender stating,
among other things, that the Trustee has a perfected first priority security
interest in the CS II Defeasance Deposit and the U.S. Obligations delivered by
the Columbia Sussex II Pool Borrower and that neither Trust REMIC will fail to
maintain its status as a REMIC, (c) evidence in writing from the applicable
Rating Agencies to the effect that such release will not result in a downgrade,
withdrawal or qualification of their respective ratings of the Certificates in
effect immediately prior to such release and (d) if the Columbia Sussex II Pool
Borrower is defeasing only a portion of the Columbia Sussex II Pool Loan, two
Notes, one having a principal balance equal to the defeased portion of the
original Note (the 'CS II Defeased Note') and the other having a principal
balance equal to the undefeased portion of the original Note (the 'CS II
Undefeased Note'). The terms of the CS II Defeased Note and the CS II Undefeased
Note will be identical to the terms of the original Note except for the
principal balance. The Servicer will be responsible for purchasing the U.S.
Obligations on behalf of the Columbia Sussex II Pool Borrower.
'CS II Defeasance Deposit' means generally an amount sufficient to purchase
direct noncallable U.S. Obligations providing payments on or prior to, but as
close as possible to, all successive scheduled payment dates after the CS II
Defeasance Date through and including the CS II Anticipated Repayment Date upon
which payments are required under the related Note or the CS II Defeased Note,
as applicable, and in amounts equal to (a) the proportionate share, based on the
amount of principal defeased, of scheduled payments due on such dates under the
Columbia Sussex II Pool Loan and (b) the unpaid principal balance of the
Columbia Sussex II Pool Loan (or the allocable portion with respect to a partial
defeasance), together with accrued interest, on the CS II Anticipated Repayment
Date. In addition, the Columbia Sussex II Pool Borrower is required to deposit
certain expenses in connection with the defeasance.
The Columbia Sussex II Pool Borrower will be entitled to the release of a
particular Columbia Sussex II Pool Property from the lien of the related
Mortgage if, among other things, (a) the principal amount of the CS II Defeased
Note is equal to or exceeds an amount equal to 125% of the Pro Rata Release
Amount for the related property and (b) after giving effect to the release, the
CS II Loan DSCR (as defined below) for all of the remaining Columbia Sussex II
Pool Properties is equal to the greater of (i) the CS II Loan DSCR for the
Columbia Sussex II Pool Properties on origination of the Columbia Sussex II Pool
Loan (a ratio equal to 1.65) and (ii) the CS II Loan DSCR for all of the
remaining Columbia Sussex II Pool Properties (including the proposed release
property) for the twelve calendar months immediately preceding the CS II
Defeasance Date. Upon satisfaction of such conditions, the Columbia Sussex II
Pool Property will be released from the lien of the Columbia Sussex II Pool Loan
and the pledged U.S. Treasury obligations will serve as collateral securing the
Columbia Sussex II Pool Loan.
With respect to each of the Columbia Sussex II Pool Properties, the term
'CS II Loan DSCR' for such trailing twelve-month period of time means a ratio,
(a) the numerator of which is the net operating income, (calculated as provided
in the Columbia Sussex II Pool Loan) without deduction for (i) actual management
fees paid, (ii) franchise fees, or (iii) amounts paid to the tax and insurance
escrow fund, replacement reserve fund and
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required repair fund, less (A) management and franchise fees equal to the
greater of (1) assumed management and franchise fees of eight percent (8%) of
gross income from operations or (2) the actual management and franchise fees,
and (B) assumed replacement reserve fund contributions equal to 5% of gross
income from operations, and (b) the denominator is the aggregate amount of
principal and interest due and payable on the Note or, in the event a Defeasance
Event has occurred, the Undefeased Note, for such period.
Upon the satisfaction of the foregoing conditions precedent, the Columbia
Sussex II Pool Property will be released from the lien of the Trust Fund.
Substitution of Mortgaged Properties. The Columbia Sussex II Pool Borrower
is permitted at any time after the second anniversary of the Closing Date to
substitute additional hotel properties (each, a 'CS II Substitute Property') for
one or more of the Columbia Sussex Pool Properties, provided that, among other
conditions, (a) such substitution shall not be allowed more than three times
during the term of the Columbia Sussex II Pool Loan, (b) all Columbia Sussex II
Pool Properties released in a single substitution or related series of
substitutions do not represent in the aggregate more than 10% of (i) the
aggregate net operating income (for the immediately preceding 12-month period)
of all of the Columbia Sussex II Pool Properties as of the date of origination
and the date of substitution and (ii) the value of the Columbia Sussex II Pool
Properties as of the date of origination and the date of substitution and (c)
all Columbia Sussex II Pool Properties released do not represent in the
aggregate more than 25% of (i) the aggregate net operating income (for the
immediately preceding 12-month period) of all of the Columbia Sussex II Pool
Properties as of the date of origination and the date of substitution and (ii)
the value of the Columbia Sussex II Pool Properties as of the date of
origination and the date of substitution.
Prior to any such substitution, the Columbia Sussex II Pool Borrower shall
have provided evidence in writing from the applicable Rating Agencies to the
effect that such substitution will not result in a withdrawal, qualification or
downgrade of the respective ratings of the Certificates in effect immediately
prior to such substitution. In addition, any such hotel property substitution
will not be permitted unless (1) the CS II Substitute Properties are
satisfactory to lender in all respects, (2) after giving effect to the
substitution, the CS II Loan DSCR for all of the Columbia Sussex II Pool
Properties is not less than the CS II Loan DSCR for all of the Columbia Sussex
II Pool Properties as of the date of origination and as of the date immediately
preceding the substitution, (3) the net operating income for the Substitute
Properties (adjusted, if necessary, to cap the growth of departmental profit at
10% per annum for each of the preceding three years) does not show a downward
trend for any of the preceding three years, and (4) the net operating income and
CS II Loan DSCR (for the twelve (12) full calendar months immediately preceding
the substitution) for the CS II Substitute Properties is greater than 125% of
the net operating income and CS II Loan DSCR (for the twelve (12) full calendar
months immediately preceding the substitution) for the Columbia Sussex II Pool
Properties for which the CS II Substitute Properties are being substituted.
Upon the satisfaction of the foregoing conditions precedent, the Columbia
Sussex II Pool Property will be released from the lien of the Trust Fund.
Reserves. Pursuant to the terms of the Columbia Sussex II Pool Loan, the
Columbia Sussex II Pool Borrower has established (a) a ground lease escrow fund
for the making of monthly ground rent payments, provided that this reserve need
not be funded on a monthly basis if the Columbia Sussex II Pool Borrower
maintains a balance of $30,000 in the ground lease escrow fund (an amount not
less than one month's ground rents with respect to the Columbia Sussex II Pool
Properties), (b) a required repair fund in an amount, as of the date of
origination, of $8,000,000, with an additional amount to be funded from
replacement reserve deposits as described below, (c) a replacement reserve fund
to cover the cost of replacing certain appliances, amenities and hotel systems
and perform periodic maintenance to be funded with monthly payments equal to
1/12 of 4% of the annual gross revenues at the Columbia Sussex II Pool
Properties, provided that for the first 12 scheduled payment dates, $85,000 will
be deducted from the replacement reserve deposit and redirected to the required
repair reserve for core refurbishment of the Holiday Inn Southfield Detroit
(scheduled for January of 1998) and (d) a tax and insurance account to be funded
monthly by an amount equal to 1/12 of the aggregate insurance premiums and taxes
in respect of the properties payable in the succeeding twelve months. The
required repair fund closing deposit of $8,000,000 includes $7,111,334 to cover
the cost of substantial structural repairs and facility upgrades required by
Holiday Inns with respect to the five Columbia Sussex II Pool Properties that
are Holiday Inns and by
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Radisson with respect to the Radisson Hotel Central-Birmingham. Future deposits
totaling $1,020,000 will be made to the required repair fund from the first
twelve replacement reserve deposits in respect to these franchisor-mandated
repairs. The Columbia Sussex II Pool Borrower will be required to make deposits
into the tax and insurance account for insurance premiums, unless (a) the
Columbia Sussex II Pool Borrower separately maintains $400,000 in the tax and
insurance escrow (which amount may be increased annually based on the consumer
price index or at the lender's discretion) to cover the cost of insurance
premiums for three months, (b) the Columbia Sussex II Pool Borrower pays all
insurance premiums when due and provides the lender evidence of renewal and
notices of increases in premiums prior to expiration and (c) if the Columbia
Sussex II Pool Borrower finances any premiums, the company financing the
premiums has agreed to give the lender at least 30 days' notice of a default by
the Columbia Sussex II Pool Borrower in the payment of amounts due such company
and will give the lender an opportunity to cure any such default.
Lock Box. The Columbia Sussex II Borrower is obligated to cause all checks
and other forms for the payment of money due from credit card companies ('Credit
Card Receipts'), rents from space tenants and amounts received from hotel
customers who pay on an accounts receivable basis (together, 'Other Receipts')
to be deposited directly to central clearing accounts and to use its best
efforts to deposit on the next business day after receipt any revenues other
than such amounts due ('Over-the-Counter Receipts') to clearing accounts held
with local banks. The central clearing account and the local clearing accounts
are in the name of the Servicer. The funds in the local accounts will be swept
on a daily basis into a collection account (the 'CS II Deposit Account') held by
the Servicer. Funds on deposit in the central clearing accounts will be swept
into the CS II Deposit Account on a daily basis unless the short-term and
long-term unsecured debt obligations of such bank are rated at least 'A-1' and
'AA,' respectively, by S&P and any other Rating Agency which rates the
obligations of such bank, in which case such sweeps may be made weekly. In the
event such sweeps are being made weekly, an additional sweep will be made on the
tenth day of each month or, if such day is not a business day, the next
preceding business day and in the event that the amount in the central clearing
account with respect to Credit Card Receipts exceeds $150,000 or the amount in
the central clearing account with respect to Other Receipts exceeds $100,000.
The Servicer will distribute funds held in the CS II Deposit Account in the
following order: (a) if monthly deposits are then required, to the ground lease
escrow fund, (b) to meet tax and, unless such premiums have previously been
paid, insurance requirements, (c) to pay the scheduled monthly payment of
interest and principal, (d) to the replacement reserve account to meet monthly
funding requirements, (e) to the extent the rating surveillance fee has not
previously been paid by Columbia Sussex II Borrower, to the rating surveillance
fee escrow, (f) to any other amounts due under the loan documents and (g) prior
to the CS II Anticipated Repayment Date and for so long as no Involuntary
Prepayment Shortfall or event of default exists, to the Columbia Sussex II Pool
Borrower. On and after the CS II Anticipated Repayment Date and for so long as
an Involuntary Prepayment Shortfall exists, amounts remaining after allocation
under clause (e) will be allocated as follows: (1) to pay for the Columbia
Sussex II Pool Borrower's (A) budgeted operating expenses, (B) capital
expenditures (not previously reserved for) and (C) non-budgeted operating and
capital expenses, in that order, (2) to pay the outstanding principal balance of
the Columbia Sussex II Pool Loan until paid in full, (3) to pay the CS II Excess
Interest and (4) to pay any other amounts due under the loan documents.
Transfer of Properties and Interest in Borrower; Encumbrance. Other than
with respect to Columbia Sussex II Pool Properties which have been released from
the lien imposed by the Columbia Sussex II Pool Loan, the Columbia Sussex II
Pool Borrower is prohibited from transferring or encumbering the Columbia Sussex
II Pool Properties without the prior written consent of the lender. The Columbia
Sussex II Pool Loan generally prohibits the voluntary or involuntary sale,
conveyance or transfer of stock of the CS II GP (or the stock of any corporation
directly or indirectly controlling the CS II GP, by operation of law or
otherwise) or the creation or issuance of new stock in one or a series of
transactions by which an aggregate of more than 10% of the CS II GP's stock
shall be vested in a party or parties who are not stockholders as of the loan
closing date or any change in the control of the CS II GP, the resignation or
removal of either the CS II GP or CS II LP and the addition of new general or
limited partners to the Columbia Sussex II Pool Borrower.
However, holders of interests in the Columbia Sussex II Pool Borrower (or
holders of interests in any entity directly or indirectly holding an interest in
the Columbia Sussex II Pool Borrower) as of the date of origination (the
'Interest Holders') have the right to transfer their interest in the Columbia
Sussex II Pool Borrower (or any
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entity directly or indirectly holding an interest in the Columbia Sussex II Pool
Borrower) without the Servicer's consent if (i) after taking into account any
such prior transfers, no such transfer (or series of transfers) results in (x)
the proposed transferee, together with all members of his/her immediate family
or any affiliates thereof, owning in the aggregate (directly, indirectly or
beneficially) more than 49% of the interests in the Columbia Sussex II Pool
Borrower (or any entity directly or indirectly holding an interest in the
Columbia Sussex II Pool Borrower), or (y) a transfer in the aggregate of more
than 49% of the interests in the Columbia Sussex II Pool Borrower as of the date
of origination, (ii) no such transfer of interest results in a change of control
of the Columbia Sussex II Pool Borrower or the day to day operations of the
Mortgaged Property, and (iii) the legal and financial structure of the Columbia
Sussex II Pool Borrower after such transfer and its shareholders, partners or
members and the single purpose nature and bankruptcy remoteness of the Columbia
Sussex II Pool Borrower and its shareholders, partners or members satisfy the
Originator's then current applicable underwriting criteria and requirements
including, without limitation, the requirement at the request of the Servicer,
to deliver (A) a non-consolidation opinion acceptable to the lender and (B)
evidence reasonably satisfactory to the lender that the single purpose nature
and bankruptcy remoteness of the Columbia Sussex II Pool Borrower and its
shareholders or partners following such transfer is in accordance with the
standards of the Rating Agencies (including written confirmations from the
Rating Agencies that such transfer or series of transfers will not result in a
requalification, reduction or withdrawal of the ratings then applicable to the
Certificates). In addition, a transfer shall not require consent if the transfer
occurs by operation of law upon the death of a natural person who is an Interest
Holder. The Pooling and Servicing Agreement provides that the Servicer may not
give its consent to any of the transfers described in this paragraph unless it
has first obtained written confirmation from the Rating Agencies that such
transfer will not result in a downgrade, withdrawal or qualification of their
respective ratings of the Certificates in effect immediately prior to such
transfer.
The Columbia Sussex II Pool Loan permits the Columbia Sussex II Pool
Borrower to obtain up to $7,500,000 in financing for the acquisition or
replacement of furniture, fixtures or equipment for the Columbia Sussex II Pool
Properties, but only if such acquisition or replacement is required by an
applicable franchisor and the debt incurred does not cause the overall CS II
Loan DSCR for any quarter in which such debt is outstanding to be less than 1.7.
Any such debt incurred must amortize over a term of not more than five years and
must be secured only by the items financed. The Columbia Sussex II Pool Loan
also permits the Columbia Sussex II Pool Borrower to incur secured debt on
vehicles and to finance insurance premiums, as described above under
'--Reserves,' and unsecured trade debt customarily due within 30 days in an
amount not to exceed $5,000,000. None of the secured debt described above is
required to be subordinate to the security interest of the Trust Fund in such
items.
Insurance. The Columbia Sussex II Pool Borrower is required to maintain
(a) fire and extended coverage insurance in an amount equal to at least 100% of
the full replacement cost of the improvements, (b) flood insurance with respect
to any part of a Columbia Sussex II Pool Property that is located in an area
identified by the Federal Emergency Management Agency as an area having special
flood hazards and in which such insurance is available under the National Flood
Insurance Program, (c) comprehensive public liability insurance, (d) rental loss
and/or business interruption insurance which will cover a period of at least
eighteen months, (e) machinery and boiler explosion insurance, (f) statutory
workers compensation insurance, (g) during any period of restoration, builder's
'all risk' insurance in an amount equal to not less than the full insurable
value of the related property and (h) if any of the Columbia Sussex II Pool
Properties becomes a 'non-conforming use' under applicable zoning laws,
ordinance or law coverage to compensate the cost of demolition and the increased
cost of construction for the related property. The Columbia Sussex II Pool Loan
requires the Columbia Sussex II Pool Borrower to obtain the insurance described
above from insurance carriers having claims paying abilities rated not less than
'AA' by S&P.
Condemnation and Casualty. Insurance proceeds and condemnation awards will
be made available to the Columbia Sussex II Pool Borrower for the repair,
restoration and replacement of the affected improvements if, among other
conditions, (a) the loss is in an amount less than 25% of the Allocated Loan
Amount for such property, (b) in the reasonable judgment of the lender, the
property can be restored within six months and prior to the CS II Maturity Date
to an economic unit not less valuable than the same was prior to the casualty or
condemnation and (c) after such restoration will adequately secure the Allocated
Loan Amount for such property. In all other cases, the Servicer may apply the
proceeds to a partial prepayment of the Columbia Sussex II Pool
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Loan. Unless an event of default has occurred and is continuing, such prepayment
will not be accompanied by the payment of a yield maintenance premium. If,
however, an event of default has occurred and is continuing, such prepayment
shall include a yield maintenance premium as described above. See 'Description
of the Mortgage Loans and Mortgaged Properties--The Columbia Sussex II Pool Loan
and Properties-- Release in Exchange for Substitute Collateral.'
The Radisson Cincinnati Airport is located at the Cincinnati/Northern
Kentucky Airport and is leased by the Columbia Sussex II Pool Borrower under a
ground lease with the Kenton County Airport Board described below. The Kenton
County Airport Board has announced the results of its master plan study for
expansion of the Cincinnati/Northern Kentucky Airport. The master plan study
represents long range planning for the airport's growth based on short term
(1991-1996), intermediate term (1996-2001) and long term (2001-2011) projections
for passenger, cargo, aircraft and automobile activity and regional economic and
population trends. The master plan study recommends for various airport
improvements if passenger, cargo, aircraft and automobile activity levels reach
certain thresholds. If airport activity grows as projected and if the master
plan is effectuated as currently described, the master plan for expansion could
involve the movement or replacement of the Radisson Cincinnati Airport. It is
unclear whether airport activity will increase as projected, whether the master
plan will be effectuated as currently stated or whether the master plan will
ultimately have a negative or positive effect on the Columbia Sussex II Pool
Loan or the Radisson Cincinnati Airport. While it is not clear that a
condemnation would result from any such airport expansion, if condemnation
proceedings were to occur, as a matter of law, the relevant government body
would be prohibited from taking any property interest without compensation in
the form of a condemnation award. Any such condemnation award should generally
be based on then fair market value of the property as determined by the relevant
court. Based on current case law, a Kentucky court would be required generally
to apportion the condemnation award between the lessor and the lessee based on
the relative values of the leasehold interest and the fee interest. Any
condemnation award received by the Columbia Sussex II Pool Borrower would be
applied in accordance with the loan provisions outlined above, but there can be
no assurance that the amounts received by the Columbia Sussex II Pool Borrower
as a condemnation award under such circumstances would be sufficient to prepay
the Allocated Loan Amount with respect to such Mortgaged Property. The Allocated
Loan Amount with respect to the Radisson Cincinnati Airport was $11,920,000 on
the closing date of the Columbia Sussex II Pool Loan and the appraised value of
the leasehold interest as of July 1, 1996 was $19,300,000, resulting in an
Allocated-Loan-Amount-to-value ratio of approximately 60%. However, there can be
no assurance that the fair market value of the property attributable to the
leasehold interest as determined by a court will be at or near to the appraised
value of the leasehold interest as determined by the appraiser on July 1, 1996.
Also, in the event that the lender had given its consent to the termination of
the Cincinnati Ground Lease by the Columbia Sussex II Pool Borrower in
connection with a casualty to the related property not susceptible to repair
within 90 days, the Cincinnati Airport ground lease provides that, depending on
the length of the remaining lease term (including all extensions), the ground
lessor may be entitled to receive a portion of the casualty proceeds
attributable to the land interest.
If a casualty or condemnation occurs with respect to the Radisson
Cincinnati Airport property and the proceeds paid to the Columbia Sussex II Pool
Borrower are insufficient to pay the Allocated Loan Amount (after reduction for
previous amortization) for such property (the 'Pro Rata Release Amount'), the
Columbia Sussex II Pool Loan provides for the additional protection that CS II
Excess Cash Flow will be applied to prepay principal on the Columbia Sussex II
Pool Loan without premium until the deficiency in the Pro Rata Release Amount
with respect to such Mortgaged Property (an 'Involuntary Prepayment Shortfall')
has been received in the manner described above under '--Prepayment.' The
'Allocated Loan Amount' with respect to each of the Columbia Sussex II Pool
Properties is the portion of the principal amount of the Columbia Sussex II Pool
Loan allocated to such property for such purpose, as agreed to by the Originator
and the Columbia Sussex II Pool Borrower.
Financial Covenants and Reporting. Under the Columbia Sussex II Pool Loan,
the Columbia Sussex II Pool Borrower is obligated to achieve, and within 45 days
of the end of each calendar quarter (the 'CS II Loan DSCR Determination Date')
to provide evidence to the Servicer of the achievement of, a CS II Loan DSCR of
at least 1.10. If the Columbia Sussex II Pool Borrower fails to achieve such
ratio (the 'CS II Default Determination Ratio'), the Columbia Sussex II Pool
Borrower must deposit additional funds in the CS II Deposit Account in an amount
which, if treated as income from the operations of the Columbia Sussex II Pool
Properties, would
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increase the net operating income of the Columbia Sussex II Pool Properties and
thereby maintain the CS II Loan DSCR above the CS II Default Determination
Ratio. Any such funds escrowed shall be returned to the Columbia Sussex II Pool
Borrower if the CS II Default Determination Ratio is achieved for two
consecutive CS II Loan DSCR Determination Dates. So long as the Columbia Sussex
II Pool Borrower makes the required deposits into the CS II Deposit Account, the
Columbia Sussex II Pool Borrower's failure to achieve the CS II Default
Determination Ratio (as defined below under '--Property Management') will not
constitute an event of default under the Columbia Sussex II Pool Loan.
The Columbia Sussex II Pool Borrower is required to furnish to the
Servicer: (a) within 60 days after the end of each fiscal year, unaudited
year-end financial statements (including a schedule of capital expenditures) for
the Columbia Sussex II Pool Borrower, together with a chief financial officer's
or general partner's certificate stating that such financial statements fairly
reflect the financial condition of the Columbia Sussex II Pool Borrower, (b)
within 90 days after the end of each fiscal year, audited year-end financial
statements for the Columbia Sussex II Pool Borrower accompanied by an
unqualified opinion from a 'Big Six' accounting firm or other accounting firm
acceptable to the lender, (c) within 45 days after the end of each month, the
following items accompanied by a certificate of the chief financial officer or
general partner of the Columbia Sussex II Pool Borrower, as applicable, stating
that such items fairly present the financial condition and results of operations
of the Columbia Sussex II Pool Borrower and the Columbia Sussex II Pool
Properties as applicable: (i) a report of occupancy and average daily rates (on
a property-by-property basis) and any and all franchise inspection reports
received by Columbia Sussex II Pool Borrower during the subject month, (ii)
monthly and year to date operating statements and (iii) a calculation reflecting
the CS II Loan DSCR and net operating income for the immediately preceding
twelve month period as of the last day of each such month. In addition, the
above referenced certificate will also be accompanied by a certificate of the
chief financial officer or general partner of the Columbia Sussex II Pool
Borrower or the general partner of Borrower stating that certain of the
representations and warranties of Columbia Sussex II Pool Borrower are true and
correct as of the date of such certificate and that there are no trade payables
outstanding for more than sixty days (other than payables for which there is a
bona fide dispute).
The Properties. The Columbia Sussex II Pool Properties consist of five
Holiday Inns, four Radisson Hotels, one Best Western Hotel, one Sheraton Hotel
and one Marriott Hotel. The Columbia Sussex II Pool Borrower has covenanted not
to terminate any of the franchise agreements with respect to such properties
without the prior written consent of the Servicer. The size of the hotels range
from 121 rooms to 501 rooms. The hotels were constructed between 1960 and 1990.
The average occupancy rates for the 12 months ended August 31, 1996 for the
Columbia Sussex II Pool Properties ranged from 44% to 83%, with a weighted
average occupancy rate of 67%. The ADRs for the 12 month period ending August
31, 1996 for the Columbia Sussex II Pool Properties ranged from $41 to $108,
with a weighted average of $66. The appraisals performed for the Columbia Sussex
II Pool Properties as of July 1, 1996 determined an aggregate value of
approximately $239,000,000.
Ten of the hotels are built on real property that is owned by the Columbia
Sussex II Pool Borrower in fee simple. Two of the hotels--the Radisson Hotel
Cincinnati Airport and Radisson Hotel-Central Birmingham--are built on real
property that is leased by the Columbia Sussex II Pool Borrower under ground
leases as described below.
Holiday Inn Louisville South Airport. The Holiday Inn Louisville South
Airport, located on approximately 8.0 acres in Louisville, Kentucky, near the
Louisville International Airport, is a six-story, 405-room, full-service lodging
facility, containing an atrium restaurant, an atrium bar, 16,000 square feet of
meeting space, and a Holidome(Registered) that houses an indoor swimming pool, a
exercise room, a whirlpool, a sauna, a game room and a playground. The Mortgaged
Property was built in 1960, with additions built in the 1960's, 1980 and 1985.
Potential new competition for the hotel may occur from a new Best Western hotel
of approximately 150 rooms which is proposed to be constructed in the area. The
Mortgaged Property is scheduled for significant core modernization mandated by
the franchisor to be completed by January of 1997. In connection with the
origination of the Columbia Sussex II Pool Loan, funds sufficient (at least 110%
of the budgeted amount for such modernization) to cover the estimated cost of
these renovations were escrowed in the required repair fund held by the
Servicer. The franchise agreement between the Columbia Sussex II Pool Borrower
and Holiday Inns Franchising, Inc. with respect to the Holiday Inn Louisville
South Airport expires on December 14, 2007. The monthly fees under the franchise
agreement include a royalty fee, a marketing fee, a reservation contribution,
and a reservations system fee. For the twelve-month period ended August 31,
1996, the average occupancy rate was
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approximately 58% and the average daily room rate was approximately $60.75. As
of July 1, 1996, the appraised value of the Mortgaged Property is $16,600,000.
Holiday Inn Southfield Detroit. The Holiday Inn Southfield Detroit,
located on approximately 7.31 acres in Southfield, Michigan, is a sixteen-story,
417-room, full-service lodging facility, containing a restaurant, a sports bar,
5,840 square feet of meeting and banquet space, an exercise room and an indoor
swimming pool. The Mortgaged Property is scheduled for significant core
modernization mandated by the franchisor to be completed by January of 1998. In
connection with the origination of the Columbia Sussex II Pool Loan, funds were
deposited and additional funds will be added to the required repair fund held by
the Servicer sufficient to cover the estimated cost of these renovations. The
franchise agreement between the Columbia Sussex II Pool Borrower and Holiday
Inns Franchising, Inc. with respect to the Holiday Inn Southfield Detroit
expires on November 20, 2005. The monthly fees under the franchise agreement
include a royalty fee, a marketing fee, a reservation contribution, and a
Holidex fee. For the twelve-month period ended August 31, 1996, the average
occupancy rate was approximately 44% and the average daily room rate was
approximately $65.75. As of July 1, 1996, the appraised value of the Mortgaged
Property is $22,000,000.
Holiday Inn Springfield South. The Holiday Inn Springfield South, located
on approximately 7.0 acres in Springfield, Ohio, is a 150-room full-service
lodging facility consisting of a two-story guest room structure, and a
Holidome(Registered) that houses an indoor swimming pool, an exercise room, a
whirlpool, a sauna, a game room and a playground. The Mortgaged Property
additionally contains a restaurant, a lounge and 5,420 square feet of meeting
space. The Mortgaged Property was built in 1973, with additional improvements in
1985. The Mortgaged Property is scheduled for significant core modernization
mandated by the franchisor to be completed by January of 1997. In connection
with the origination of the Columbia Sussex II Pool Loan, funds sufficient (at
least 110% of the budgeted amount for such modernization) to cover the estimated
cost of these renovations were escrowed in the required repair fund held by the
Servicer. The franchise agreement between the Columbia Sussex II Pool Borrower
and Holiday Inns, Inc. with respect to the Holiday Inn Springfield South expires
on April 17, 2000. The monthly fees under the franchise agreement include a
royalty fee, a marketing fee, a reservation contribution, and a Holidex fee. For
the twelve-month period ended August 31, 1996, the average occupancy rate was
approximately 57% and the average daily room rate was approximately $61.66. As
of July 1, 1996, the appraised value of the Mortgaged Property is $5,400,000.
Holiday Inn Itasca. The Holiday Inn Itasca, located on approximately 7.0
acres in Itasca, Illinois, is a 161-room, full-service lodging facility
consisting of a five-story guest room structure, an indoor swimming pool, an
exercise room, a whirlpool and a game room. The Mortgaged Property additionally
contains a restaurant, a lounge and 6,920 square feet of meeting space and was
built in 1966. Potential new competition for the hotel may occur from a new
approximately 128-room Amerisuites hotel which is currently under construction
and scheduled to open in late 1996. The Mortgaged Property is scheduled for
significant core modernization mandated by the franchisor to be completed by
January of 1997. In connection with the origination of the Columbia Sussex II
Pool Loan, funds sufficient (at least 110% of the budgeted amount for such
modernization) to cover the estimated cost of these renovations were escrowed in
the required repair fund held by the Servicer. The franchise agreement between
the Columbia Sussex II Pool Borrower and Holiday Inns Franchising, Inc. with
respect to the Holiday Inn Itasca expires on April 13, 2007. The monthly fees
under the franchise agreement include a royalty fee, a marketing fee, a
reservation contribution, and a reservations system fee. For the twelve-month
period ended August 31, 1996, the average occupancy rate was approximately 58%
and the average daily room rate was approximately $66.99. As of July 1, 1996,
the appraised value of the Mortgaged Property is $8,800,000.
Holiday Inn Glen Ellyn. The Holiday Inn Glen Ellyn, located on
approximately 3.38 acres in Glen Ellyn, Illinois, is a 121-room, full-service
lodging facility consisting of two four-story guest room structures and a
restaurant, a sports bar, 8,871 square feet of meeting space, an outdoor pool
and an exercise room. The Mortgaged Property was built in and has been operated
as a Holiday Inn since 1967. The Mortgaged Property is scheduled for significant
core modernization mandated by the franchisor to be completed by January of
1997. In connection with the origination of the Columbia Sussex II Pool Loan,
funds sufficient (at least 110% of the budgeted amount for such modernization)
to cover the estimated cost of these renovations were escrowed in the required
repair fund held by the Servicer. The franchise agreement between the Columbia
Sussex II Pool Borrower and Holiday Inns Franchising, Inc. with respect to the
Holiday Inn Glen Ellyn expires on November 30, 2007. The monthly fees under the
franchise agreement include a royalty fee, a marketing fee, a
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reservation contribution, and a reservations system fee. For the twelve-month
period ended August 31, 1996, the average occupancy rate was approximately 56%
and the average daily room rate was approximately $58.15. As of July 1, 1996,
the appraised value of the Mortgaged Property is $3,700,000.
Radisson Lake Buena Vista. The Radisson Lake Buena Vista, located on
approximately 5.24 acres in Orlando, Florida, is a seven-story, 200-room
full-service lodging facility containing a restaurant, a lounge, an outdoor
swimming pool and hot tub, a game room and a gift shop. The Mortgaged Property
is one mile north of Disney World and was built in 1989. The franchise agreement
between the Columbia Sussex II Pool Borrower and Radisson Hotels International,
Inc., formerly known as Carlson Hospitality Group, Inc., with respect to the
Radisson Lake Buena Vista expires on December 31, 2009. The monthly fees under
the franchise agreement include a royalty fee and a marketing fee. For the
twelve-month period ended August 31, 1996, the average occupancy rate was
approximately 70.19% and the average daily room rate was $75. As of July 1,
1996, the appraised value of the Mortgaged Property is $14,600,000.
Radisson Orlando Airport. The Radisson Orlando Airport, located on
approximately 9.53 acres in Orlando, Florida, is a ten-story, 347-room
full-service lodging facility containing a restaurant, a lounge, 8,676 square
feet of meeting space, an outdoor swimming pool, a game room, an exercise room
and a gift shop. The Mortgaged Property is located near the Orlando
International Airport and was built in 1989. The franchise agreement between the
Columbia Sussex II Pool Borrower and Radisson Hotels International, Inc.,
formerly known as Carlson Hospitality Group, Inc., with respect to the Radisson
Orlando Airport expires on December 31, 2009. The monthly fees under the
franchise agreement include a royalty fee and a marketing fee. For the twelve-
month period ended August 31, 1996, the average occupancy rate was approximately
80% and the average daily room rate was approximately $58.13. As of July 1,
1996, the appraised value of the Mortgaged Property is $30,300,000.
Radisson Cincinnati Airport. The Radisson Cincinnati Airport, located on
approximately 6.932 acres in Burlington, Kentucky, is a 214-room, full-service
lodging facility containing an eight-story and a two-story guest room facility,
a restaurant, a sports bar, an atrium bar, 10,556 square feet of meeting space,
an indoor swimming pool and hot tub, an exercise room and a game room. The
Mortgaged Property is located at the Cincinnati/Northern Kentucky Airport, and
was built in 1963, with additions added in 1971 and the early 1980's. The
property is leased by the Columbia Sussex II Pool Borrower under a ground lease
with the Kenton County Airport Board described below. The franchise agreement
between the Columbia Sussex II Pool Borrower and Radisson Hotels International,
Inc., formerly known as Carlson Hospitality Group, Inc., with respect to the
Radisson Cincinnati Airport expires on December 31, 2007. The monthly fees under
the franchise agreement include a royalty fee and a marketing fee. For the
twelve-month period ended August 31, 1996, the average occupancy rate was
approximately 73% and the average daily room rate was approximately $66.40. As
of July 1, 1996, the appraised value of the leasehold interest in the Mortgaged
Property is $19,300,000.
Sheraton Newark Airport. The Sheraton Newark Airport, located on
approximately 7.5 acres in Newark, New Jersey, is a twelve-story, 501-room,
full-service lodging facility containing two restaurants, a lobby bar and
lounge, a sports bar, 14,324 square feet of meeting space, an indoor swimming
pool and hot tub, an exercise room, a gift shop and a game room. The Mortgaged
Property is located approximately two miles from Newark International Airport
and was built in 1989. Potential new competition for the hotel may be created by
a former airport Hilton hotel which is currently closed for renovation and is
scheduled to re-open as a Wyndham hotel by the spring of 1997. The Columbia
Sussex II Pool Borrower changed the franchise of the hotel from Radisson to
Sheraton, effective December 1, 1996, and the new franchise agreement between
the Columbia Sussex II Pool Borrower and ITT Sheraton Corporation with respect
to the Sheraton Hotel Newark Airport expires on December 1, 2006. For the
twelve-month period ended August 31, 1996, the average occupancy rate was
approximately 83% and the average daily room rate was approximately $69.26. As
of July 1, 1996, the appraised value of the Mortgaged Property is $42,600,000.
Radisson Hotel Central-Birmingham. The Radisson Hotel Central-Birmingham,
located on approximately 1.52 acres in Birmingham, Alabama, is a fourteen-story,
298-room, full-service lodging facility containing a restaurant, an atrium bar
and lounge, 14,892 square feet of meeting space, an outdoor swimming pool and
hot tub and an exercise room. The Mortgaged Property is located in downtown
Birmingham on the campus of the University of Alabama at Birmingham and was
built in 1972. The Mortgaged Property is scheduled for significant modernization
to be completed by January of 1997. In connection with the origination of the
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Columbia Sussex II Pool Loan, funds sufficient (at least 110% of the budgeted
amount for such modernization) to cover the estimated cost of these renovations
were escrowed in the required repair fund held by the Servicer. The property is
leased by the Columbia Sussex II Pool Borrower under a ground lease described
below. The franchise agreement between the Columbia Sussex II Pool Borrower and
Radisson Hotels International, Inc., formerly known as Carlson Hospitality
Group, Inc., with respect to the Radisson Hotel Central-Birmingham expires on
December 31, 2009. The monthly fees under the franchise agreement include a
royalty fee and a marketing fee. For the twelve-month period ended August 31,
1996, the average occupancy rate was approximately 61% and the average daily
room rate was approximately $56.67. As of July 1, 1996, the appraised value of
the leasehold interest in the Mortgaged Property is $11,000,000.
Marriott Melville Long Island. The Marriott Melville Long Island, located
on approximately 11.5 acres in Melville, New York, is a four-story, 371-room,
full-service lodging facility containing two restaurants, an atrium lounge, a
sports bar, 17,600 square feet of meeting space, an indoor swimming pool, a hot
tub, an exercise room and a game room. The Mortgaged Property was built in 1990.
The franchise agreement between the Columbia Sussex II Pool Borrower and
Marriott International, Inc. with respect to the Marriott Melville Long Island
expires on July 22, 2014. The monthly fees under the franchise agreement include
a franchise fee and an advertising fee. The franchise agreement also obligates
the Columbia Sussex II Pool Borrower to pay a chain services fee for certain
central and regional services such as central advertising and the Marriott
reservation system, the amount of which payable with respect to the Marriott
Melville Long Island is based on such hotel's allocable portion of the fee as
divided among all Marriott hotels systemwide. For the twelve-month period ended
August 31, 1996, the average occupancy rate was approximately 72% and the
average daily room rate was approximately $107.60. As of July 1, 1996, the
appraised value of the Mortgaged Property is $52,300,000.
Best Western Eastgate. The Best Western Eastgate, located on approximately
10.59 acres in Kissimmee, Florida, is a five-story, 403-room, full-service
lodging facility, containing a restaurant, an outdoor swimming pool and hot tub
and a gift shop. The Mortgaged Property was built in 1984. The franchise
agreement between the Columbia Sussex II Pool Borrower and Best Western
International with respect to the Best Western Eastgate expired November 30 of
each year, and is renewable annually. The monthly fees under the franchise
agreement are not specified, but are as determined by the Board of Directors of
Best Western. For the twelve-month period ended August 31, 1996, the occupancy
rate was approximately 71%, and the average daily room rate was approximately
$41.04. As of July 1, 1996, the appraised value of the Mortgaged Property is
$12,400,000.
Ground Leases. The interest of the Columbia Sussex II Pool Borrower in the
Radisson Cincinnati Airport consists of a ground leasehold interest created
under a ground lease with the Kenton County Airport Board (the 'Cincinnati
Ground Lease'). The Cincinnati Ground Lease expires on November 20, 2026, and
may be extended by the Columbia Sussex II Pool Borrower for an additional
10-year period. Rent is payable under the Cincinnati Ground Lease as follows:
(a) basic rent of $11,000 is payable monthly, (b) percentage rent equal to 6% of
'gross revenues' in excess of $5,000,000 of annual gross revenues from the
property is payable monthly commencing each year at such time as the annual
gross revenues from the property exceed $5,000,000, provided that an additional
3% will be due if the Columbia Sussex II Pool Borrower fails to maintain a
national franchise as required by the Cincinnati Ground Lease.
The interest of the Columbia Sussex II Pool Borrower in the Radisson Hotel
Central Birmingham consists of a ground leasehold interest created under a
ground lease with The Board of Trustees of the University of Alabama (the
'Alabama Ground Lease'). The Alabama Ground Lease expires on September 30, 2033.
Rent is payable under the Alabama Ground Lease as follows: (a) base rent of
$4,333.33 is payable monthly until October 1, 2003, and thereafter the base rent
is to be adjusted in accordance with CPI as provided in the Alabama Ground Lease
and (b) percentage rent equal to 1.5% of gross income received from hotel
operations and 5% of gross income received from any commercial leases is payable
monthly.
Property Management. The Columbia Sussex II Pool Properties are managed by
Columbia Sussex Corporation, a Kentucky corporation (the 'Columbia Sussex II
Manager') pursuant to management agreements, each dated as of August 8, 1996
(collectively, the 'Columbia Sussex II Management Agreements'), between the
Columbia Sussex II Manager and the Columbia Sussex II Pool Borrower. The
Columbia Sussex II Management Agreement provides for a monthly management fee
equal to 3% of monthly gross revenues received on an accrual basis. The Columbia
Sussex II Management Agreement provides for a 15-year term, which the Columbia
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Sussex II Pool Borrower may extend for an additional ten years by giving at
least 30 days' notice to the Columbia Sussex II Manager.
Under the Columbia Sussex II Pool Loan, the Columbia Sussex II Pool
Borrower is obligated to achieve, and for each CS II Loan DSCR Determination
Date to provide evidence to the Servicer of the achievement of, a CS II Loan
DSCR for the Columbia Sussex II Pool Properties of not less than 1.40. If such
ratio (the 'CS II Fee Escrow Ratio') is not maintained, the Columbia Sussex II
Pool Borrower's obligation to pay, and the CS II Manager's right to receive, the
related management fee will be suspended and an amount equal to such management
fee will be retained by the Servicer in the CS II Deposit Account. Subsequently,
if the required CS II Fee Escrow Ratio is obtained for two consecutive CS II
Loan DSCR Determination Dates, the CS II Manager will be entitled to receive the
management fee escrowed in the CS II Deposit Account and will be entitled
thereafter to receive the management fee so long as the CS II Fee Escrow Ratio
is maintained. If the Columbia Sussex II Pool Borrower fails to satisfy the
borrower's covenant with respect to the CS II Default Determination Ratio, the
Servicer can notify the Columbia Sussex II Pool Borrower and instruct the
Columbia Sussex II Pool Borrower to remove the CS II Manager (or any other
manager of the Columbia Sussex II Pool Properties) and designate a replacement
property manager acceptable to the lender.
Pursuant to a Manager's Consent and Subordination of Management Agreement
with respect to each of the CS II Management Agreements, the Servicer will have
the right to terminate such CS II Management Agreement upon, or at any time
after, an event of default under the Columbia Sussex II Pool Loan by giving the
CS II Manager 30 days' prior written notice of such termination. The CS II
Manager has also agreed in such subordination agreements that its right to
receive the management fee and all liens, rights and interests owned, claimed or
held by the CS II Manager in and to any of the Columbia Sussex II Pool
Properties are and will be, in all respects, subordinate and inferior to the
liens and security interest created by the Columbia Sussex II Pool Loan.
Additionally, the CS II Management Agreement provides that the management fee is
subordinate to the payment of all amounts due under the Columbia Sussex II Pool
Loan.
The CS II Manager was organized in 1972 and, as of September, 1996, the CS
II Manager and its affiliates own and operate 44 hotels containing a total of
over 11,000 rooms. Located in Ft. Mitchell, Kentucky, the CS II Manager operates
its hotels primarily under the Radisson, Holiday Inn, Crowne Plaza, Westin,
Marriott and Days Inn trade names in 16 states, Grand Cayman, British West
Indies and St. Croix, U.S. Virgin Islands. William J. Yung is the President,
Chief Executive Officer and sole voting shareholder of the CS II Manager.
THE HGI II POOL LOAN AND PROPERTIES
The Loan. The HGI II Pool Loan has a principal balance as of the Cut-off
Date of $99,217,643 and is secured by Mortgages encumbering five factory outlet
center properties located in California, Maryland and Texas (the 'HGI II Pool
Properties'). The Mortgages encumbering the HGI Pool Properties are cross-
collateralized and cross-defaulted.
The Borrower. Second Horizon Group Limited Partnership (the 'HGI II Pool
Borrower') is a Delaware limited partnership formed on September 3, 1996. The
partnership agreement of the HGI II Pool Borrower provides that it was formed
(a) to acquire, own and operate the HGI II Pool Properties for investment and
for income producing purposes, (b) to mortgage, manage, operate, lease,
refinance, and, if necessary or appropriate, sell the individual HGI II Pool
Properties or any portion thereof, and (c) to carry on all incidental or related
activities. The HGI II Pool Borrower has no material assets other than the HGI
II Pool Properties and related interests. The sole general partner of the HGI II
Pool Borrower is Second HGI, Inc. ('Second HGI'), a special purpose Delaware
corporation formed solely for the purpose of acting as general partner of the
HGI II Pool Borrower. The sole limited partner of the HGI II Pool Borrower is
Horizon/Glen Outlet Centers Limited Partnership ('Horizon/Glen'), a Delaware
limited partnership which is a subsidiary of Horizon Group, Inc. (the 'HGI
REIT'), a Michigan corporation which is an SEC reporting company under the
Securities Exchange Act of 1934, as amended, and a real estate investment trust,
the stock of which is traded on the New York Stock Exchange. The voting stock of
Second HGI is held 99% by Jeffrey A. Kerr, who is the Chairman of the Board of
Directors of the HGI REIT. The remaining 1% of the voting stock and 100% of the
non-voting stock of Second HGI is held by Horizon/Glen.
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Security. The HGI II Pool Loan is a non-recourse loan, secured only by the
interest of the HGI II Pool Borrower in the related Mortgaged Properties and
certain collateral therefor (including an assignment of leases and rents and the
funds in certain accounts). Because Maryland law requires the payment of a
mortgage recording tax based on the principal amount of the debt secured by a
mortgage, the mortgage encumbering the Chesapeake Village Outlet secures a
portion of the HGI II Pool Loan equal to 172% of the initial Allocated Loan
Amount (which portion is equal to the appraised value) of such property. The HGI
II Pool Loan is also secured by a pledge of all of the partnership interests in
the HGI II Pool Borrower. Subject to exceptions for losses resulting from, among
other things, fraud, intentional misrepresentation, breach of certain
environmental indemnities and covenants, misapplication of funds,
misappropriation of certain security deposits, insurance proceeds, condemnation
proceeds, and rents arising from the HGI II Pool Properties, neither the HGI II
Pool Borrower nor any of its affiliates is personally liable for payment of the
HGI II Pool Loan. The sole limited partner of the HGI II Pool Borrower has
provided a limited guarantee of the HGI II Pool Borrower's obligations and
liabilities to the extent of the foregoing exceptions to the personal liability
of the HGI II Pool Borrower. The HGI II Pool Borrower has represented that it
owns good, marketable and insurable fee simple title to all of the HGI II Pool
Properties, subject only to encumbrances described in the applicable title
insurance policies and other encumbrances permitted by the lender under the loan
documents (the 'HGI II Permitted Encumbrances'). The Originator is the named
insured under title insurance policies (which will be assigned to the Trust
Fund) which insure that each of the Mortgages constitutes a valid and
enforceable first lien on the HGI II Pool Properties, subject to certain
exceptions and exclusions from coverage set forth therein.
Payment Terms. The HGI II Pool Loan was originated by the Originator on
September 12, 1996. The HGI II Pool Loan matures on October 11, 2026 (the 'HGI
II Maturity Date') and bears interest at a fixed rate per annum equal to 9.06%
(the 'HGI II Current Interest Rate') through and including October 10, 2006 and
from and including October 11, 2006 (the 'HGI II Anticipated Repayment Date'),
at a fixed rate per annum (the 'HGI II Revised Interest Rate') equal to 2% plus
the greater of (a) the HGI II Current Interest Rate and (b) the yield as of the
HGI II Anticipated Repayment Date, calculated by linear interpolation of the
yields of U.S. Treasury Constant Maturities with terms (one longer and one
shorter) most nearly approximating that of noncallable U.S. Treasury obligations
having maturities as close as possible to the HGI II Maturity Date. However, as
described below, until the principal balance of the HGI II Pool Loan has been
reduced to zero, the HGI II Pool Borrower will only be required to pay interest
at the HGI II Current Interest Rate. The interest accrued at the excess of the
HGI II Revised Interest Rate over the HGI II Current Interest Rate will be
deferred and will bear interest at the HGI II Revised Interest Rate (such
accrued and deferred interest and interest thereon, the 'HGI II Excess
Interest'). Interest on the HGI II Pool Loan is calculated on the basis of the
actual number of days elapsed and a 360-day year.
Commencing on November 11, 1996, the HGI II Pool Loan requires 360 constant
monthly payments (the 'HGI II Monthly Debt Service Payment Amount') of principal
and interest of $803,280.95 (based on a 360-month amortization schedule and the
HGI II Current Interest Rate and recalculated following certain mandatory types
of prepayment of principal, including prepayments in connection with a casualty
or condemnation). Payment of the balance of the principal, if any, together with
all accrued and unpaid interest (including HGI II Excess Interest) is required
on the HGI II Maturity Date. Commencing on the first payment date after the HGI
II Anticipated Repayment Date, in addition to the HGI II Monthly Debt Service
Payment Amount, the HGI II Pool Borrower is required to apply 100% of HGI II
Excess Cash Flow in the following order of priority: first, to principal until
the principal balance of the HGI II Pool Loan is reduced to zero and second to
pay HGI II Excess Interest. 'HGI II Excess Cash Flow' is equal to the amount
remaining in the HGI II Cash Collateral Account (as defined below under '--Lock
Box') on each payment date after payments therefrom to fund certain reserve
funds and to pay the scheduled debt service payment for such payment date and,
after the HGI II Anticipated Repayment Date, to pay operating and capital
expenses set forth in an annual budget approved by the Servicer or otherwise
requested by the HGI II Pool Borrower and approved by the Servicer, all in the
order of priority described below under '--Lock Box.' The scheduled principal
balance of the HGI II Pool Loan as of the HGI II Anticipated Repayment Date will
be approximately $90,933,808.
After the occurrence and during the continuance of an event of default, the
entire outstanding principal balance of the HGI II Pool Loan will bear interest
at a per annum default rate equal to the lesser of (a) the
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maximum rate permitted by law and (b) prior to the HGI II Anticipated Repayment
Date, 13.06%, and on and after the HGI II Anticipated Repayment Date, the HGI II
Revised Interest Rate plus 4.00%.
Prepayment. Voluntary prepayment is prohibited under the HGI II Pool Loan
prior to the HGI II Anticipated Repayment Date. On and after the HGI II
Anticipated Repayment Date the HGI II Pool Borrower may repay the HGI II Pool
Loan in whole or part without payment of a yield maintenance premium. In
connection with any repayment in part, the HGI II Pool Borrower may transfer and
obtain the release of one or more of the HGI II Pool Properties; provided that,
among other conditions (a) the HGI II Pool Borrower pays (i) an amount equal to
125% of the Allocated Loan Amount of each Mortgaged Property to be released (the
'HGI II Release Price') and (ii) an amount with respect to each Mortgaged
Property to be released equal to the product of the HGI II Excess Interest and a
percentage equal to the HGI II Release Price divided by the principal amount of
the HGI II Pool Loan and (b) the HGI II Pool Borrower provides (i) evidence
satisfactory to the Servicer that following such release the HGI II Loan DSCR
will not be less than the greater of (A) the HGI II Loan DSCR at the date of
origination of the loan and (B) the HGI II Loan DSCR for the twelve full
calendar month period preceding the date of such release (before giving effect
to such release) and (ii) an officer's certificate stating that the principal
amount of the HGI II Pool Loan, after deducting the HGI II Release Price, does
not exceed 125% of the fair market values of the remaining HGI II Pool
Properties for federal income tax purposes. The HGI II Pool Borrower may satisfy
the condition relating to the HGI II Loan DSCR by increasing the HGI II Release
Price.
To the extent that the HGI II Pool Borrower is not permitted to apply any
insurance proceeds or condemnation awards to the restoration of the Mortgaged
Property under the HGI II Pool Loan, the Servicer will be entitled to apply such
proceeds to prepay the HGI II Pool Loan.
The Servicer may apply certain amounts to the prepayment of the HGI II Pool
Loan in the event of a default thereunder, as described below under '--Lock Box'
or upon a condemnation of or casualty with respect to the HGI II Pool
Properties, as described below under '--Condemnation and Casualty.' No yield
maintenance premium will be payable upon any prepayment or acceleration of the
HGI II Pool Loan in connection with a default, casualty or condemnation.
Release in Exchange for Substitute Collateral. The HGI II Pool Borrower is
permitted on any payment date after the second anniversary of the Closing Date
(but only before the HGI II Anticipated Repayment Date) to defease all or a
portion of the HGI II Pool Loan, provided that, among other conditions, the HGI
II Pool Borrower pays on such payment date (the 'HGI II Defeasance Date') (i)
all scheduled principal and interest payments on the HGI II Pool Loan then due
and (ii) the HGI II Defeasance Deposit (as defined below). In addition, the HGI
II Pool Borrower is required to deliver to the Servicer (a) a security agreement
granting the Trustee a first priority lien on the HGI II Defeasance Deposit and
the U.S. Obligations purchased with the HGI II Defeasance Deposit, (b) an
opinion of counsel for the HGI II Pool Borrower in form satisfactory to the
Servicer stating that the Trustee has a perfected security interest in the HGI
II Defeasance Deposit and a first priority perfected security interest in the
U.S. Obligations purchased therewith and (c) such other certificates, documents
or instruments as may reasonably be requested by the Servicer. In addition, it
is a condition to any such defeasance that the Servicer have received (and the
Servicer is required to make diligent efforts, upon the satisfaction by the HGI
II Pool Borrower of the other conditions to such defeasance, to obtain) written
confirmation from the Rating Agencies that such defeasance will not result in a
qualification, withdrawal or downgrading of the ratings of the Certificates in
effect prior to such defeasance. 'HGI II Defeasance Deposit' means an amount
equal to the total cost to be incurred in the purchase of direct noncallable
U.S. obligations or U.S.-guaranteed obligations providing payments on or prior
to, but as close as possible to (a) all scheduled payment dates after the HGI II
Defeasance Date through and including the HGI II Anticipated Repayment Date,
upon which principal and interest payments are required under the HGI II Pool
Loan and in amounts equal to the proportionate share, based on the amount of
principal defeased (which, in the case of a defeasance in full, will be 100%),
of scheduled payments due on such dates under the HGI II Pool Loan and (b) the
unpaid principal balance of the HGI II Pool Loan (or the allocable portion with
respect to a partial defeasance), together with accrued interest, on the HGI II
Anticipated Repayment Date.
Upon receipt of the HGI II Defeasance Deposit, the Servicer will purchase
U.S. Obligations on behalf of the HGI II Pool Borrower and, in the case of a
defeasance in whole, such U.S. Obligations will serve as the sole
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collateral for the payments of the amounts due under the HGI II Pool Loan. Upon
a deposit of U.S. Obligations, the HGI II Pool Borrower has the right to assign
the obligation to make payments under the HGI II Pool Loan with respect to the
principal amount of the HGI II Pool Loan that has been defeased to an entity
designated by the Servicer. If the HGI II Pool Borrower does assign such
obligations, the Servicer will cause such obligations to be assumed by a
special-purpose bankruptcy-remote entity.
In connection with the defeasance of the HGI II Pool Loan, the release of
one or more properties from the lien of the related Mortgage may be obtained,
provided no event of default exists, subject to the condition that: (a) if such
defeasance is in connection with a release of less than all of the HGI II Pool
Properties, the HGI II Pool Borrower provides (i) evidence satisfactory to the
Servicer that following such release the HGI II Loan DSCR will not be less than
the greater of (A) the HGI II Loan DSCR at the date of origination of the loan
and (B) the HGI II Loan DSCR for the twelve full calendar month period preceding
such release (before giving effect to such release) and (ii) an officer's
certificate stating the principal amount of the HGI II Pool Loan, after
deducting the HGI II Release Price, does not exceed 125% of the fair market
values of the remaining HGI II Pool Properties for federal income tax purposes,
(b) the HGI II Pool Borrower pays (i) if such defeasance is in connection with a
release of all the HGI II Pool Properties, all other sums due and payable under
the HGI II Pool Loan or (ii) if such defeasance is in connection with a release
in part, all other sums due and payable under the related Mortgage and (c) the
HGI II Pool Borrower defeases a principal portion of the HGI II Pool Loan equal
to (i) the HGI II Release Price of the HGI II Pool Property being released in
the case of the release of less than all the HGI II Pool Properties or (ii) an
amount equal to the HGI II Defeasance Deposit for a full defeasance in the case
of the release of all the HGI II Pool Properties. The HGI II Pool Borrower may
satisfy the condition relating to the HGI II Loan DSCR by increasing the HGI II
Release Price.
Reserves. Pursuant to the terms of the HGI II Pool Loan, the HGI II Pool
Borrower has established (i) a capital reserve fund to cover the cost of capital
expenditures, tenant improvements and leasing commissions incurred by the HGI II
Pool Borrower, which is to be funded monthly in an amount equal to approximately
$51,996, and (ii) a tax and insurance account to be funded monthly by an amount
equal to 1/12 of the aggregate insurance premiums and taxes in respect of the
HGI II Pool Properties payable in the succeeding twelve months. In addition,
$61,000 was reserved at closing to cover the cost of items requiring immediate
attention as set forth in the engineering report.
Lock Box. The HGI II Pool Borrower is obligated to cause all rents with
respect to the HGI II Pool Properties to be deposited directly by the tenants to
a collection account. The collection account will be held in the name of the HGI
II Pool Borrower, as debtor, and the lender, as secured party. Each calendar
month funds in the collection account in excess of the minimum balance required
(not to exceed $10,000) will be swept on a daily basis into a deposit account
(the 'HGI II Cash Collateral Account') held by the Servicer; provided that prior
to the HGI II Anticipated Repayment Date, such sweep will cease at such time in
each month as the Servicer notifies the bank maintaining the collection account
that sufficient funds have been deposited in the HGI II Cash Collateral Account
to provide for payment of debt service and the required reserve funds under the
HGI II Pool Loan.
The Servicer will cause the Trustee to distribute funds held in the HGI II
Cash Collateral Account in the following order: (a) to fund the tax and
insurance account, (b) to fund the HGI II Monthly Debt Service Payment Amount,
(c) to fund the capital reserve fund, (d) if after the HGI II Anticipated
Repayment Date, to pay operating expenses and capital expenditures set forth in
the approved annual budget (as described below under '-- Financial Covenants and
Reporting') or otherwise approved by the Servicer, (e) if after the HGI II
Anticipated Repayment Date or at any time that there is a continuing event of
default under the HGI II Pool Loan, to pay principal until the outstanding
principal balance of the HGI II Pool Loan has been reduced to zero, (f) if after
the Anticipated Repayment Date, to pay the HGI II Excess Interest and (g) to the
HGI II Pool Borrower.
Transfer of Property and Interest in Borrower; Encumbrance. The HGI II
Pool Borrower is permitted to transfer an HGI II Pool Property only following a
release in connection with a defeasance (as described above under '--Release in
Exchange for Substitute Collateral'), or, on and after the HGI II Anticipated
Repayment Date, a prepayment (as described above under '--Prepayment') of a
portion of the HGI II Pool Loan. The HGI II Pool Borrower may not encumber the
HGI II Pool Properties, other than by the HGI II Permitted Encumbrances. The HGI
II Pool Loan permits transfers or encumbrances of the partnership interests in
the HGI II
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Pool Borrower (which have been pledged to secure the HGI II Pool Loan), as long
as (i) the transferee enters into a pledge of its partnership interest in
substantially the same form as the pledge entered into by the transferor, (ii)
no more than 49.9% of the limited partnership interests are transferred in the
aggregate, (iii) no event of default exists under the HGI II Pool Loan and (iv)
if such transfer is to an affiliate of the HGI II Pool Borrower, Second HGI,
Horizon/Glen or the HGI REIT that is not covered by the non-consolidation
opinion delivered on the Closing Date, the HGI II Pool Borrower provides written
confirmation from each Rating Agency that the transfer will not result in a
downgrade, qualification or withdrawal of the then-current rating assigned to
any class of the Certificates. However, the HGI II Pool Loan provides that no
person or entity may be admitted as a partner of the HGI II Pool Borrower unless
(i) in the case of the admission of a new general partner, (w) each Rating
Agency confirms in writing that such person's admission will not result in a
downgrade, qualification or withdrawal of the then current ratings on any class
of Certificates, (x) the new partner is a single purpose entity, (y) the new
partner confirms to the Trustee in writing the representations and covenants
regarding single purpose entity status set forth in the HGI II Pool Loan and (z)
a nonconsolidation opinion acceptable to the Rating Agencies is delivered to the
Rating Agencies and the Servicer and (ii) in the case of admission of a new
limited partner, if any person is admitted as a limited partner owning 49% or
more of the partnership interests, the Servicer and each Rating Agency confirms
in writing that such person's admission will not result in a downgrade,
qualification or withdrawal of the then current ratings on any class of
Certificates and a nonconsolidation opinion acceptable to the Rating Agencies is
delivered to the Rating Agencies.
Insurance. The HGI II Pool Borrower is required to maintain (a) during any
period of repair or restoration in connection with a casualty or condemnation
causing loss or damage in excess of $500,000, builder's risk insurance for the
full cost of construction, (b) insurance with respect to the improvements,
equipment and inventory against any peril included within the classification
'All Risks of Physical Loss' with extended coverage insurance in an amount equal
to at least 100% of the full replacement cost of the improvements, equipment and
inventory, (c) comprehensive general liability insurance in such amounts as are
generally required by institutional lenders for comparable properties but in no
event with limits less than $1,000,000 per occurrence with combined single limit
coverage for bodily injury or property damage and excess (umbrella) liability
coverage of not less than $50,000,000 per occurrence, (d) statutory workers
compensation insurance, (e) rental loss and/or business interruption insurance
in an amount equal to eighteen months estimated gross revenue, (f) flood or
earthquake insurance with respect to any portion of any of the HGI II Pool
Properties that is located within a federally designated flood or earthquake
hazard zone, to the extent that the occurrence of a flood or earthquake with
respect to such portion of such HGI II Pool Property would have a material
adverse effect on such HGI II Pool Property as a whole, (g) machinery and boiler
explosion and sprinkler leakage insurance and (h) such other insurance as is
reasonably requested by the Servicer provided such insurance is of the kind from
time to time customarily insured against and in such amounts as are generally
required by institutional lenders for properties comparable to the applicable
property. Any such insurance may be effected under a blanket policy so long as,
except in the case of public liability insurance, the portion of the total
policy that is allocated to each of the HGI II Pool Properties is not less than
the required amount of such insurance. The HGI II Pool Loan requires the HGI II
Pool Borrower to obtain the insurance described above from insurance carriers
having claims paying abilities rated not less than 'AA' by S&P. In addition,
such insurance must be provided by insurers rated not less than 'AA' or its
equivalent by any one of the other Rating Agencies; provided that (i) the
insurance described in clauses (b) and (e) above may be provided by a syndicate
as to which at least 60% (if there are five or more members of the syndicate) or
at least 75% of the coverage (if there are four or fewer members of the
syndicate) of the coverage is rated 'AA' or better by either such Rating Agency
and the remainder of the coverage is rated 'A' or better by either such Rating
Agency and (ii) worker's compensation insurance may be provided by the
applicable state workers' compensation fund. Hartford Fire Insurance Company,
the property insurer for the HGI II Pool Properties, has a claims paying ability
rating of 'AA' by S&P and a rating of 'A+/XV' by Best's. The HGI II Pool
Properties located in Lake Elsinore, Tracy and Pismo Beach are each located in
an earthquake zone and the HGI Pool Borrower has obtained separate earthquake
insurance for these properties. See 'Risk Factors and Other
Considerations--Availability of Earthquake, Flood and Other Insurance.'
Condemnation and Casualty. The Servicer is obligated to make casualty
insurance or condemnation proceeds available for the restoration of the HGI II
Pool Properties if the following conditions, among others, are met: (i) the
property can be restored to materially the same condition and utility as, and
having a value equal to or
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greater than, that prior to the casualty or condemnation, and such restoration
shall be capable of being completed prior to October 11, 2005, (ii) the HGI II
Pool Borrower shall demonstrate to the Servicer's reasonable satisfaction its
ability to pay its obligations under the HGI II Pool Loan during the restoration
period (including the use of rental loss and business interruption insurance),
(iii) the cost of the repair, restoration and replacement shall not exceed 50%
of the replacement cost of the improvements, inventory and equipment, (iv) the
HGI II Pool Borrower shall demonstrate to the Servicer's reasonable satisfaction
that the property will have an occupancy rate of at least 75% upon completion of
the restoration period, (v) within 60 days after the casualty or condemnation
the HGI II Pool Borrower shall have given notice of its election to restore,
(vi) within 60 days following the date of such notice, and prior to any proceeds
being disbursed to it, the HGI II Pool Borrower shall have provided to the
Servicer such additional funds or other security (if any) as, in the Servicer's
reasonable judgment, are necessary to complete the restoration, (vii) if loss or
damage exceeds $500,000, within 60 days following the date of such notice, and
prior to any proceeds being disbursed to it, the HGI II Pool Borrower shall have
provided to the Servicer (1) complete plans and specifications for restoration,
(2) fixed price or guaranteed maximum cost construction contracts for completion
of the restoration in accordance with such plans, (3) builder's risk insurance
for the full cost of construction with the Trustee named as payee and (4) all
permits needed for the restoration, (viii) the HGI II Pool Borrower shall
commence such work within 90 days after the casualty or condemnation and
diligently pursue such work to completion and (ix) the Trustee shall have a
first priority security interest in all building materials and completed
restoration work. If loss or damage exceeds $500,000, (i) each disbursement by
the Servicer of insurance or condemnation proceeds shall be funded subject to
conditions and in accordance with disbursement procedures which a commercial
construction lender would typically establish in the exercise of sound lending
practices and shall be made only upon receipt of disbursement requests signed by
the HGI II Pool Borrower and its architect and general contractor with
appropriate invoices, lien waivers and other documents reasonably required by
the Servicer and (ii) the Servicer may retain an independent inspector to review
and approve plans and specifications and completed construction and to approve
all requests for disbursement, and the reasonable fees and expenses of such
independent inspector shall be paid by the HGI II Pool Borrower. Notwithstanding
the foregoing, if the insurance proceeds are less than $500,000, so long as
there is no event of default under the HGI II Pool Loan, the Servicer shall
promptly make the net insurance proceeds available to the HGI II Pool Borrower
for restoration.
To the extent that the proceeds of any casualty or condemnation are not
required or used for restoration, or in the event the HGI II Pool Borrower fails
to timely elect to restore or fails to meet the conditions for restoration, upon
five business days notice to the HGI II Pool Borrower and the HGI II Pool
Borrower's failure to cure such matter within such five business day period, the
Servicer is required to apply such proceeds to prepay a portion of the HGI II
Pool Loan in an amount equal to the HGI II Release Price for the related HGI II
Pool Property together with interest thereon. Such prepayment will not be
accompanied by the payment of a yield maintenance premium. Any excess casualty
or condemnation proceeds over the amount required to be applied to the
prepayment of the HGI II Pool Loan as described above is required to be released
to the Borrower.
Financial Covenants and Reporting. The HGI II Pool Borrower is required to
furnish to the Servicer: (a) within 90 days after the end of each fiscal year,
financial and operating statements for the HGI II Pool Borrower audited by Conn
Geneva or another certified public accounting firm reasonably acceptable to the
Servicer, together with a certificate of the HGI II Pool Borrower stating that,
to the best of its knowledge, such financial statements present fairly in all
material respects the financial condition and results of operations of the HGI
II Pool Borrower, (b) within 45 days after the end of each fiscal quarter,
unaudited operating and financial statements with respect to the HGI II Pool
Borrower for that quarter (in the case of the operating statements, prepared on
an accrual basis and including a schedule showing actual total cash receipts),
together with an officer's certificate and certified updated occupancy
statements, rent rolls and tenant sales reports for each property, (c) within 15
days following the end of a month, property operating statements (prepared on an
accrual basis and including a schedule showing actual cash receipts), certified
by the HGI II Pool Borrower, (d) within 15 business days after request, such
other information regarding any Plan and any reports or other information
required to be filed under ERISA as may be reasonably requested, and (e) within
15 business days after request, (which request may be made not more than once a
quarter) such other information regarding the operation of the HGI II Pool
Properties and the financial affairs of the HGI II Pool Borrower as the Servicer
may reasonably request; provided, however, that any such information furnished
at the Servicer's request that is reasonably considered confidential shall be
delivered only upon receipt of a confidentiality agreement reasonably acceptable
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to the HGI II Pool Borrower. In addition, the HGI II Pool Loan provides that the
Originator, Trustee, Servicer and Rating Agencies shall keep the foregoing
confidential information, rent rolls, and per square foot sales figures
confidential. Such information may be available to any private Certificateholder
that signs a confidentiality agreement and may be available to all
Certificateholders if the HGI II Loan DSCR is less than 1.25 unless within five
business days after notice the HGI II Pool Borrower deposits with the Servicer
U.S. Obligations the payments from which will increase the HGI II Loan DSCR to
1.25. After the HGI II Anticipated Repayment Date, the HGI II Pool Borrower is
required to submit an annual budget to the Servicer for the Servicer's approval.
Operating expenses and capital expenditures (to the extent not to be paid from
the capital reserve fund) for the HGI II Pool Properties will then be paid in
accordance with such approved annual budget.
The Properties. The Mortgaged Properties securing the HGI II Pool Loan are
five factory outlet centers containing an aggregate of approximately 1,248,107
square feet of GLA.
Chesapeake Village Outlet Center. This outlet center is located on
approximately 24 acres located at the intersection of Routes 50 and 301 and
Chesapeake Village Road in Queenstown, Maryland. Queenstown, Maryland is located
approximately 25 miles east of Annapolis, Maryland on the eastern shore of the
Chesapeake Bay. The center contains 219,307 square feet of GLA, and was built in
five phases: Phase I, comprising 67,283 square feet of GLA in 1989, Phase II,
comprising 54,940 square feet of GLA, in 1990, Phase III, comprising 15,600
square feet of GLA, in 1991, Phase IV, comprising 13,640 square feet of GLA, in
1992 and Phase V, comprising 67,804 square feet of GLA, in 1993. As of September
13, 1996, the center was approximately 100% occupied. Tenants include Vanity
Fair, Nike, Springmaid-Wamsutta, Chesapeake Gourmet, Bass Company Store and Liz
Claiborne. The center contains parking spaces for approximately 1,284 vehicles.
Based on an appraisal dated September 30, 1996, the appraised value of the
property was $30,000,000. Overall sales for the property were approximately $269
per square foot for the twelve-month period ending July 31, 1996 and overall
occupancy costs were approximately 6% of such sales.
Lake Elsinore Outlet Center. This outlet center is located on
approximately 35 acres on Interstate 15 in Lake Elsinore, Riverside County,
California. Lake Elsinore, California is located approximately 75 miles east of
Los Angeles, California and approximately 74 miles north of San Diego,
California. The center contains 368,785 square feet of GLA, and was built in
four phases: Phase I, comprising 127,850 square feet of GLA, in 1991, Phase II,
comprising 81,610 square feet of GLA, in 1992, Phase III, comprising 82,630
square feet of GLA, in 1993 and Phase IV, comprising 76,695 square feet of GLA,
in 1995. As of September 13, 1996, the center was approximately 91% occupied.
Tenants include Liz Claiborne, London Fog, Nike, Bass Company Store, Mikasa
Factory Store, ESPRIT, Levi's Outlet, Stroud's Linen, Sony, Oshkosh, Jordache
and Bugle Boy. The center contains parking spaces for approximately 2,216
vehicles. Based on an appraisal dated August 20, 1996, the appraised value of
the property was $58,300,000. Overall sales for the property were $232 per
square foot for the twelve-month period ending July 31, 1996 and occupancy costs
were approximately 10% of such sales.
Pismo Beach Outlet Center. This outlet center is located on approximately
14.9 acres south of Highway 101, in the city of Pismo Beach in San Luis Obispo
County, California. Pismo Beach is approximately 20 miles north of Santa Maria
and 10 miles south of San Luis Obispo. The center contains 147,560 square feet
of GLA, and consists of two, single story buildings constructed in 1994. As of
September 13, 1996, the center was approximately 96% occupied. Tenants include
Levi's Outlet, Bass, Mikasa Factory Store, Designer Labels for Less and Bugle
Boy. Based on an appraisal dated August 22, 1996, the appraised value of the
property was $22,800,000. The center contains parking spaces for approximately
712 vehicles. Overall sales for the property were $190 per square foot for the
twelve-month period ending July 31, 1996 and overall occupancy costs were
approximately 12% of such sales.
Southwest Outlet Center. This outlet center is located on approximately 43
acres east of Interstate Highway 35, between State Highway 22/171 and
Farm-to-Market 286 in Hillsboro, Texas. Hillsboro is located approximately 65
miles southwest of Dallas, Texas, approximately 55 miles southeast of Fort
Worth, Texas and approximately 30 miles north of Waco, Texas. The center
contains 359,455 square feet of GLA, and was built in three phases: Phase I,
comprising 95,495 square feet, in 1989, Phase II, comprising 100,600 square feet
of GLA, in 1991, and Phase III, comprising 163,160 square feet of GLA, in 1993.
As of August 9, 1996, the center was approximately 95% occupied. Tenants include
Nike, Liz Claiborne, Eddie Bauer, Guess, Mikasa Factory Store,
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Bugle Boy, Reebok Factory Store, J. Crew, Saks Fifth Avenue and Gap Outlet. The
center contains parking spaces for approximately 2,278 vehicles. Based on an
appraisal dated August 21, 1996, the appraised value of the property was
$46,500,000. Overall sales for the property were $220 per square foot for the
twelve-month period ending July 31, 1996 and overall occupancy costs were
approximately 8% of such sales.
Tracy Outlet Center. This outlet center is located on approximately 20
acres on the north side of Pescadero Avenue, east of MacArthur Drive in Tracy,
California. Tracy, California is located approximately 60 miles east of San
Francisco and 68 miles south of Sacramento. The center contains 153,000 square
feet of GLA and was built in 1994. As of August 13, 1996, the center was
approximately 98% occupied. Tenants include Liz Claiborne, Bass Company Store,
Reebok Factory Store, Stroud's Linen, Levi's Outlet and Mikasa Factory Store.
The center contains parking spaces for approximately 1,010 vehicles. Based on an
appraisal dated August 22, 1996, the appraised value of the property was
$21,400,000. Overall sales for the property were $174 per square foot for the
twelve-month period ending July 31, 1996 and occupancy costs were approximately
11% of such sales.
See 'Risk Factors and Other Special Considerations--Risks Relating to
Factory Outlet Centers.'
Property Management. Each HGI II Pool Property is managed by Horizon/Glen,
the sole limited partner of the HGI II Pool Borrower (solely in its capacity as
manager, the 'HGI II Manager'), pursuant to a separate property management
agreement (each, an 'HGI II Management Agreement'), between the HGI II Manager
and the HGI II Pool Borrower. Horizon/Glen, the HGI II Manager, is the operating
partnership of the HGI REIT. As of September 30, 1996 it owned and operated
(directly or through affiliates) 37 factory outlet centers (including the HGI II
Pool Properties) having over 9,000,000 square feet of GLA.
The HGI II Manager is responsible for the management of the HGI II Pool
Properties. Under the HGI II Management Agreements, the HGI II Manager is
entitled to (a) a monthly management fee equal to 4% of gross revenues of the
HGI II Pool Properties, minus the HGI II Administrative Fee (as defined below),
plus (b) reimbursement of expenses approved in advance by the HGI II Pool
Borrower. The HGI II Manager is also entitled to charge and collect the
following items (collectively the 'HGI II Administrative Fee'), but only to the
extent 'passed through' to and paid by tenants: (i) a reasonable common area
maintenance administration fee not to exceed 15% of common area maintenance
expenses, (ii) a reasonable marketing administration fee not to exceed 15% of
marketing and promotional expenses, and (iii) a reasonable advertising agency
fee not to exceed 15% of placement costs of all billboard, radio, magazine and
television advertisements.
The HGI II Management Agreement provides that the HGI II Manager will
manage the properties for an initial term of five years commencing on the date
of origination of the HGI II Pool Loan. Unless otherwise terminated, the HGI II
Management Agreement will automatically be extended for an additional three year
term; provided that the HGI II Pool Borrower may elect to terminate such
agreement as of the end of the initial term by notifying the HGI II Manager at
least 30 days prior to the end of such term. The HGI II Pool Borrower may
terminate the HGI II Management Agreement at any time without cause by giving
the HGI II Manager not less than 30 days prior notice and paying all fees,
charges and other amounts then owing under such agreement. The HGI II Manager
may terminate the agreement in the event of a default by the HGI II Pool
Borrower which is not cured within 15 days after the HGI II Pool Borrower's and
the Servicer's receipt of notice of such default or at any time by giving the
HGI II Pool Borrower not less than 30 days prior notice, and in either such case
the HGI II Manager shall be entitled to receive all fees, charges and other
amounts then owing under such agreement.
Pursuant to the Manager's Consent and Subordination of Management Agreement
with respect to each HGI II Management Agreement among the Originator, as
lender, the HGI II Pool Borrower and the HGI II Manager (each, an 'HGI II
Manager's Subordination'), the Servicer will have the right to terminate the
related HGI II Management Agreement by giving the HGI II Manager 30 days prior
written notice (i) upon the occurrence of an event of default under the HGI II
Pool Loan, (ii) in the event that the HGI II Loan DSCR is less than 1.15 (unless
the HGI II Pool Borrower deposits with the Servicer U.S. Obligations to defease
the loan such that the resulting HGI II Loan DSCR will be 1.15 or higher) or
(iii) if a tenant is moved from any of the HGI II Pool Properties to an adjacent
outlet center owned by an affiliate of the HGI II Pool Borrower (unless (1) the
HGI II Pool Borrower delivers a certification and supporting evidence that (A)
such HGI II Pool Property has an occupancy rate of at least 90% on a pro forma
basis (excluding the lease of the tenant being moved but including any
noncancelable replacement lease) and (B) the HGI II Loan DSCR for the applicable
HGI II Pool Property and for the HGI II
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Pool Properties as a whole is not less than the HGI II Loan DSCR at origination
of the HGI II Pool Loan, or (2) the Servicer consents to such transfer).
Pursuant to the HGI II Manager's Subordinations, the HGI II Manager has
agreed (i) to such termination rights of the Servicer, (ii) that all liens,
rights and interests owned, claimed or held by the HGI II Manager in and to any
of the HGI II Pool Properties are and will be, in all respects, subordinate and
inferior to the liens and security interest created by the HGI II Pool Loan;
provided that such subordination shall not affect the HGI II Manager's rights or
remedies against the HGI II Pool Borrower under the HGI II Management Agreement
for nonpayment of its compensation, (iii) that the HGI II Manager will not
terminate the HGI II Management Agreement without giving the Servicer the same
notice and the same rights to cure (if any) as the HGI II Pool Borrower and (iv)
that the HGI II Manager will not amend the HGI II Management Agreement without
the Servicer's consent. The HGI II Pool Loan prohibits the HGI II Pool Borrower
from terminating, reducing rents under or shortening the term of any lease
(except in connection with a tenant default) unless such action (taking into
account the planned alternative use of the affected space) does not materially
adversely affect the value of any HGI II Pool Property.
The 'HGI II Loan DSCR' as of any date is a ratio, the numerator of which is
the net operating income (determined as set forth in the HGI II Pool Loan) from
the HGI II Pool Properties (not including any HGI II Pool Property that has been
released from the lien of the related Mortgage) for the twelve full calendar
month period preceding such date and the denominator of which is the aggregate
of the payments of principal and interest (excluding for purposes of such
calculations any payments that are covered by U.S. obligations as described
above) that would be due and payable under the HGI II Pool Loan during such
period calculated using a debt constant of 9.71% per annum.
MHP II POOL LOAN AND PROPERTIES
The Loan. The MHP II Pool Loan has a principal balance as of the Cut-off
Date of $266,000,000 and is evidenced by three separate notes issued by two
related borrowers. The first two Notes (the 'MHPLP Notes'), having principal
balances of $195,405,904 and $27,094,096, respectively, were issued by Marriott
Hotel Properties II Limited Partnership (the 'MHPLP Borrower') and are secured
by (a) first Mortgages encumbering three full service hotels (the 'MHPLP
Properties') located in New Orleans, Louisiana (the 'Louisiana Property'), San
Antonio, Texas (the 'San Antonio Property') and San Ramon, California (the 'San
Ramon Property') and (b) a pledge of the 50% limited partnership interest in the
Santa Clara Borrower (as defined below) owned by the MHPLP Borrower. The third
Note (the 'Santa Clara Note,' and together with the MHPLP Notes, the 'MHP II
Pool Notes'), having a principal balance of $43,500,000, was issued jointly by
Santa Clara Marriott Hotel Limited Partnership (the 'Santa Clara Borrower,' and
together with the MHPLP Borrower, the 'MHP II Pool Borrowers') and the MHPLP
Borrower and is secured by (a) a first Mortgage encumbering a full service hotel
owned by the Santa Clara Borrower (the 'Santa Clara Property,' and together with
the MHPLP Properties, the 'MHP II Pool Properties') located in Santa Clara,
California and (b) second Mortgages on the MHPLP Properties. All of the MHP II
Pool Notes are cross-defaulted, but have only 'one-way' cross-collaterization in
that the MHPLP Properties secure the Santa Clara Note, but the Santa Clara
Property does not secure the MHPLP Notes.
The Borrower. The MHPLP Borrower and the Santa Clara Borrower are each
limited partnerships limited in their respective purposes to owning, operating
and managing the MHPLP Properties and the Santa Clara Property, respectively.
The MHPLP Borrower has no material assets other than the MHPLP Properties and
related interests and a 50% limited partnership interest in the Santa Clara
Borrower granted under the limited partnership agreement of the Santa Clara
Borrower (the 'Santa Clara Partnership Agreement'). The Santa Clara Borrower has
no material assets other than the Santa Clara Property and related interests.
The general partner of both the MHPLP Borrower and the Santa Clara Borrower is
Marriott MHP Two Corporation (the 'MHP II GP'), a Delaware corporation, which is
limited in its purposes to acting as general partner of the MHPLP Borrower and
the Santa Clara Borrower. As of September 23, 1996, the MHPLP Borrower had
approximately 420 limited partners (the 'MHPLP LPs'). Such limited partners are
entitled to receive semi-annual partnership distributions based on net cash
flow, if available, after payment of debt service and reserves. The MHPLP LPs
include MHP II Acquisition Corp. ('MHP II Acquisition'), which as of September
23, 1996 held approximately 51.4% of the limited partnership units of the MHPLP
Borrower. MHP II Acquisition is a direct, wholly-owned
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subsidiary of Host Marriott Corporation, a Delaware corporation ('Host
Marriott'). The limited partners of the Santa Clara Borrower are the MHPLP
Borrower and HMH Properties, Inc. ('HMH'), a Delaware corporation and a
wholly-owned indirect subsidiary of Host Marriott. The MHP II GP is a
wholly-owned indirect subsidiary of Host Marriott. Marriott Hotel Services,
Inc., which is the property manager for the MHP II Pool Properties (the 'MHP II
Manager'), is a wholly-owned subsidiary of Marriott International, Inc. ('MII')
and is not affiliated with Host Marriott or the MHP II Pool Borrowers.
Both of the MHP II Pool Borrowers were formed for a significant period
prior to the origination of the MHP II Pool Loan. As a result, while each such
borrower has not been engaged in any business other than owning and operating
the related MHP II Pool Properties, it may be subject to certain liabilities to
which a newly-formed entity might not be subject. In addition, the
organizational documents of each of the MHP II Pool Borrowers lack some of
protective terms and covenants typically associated with special purpose
entities. For example, certain limited intercompany loans are permitted between
the MHP II Pool Borrowers and their affiliates, none of the customary
restrictions on transfers of the partnership interests in the borrower are
present in the related limited partnership agreement, and under certain
circumstances, the MHP II Pool Borrowers could be dissolved.
Security. The MHP II Pool Notes are non-recourse notes, and, subject to
exceptions for fraud, material misrepresentation, breach of any provision of a
related environmental indemnity agreement or misappropriation of funds, neither
of the MHP II Pool Borrowers nor any of their respective affiliates is
personally liable for payment thereof. The MHPLP Notes are secured as described
above by the leasehold estate, or in the case of the Louisiana Property, the fee
estate, of the MHPLP Borrower in the MHPLP Properties, certain collateral
therefor (including an assignment of leases and rents and the funds in certain
accounts), and a pledge of 50% limited partnership interest of the MHPLP
Borrower in the Santa Clara Borrower. The Santa Clara Note is secured as
described above by the leasehold estate of the Santa Clara Borrower in the Santa
Clara Property and the leasehold estate, or in the case of the Louisiana
Property, the fee estate, of the MHPLP Borrower in the MHPLP Properties and
certain collateral therefor (including an assignment of leases and rents and the
funds in certain accounts). Each of the MHP II Pool Borrowers has agreed to
indemnify the Originator and its successors and assigns with respect to the
liabilities arising from and in connection with certain environmental matters.
Each of the MHP II Pool Borrowers has represented that it owns good, marketable
and insurable fee simple title to (or leasehold interest in) the MHP II Pool
Properties owned by it, subject only to encumbrances permitted by the lender.
The Originator is the named insured under title insurance policies (which will
be assigned to the Trust Fund) which insure that each of the related Mortgages
constitutes a valid and enforceable first lien on the applicable MHP II Pool
Properties, subject to certain exceptions and exclusions from coverage set forth
therein.
Payment Terms. The MHP II Pool Loan was originated by the Originator on
September 23, 1996. Each of the MHP II Pool Notes matures on October 11, 2017
(the 'MHP II Maturity Date') and bears interest at (a) a fixed rate per annum
equal to 8.22% (the 'MHP II Current Interest Rate') through October 10, 2007,
and (b) from October 11, 2007 (the 'MHP II Anticipated Repayment Date'), at a
fixed rate per annum (the 'MHP II Revised Interest Rate') equal to the greater
of (i) 10.22% and (ii) the yield as of the MHP II Anticipated Repayment Date,
calculated by linear interpolation of the yields of U.S. Treasury Constant
Maturities with terms (one longer and one shorter) most nearly approximating
that of noncallable U.S. Treasury obligations having maturities as close as
possible to the tenth anniversary of the MHP II Anticipated Repayment Date, plus
2.0%. The interest accrued at the excess of the MHP II Revised Interest Rate
over the MHP II Current Interest Rate will be deferred until the MHP II Maturity
Date (such accrued and deferred interest and interest thereon at the MHP II
Revised Interest Rate, the 'MHP II Excess Interest'). Interest on the MHP II
Pool Notes is calculated on the basis of the actual number of days elapsed and a
360-day year.
The MHP II Pool Notes require payments of interest only through October 11,
1997. Commencing on November 11, 1997, each of the MHP II Pool Notes requires
240 constant monthly payments of principal and interest (based on a 240-month
amortization schedule and the MHP II Current Interest Rate). The amounts of the
monthly payments of principal and interest on the two MHPLP Notes are
$1,661,308.90 and $230,349.55, respectively (combined, the 'MHPLP Monthly Debt
Service Payment Amount') and the amount of the monthly payment of principal and
interest on the Santa Clara Note is $369,829.85 (the 'Santa Clara Monthly Debt
Service Payment Amount,' and together with the 'MHPLP Monthly Debt Service
Payment Amount,' the 'MHP II Monthly Debt Service Payment Amount'). Payment of
the balance of the principal, if any, together
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with all accrued and unpaid interest (including the MHP II Excess Interest on
each of the MHP II Pool Notes) is required on the MHP II Maturity Date.
Commencing on the first payment date after the MHP II Anticipated Repayment
Date and continuing on each monthly payment date thereafter, in addition to the
MHP II Monthly Debt Service Payments, the MHP II Pool Borrowers are required to
pay 100% of MHPLP Excess Cash Flow (as defined below) and the share of the MHPLP
Borrower (the 'MHP Share') of Santa Clara Excess Cash Flow for the MHP II
Accounting Periods (as defined below) ending during the MHP II Debt Service
Period (as defined below) relating to the payment date in the following order of
priority: (a) to pay the outstanding principal balance of the MHP II Pool Notes,
pro rata, until such principal is reduced to zero and (b) to pay the MHP II
Excess Interest on the MHP II Pool Notes, pro rata. 'MHPLP Excess Cash Flow'
means operating profit (calculated as provided in the loan documents relating to
the MHPLP Notes, the 'MHPLP Operating Profit') from the MHPLP Properties after
application of funds (a) to amounts required to be paid into the ground lease
escrow fund with respect to the MHPLP Properties as described below under
'--Reserves,' (b) to pay certain amounts to the Servicer, (c) to pay the MHPLP
Monthly Debt Service Payment Amount, (d) to pay any other amounts then due to
the lender with respect to the MHPLP Notes, (e) if then required, to fund any
amounts to be paid into the tax and insurance escrow fund with respect to the
MHPLP Properties as described below under '--Reserves,' (f) to fund any
shortfall in the debt service reserve fund with respect to the MHPLP Notes as
described below under '--Reserves,' (g) to fund any amounts required to be paid
into the capital expenditure/FF&E reserve fund with respect to the MHPLP
Properties, as described below under '--Reserves,' (h) to fund any deficiencies
for such payment date in items corresponding to items (a) through (g) with
respect to the Santa Clara Note and the Santa Clara Property, (i) to pay amounts
due (amortized on a five-year basis) in respect of any subordinated loans
advanced to the MHPLP Borrower by the MHP II Manager ('MHPLP Manager Loans'),
(j) to pay (1) certain incentive management fees earned in the current fiscal
year with respect to the MHPLP Properties and (2) certain deferred incentive
management fees incurred prior to the MHP II Anticipated Repayment Date with
respect to the Santa Clara Property and the San Ramon Property, payable in that
order, (k) to repay any subordinated loans (amortized on a five-year basis) made
by the MHP II GP and HMH for the payment of Santa Clara Monthly Debt Service
Payment Amounts or for funding the debt service reserve account with respect to
the Santa Clara Note ('Santa Clara Partner Loans') and (l) to pay for certain
repairs, alterations, improvements, renewals or replacements with respect to the
MHPLP Properties ('MHPLP Additional Repair Amounts').
'Santa Clara Excess Cash Flow' means operating profit (calculated as
provided in the loan documents relating to the Santa Clara Note, the 'Santa
Clara Operating Profit' and together with the MHPLP Operating Profit, the 'MHP
II Operating Profit') from the Santa Clara Property after application of funds
(a) to amounts required to be paid into the ground lease escrow fund with
respect to the Santa Clara Property as described below under '--Reserves,' (b)
to pay certain amounts to the Servicer, (c) to pay the Santa Clara Monthly Debt
Service Payment Amount, (d) to pay any other amounts then due to the lender with
respect to the Santa Clara Notes, (e) if then required, to amounts to be paid
into the tax and insurance escrow fund with respect to the Santa Clara Property
as described below under '--Reserves,' (f) to fund any shortfall in the debt
service reserve fund with respect to the Santa Clara Notes as described below
under '--Reserves,' (g) to fund any amounts required to be paid into the capital
expenditure/FF&E reserve fund with respect to the Santa Clara Property, as
described below under '--Reserves,' (h) to fund any deficiencies for such
payment date in items corresponding to items (a) through (g) with respect to the
MHPLP Notes and the MHPLP Properties, but only to the extent of the funds that
would otherwise be distributable to the MHPLP Borrower under the Santa Clara
Partnership Agreement, excluding for the purpose of calculating such funds
repayment of the Santa Clara Partner Loans, (i) to pay amounts due (amortized on
a five-year basis) in respect of any subordinated loans to the Santa Clara
Borrower by the MHP II Manager ('Santa Clara Manager Loans'), (j) to pay (1)
certain incentive management fees earned in the current fiscal year with respect
to the Santa Clara Property and (2) certain deferred incentive management fees
incurred prior to the Anticipated Repayment Date with respect to the Santa Clara
Property, payable in that order, (k) to repay any Santa Clara Partner Loans from
the MHP Share and (l) to pay for certain repairs, alterations, improvements,
renewals or replacements with respect to the Santa Clara Property ('Santa Clara
Additional Repair Amounts').
A 'MHP II Accounting Period' generally means each period of four
consecutive weeks having the same beginning and ending dates as the MHP II
Manager's corresponding four week accounting period. A 'MHP II
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Debt Service Period' means the period from and including the eleventh day of the
month immediately preceding each respective payment date to the tenth day of the
month in which such payment date occurs. The scheduled principal balance of the
MHP II Pool Loan as of the MHP II Anticipated Repayment Date is approximately
$188,990,239.
Upon the occurrence of an event of default, the entire unpaid principal sum
and any other amounts, including interest, under the MHP II Pool Notes will bear
interest at a default rate equal to the lesser of (a) the maximum rate permitted
by applicable law and (b) the then applicable interest rate on the MHP II Pool
Loan (i.e., the MHP II Current Interest Rate or the MHP II Revised Interest
Rate) plus 2%.
The MHP II Pool Borrower has agreed to pay a portion of the Rating Agency
surveillance fees relating to the Certificates.
Prepayment. Voluntary prepayment is prohibited under the MHP II Pool Loan
prior to the MHP II Anticipated Repayment Date. Thereafter, the MHP II Pool Loan
may be voluntarily prepaid in whole or in part without payment of a yield
maintenance premium. Principal prepayments on the MHP II Pool Notes may occur on
payment dates after the MHP II Anticipated Repayment Date through application of
the MHPLP Excess Cash Flow and the MHP Share of Santa Clara Excess Cash Flow, as
described above under '--Payment Terms.' If an MHP II Pool Borrower prepays any
portion of the principal balance of the related MHP II Pool Note(s) on or after
the MHP II Anticipated Repayment Date (other than through the application of
MHPLP Excess Cash Flow or the MHP Share of Santa Clara Excess Cash Flow, as
applicable), the related MHP II Monthly Debt Service Payment Amount will be
reduced proportionately.
In the event of a prepayment in part of the related MHP II Pool Notes as
the result of the voluntary sale of a MHP II Pool Property after the MHP II
Anticipated Repayment Date, the applicable MHP II Pool Borrower may obtain the
release of the related MHP II Pool Property if (a) no event of default has
occurred or is continuing, (b) such MHP II Pool Borrower has paid all accrued
and unpaid interest and all other sums due on the related MHP II Pool Note(s)
through and including such payment date and (c) except if such prepayment is
being made in connection with a casualty or condemnation, (I) if a MHPLP
Property is to be released, the MHPLP Borrower has paid an amount equal to 125%
of the Allocated Loan Amount of the MHPLP Property to be released and (II) if
the Santa Clara Property is to be released, the Santa Clara Borrower has paid an
amount equal to the lesser of (A) 125% of the Allocated Loan Amount of the Santa
Clara Property and (B) the sum of the Allocated Loan Amount of such Santa Clara
Property and the amount of proceeds with respect thereto payable to or otherwise
constituting the property of the MHPLP Borrower pursuant to the Santa Clara
Partnership Agreement. As an additional condition to the release of a MHP II
Pool Property, the related MHP II Pool Borrower must provide evidence
satisfactory to the lender to the effect that the MHPLP DSCR (as defined below)
will be maintained for twelve full months commencing after the date of such
release at the greater of (i) 1.7 and (ii) the ratio of net operating income of
the MHPLP Properties for the thirteen MHP II Accounting Periods immediately
preceding the date of such release divided by the difference between (A) debt
service expense payable with respect to the MHPLP Notes for such period and (B),
if applicable, the payments received for such period from U.S. Treasury
obligations held as security for the MHPLP Notes, as described below under
'--Release in Exchange for Substitute Collateral' (the ratio in clause (ii)
being the 'MHPLP Defeasance DSCR'). The 'MHPLP DSCR' for any fiscal period is
the quotient obtained by dividing (a) the projected net operating income for the
MHPLP Properties for the thirteen full MHP Accounting Periods immediately
succeeding the date of calculation by (b) the difference between (i) the debt
service expense payable with respect to the MHPLP Notes for such period and
(ii), if applicable, the payments to be received for such period from U.S.
Treasury Obligations held as security for the MHPLP Notes, as described below
under '--Release and Exchange for Substitute Collateral.' The Pooling and
Servicing Agreement will provide that the Servicer will use the MHP II Current
Interest Rate in making all debt service coverage calculations under the MHP II
Pool Loan.
To the extent that either of the MHP II Pool Borrowers is not required to
apply any insurance proceeds or condemnation awards to the restoration of the
related MHP II Pool Property, the Servicer will be entitled to apply such
proceeds to prepay the related MHP II Pool Note(s) and such prepayment will be
made without payment of a yield maintenance premium. Unless an event of default
has occurred, insurance proceeds, proceeds in excess of amounts necessary for
restoration of the affected MHP II Pool Property will be released to the
applicable MHP II Pool Borrower.
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The Servicer may apply certain amounts to the prepayment of the MHP II Pool
Notes in the event of a default thereunder.
Release in Exchange for Substitute Collateral. Each MHP II Pool Borrower
is permitted on any payment date at any time after the second anniversary of the
Closing Date and prior to the MHP II Anticipated Repayment Date, to defease all
or a portion of the related MHP II Pool Note(s), provided that, among other
conditions, such MHP II Pool Borrower pays on such payment date (the 'MHP II
Defeasance Date') (a) all interest accrued and unpaid on the principal balance
of the related MHP II Pool Note(s) to and including the applicable MHP II
Defeasance Date, (b) all other sums due under the related MHP II Pool Note(s)
and all other loan documents executed in connection with such MHP II Pool
Note(s) and (c) the MHPLP Defeasance Deposit (as defined below) or the Santa
Clara Defeasance Deposit (as defined below), as applicable (each, a 'MHP II
Defeasance Deposit'). In addition, such MHP II Pool Borrower is required to
deliver to the Servicer (a) a security agreement granting the Trustee a first
priority lien on the U.S. Treasury obligations purchased with such MHP II
Defeasance Deposit, (b) an opinion of counsel for the related MHP II Pool
Borrower in form satisfactory to the Servicer stating that the Trustee will have
a perfected first priority security interest in such U.S. Treasury obligations
and that the transfer of such U.S. Treasury obligations will not adversely
affect the status of either Trust REMIC as a REMIC and (c) confirmation from
each of the Rating Agencies that the defeasance will not result in a withdrawal,
qualification or downgrade of the then existing ratings of the Certificates.
The 'MHPLP Defeasance Deposit' is the sum of (i) the amount necessary to
purchase direct noncallable U.S. Treasury obligations that provide payments on
or prior to, but as close as possible to, all successive payment dates under the
MHPLP Notes (or, in the case of a release of less than all of the MHP II Pool
Properties, with respect to a principal amount equal to 125% of the Allocated
Loan Amounts for the MHPLP Properties to be released) after the MHP II
Defeasance Date through and including the MHP II Anticipated Repayment Date and
the outstanding principal balance of the MHPLP Notes on the MHP II Anticipated
Repayment Date (or a principal amount equal to 125% of the Allocated Loan Amount
of each property released with respect to a release of less than all of the MHP
II Pool Properties), together with accrued and unpaid interest, as if such
payments were then due and payable on such date, and any costs and expenses
incurred in connection with the purchase of such U.S. Treasury obligations,
except that if the defeasance is the result of a casualty or condemnation, the
MHPLP Defeasance Deposit shall be in the amount described below under
'--Condemnation and Casualty' and (ii) if necessary, the amount sufficient to
purchase additional direct noncallable U.S. Treasury obligations in order to
obtain a MHPLP DSCR sufficient to satisfy the debt service coverage condition to
partial defeasance described in the next paragraph. The 'Santa Clara Defeasance
Deposit' is the sum of (i) the amount necessary to purchase direct noncallable
U.S. Treasury obligations that provide payments on or prior to, but as close as
possible to, all successive payment dates under the Santa Clara Note (or, in the
case of a release of less than all of the MHP II Pool Properties, with respect
to a principal amount equal to 125% of the Allocated Loan Amount for the Santa
Clara Property unless such release occurs in connection with a sale of the Santa
Clara Property, in which case such release amount shall be the lesser of (A)
125% of the Allocated Loan Amount thereof and (B) the Allocated Loan Amount
thereof plus the proceeds of sale or other amounts that would be distributed to
or otherwise constituting the property of the MHPLP Borrower pursuant to the
Santa Clara Partnership Agreement) after the MHP II Defeasance Date through and
including the MHP II Anticipated Repayment Date and the outstanding principal
balance of the Santa Clara Note on the MHP II Anticipated Repayment Date (or a
principal amount equal to 125% of the Allocated Loan Amount of the Santa Clara
Property released (or with respect to a sale of the Santa Clara Property, such
other amount described above) with respect to a release of less than all of the
MHP II Pool Properties), together with accrued and unpaid interest, as if such
payments were then due and payable on such dates and any costs and expenses
incurred in connection with the purchase of such U.S. Treasury obligations,
except that if the defeasance is the result of a casualty or condemnation, the
Santa Clara Defeasance Deposit shall be in the amount described below under
'--Condemnation and Casualty' and (ii) if necessary, the amount sufficient to
purchase additional direct noncallable U.S. Treasury obligations in order to
obtain a MHPLP DSCR sufficient to satisfy the debt service coverage condition to
partial defeasance described in the next paragraph.
As a condition to any release of any MHPLP Properties in connection with a
partial defeasance or of the Santa Clara Property, the related MHP II Pool
Borrower must also provide evidence that, after giving effect to the release,
the MHPLP DSCR calculated with respect to the remaining MHPLP Properties would
be maintained,
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<PAGE>
for the thirteen MHP II Accounting Periods commencing after the MHP II Release
Date, at the greater of (a) 1.7 and (b) the MHPLP Defeasance DSCR based on the
aggregate net operating income of the MHPLP Properties pledged immediately prior
to the release during the thirteen full MHP II Accounting Periods next preceding
the MHP II Release Date.
If all of the MHP II Pool Properties have been released as a result of a
defeasance, the MHP II Pool Borrowers will be permitted to assign all of their
obligations and rights under the MHP II Pool Notes together with the pledged
U.S. obligations purchased with the MHP II Defeasance Deposits to a successor
mortgagor designated by the Servicer. In such event, the successor mortgagor
will assume the applicable MHP II Pool Borrower's obligations under the related
MHP II Pool Note(s) and the security agreements referred to above and thereupon
the MHP II Pool Borrowers will be relieved of its obligations thereunder. The
Servicer will be responsible for purchasing the U.S. Treasury obligations on
behalf of the MHP II Pool Borrowers.
Upon the satisfaction of the foregoing conditions precedent, the applicable
MHP II Pool Property will be released from the lien of the Trust Fund.
Reserves. The MHPLP Borrower has established the following reserves with
respect to the MHPLP Notes and MHPLP Properties: (a) a ground lease escrow fund
to be used to pay ground rent if the MHPLP Borrower fails to make such payments,
which was funded on the date of origination in the amount of $148,500 and is to
be replenished on a monthly basis such that the balance is maintained equal to
one month's ground rent with respect to the MHPLP Properties, (b) a debt service
reserve fund, which is to be funded initially in twelve monthly installments
commencing on October 11, 1996 until the balance is equal to $3,783,317 or two
month's MHPLP Monthly Debt Service Payments and shall be maintained at such
level unless the long-term senior unsecured debt of MII is downgraded to 'BBB+'
by S&P (from 'A-' as of the Closing Date) in which case the balance of such
reserve is to be maintained at three month's MHPLP Monthly Debt Service Payments
(with the additional payment to be funded in six monthly installments), (c) a
capital expenditures and furniture, fixtures and equipment reserve fund into
which the MHPLP Borrower deposited the amounts set forth below with respect to
the MHPLP Properties on the date of origination, and which is to be funded
within three weeks after the end of each MHP II Accounting Period, by deposits
equal to the difference between (1) the percentage of gross revenues set forth
below for each MHPLP Property for the MHP II Accounting Period immediately
preceding the related funding date (such percentage subject to increase or
decrease (subject to the lender's consent) by the MHP II Manager under the terms
of the related management agreement) and (2) amounts actually expended for
capital expenditures and furniture, fixtures and equipment for such MHPLP
Property for such period, (d) a tax and insurance escrow account which is to be
established only if the long-term senior unsecured debt rating of MII is
downgraded to 'BBB+' by S&P and will be funded as described below and (e) a
rehabilitation reserve account which was funded in the amount of $5,356,250,
$812,500 and $868,750 with respect to the New Orleans Property, the San Antonio
Property and the San Ramon Property, respectively, and is to be used for certain
capital repairs, a reserve for public area furniture (New Orleans only) and for
chiller maintenance (New Orleans only) and is required to make the additional
deposits required below.
Once established after a downgrade of the senior unsecured debt rating of
MII by S&P and until the long-term unsecured debt of MII is rated at least 'A-'
by S&P, the tax and insurance escrow account will be funded monthly to maintain
a balance with respect to each MHPLP Property equal, with respect to each tax
payment or insurance premium next coming due with respect to such MHPLP
Property, to the product of (x) the amount of such next payment or premium (or,
the most recent payment or premium if the amount of the next payment or premium
is unknown) times (y) a fraction, the numerator of which is the number of whole
MHP II Accounting Periods since the date of the last payment of the applicable
tax or premium and the denominator of which is the number of whole MHP II
Accounting Periods from the date of the last payment of the applicable tax or
premium to the date of the next payment of such tax or premium. In addition, the
MHPLP Borrower is required to deposit in the rehabilitation reserve account
$1,000,000 on the last payment date of each calendar year commencing on December
11, 1997, until an aggregate amount of $5,000,000 has been so deposited to be
used for chiller maintenance at the New Orleans Property. On or prior to
February 18, 1997, the MHPLP Borrower is required to provide the lender with a
comprehensive conceptual plan for the renovation of the restaurant and lobby of
the New Orleans Marriott, together with an itemized estimate of the cost
thereof. If, based upon such plan, the lender determines that the cost for such
renovation (a) is greater than $2,000,000, the MHPLP Borrower is required to
promptly deposit an amount equal to 125% of the amount of the excess in the
rehabilitation reserve account or
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<PAGE>
(b) is less than $2,000,000, 125% of the amount of the difference will be
remitted to the MHPLP Borrower. Notwithstanding the foregoing, if the MHPLP
Borrower disagrees with the lender's determination of the cost of such
renovation, the lender is required to negotiate in good faith to agree upon a
mutually acceptable estimate.
The Santa Clara Borrower has established the following reserves with
respect to the Santa Clara Note and the Santa Clara Property: (a) a ground lease
escrow fund to be used to pay ground rent if the Santa Clara Borrower fails to
make such payments, which was funded on the date of origination in the amount of
$6,500 and is to be replenished on a monthly basis such that the balance is
maintained equal to one month's ground rent with respect to the Santa Clara
Property, (b) a debt service reserve fund, which is to be funded initially in
twelve monthly installments commencing on October 11, 1996 until the balance is
equal to $739,660 or two month's Santa Clara Monthly Debt Service Payments and
shall be maintained at such level unless the long-term senior unsecured debt
rating of MII is downgraded to 'BBB+' in which case the balance of such reserve
is to be maintained at three month's Santa Clara Monthly Debt Service Payments
(with the additional payment to be funded in six monthly installments), (c) a
capital expenditures and furniture, fixtures and equipment reserve fund into
which the Santa Clara Borrower deposited the amount set forth below with respect
to the Santa Clara Property as of the date of origination, and which is to be
funded within three weeks after the end of each MHP II Accounting Period, by
deposits equal to the difference between (1) the percentage of gross revenues
set forth below for the Santa Clara Property for the MHP II Accounting Period
immediately preceding the related funding date (such percentage subject to
increase or decrease (subject to the lender's consent) by the MHP II Manager
under the terms of the related management agreement) and (2) amounts actually
expended for capital expenditures and furniture, fixtures and equipment for the
Santa Clara Property for such period, and (d) a tax and insurance escrow account
which is to be established only if the long-term senior unsecured debt rating of
MII is downgraded to 'BBB+' and will be funded in the same manner as the tax and
insurance escrow account for the MHPLP Properties.
CAPITAL EXPENDITURES AND FURNITURES, FIXTURES AND EQUIPMENT RESERVES
<TABLE>
<CAPTION>
ORIGINATION ADA ENVIRONMENTAL DEFERRED MONTHLY
DATE COMPLIANCE REMEDIATION MAINTENANCE CONTRIBUTION
PROPERTY DEPOSIT WORK WORK WORK PERCENTAGE
- ------------------------------------- ----------- ---------- ------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
New Orleans $ 4,477,163 $ 7,063 $92,325 $ 187,088 5%
San Antonio 4,445,858 5,750 0 127,688 1994-1998: 4%
Thereafter: 5%
San Ramon 1,056,070 59,000 0 194,563 1994-1998: 4%
Thereafter: 5%
Santa Clara 753,274 135,625 3,750 287,000 5%
----------- ---------- ------------- -----------
$10,732,365 $207,438 $96,075 $ 796,339
</TABLE>
Lock Box. No lock box is required to be maintained under either the MHPLP
Notes or the Santa Clara Note prior to the occurrence of a MHP II Lock Box Event
with respect to such MHPLP Notes or Santa Clara Note. A 'MHP II Lock Box Event'
with respect to the related MHP II Pool Note(s) occurs if (a) (i) the MHP II
Pool Properties are not managed by the MHP II Manager, (ii) the MHP II Manager
is not MII or a wholly-owned, direct or indirect subsidiary of MII, (iii) the
S&P rating of MII's long-term unsecured debt is not at least 'BBB+' or (iv) (A)
at any time after October 11, 1997, S&P rates MII's long term unsecured debt at
least 'A-' and the debt service reserve account established with respect to such
MHP II Pool Note(s) contains less than one MHPLP Monthly Debt Service Payment or
Santa Clara Monthly Debt Service Payment, as applicable or (B) at any time after
October 11, 1997, S&P rates MII's long term unsecured debt 'BBB+' and the debt
service reserve account established with respect to such MHP II Pool Note(s)
contains less than two MHPLP Monthly Debt Service Payments or Santa Clara
Monthly Debt Service Payments, as applicable and (C) in each case the related
MHP II Pool Borrower does not fund the shortfall therein within fifteen days'
notice to such effect from the Servicer and (b) the Servicer notifies the
related MHP II Pool Borrower that a lock box account is required to be put in
effect.
If a Lock Box Event occurs under the MHPLP Notes or the Santa Clara Note,
the related MHP II Pool Borrower will be obligated to cause all checks and other
forms for the payment of money from credit card
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<PAGE>
companies ('Credit Card Receipts') and amounts received from hotel customers and
others who pay on an accounts receivable basis ('Other Receipts') from the
related MHP II Pool Property to be deposited directly to a lock box account
established for such MHP II Pool Property generally with a bank the long-term
debt obligations of which (or the holding company of which) are rated in the two
highest rating categories by each Rating Agency and the short-term debt
obligations of which are rated not lower than 'A-1+' by S&P and or the
equivalent rating by the other Rating Agencies (or such other bank as will not
result in a downgrade, withdrawal or qualification of their respective ratings
of the Certificates) (a 'MHP II Eligible Account'). The MHP II Manager may
establish local accounts which may be in the name of the MHP II Manager for
deposit of cash and checks received at the MHP II Pool Properties. Funds in the
local accounts for the MHPLP Properties (exclusive of certain limited amounts)
will be swept on a daily basis into a collection account held by the Servicer
with respect to the MHPLP Notes (the 'MHPLP Deposit Account') and funds in the
local account for the Santa Clara Property (exclusive of certain limited
amounts) will be swept on a daily basis into a collection account held by the
Servicer with respect to the Santa Clara Note (the 'Santa Clara Deposit
Account,' and together with the MHPLP Deposit Account, the 'MHP II Deposit
Accounts'). Within one business day of receipt thereof, funds on deposit in the
lock box accounts for the MHPLP Properties will be swept into the MHPLP Deposit
Account and funds on deposit in the lock box accounts for the Santa Clara
Property will be swept into the Santa Clara Deposit Account.
The Servicer will distribute daily funds held in the MHPLP Deposit Account
(including any funds of the MHP II Manager deposited separately therein ('MHPLP
Direct Manager Funds') in the following order: (a) to fund the amounts required
to be paid into the ground lease escrow fund with respect to the MHPLP
Properties, (b) if then required, to fund the amounts to be paid into the tax
and insurance escrow fund with respect to the MHPLP Properties, (c) commencing
on September 12, 1997, to fund any deficiencies in the debt service reserve
account with respect to the MHPLP Notes and (d) to fund the amounts required to
be paid into the capital expenditure/FF&E reserve fund with respect to the MHPLP
Properties (items (a) through (d) being the 'MHPLP Required Reserve Payments').
After the balances of the above reserves are at the required levels, the
remainder in the MHPLP Deposit Account will be transferred to an operating
account (the 'MHPLP Operating Account') established for each MHPLP Property
(which shall be a MHP II Eligible Account) from which the MHP II Manager may
withdraw funds to (a) pay certain operating and other expenses with respect to
the MHPLP Properties, (b) make deposits to the capital expenditure/FF&E reserve
fund with respect to the MHPLP Properties and (c) to repay any MHPLP Direct
Manager Funds.
At least one business day prior to each payment date, the MHP II Manager is
required to transfer the MHPLP Operating Profit (with certain adjustments) (the
'MHPLP Adjusted Operating Profit') attributable to the MHP II Accounting Period
ended at least three weeks prior to such payment date (and with respect to which
the MHP II Pool Manager has not previously transferred MHPLP Adjusted Operating
Profit to the MHPLP Deposit Account). On or before the MHP II Anticipated
Repayment Date, the Servicer will apply the MHPLP Adjusted Operating Profit in
the following order: (a) to pay certain amounts to the Servicer, (b) to fund the
MHPLP Monthly Debt Service Payment Amount, (c) to fund any other amounts then
due to the lender with respect to the MHPLP Notes, (d) to fund any deficiencies
on such payment date in the Santa Clara Required Reserve Payments (as defined
below), amounts payable to the Servicer and the Santa Clara Monthly Debt Service
Payment Amount, (e) to pay amounts due to the MHP II Manager under the related
management agreement and any other agreement between the MHPLP Borrower and the
MHP II Manager, including in respect of MHPLP Manager Loans and (f) provided no
event of default exists, to the MHPLP Borrower.
After the MHP II Anticipated Repayment Date, the Servicer will apply the
MHPLP Adjusted Operating Profit on the date received in the following order: (a)
to pay certain amounts to the Servicer, (b) to fund the MHPLP Monthly Debt
Service Payment Amount, (c) to fund any other amounts then due to the lender
with respect to the MHPLP Notes, (d) to fund any deficiencies on such payment
date in the Santa Clara Required Reserve Payments (as defined below), amounts
payable to the Servicer and the Santa Clara Monthly Debt Service Payment Amount,
(e) to pay the MHPLP Manager Loans in the manner described above, (f) to pay (1)
certain incentive management fees earned in the current fiscal year with respect
to the MHPLP Properties and (2) certain deferred incentive management fees
incurred prior to the MHP II Anticipated Repayment Date with respect to the San
Ramon Property and the Santa Clara Property, payable in that order, (g) to repay
Santa Clara Partner Loans in the manner described above and (h) to pay for MHPLP
Additional Repair Amounts, and (i) together with MHP
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<PAGE>
Share of Santa Clara Excess Cash Flow for such date (A) to pay the outstanding
principal balance of the MHP II Pool Notes, pro rata, until such principal is
reduced to zero and (b) then, to pay the MHP II Excess Interest on the MHP II
Pool Notes, pro rata.
The Servicer will distribute daily funds held in the Santa Clara Deposit
Account (including any funds of the MHP II Manager deposited separately therein
('Santa Clara Direct Manager Funds') in the following order: (a) to fund the
amounts required to be paid into the ground lease escrow fund with respect to
the Santa Clara Property, (b) if then required, to fund the amounts to be paid
into the tax and insurance escrow fund with respect to the Santa Clara Property,
(c) to fund any deficiencies in the debt service reserve account with respect to
the Santa Clara Note and (d) to fund the amounts required to be paid into the
capital expenditure/FF&E reserve fund with respect to the Santa Clara Property
(items (a) through (d) being the 'Santa Clara Required Reserve Payments'). After
the balances of the above reserves are at the required levels, the remainder in
the Santa Clara Deposit Account, will be transferred to an operating account
(the 'Santa Clara Operating Account'), which shall be a MHP II Eligible Account,
from which the MHP II Manager may withdraw funds to (a) pay certain operating
and other expenses with respect to the Santa Clara Property, (b) make deposits
to the capital expenditure/FF&E reserve fund with respect to the Santa Clara
Property and (c) to repay any Santa Clara Direct Manager Funds.
At least one business day prior to each payment date, the MHP II Manager is
required to transfer the Santa Clara Operating Profit (with certain adjustments)
(the 'Santa Clara Adjusted Operating Profit') attributable to the MHP II
Accounting Period ended at least three weeks prior to such payment date (and
with respect to which the MHP II Pool Manager has not previously transferred
Santa Clara Adjusted Operating Profit to the Santa Clara Deposit Account). On or
before the MHP II Anticipated Repayment Date, the Servicer will apply the Santa
Clara Adjusted Operating Profit in the following order: (a) to pay certain
amounts to the Servicer, (b) to the Santa Clara Monthly Debt Service Payment
Amount, (c) to any other amounts then due to the lender with respect to the
Santa Clara Note, (d) to fund any deficiencies on such payment date in the MHPLP
Required Reserve Payments and the MHPLP Monthly Debt Service Payment Amount, but
only to the extent of the MHP Share of any remaining funds, (e) to pay amounts
due to the MHP II Manager under the related management agreement and any other
agreement between the Santa Clara Borrower and the MHP II Manager, including in
respect of Santa Clara Manager Loans, and (f) if the MHPLP Notes remain
outstanding, to pay the MHP Share to the MHPLP Deposit Account for distribution
in accordance with the terms of the MHP II Pool Loan and the remaining amounts
to the Santa Clara Borrower for distribution to HMH and the MHP II GP in
accordance with the Santa Clara Partnership Agreement.
After the MHP II Anticipated Repayment Date, the Servicer will apply the
Santa Clara Adjusted Operating Profit on the date received in the following
order: (a) to pay certain amounts to the Servicer, (b) to fund the Santa Clara
Monthly Debt Service Payment Amount, (c) to fund any other amounts then due to
the lender with respect to the Santa Clara Note, (d) to fund any deficiencies on
such payment date in the MHPLP Required Reserve Payments and the MHPLP Monthly
Debt Service Payment Amount, but only to the extent of the MHP Share of any
remaining funds, (e) to pay Santa Clara Manager Loans in the manner described
above, (f) to pay (1) certain incentive management fees earned in the current
fiscal year with respect to the Santa Clara Property and (2) certain deferred
incentive management fees incurred prior to the MHP II Anticipated Repayment
Date with respect to the Santa Clara Property, payable in that order, (g) to
repay Santa Clara Partner Loans in the manner described above, (h) to pay for
Santa Clara Additional Repairs and (i) to pay the MHP Share to the MHPLP Deposit
Account for distribution in accordance with the terms of the MHP II Pool Loan
and related documents and the remaining amounts to the Santa Clara Borrower for
distribution to HMH and the MHP II GP in accordance with the Santa Clara
Partnership Agreement.
If a Lockbox Event occurs with respect to the MHPLP Notes or the Santa
Clara Note, after a phase-in period of up to 120 days, the above procedures will
apply with respect to such MHP II Pool Note(s) until the first day of the first
full MHP II Accounting Period after (a) (i) the related MHP II Pool Properties
are managed by the MHP II Manager or (ii) the MHP II Manager is MII or a
wholly-owned, direct or indirect, subsidiary of MII, (b) S&P rates the long-term
senior unsecured indebtedness of MII at least 'BBB+,' and (c) either (i) if S&P
rates the senior unsecured indebtedness of MII at least 'A-,' the debt service
reserve account with respect to such MHP II Pool Note(s) contains at least two
MHPLP Monthly Debt Service Payments or Santa Clara Monthly Debt Service
Payments, as applicable or (ii) if S&P rates the senior unsecured indebtedness
of MII at least 'BBB+,' the debt
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<PAGE>
service reserve account with respect to such MHP II Pool Note(s) contains at
least three MHPLP Monthly Debt Service Payments or Santa Clara Monthly Debt
Service Payments, as applicable.
Transfer of Properties and Interest in Borrower; Encumbrance. The MHP II
Pool Borrowers are generally prohibited from encumbering the related MHP II Pool
Properties without the written consent of the Servicer. However, on and after
the second anniversary of the closing of the MHP II Pool Loan, each MHP II Pool
Borrower is permitted to place a subordinate mortgage on the related MHP II Pool
Property, provided that, among other things, (a) the Rating Agencies confirm
that the placement of the subordinate debt will not result in a withdrawal,
qualification or downgrade of the then existing ratings of the Certificates and
(b) the debt service coverage ratio with respect to such subordinate mortgage
(calculated by comparing the net operating income of such MHP II Pool Borrower
to debt service due on any indebtedness secured by the assets of such MHP II
Pool Borrower (other than the Santa Clara Note in the case of the MHPLP
Borrower) minus payments from U.S. Treasury obligations then securing the
related MHP II Pool Note) will be not less than 2.25. Additionally, each MHP II
Pool Borrower may incur purchase money security interests with respect to the
purchase of furnitures, fixtures and equipment in amount not to exceed at any
time $817,669 with respect to the Santa Clara Note and $4,182,331 with respect
to the MHPLP Notes (which latter amount is to be reduced if any of the MHPLP
Properties is released from the lien of the related Mortgage). Each MHP II Pool
Borrower is precluded from incurring any other indebtedness except for (a)
unsecured indebtedness incurred (i) in connection with capitalized equipment
leases, (ii) to provide working capital, in an aggregate amount, which when
added to the outstanding balance of previous indebtedness incurred by such MHP
II Pool Borrower and outstanding for such purposes, will not exceed the average
amount of certain operating and other expenses with respect to the related MHP
II Pool Properties for each of the previous full thirteen MHP II Accounting
Periods and to fund any shortfalls in the related MHP II Monthly Debt Service
Payment, provided that with respect to clause (ii) the payee of such
indebtedness agrees not to assert any remedies with respect to the non-payment
thereof so long as any of the MHP II Pool Notes is outstanding or (b)
indebtedness, if any, incurred in connection with a hotel expansion described
below.
Each of the MHP II Pool Borrowers has the right to undertake a hotel
expansion with respect to any of the related MHP II Pool Properties upon
delivery to the lender of, among other things, (a) evidence in writing from each
of the Rating Agencies that such hotel expansion (and any related financing)
will not result in a withdrawal, qualification or downgrade of the then current
ratings of the Certificates, (b) documentation reasonably satisfactory to the
lender that the hotel expansion is not being financed by the related MHP II Pool
Borrower with secured or unsecured indebtedness except to the extent permitted
as described in the preceding paragraph or specifically covered in the rating
letter delivered to the lender as described in clause (a) above, (c) updated
surveys and endorsements to the applicable title policies indicating that the
hotel expansion will be constructed entirely within the boundaries of the
applicable MHP II Pool Property, and will become part of such MHP II Pool
Property encumbered by the lien of the applicable Mortgage and the other
security documents, (d) such insurance, construction bonds, completion
guaranties and other documentation and assurances that the lender may reasonably
require to protect the collateral and security interests granted to the lender
during the construction of the hotel expansion and (e) an officer's certificate
stating that the hotel expansion is not likely to have a material adverse effect
on (i) the related MHP II Pool Borrower's ability to enter into or fulfill its
material obligations under the related loan documents or to effect the
transactions contemplated thereby or (ii) the condition (financial or
otherwise), business, prospects, assets, liabilities, management, financial
position or results of operations of the related MHP II Pool Property.
The MHP II Pool Borrowers together have the right to sell all the MHP II
Pool Properties provided that (a) the Rating Agencies confirm that such action
will not result in the withdrawal, qualification or downgrade of the then
existing ratings of the Certificates, (b) the transferee is approved by the
lender, whose approval will not be unreasonably withheld, (c) no event of
default has occurred and is continuing and (d) the transferee executes new notes
in a principal amount equal to the then outstanding principal amounts of the MHP
II Pool Notes.
The loan documents with respect to each of the MHPLP Notes and the Santa
Clara Note prohibit any transfer of (i) an equity interest in the MHP II GP,
(ii) the MHP II GP's interest in the related MHP II Pool Borrower or (iii) any
interest of a limited partner in such MHP II Pool Borrower such that as a result
of such transfer and any other transfers of limited partnership interests prior
to the date of determination, (A) Host Marriott, directly or indirectly, holds
less than 51% of the limited partnership interests in the MHPLP Borrower
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or less than 50% of the limited partnership interests in the Santa Clara
Borrower or (B) an entity other than HMH holds more than 49% of the limited
partnership interests in the Santa Clara Borrower, unless (a) no event of
default has occurred and is continuing, (b) the related MHP II Pool Borrower
supplies a non-consolidation opinion satisfactory to the lender, (c) the
organizational documents of the entities involved in the transfer are approved
by the lender and (d) the Rating Agencies confirm that the transfer will not
result in a withdrawal, qualification or downgrade of the then existing ratings
of the Certificates.
Insurance. Each MHP II Pool Borrower is required to maintain (a) fire and
extended coverage insurance in an amount equal to at least 100% of the full
replacement cost of the improvements (exclusive of excavations and foundations
and without deduction for physical depreciation), (b) if the improvements are
located within an area designated as a flood hazard area or an area designated
as flood prone pursuant to the National Flood Insurance Act of 1968 and the
Flood Disaster Protection Act of 1973, flood insurance as is available through
the National Flood Insurance Program, (c) comprehensive public liability
insurance, (d) business interruption insurance which will cover a period of at
least twenty-four months, (e) machinery and boiler explosion insurance, (f)
unless otherwise provided by the MHP II Manager, statutory workers compensation
insurance or a self-insurance program complying with state law, (g) during any
period of material construction or renovation, builder's 'all risk' insurance on
an all-risk, completed value basis, (h) with respect to the San Ramon Property
and the Santa Clara Property, earthquake insurance in an amount not less than
$65,000,000, which may be issued as part of a blanket policy with seventeen
other properties operated by affiliates of the MHP II Manager, (i) director's
and officer's and professional liability insurance with respect to the MHP II
Pool Borrowers and the MHP II GP and (j) such other insurance as is generally
available on commercially reasonable terms and is generally required by
institutional lenders on loans secured by properties similar to the related MHP
II Pool Property.
Such insurance (other than earthquake insurance with respect to the two
California properties) generally is required to be maintained by insurance
carriers having a rating of at least 'AA-' by S&P. However, the MHP II Pool
Borrower's current property insurer, Allendale Mutual Insurance Company, has a
claims paying ability rating of 'Aq' by S&P and 'A++/X' by Best's. The MHP II
Pool Loan provides that the existing insurer may continue to provide coverage
until April 1, 1997. Primary earthquake insurance with respect to the San Ramon
Property and the Santa Clara Property for not less than $15,000,000 is required
to be maintained by Allendale Insurance Company or a comparable insurance
company and the additional earthquake insurance coverage with respect to such
properties is required to be maintained by insurers having a claims paying
rating of 'A-/10' or better by Best's, Inc. or if such insurance is not
available from companies having such a rating, from the best rated insurance
companies then providing such insurance.
Condemnation and Casualty. The related MHP II Pool Borrower is required to
restore the affected MHP II Pool Property in casualty situations and in all
condemnation situations, other than those which involve a total taking, unless a
release of the MHP II Pool Property is obtained as described above under
'--Release in Exchange for Substitute Collateral.' If no event of default exists
at the time of settlement and if the estimated restoration cost is less than the
lesser of $1,000,000 (or $500,000 in the case of the San Ramon Property) or 5%
of the Allocated Loan Amount of the damaged property (the 'Restoration
Benchmark'), then the MHP II Pool Borrower may settle the insurance claim
without the lender's consent and may receive the settlement proceeds from the
insurer to be applied to the costs of restoration. If the estimated restoration
cost equals or exceeds the Restoration Benchmark, the Servicer shall have the
right to participate in the settlement of the insurance claim and all insurance
proceeds shall be paid directly to the Servicer for deposit by the Servicer into
a segregated subaccount of the related MHP II Deposit Account, to be advanced to
the related MHP II Pool Borrower in reimbursement for amounts expended in
restoration of such MHP II Pool Property.
If an event of default exists or if, in the lender's reasonable judgment
based on professional consultation: (a) the restoration of the affected MHP II
Pool Property cannot be completed (i) so as to constitute an economically viable
building or (ii) at least six months prior to the MHP II Maturity Date, (b) the
amount of business interruption insurance is insufficient to cover all fixed and
operating expenses of such MHP II Pool Property, including such portion of the
debt service of the related MHP II Pool Note(s) as is allocable thereto, during
restoration and until the operation of such MHP II Pool Property is resumed, (c)
the amount of insurance proceeds equals or exceeds the amount of the outstanding
aggregate principal balance of the MHP II Pool Notes or (d) restoration of such
MHP II Pool Property cannot be completed except at a cost which exceeds the
amount of available insurance proceeds and the related MHP II Pool Borrower
fails to post the deficiency within 90 days
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after notice, then the Servicer shall have the option to apply insurance
proceeds to a prepayment of the related MHP II Pool Note(s) and such prepayment
shall be without the payment of a yield maintenance premium.
If any condemnation proceeding appears likely to involve an amount which
will equal or exceed the Restoration Benchmark, then the proceeding cannot be
settled without the lender's consent. The proceeds of any condemnation award
greater than or equal to the Restoration Benchmark are required to be paid to
the Servicer for deposit by the Servicer in a segregated subaccount of the
related MHP II Deposit Account. In the case of the total taking of any MHP II
Pool Property, the proceeds of the condemnation award will be applied by the
Servicer to a partial prepayment of the related MHP II Pool Note(s). In the case
of a partial taking, if no event of default exists or if the conditions
described above with respect to casualty have not been met, a condemnation award
will be applied as provided above with respect to casualty proceeds.
In connection with a casualty or condemnation, in order to obtain a release
of a MHP II Pool Property under the provisions described above in '--Prepayment'
or '--Release in Exchange for Substitute Collateral,' the related MHP II Pool
Borrower is only required to deposit an amount at least equal to the greater of
(a) 100% of the Allocated Loan Amount for such MHP II Pool Property and (b) the
lesser of 125% of the Allocated Loan Amount thereof and the net condemnation or
casualty proceeds received on account of such MHP II Pool Borrower.
Financial Reporting. Each MHP II Pool Borrower is required to keep and
maintain accurate books and records on a fiscal year basis in accordance with
GAAP. Each MHP II Pool Borrower will furnish to the Servicer, (a) within 120
days following the end of each fiscal year, a complete copy of its annual
financial statements audited by a 'Big Six' accounting firm, including a balance
sheet, income statement and statement of cash flows, (b) not later than 27 days
after the end of each MHP II Accounting Period (i) unaudited financial
statements covering such accounting period and for the year to date showing in
detail for each related MHP II Pool Property separately, among other things, a
breakdown of sales revenues and operating expenses and the calculation of house
profit, average room and average occupancy rates, each with a comparison to
budget and prior year, (ii) an unaudited profit and loss statement and escrow
analysis on a consolidated basis and (iii) unaudited periodic and year-to-date
reports detailing for each related MHP II Pool Property the calculation of
operating profit, (c) not later than 60 days after the end of each accounting
quarter, quarterly and year-to-date unaudited financial statements (including
balance sheets, income statements and statements of cash flows) and (d) on or
before January 20 of each year, an annual budget for each related MHP II Pool
Property.
The Properties. The MHP II Pool Properties consist of four full-service
Marriott Hotels. The MHP II Pool Properties are not operated pursuant to
franchise agreements, but rather have rights to use the Marriott name and to
other central Marriott services through the management agreements with the MHP
II Manager (which provide for a separate chain services charge for such central
services as described below). The size of the hotels range from 368 rooms to
1290 rooms. Two of the hotels--the San Antonio Marriott Rivercenter and the New
Orleans Marriott--are convention hotels. The hotels were constructed between
1972 and 1989. The average occupancy rates for the 12 months ended September 6,
1996 for the MHP II Pool Properties ranged from 77% to 85%, with a weighted
average occupancy rate of 81%. The ADRs for the 12 month period ending September
6, 1996 for the MHP II Pool Properties ranged from $94 to $131, with a weighted
average of $121. The appraisals performed for the MHP II Pool Properties as of
August 1, 1996 determined an aggregate value of approximately $540,400,000.
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One of the hotels--the New Orleans Marriott--is built on real property that
is owned by the MHPLP Hotel Borrower in fee simple. Two of the hotels--the San
Ramon Marriott and the San Antonio Marriott Rivercenter-- are built on real
property that is leased by the MHPLP Borrower under ground leases as described
below. One of the hotels--the Santa Clara Marriott--is built on real property
that is leased by the Santa Clara Borrower under a ground lease as described
below.
New Orleans Marriott. The New Orleans Marriott, located on approximately
1.88 acres at 555 Canal Street, New Orleans, Louisiana, consists of a forty-two
story tower and a twenty-one story tower and is a 1290-room, full-service
lodging facility, containing three restaurants, two lounges, a pool bar, 77,000
square feet of meeting, banquet and exhibit facilities, a swimming pool and
patio area, and workout facilities. The hotel is adjacent to New Orleans' French
Quarter and in the general vicinity of the New Orleans convention center. The
initial improvements on the Mortgaged Property were built in 1972, and the
twenty-one story tower was constructed in 1978. For the twelve-month period
ended September 6, 1996, the average occupancy rate was approximately 77% and
the average daily room rate was approximately $125. For the twelve-month period
ending September 6, 1996, the Net Operating Income of the property was
$25,521,722. As of August 1, 1996, the appraised value of the Mortgaged Property
is $218,300,000.
San Ramon Marriott. The San Ramon Marriott, located on approximately
11.740 acres at 2600 Bishop Drive, San Ramon, California, is a 368-room
full-service lodging facility consisting of a six-story guest room structure, an
indoor/outdoor swimming pool and a fitness center. The Mortgaged Property
additionally contains a restaurant, a lobby lounge and 16,166 square feet of
meeting space. The property is located in the Bishop Ranch Business Park, which
contains several national and regional businesses. The improvements on the
Mortgaged Property were built in 1989. The Mortgaged Property is leased by the
MHPLP Borrower under a ground lease described below. For the twelve-month period
ended September 6, 1996, the average occupancy rate was approximately 84% and
the average daily room rate was approximately $94. For the twelve-month period
ending September 6, 1996, the Net Operating Income of the property was
$4,554,755. As of August 1, 1996, the appraised value of the Mortgaged Property
is $28,700,000.
Santa Clara Marriott. The Santa Clara Marriott, located on approximately
21.540 acres at 2700 Mission College Boulevard, Santa Clara, California,
consists of an eight-story tower, a thirteen-story tower, three two-story wings,
three three-story wings and two public space buildings, and is a 754-room,
full-service lodging facility containing one restaurant, a concierge lounge, a
sports bar and grill, 23,587 square feet of meeting space, an indoor/outdoor
swimming pool, a whirlpool, an exercise room and a game room. The hotel is
located in California's 'Silicon Valley' and is approximately two blocks from
the Santa Clara Convention Center. The improvements on the Mortgaged Property
were built in 1976, with additions in 1978 and 1981. The Mortgaged Property is
leased by the Santa Clara Borrower under a ground lease described below. For the
twelve-month period ended September 6, 1996, the average occupancy rate was
approximately 81% and the average daily room rate was approximately $113. For
the twelve-month period ending September 6, 1996, the Net Operating Income of
the property was $13,903,767. As of August 1, 1996, the appraised value of the
Mortgaged Property is $108,100,000.
San Antonio Marriott Rivercenter. The San Antonio Marriott Rivercenter,
located on approximately 2.82 acres at 101 Bowie Street, San Antonio, Texas, is
a thirty-eight-story, 999-room, full-service lodging facility containing two
restaurants, a lounge, a lobby bar, 60,000 square feet of meeting space, an
indoor/outdoor swimming pool, a whirlpool, a sauna, a fitness room and a game
room. The hotel is located two blocks from the Harry B. Gonzalez Convention
Center. The improvements on the Mortgaged Property were built in 1988. The
Mortgaged Property is leased by the MHPLP Borrower under a ground lease
described below. For the twelve-month period ended September 6, 1996, the
average occupancy rate was 85% and the average daily room rate was approximately
$131. For the twelve-month period ending September 6, 1996, the Net Operating
Income of the property was $23,245,748. As of August 1, 1996, the appraised
value of the Mortgaged Property is $185,300,000.
'Total Revenues' as used above with respect to any Mortgaged Property
generally means total revenue generated at such Mortgaged Property during the
twelve calendar months ending September 6, 1996. 'Net Operating Income' as used
above with respect to any Mortgaged Property means the excess of the Total
Revenue for such Mortgaged Property for the twelve month period ending September
6, 1996 over the total
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operating expenses of such Mortgaged Property incurred during such period,
without giving effect to any deductions for debt service, depreciation,
amortization, capital expenditures or reserves therefor.
Ground Leases. The interest of the MHPLP Borrower in the San Ramon
Marriott consists of a leasehold interest created under a ground lease with the
Sunset Development Company, formerly known as Granada Sales, Inc. (the 'San
Ramon Ground Lease'). The San Ramon Ground Lease expires on May 28, 2034, and
may be extended by the MHPLP Borrower for three additional 10-year periods. Rent
is payable under the San Ramon Ground Lease in thirteen installments in an
amount equal to the greater of (a) minimum annual rent of $350,000, or (b)
annual percentage rent equal to 3% of 'gross sales.' The minimum rent may be
adjusted every five years to equal 75% of the average of the rent actually paid
during the three-year period preceding the adjustment date. In the event that
the tenant under the ground lease defaults and foreclosure proceedings are
commenced under the leasehold mortgage, the ground lessor has the right and
option to purchase the interest in the leasehold mortgage. The purchase price
for such mortgage is $27,094,096.00, plus accrued and unpaid interest, and any
advances made by lender or its successors under the Mortgage for the protection
of the Mortgaged Property.
The interest of the MHPLP Borrower in the San Antonio Marriott Rivercenter
consists of a leasehold interest created under a ground lease with La Plaza Del
Rio Associates as last assigned by the ground lessor to Keystone Texas Property
Holding Corp. (the 'San Antonio Ground Lease'). The San Antonio Ground Lease
expires on December 31, 2033, and may be extended by the MHPLP Borrower for
three additional 10-year periods. Rent is payable under the San Antonio Ground
Lease in thirteen installments in an amount equal to the greater of (a) minimum
annual rent of $700,000, or (b) annual percentage rent equal to 3.5% of 'gross
sales.' In the event that the tenant under the ground lease defaults and
foreclosure proceedings are commenced under the leasehold mortgage, the ground
lessor has the right and option to purchase the interest in the leasehold
mortgage. The purchase price for such mortgage is an amount equal to the lesser
of: (a) the fair market value of the leasehold estate and the improvements to
the Mortgaged Property, or (b) an amount necessary to pay the MHPLP Defeasance
Deposit for such property and any other amounts due in connection with a
defeasance of the San Antonio Property.
The interest of the Santa Clara Borrower in the Santa Clara Marriott
consists of two leasehold interests created under two separate ground leases,
one ground lease with Stephen Dorcich, trustee of the Dorcich Living Trust,
successor in interest to Zaton Corporation (the 'Zaton Ground Lease') and the
other ground lease with Dorcich Farms, successor in interest to Stephen and Mary
Dorcich (the 'Dorcich Ground Lease'). Both the Zaton and the Dorcich Ground
Leases expire on November 22, 2028. Rent is payable under the Zaton Ground Lease
as follows: base rent is payable monthly in advance from November 2, 1993
through November 1, 2003 in the annual amount of $34,000, from November 2, 2003
through November 1, 2013 in the annual amount of $38,250, from November 2, 2013
through November 1, 2023 in the annual amount of $42,500, and from November 2,
2023 through November 1, 2028 in the annual amount of $46,750. Rent is payable
under the Dorcich Ground Lease as follows: base rent is payable monthly in
advance from November 2, 1993 through November 1, 2003 in the annual amount of
$38,745.60, from November 2, 2003 through November 1, 2013 in the annual amount
of $43,588.80, from November 2, 2013 through November 1, 2023 in the annual
amount of $48,432, and from November 2, 2023 through November 1, 2028 in the
annual amount of $53,275.20.
Property Management. The MHP II Pool Properties are managed by the MHP II
Manager pursuant to four separate management agreements (each a 'MHP II
Management Agreement' and collectively, the 'MHP II Management Agreements').
Pursuant to each agreement, the MHP II Manager is responsible for managing each
Property owned by the MHP II Pool Borrower and the Santa Clara Borrower under
standards comparable to those prevailing in the first-class Marriott
full-service hotel system. The services furnished by the MHP II Manager include
(a) executive supervision, consulting, planning, policy making, corporate
finance, risk planning and insurance services, personnel and employee relations,
in-house legal services, legislative and governmental representation, trademark
protection, research and development, and (b) the services of the MHP II
Manager's technical, operational and marketing experts making periodic
inspection and consultation visits to each property. The MHP II Manager shall
also provide certain services, which are furnished on a central or regional
basis to other hotels in the Marriott full-service chain and which benefit each
hotel as a participant in the Marriott full-service chain. These services
include national sales office services, central training services, manpower
development and management personnel relocation, central advertising and
promotion, the Marriott national reservations system and the Marriott computer
payroll and accounting services and such additional central or regional services
as may from time to time be furnished for the benefit of hotels in the MHP II
Manager's full
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service chain or in substitution for services now performed at individual hotels
which may be more efficiently performed on a group basis ('chain services').
Each MHP II Pool Borrower is also responsible for payment of the related hotel's
allocable share of the MHP II Manager's costs for the central services described
in the preceding sentence (the 'chain services fee').
Under each MHP II Management Agreement, the MHP II Manager is entitled to
receive as compensation for its services two fees: (a) a 'base management fee'
equal to 3% of gross revenues with respect to the related MHP II Pool Property,
and (b) an 'incentive management fee' equal to 20% of the related MHP II
Operating Profit. Available cash, after payment of related MHP II Monthly Debt
Service Amount, is allocated between the MHP II Manager and the related MHP II
Pool Borrower pursuant to a formula, and to the extent payable to the MHP II
Manager, is applied to current and deferred incentive management fees and to
working capital loans, if any, made by the MHP II Manager as (described above
under '--The Loan--Transfer of Properties and Interest in Borrower;
Encumbrance.') Unpaid incentive management fees are deferred, without interest,
until cash is available for their payment. Under the loan documents for the MHP
II Pool Loan, such deferred incentive management fees incurred under the MHP II
Management Agreements with respect to the San Antonio Property and the Louisiana
Property will not be paid until the MHP II Pool Loan is paid in full.
The lender has the right to terminate any MHP II Management Agreement,
whether or not a default has occurred under the MHP II Pool Loan, if the average
MHP II Operating Profit for any MHP II Pool Property during any three
consecutive fiscal years does not equal or exceed 8% of the sum of (a) the
original cost of each hotel to the related MHP II Pool Borrower and (b)
additional amounts incurred by such MHP II Pool Borrower in connection with
expansions, alterations and certain repairs and other items. The MHP II Manager
may assign the MHP II Management Agreements to certain of its affiliates,
subject to the obligation to provide confirmation from each of the Rating
Agencies that such assignment will not result in a withdrawal, qualification or
reduction of the then existing ratings of the Certificates.
The term of each MHP II Management Agreement expires December 31, 2018, and
automatically is renewed for three successive periods of ten years each, unless
the MHP II Manager elects not to renew.
The lender, each MHP II Pool Borrower and the MHP II Manager have entered
into certain agreements (the 'MHP II Modification and Subordination Agreements')
which modify certain of the terms of the MHP II Management Agreements. Among
other things, under the terms of the MHP II Modification and Subordination
Agreements, (a) the lender has the right to terminate any MHP II Management
Agreement for a failure to satisfy the performance standards described in the
second preceding paragraph, whether or not an event of default has occurred
under the MHP II Pool Loan and, if there has been an event of default under the
MHP II Pool Loan, the lender may exercise all rights of the related MHP II Pool
Borrower to terminate such agreement, (b) the MHP II Manager may not assign the
MHP II Management Agreement unless (i) written confirmation has been received
from each of the Rating Agencies that the assignment will not result in the
withdrawal, qualification or reduction of the then existing ratings of the
Certificates, and (ii) a guarantee has been received from MII of the obligations
of the assignee in a form reasonably satisfactory to lender, (c) the MHP II
Manager shall not terminate the MHP II Management Agreement (except in
accordance with its terms) or modify the MHP II Management Agreement in any
material respect without the consent of the lender and (d) the MHP II Manager
will not terminate the MHP II Management Agreement without giving notice and an
opportunity to cure to the lender. In addition, the MHP II Manager (a) agrees to
comply with the various procedures described above under '--Prepayment' and
'--Lock Box,' (b) consents to the collateral assignment of the MHP II Management
Agreement to the lender and (c) subordinates its rights (other than with respect
to the base management fees) under the MHP II Management Agreement to the lien
of the MHP II Pool Mortgages subject to its non-disturbance rights. The MHP II
Modification and Subordination Agreement provides that all incentive management
fees and the repayment of any loans (advances made by the MHP II Manager to an
MHP II Pool Borrower, which may not, at the time made, when added to other
outstanding loans, exceed the average of operating expenses for one MHP II
Accounting Period (based on the preceding thirteen periods)) are subordinated to
all payments of MHP II Monthly Debt Service Payments under the MHP II Pool Loan,
provided that the MHP II Manager is entitled to receive payment thereof from
available cash as described above under
'--Lock Box' until (and in certain circumstances following) an event of default
under the MHP II Pool Loan. The MHP II Management Agreement is binding upon any
successor owner of an MHP II Pool Property (including the lender) taking title
by foreclosure or deed in lieu of foreclosure, but such successor owner is not
liable for any non-monetary defaults of the MHP II Pool Borrower under the MHP
II Management Agreement.
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It is an event of default under the MHP II Pool Loan (subject to certain
notice and cure periods) if (a) the MHP II Pool Borrower cancels, releases,
terminates or surrenders the MHP II Management Agreement or permits any material
changes thereto, provided however, that the MHP II Pool Borrowers may cancel
release, terminate, surrender, amend, modify or alter the MHP II Management
Agreement in connection with the replacement of the manager, if before the date
the MHP II Manager ceases to be the Manager of any of the MHP II Pool Properties
(i) the MHP II Pool Borrower causes the properties to come under management by a
nationally recognized hotel operator acceptable to the Servicer, in the exercise
of its reasonable discretion, (ii) the properties continue to be part of a
comparable nationally recognized hotel system acceptable to the Servicer, in the
exercise of its reasonable discretion, and (iii) each of the Rating Agencies
confirms that the events will not result in the withdrawal, qualification or
reduction of the then existing ratings of the Certificates or (b) certain
insolvency events affecting the MHP II Manager occur, unless (as to each
affected MHP II Pool Property or as to all MHP II Pool Properties if certain
insolvency events occur) (i) the MHP II Pool Borrower causes the properties to
come under management by a nationally recognized hotel operator acceptable to
the Servicer, in the exercise of its reasonable discretion, (ii) the properties
continue to be part of a comparable nationally recognized hotel system
acceptable to the Servicer and (iii) each of the Rating Agencies confirms that
the events will not result in the withdrawal, qualification or downgrade of the
then existing ratings of the Certificates.
The MHP II Manager manages or franchises approximately 269 full-service
hotels containing approximately 111,460 rooms, including the MHP II Pool
Properties, and employs approximately 179,000 persons in property management.
THE PALMER SQUARE LOAN AND PROPERTIES
The Loan. The Palmer Square Loan has a principal balance as of the Cut-off
Date of $36,000,000 and is secured by a mortgage encumbering parcels of land and
buildings comprising a full-service hotel, office buildings, retail properties
and parking facilities, which together constitute a portion of the planned
development of retail, residential and commercial uses known as Palmer Square,
anchoring the central business district of Princeton, New Jersey ('Palmer
Square').
The Borrowers. Nassau Inn Limited Partnership (the 'Palmer Square NI
Borrower') is a special purpose New Jersey limited partnership the sole purpose
of which is owning, operating and managing The Nassau Inn, a 216-room hotel and
related retail properties (the 'Palmer Square NI Property') described more fully
below under '--The Properties--The Palmer Square NI Property.' The Palmer Square
NI Borrower has no material assets other than the Palmer Square NI Property and
related interests. The sole general partner of the Palmer Square NI Borrower is
HDA Properties, Inc. (the 'Palmer Square NI GP'), a special purpose Delaware
corporation the sole purpose of which is acting as general partner of the Palmer
Square NI Borrower. The sole limited partner of the Palmer Square NI Borrower is
Palmer Square Associates L.P., a New Jersey limited partnership (the 'Palmer
Square Limited Partner').
Palmer Square Limited Partnership (the 'Palmer Square PS Borrower') is a
special purpose Connecticut limited partnership the sole purpose of which is
owning or leasing, operating and managing certain commercial retail and office
property and parking facilities in Palmer Square (the 'Palmer Square PS
Property'), described more fully below under '--The Properties--The Palmer
Square PS Property and the Palmer Square PSN Property.' The Palmer Square PS
Borrower has no material assets other than the Palmer Square PS Property and
related interests. The sole general partner of the Palmer Square PS Borrower is
MA Properties L.L.C. (the 'Palmer Square PS GP'), a special purpose New Jersey
limited liability company the sole purpose of which is acting as general partner
of the Palmer Square PS Borrower. The sole managing member of the Palmer Square
PS GP is GA Properties, Inc., a special purpose New Jersey corporation ('GA
Properties'). The sole limited partner of the Palmer Square PS Borrower is the
Palmer Square Limited Partner.
PSN Partners L.P. (the 'Palmer Square PSN Borrower' and, collectively with
the Palmer Square NI Borrower and the Palmer Square PS Borrower, the 'Palmer
Square Borrowers') is a special purpose New Jersey limited partnership the sole
purpose of which is owning, operating and managing certain commercial retail and
office property and parking facilities in Palmer Square (the 'Palmer Square PSN
Property'), described more fully below under '--The Properties--The Palmer
Square PS Property and the Palmer Square PSN Property.' The Palmer Square NI
Property, the Palmer Square PS Property and the Palmer Square PSN Property are
referred to collectively herein as the 'Palmer Square Properties.' The Palmer
Square PSN Borrower has no material assets other than the Palmer Square PSN
Property and related interests. The sole general partner of the Palmer
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Square PSN Borrower is GA Properties, the sole purpose of which is serving as
managing member of the Palmer Square PS GP and general partner of the Palmer
Square PSN Borrower. The sole limited partner of the Palmer Square PSN Borrower
is the Palmer Square Limited Partner.
Security. The Palmer Square Loan is a non-recourse loan, secured only by
the fee estate (portions of which are comprised of condominium units), or in the
case of a portion of the Palmer Square PS Property, the ground leasehold estate,
of the Palmer Square Borrowers in the Palmer Square Properties and certain
collateral therefor (including an assignment of rents, the assignment of certain
agreements and the funds in certain accounts), and, subject to exceptions for,
among other things, fraud, intentional misrepresentation, breach of any
covenant, representation or warranty made concerning certain environmental
matters and misapplication of funds, none of the Palmer Square Borrowers or any
of their affiliates is personally liable for payment thereof. The Palmer Square
Borrowers have agreed to indemnify the Originator and its successors and assigns
with respect to the liabilities arising from and in connection with certain
environmental matters. Each Palmer Square Borrower has represented that it owns
good, indefeasible, marketable and insurable fee simple title to (or leasehold
interest in) its respective Palmer Square Property, subject only to encumbrances
permitted by the lender. The Originator is the named insured under a title
insurance policy (which will be assigned to the Trust Fund) which insures that
the Mortgage constitutes a valid and enforceable first lien on the Palmer Square
Properties, subject to certain exceptions and exclusions from coverage set forth
therein.
Payment Terms. The Palmer Square Loan was originated by the Originator on
November 22, 1996. The Palmer Square Loan matures on December 11, 2021 (the
'Palmer Square Maturity Date') and bears interest at (a) a fixed rate per annum
equal to 8.09% (the 'Palmer Square Current Interest Rate') through December 10,
2007, and (b) from December 11, 2007 (the 'Palmer Square Anticipated Repayment
Date'), at a fixed rate per annum (the 'Palmer Square Revised Interest Rate')
equal to the lesser of (A) the maximum rate permitted by applicable law, and (B)
the greater of (x) the Palmer Square Current Interest Rate plus 2.00% and (y)
the yield as of the Palmer Square Anticipated Payment Date calculated by linear
interpolation of the yields of U.S. Treasury Constant Maturities with terms (one
longer and one shorter) most nearly approximating that of noncallable U.S.
Treasury Obligations having maturities as close as possible to 14 years from the
Palmer Square Anticipated Payment Date, plus 2.00%. The interest accrued at the
excess of the Palmer Square Revised Interest Rate over the Palmer Square Current
Interest Rate will be deferred until the Palmer Square Maturity Date (such
accrued and deferred interest and interest thereon at the Palmer Square Revised
Interest Rate, the 'Palmer Square Excess Interest'). Interest on the Palmer
Square Loan is calculated on the basis of the actual number of days elapsed and
a 360-day year.
Commencing on January 11, 1997, the Palmer Square Loan requires 300
constant monthly payments of principal and interest (the 'Palmer Square Monthly
Debt Service Payment Amount') of $280,003.58 (based on a 300-month amortization
schedule and the Palmer Square Current Interest Rate). Payment of the balance of
the principal, if any, together with all accrued and unpaid interest (including
the Palmer Square Excess Interest) is required on the Palmer Square Maturity
Date. Commencing on the first payment date after the Palmer Square Anticipated
Repayment Date, the Palmer Square Borrower is required to apply 100% of the
Palmer Square Excess Cash Flow (as defined below) for the month preceding the
month in which the payment date occurs in the following order of priority: (a)
to the outstanding principal balance of the Palmer Square Loan until paid in
full, (b) to the Palmer Square Excess Interest and (c) to any other amounts due
under the loan documents. 'Palmer Square Excess Cash Flow' means (I) the amounts
held as collected funds in the Palmer Square Cash Collateral Account (as defined
below under '--Lock Box') after monthly application of funds as described in
clauses (1) through (7) of '--Lock Box' below, less (II) amounts for the funding
of additional reserves for working capital, capital improvement and other
Borrower costs at levels reasonably satisfactory to the lender. The scheduled
principal balance of the Palmer Square Loan as of the Palmer Square Anticipated
Repayment Date is approximately $28,785,430.
Upon the occurrence of an event of default, the entire unpaid principal sum
and any other amounts, including interest, will bear interest at a default rate
equal to the lesser of (a) the maximum rate permitted by applicable law and (b)
the greater of (i) the then applicable interest rate on the Palmer Square Loan
(i.e., the Palmer Square Current Interest Rate or the Palmer Square Revised
Interest Rate) plus 3% and (ii) LIBOR plus 4.25%.
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Prepayment. Voluntary prepayment is prohibited under the Palmer Square
Loan prior to the third payment date before the Palmer Square Anticipated
Repayment Date. Thereafter, the Palmer Square Loan may be voluntarily prepaid on
any payment date in whole or in part without payment of a yield maintenance
premium. Principal prepayments on the Palmer Square Loan may occur on payment
dates after the Palmer Square Anticipated Repayment Date through application of
the Palmer Square Excess Cash Flow, as described above under '--Payment Terms.'
No yield maintenance premium is required to be paid by the Palmer Square
Borrowers in connection with any proceeds that are paid with respect to a taking
or a conveyance of all or part of the Palmer Square Properties as a result of
any condemnation or other eminent domain proceeding by any governmental
authority or proceeds received under any insurance policy. Insurance proceeds
and condemnation proceeds in excess of amounts necessary for restoration or
payment of the Palmer Square Loan will be released to the Palmer Square
Borrowers.
Release in Exchange for Substitute Collateral. The Palmer Square Borrowers
are permitted at any time after the second anniversary of the Closing Date but
prior to the Palmer Square Anticipated Repayment Date, provided no event of
default has occurred and is continuing, to defease all or a portion of the
Palmer Square Loan, provided that, among other conditions, the Palmer Square
Borrowers pay on any payment date (the 'Palmer Square Defeasance Date') (A) all
interest accrued and unpaid on the principal balance of the Palmer Square Loan,
(B) all other sums then due and payable under the Palmer Square Loan and (C) the
Palmer Square Defeasance Deposit (as defined below). In addition, the Palmer
Square Borrowers are required to deliver to the Servicer, among other things,
(a) written confirmation from the Rating Agencies that such defeasance will not
cause any Rating Agency to withdraw, qualify or downgrade the then applicable
rating of the Certificates, (b) a security agreement in form and substance
reasonably satisfactory to the Servicer creating a first priority lien on the
U.S. Obligations (as defined below) purchased with the Palmer Square Defeasance
Deposit and (c) an opinion of counsel for the Palmer Square Borrower in form and
substance reasonably satisfactory to the Servicer stating, among other things,
that the Trustee has a perfected first priority security interest in such U.S.
Obligations and that the defeasance will not adversely affect the status of
either Trust REMIC as a REMIC.
'Palmer Square Defeasance Deposit' means an amount equal to the total cost
incurred by the Servicer in purchasing U.S. Obligations providing payments on or
prior to, but as close as possible to, all successive payment dates after the
Palmer Square Defeasance Date upon which interest and principal payments are
required under the Palmer Square Loan after the Palmer Square Defeasance Date
and through the Palmer Square Anticipated Repayment Date and in amounts equal to
the payments due on such dates and in the amount of the outstanding principal
balance and all accrued interest on the Palmer Square Anticipated Repayment Date
or, in the case of a defeasance of only a portion of the Palmer Square Loan, in
amounts equal to a portion of the scheduled payments of interest and principal
equal to the amount of each such payment multiplied by a fraction, the numerator
of which is the defeased portion of the loan and the denominator of which is the
outstanding principal indebtedness immediately prior to such defeasance.
'U.S. Obligations' means direct non-callable obligations of, or fully
guaranteed by, the United States of America or any agency or instrumentality
thereof whose obligations are backed by the full faith and credit of the United
States of America.
In connection with a defeasance of the Palmer Square Loan, (a) after giving
effect to the release of the Mortgaged Property to be released in connection
with such defeasance, the Palmer Square Loan DSCR (as defined below) must be
equal to or greater than the greater of (x) 1.8 and (y) the Palmer Square Loan
DSCR immediately preceding such release, and (b) the Palmer Square Borrowers
must defease a principal portion of the Palmer Square Loan in an amount equal to
(a) 125% of the Palmer Square Allocated Loan Amount for such Mortgaged Property
in the case of a defeasance of more than 10% of such principal portion, (b) 135%
of the Palmer Square Allocated Loan Amount in the case of a defeasance of an
amount from and including 5% and to and including 10% of such principal portion,
or (c) 150% of the Palmer Square Allocated Loan Amount in the case of a
defeasance of an amount less than 5% of such principal portion.
'Palmer Square Loan DSCR' means, for any period, the quotient obtained by
dividing adjusted net operating income for such period by the Palmer Square
Monthly Debt Service Payment Amounts due for such period.
'Palmer Square Allocated Loan Amount' means, with respect to a portion of
the Palmer Square Properties, the portion of the principal amount of the Palmer
Square Loan allocated to such portion of the Palmer Square
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Properties agreed upon by the Originator and the Palmer Square Borrowers and
determined as described under the definition of 'Allocated Loan Amount' set
forth above under 'Description of the Mortgage Pool.'
Upon receipt of the Palmer Square Defeasance Deposit, the Servicer will
purchase U.S. Obligations on behalf of the Palmer Square Borrower, and such U.S.
Obligations will serve as the sole collateral for the payment of amounts due
with respect to the defeased portion of the Palmer Square Loan or, if the Palmer
Square Borrower is defeasing the entire loan, as the sole collateral for the
Palmer Square Loan. The Palmer Square Borrowers will be required to assign to a
successor mortgagor designated by the Originator, which pursuant to the terms of
the Pooling and Servicing Agreement will be a special purpose, bankruptcy remote
entity, the obligations under the related loan documents relating to the
principal amount so defeased.
Upon satisfaction of the conditions for defeasance described above, the
applicable Palmer Square Property will be released from the lien of the Palmer
Square Loan and the pledged U.S. Obligations will serve as collateral securing
the Palmer Square Loan.
Reserves. Pursuant to the terms of the Palmer Square Loan, the Palmer
Square Borrowers have established (a) a ground rents account to be funded
monthly to the extent of an amount sufficient to enable payment of ground rents
when due under the Palmer Square Ground Lease described below under '--The
Properties-- Ground Lease,' (b) a tax, insurance and condominium assessment
reserve account funded at the closing of the origination in the amount of
$111,400 and to be funded each month to the extent of an amount equal to one-
twelfth of the annual taxes and insurance premiums due and, if the Palmer Square
Loan DSCR is 1.25 or less, condominium assessments, (c) a capital reserve
account for the purpose of funding on-going capital repairs, replacements and
improvements, to be funded each month to the extent of an amount which, when
added to any fund previously expended by the Palmer Square Borrowers for such
purposes, equals one-twelfth of the sum of (i) $0.25 per square foot of net
rentable area of retail space, (ii) $0.50 per square foot of net rentable area
of office space and (iii) 4% of the gross revenues of the hotel during the
preceding calendar year, (d) a deferred maintenance account, which was funded in
the amount of $115,000 at the origination of the Palmer Square Loan, for the
purpose of completing certain repairs as agreed by the Originator and the Palmer
Square Borrowers, (e) an operating expense account to be funded each month after
the Palmer Square Anticipated Repayment Date to the extent of the operating
expense requirements for such month shown on the annual operating budget to be
prepared by the Palmer Square Borrower and approved by the lender (the 'Annual
Palmer Square Budget') and (f) a surplus funds account for the purpose of paying
certain operating expenses in excess of the Annual Palmer Square Budget, to be
funded after the Palmer Square Anticipated Repayment Date and maintained in an
amount equal to one-twelfth of 15% of annualized operating expenses shown on the
Annual Palmer Square Budget then in effect. If the Palmer Square Loan DSCR is
1.25 or less, the Palmer Square Borrowers must remit the Disputed Amount (as
defined below) to the lender for deposit to the account described in clause (a)
above. In addition, because of a dispute with the ground lessor under the Palmer
Square Ground Lease (described below) concerning the fair market value of the
leased portion of Palmer Square PS Property and amounts of rent due for the
period April 1, 1994 to March 31, 1997, the lender will have the right, if the
ground lessor delivers a notice of default alleging that the related Palmer
Square Borrower is in default with respect to the payment of $72,072, as such
amount may be adjusted or alleged to be due by the ground lessor (the 'Disputed
Amount'), and the related Palmer Square Borrower fails to remedy such default
within 25 days of such notice, to withdraw for payment of such rent from any of
the accounts described in clauses (a) through (f) above upon notice to the
Palmer Square Borrowers, who will be obligated to reimburse the Disputed Amount
promptly to the lender for deposit in the relevant account.
Lock Box. Tenants will remit all rents with respect to the Palmer Square
Properties (the 'Palmer Square Rents') directly into a lockbox (the 'Lockbox').
The credit card receipts with respect to the hotel portion of the Palmer Square
Properties (the 'Hotel Receipts') will be remitted to an account maintained by
the Palmer Square Borrowers provided that a Cash Management Period (as defined
below) does not exist. All other receipts with respect to the Palmer Square
Properties (such other receipts, together with the Palmer Square Rents and the
Hotel Receipts, the 'Palmer Square Revenues') will be deposited by the Palmer
Square Borrowers into accounts of the Palmer Square Borrowers. On each business
day, funds will be transferred from the Lockbox to the accounts of the Palmer
Square Borrowers, as long as a Cash Management Period does not exist. During a
Cash Management Period, (i) funds will be swept each business day from the
Lockbox to one of six servicer-controlled collection accounts, (ii) Hotel
Receipts from Visa will be remitted directly into the appropriate
servicer-controlled collection account, and (iii) Hotel Receipts from American
Express and Diners Club will be transferred from
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accounts at the Palmer Square Borrowers to the appropriate collection account on
every other business day. If funds on deposit in any Palmer Square Borrower's
collection accounts equal or exceed $50,000 on any business day during a Cash
Management Period, such funds will be swept either into a seventh collection
account or, if the funds relate to the hotel portion of the Palmer Square
Properties, an eighth collection account. If funds on deposit in such seventh or
such eighth collection account equal or exceed $50,000 on any business day
during a Cash Management Period and a Sweep Period, such funds will be swept
into a cash collateral account (the 'Palmer Square Cash Collateral Account'). A
'Cash Management Period' shall exist, upon notice by the lender to the Lockbox
Account bank, from the second business day following the unremedied failure of
the Palmer Square Borrowers to remit the Prefunding Amount (as defined below)
when due until the delivery by the Palmer Square Borrowers of such Prefunding
Amount, except that no Cash Management Period shall exist during an Election
Period (as defined below). A 'Sweep Period' means (x) prior to the Palmer Square
Anticipated Repayment Date, the period from the first day of each interest
accrual period until all the accounts within the Cash Collateral Account have
been filled for such interest accrual period as described below or (y) on and
after the Palmer Square Anticipated Repayment Date, each and every interest
accrual period. Prior to the Palmer Square Anticipated Repayment Date and
provided an Election Period (as defined below) does not exist, the Palmer Square
Borrowers are obligated, no later than the business day before each payment
date, to remit an amount equal to one month's funding requirements for (i)
taxes, insurance premiums and, if the Palmer Square DSCR is 1.25 or less,
condominium assessments (ii) debt service, (iii) any ground rents and (iv)
capital reserves as described in clause (c) of '--Reserves' above (the
'Prefunding Amount').
In any period when no event of default has occurred and is continuing and
the Palmer Square Loan DSCR for the twelve months preceding the month for which
the most recent financial information has been supplied by the Palmer Square
Borrowers is greater than 1.8, the Palmer Square Borrowers may elect (a 'Palmer
Square DSCR 1.8 Election') not to cause Palmer Square Revenues to be deposited
directly into the Lockbox and to stop paying the Prefunding Amount, but they
will be obligated to deposit directly into the Palmer Square Cash Collateral
Account (A) upon the making of such election amounts equal to (i) one-sixth of
the costs of taxes and insurance premiums for the preceding 12 months, (ii)
one-sixth of the funding requirements of capital reserves described in clause
(c) of '--Reserves' above for the preceding 12 months, (iii) the monthly funding
requirements for ground rents described in clause (a) of '--Reserves' above and
(iv) one-sixth of annual debt service, which amounts the Trustee will allocate
to the relevant account within the Palmer Square Cash Collateral Account, and
(B) monthly thereafter, on each Payment Date, the amounts identified in clauses
(1), (3), (6) and (7) below. In any period when no event of default has occurred
and is continuing and the Palmer Square Loan DSCR for the twelve months
preceding the month for which the most recent financial information has been
supplied by the Palmer Square Borrowers equals or exceeds 3.0, the Palmer Square
Borrowers may elect (a 'Palmer Square DSCR 3.0 Election') not to cause Palmer
Square Revenues to be deposited directly into the Lockbox and to stop paying the
Prefunding Amount, but they will be obligated to deposit directly into the
Palmer Square Cash Collateral Account monthly thereafter, on each Payment Date,
the amounts identified in clauses (1), (3) and (6) below. An 'Election Period'
is a period when a Palmer Square DSCR 1.8 Election or a Palmer Square DSCR 3.0
Election is in effect.
The Servicer will apply funds held in the Palmer Square Cash Collateral
Account in the following order: (1) to the monthly funding of the ground rents
account described in clause (a) of '--Reserves' above, (2) if a Palmer Square
DSCR 1.8 Election has been made, to the funding of a special reserve account to
the extent of the amount described in clause (A) above, (3) to the monthly
funding of the tax, insurance and condominium assessment account described in
clause (b) of '--Reserves' above, (4) after the Palmer Square Anticipated
Repayment Date, to the monthly funding of the operating expenses account
described in clause (e) of '-- Reserves' above, (5) after the Palmer Square
Anticipated Repayment Date, to the monthly funding of the surplus funds account
described in clause (f) of '--Reserves' above, (6) to the payment of the Palmer
Square Monthly Debt Service Payment Amount and (7) to the monthly funding of the
capital reserve account described in clause (c) of '--Reserves' above, unless a
Palmer Square 3.0 Election has been made; and thereafter, during the period
before the Palmer Square Anticipated Repayment Date, to the account of the
Palmer Square Borrowers.
Transfer of Properties and Interest in Borrowers; Encumbrance. The Palmer
Square Borrowers are generally prohibited from transferring or encumbering the
Palmer Square Properties except for: (a) transfer of all or a portion of the
Palmer Square Properties (w) to a single entity newly formed as a result of a
merger of a Palmer Square Borrower into such entity, (x) to a single purchaser,
(y) to an affiliate of a Palmer Square
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Borrower or (z) in connection with the creation of a condominium regime covering
all of the Palmer Square NI Property if, prior to any such transfer, the Rating
Agencies have confirmed in writing that such transfer will not result in a
downgrade, withdrawal or qualification of any Certificates, the transferee has
assumed in writing all obligations of the transferor under the loan documents
and has executed and delivered such other documentation as may be required by
the Rating Agencies or reasonably required by the Servicer, and, in the case of
a transfer pursuant to a merger or to a non-affiliated purchaser, the Servicer
has consented to such transfer; or (b) a transfer of a Mortgaged Property that
has been released as described under '--Release in Exchange for Substitute
Collateral' above; or (c) Permitted Encumbrances. 'Permitted Encumbrances' means
(i) liens with respect to which the Rating Agencies have confirmed in writing
that such lien will not result in a downgrade, withdrawal or qualification of
any Certificates and the Servicer has consented, (ii) the lien created by the
Palmer Square Mortgage and all liens expressly permitted by the loan documents,
(iii) all liens disclosed in the applicable title insurance policy and approved
by the lender, (iv) liens for taxes not yet due or being contested in good
faith, (v) immaterial liens and (vi) covenants, restrictions, reservations and
easements in connection with any condominium regime described in clause (a)(z)
above or under '--The Properties--The Palmer Square PS Property and the Palmer
Square PSN Property' below.
The Palmer Square Loan generally prohibits the conveyance, transfer or
sale, whether by law or otherwise, of any direct legal or beneficial interest in
any Palmer Square Borrower, the Palmer Square NI GP, GA Properties or the Palmer
Square PS GP other than (a) transfers as to which the Rating Agencies shall have
confirmed in writing that such transfer or transfers will not result in a
downgrade, withdrawal or qualification of any Certificates and the Servicer
shall have consented, (b) transfers which in the aggregate during the term of
the Palmer Square Loan do not exceed 49% of the total ownership interests in
such entity or (c) transfers occurring as a result of the death or incompetency
of an individual who is a member or shareholder of the direct or indirect
general parters of the Palmer Square Borrowers. The Pooling and Servicing
Agreement provides that the Servicer may not consent to any such proposed action
without first receiving written confirmation from the Rating Agencies that such
action will not cause such Rating Agency to withdraw, downgrade or qualify any
of its then applicable ratings for the Certificates.
Any Palmer Square Borrower may obtain an unsecured loan or extension of
credit (an 'Affiliate Loan') from its limited partner and/or its general partner
or, if applicable, the managing member of its general partner (each, an
'Affiliate Lender') if such Affiliate Loan meets the following requirements: (a)
in the case of an Affiliate Loan from a general partner or, if applicable, the
managing member of a general partner of the Palmer Square Borrower, the Rating
Agencies have given written confirmation that the Affiliate Loan will not result
in a downgrade, withdrawal or qualification of the then applicable ratings on
the Certificates; (b) the Affiliate Lender has executed a subordination
agreement containing customary terms including, but not limited to, its
agreement (1) not to amend, modify or supplement the terms of the Affiliate Loan
or transfer, sell or assign the Affiliate Loan or any of the documents
evidencing the Affiliate Loan without (x) receipt of written confirmation from
the Rating Agencies that such amendment, modification, supplement, transfer,
sale or assignment will not result in a downgrade, withdrawal or qualification
of the then applicable ratings on the Certificates and (y) the written consent
of the Servicer (which shall not be required in the event of the transfer of
such Affiliate Loan to an affiliate of the Affiliate Lender or a limited partner
of the applicable Palmer Square Borrower), (2) not to file a petition seeking to
place the applicable Palmer Square Borrower in insolvency or bankruptcy, (3) not
to accelerate the Affiliate Loan or exercise any remedies or maintain any
enforcement action against such Palmer Square Borrower while the Palmer Square
Loan is outstanding, (4) to waive any and all of such Affiliate Lender's rights
to enforce the Affiliate Loan against such Palmer Square Borrower, as long as
the Palmer Square Loan is outstanding, (5) to assign to the Servicer all of such
Affiliated Lender's enforcement rights and voting rights in a bankruptcy of such
Palmer Square Borrower and not to take any actions that would interfere with or
delay the Servicer's exercise of its rights and remedies in the event of an
insolvency or bankruptcy of such Palmer Square Borrower and (6) to subordinate
the Affiliate Loan to the Palmer Square Loan; (c) the proceeds of such Affiliate
Loan are applied to refinance all or a portion of the Palmer Square Properties,
to pay any capital reserve amount required under the loan documents, to pay
transaction costs of the Palmer Square Loan or to pay working capital
shortfalls; (d) the amount of the Affiliate Loan at any time does not exceed the
excess of 80% of the appraised value of the Palmer Square Properties over the
then outstanding loan amount; (e) the maturity date of the Affiliate Loan is at
least 36 months after the Palmer Square Maturity Date; and (f) the Affiliate
Loan
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requires level scheduled principal and interest payments and is payable and
prepayable only prior to the Palmer Square Anticipated Repayment Date.
Insurance. The Palmer Square Borrowers are required to acquire or maintain
(a) insurance against any peril included within the classification 'All Risks of
Physical Loss' with extended coverage in an amount at least equal to the full
replacement cost of the improvements, (b) flood insurance with respect to any
part of a Palmer Square Property that is located within a federally designated
flood hazard zone in an amount equal to the lesser of the full insurable value
of the related property or the maximum amount available, (c) comprehensive
general liability insurance, (d) rental loss and/or business interruption
insurance which will cover a period of at least twelve months, (e) sprinkler
leakage and machinery and boiler explosion insurance, (f) statutory workers
compensation insurance, (g) during any period of major restoration, builder's
'all risk' insurance in an amount equal to not less than the full insurable
value of the related property and (h) such other customary insurance against
loss or damage as is requested by the Servicer and is of the kind customarily
required by lenders for similar properties. The Palmer Square Loan requires the
Palmer Square Borrower to obtain the insurance described above from insurance
carriers having claims paying abilities rated not less than 'AA' by S&P and 'AA'
or its equivalent by any one of the other Rating Agencies. On the closing date
of the Palmer Square Loan, certain of the insurance policies did not meet such
ratings requirements, and as the current terms of such policies expire the
Palmer Square Borrowers are required to obtain insurance policies meeting such
rating requirements.
Condemnation and Casualty. If total casualty insurance proceeds or
condemnation awards payable with respect to a casualty or condemnation are (x)
equal to or less than $250,000, such proceeds or awards will be made available
directly to the Palmer Square Borrower or (y) greater than $250,000, such
proceeds or awards will be paid directly to the lender, which will make such
amounts available to the Palmer Square Borrowers, in each case for the repair,
restoration and replacement of the affected improvements if, among other
conditions, (a) no event of default exists, (b) if any common elements of a
condominium to which part of the Mortgaged Property may be subject are also
subject to the casualty or condemnation, as the case may be, the applicable
condominium association elects to repair or restore such common elements, (c)
the Servicer determines in its reasonable discretion that the property can be
restored within nine months, prior to the full pay-out of business interruption
insurance proceeds and prior to the Palmer Square Maturity Date to an economic
unit not less valuable than the same was prior to the casualty or condemnation,
(d) the estimated cost to repair or restore is less than 25% of the appraised
value of the entire Palmer Square Properties at the closing of the origination
in the case of a casualty event or 15% thereof in the case of a condemnation,
and (e) after such restoration Mortgaged Property will adequately secure the
outstanding principal amount of the Palmer Square Loan and all outstanding
amounts secured by the mortgage. In all other cases, the Servicer may elect to
apply the proceeds to a full or partial prepayment of the Palmer Square Loan.
Unless an event of default has occurred and is continuing, such prepayment will
not be accompanied by the payment of a yield maintenance premium. If, however,
an event of default has occurred and is continuing, such prepayment shall
include a yield maintenance premium.
Financial Reporting. The Palmer Square Borrowers are required to furnish
to the Servicer, the Trustee and the Rating Agencies annually within 120 days
after the end of each fiscal year, a combined unaudited annual operating
statement of the Palmer Square Borrowers, reviewed on an accrual tax basis by a
'Big Six' accounting firm or BDO Seidman or other firm reasonably acceptable to
the lender, supplemented by a calculation of net operating income, an aged
accounts receivable report and rent rolls and occupancy statistics prepared by
the Palmer Square Borrowers and not required to be reviewed by such accountants.
If any operating statement delivered as described in the preceding sentence is
materially inconsistent with any management certified combined financial
statement, the Servicer, in its sole discretion, may require the delivery of
audited combined financial statements. In addition, the Palmer Square Borrowers
are required to furnish to the Servicer, (a) within 30 days following the end of
each calendar month and within 45 days following the end of each calendar
quarter, as applicable, monthly and quarterly internal management reports,
supplemented by a calculation of net operating income, an aged accounts
receivable report and rent rolls and occupancy statistics and (b) within 10
business days after request, such further information with respect to the
operation of the Palmer Square Properties and the financial affairs of the
Palmer Square Borrowers as may be reasonably requested by the Servicer and
similar in scope to the information described above. The Palmer Square Borrowers
are also required to arrange for all bills for real estate property taxes and
assessments, insurance premiums and condominium assessments to be sent directly
to the lender.
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The Properties. The Palmer Square Properties include the Palmer Square NI
Property, the Palmer Square PS Property and the Palmer Square PSN Property. The
improvements on the Palmer Square Properties are built on real property that is
owned by the Palmer Square Borrowers in fee simple (including portions which are
parts of condominiums), except that a portion of a parking garage on the Palmer
Square PS Property is built on real property that is leased by the Palmer Square
PS Borrower under a ground lease as described below.
The Palmer Square NI Property. The Nassau Inn, located on approximately
1.34 acres in Palmer Square, is a 3- to 5-story, 216-room full-service lodging
facility, built in 1937 with additions in 1960 and 1983. For the twelve-month
period ended August 30, 1996, the average occupancy rate was approximately 66.5%
and the average daily room rate was approximately $122. As of August 1, 1996,
the appraised value of the Palmer Square NI Property was $18,900,000.
The Palmer Square PS Property and the Palmer Square PSN Property. The
Palmer Square PS Property and the Palmer Square PSN Property together consist of
2- to 5-story mixed-use buildings and parking facilities known as Palmer Square
North, Palmer Square West, One Palmer Square, the Hulfish Street Garage and the
Chambers Street Garage, aggregating approximately 130,502 square feet of GLA of
office space, approximately 102,485 square feet of GLA of retail space and 994
parking spaces. Palmer Square North and the Hulfish Street Garage are located on
approximately 3.14 acres in Palmer Square. Palmer Square North was built from
1987 to 1990 and contains 104,760 square feet of GLA, of which approximately
33.2% is retail space and 66.8% office space. The Hulfish Street Garage is a
multi-level parking garage built from 1987 to 1989 and contains 421 parking
spaces. Palmer Square West, located on approximately 0.85 acres in Palmer
Square, was built from 1937 to 1939 and contains 42,023 square feet of GLA owned
by the Palmer Square PS Borrower, of which approximately 80.3% is retail space
and 19.7% office space. One Palmer Square, located on approximately 0.44 acres
in Palmer Square, was built in 1964 and contains 69,844 square feet of GLA, of
which approximately 25.2% is retail space and 74.8% office space. The Chambers
Street Garage, located on approximately 0.64 acres in Palmer Square, is a
multi-level parking garage built in 1984 and containing 573 parking spaces.
The aggregate office space of the Palmer Square Properties had an occupancy
rate of approximately 97% and an average base rent per square foot of
approximately $24 for the twelve-month period ended May 1, 1996. The aggregate
retail space of the Palmer Square Properties had an occupancy rate of
approximately 93% and an average base rent of approximately $28 per square foot
for the twelve-month period ended May 1, 1996. As of August 1, 1996, the
appraised value of the office component of the Palmer Square Properties
including the Hulfish Street Garage was $19,800,000, and the appraised value of
the retail component of the Palmer Square Properties including the Chambers
Street Garage was $32,100,000.
Condominium declarations have been entered into with respect to the retail
and office areas of the Palmer Square PS Property and the office, retail and
garage areas of the Palmer Square PSN Property. Each of the Palmer Square PS
Borrower and the Palmer Square PSN Borrower or their affiliate, as an owner of
its respective condominium units, is currently the controlling unit owner with
respect to the related condominium association, and each shares ownership of
certain common areas with minority unit owners.
Ground Lease. A portion of the interest of the Palmer Square PS Borrower
in the land underlying the Chambers Street Garage consists of a ground leasehold
interest created under a ground lease with The Borough of Princeton (the
'Princeton Ground Lease'). The Princeton Ground Lease expires on May 10, 2033,
and the lessee has one renewal option for an additional period of 25 years,
ending on May 11, 2058. Annual rent, payable quarterly, is 6% of the fair market
value of the demised property, determined every five years as provided in the
Princeton Ground Lease. The fair market value as of March 1994, and therefore
the amount of rent due for the period from April 1, 1994 through March 31, 1997,
are in dispute between The Borough of Princeton and the Palmer Square PS
Borrower, with the lessor contending that the annual rent now payable is
approximately $85,000 and the lessee contending that it is $61,176. The Disputed
Amount will be reserved if the Palmer Square Loan DSCR is 1.25 or less, as
described above under 'The Loan--Reserves.'
Property Management. The Palmer Square Properties are managed by Palmer
Square Management L.L.C., a New Jersey limited liability company, (the 'Palmer
Square Manager'), pursuant to three separate and substantially identical
management agreements, each dated as of November 22, 1996 (the 'Palmer Square
Management Agreements'), between the Palmer Square Manager and the respective
Palmer Square Borrowers. The Palmer Square Management Agreements provide for a
management fee equal to 4% of monthly gross revenues payable monthly on a
current basis unless the Palmer Square DSCR falls below 1.05 on a trailing
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12-month basis, in which case the management fee accrues until the Palmer Square
DSCR increases to 1.05 or above. The Palmer Square Management Agreements also
provide that the Palmer Square Manager will be reimbursed for on-site property
expenses. The Palmer Square Management Agreements are for an initial term ending
December 31, 2001 renewable automatically for additional terms of five years
unless sooner terminated in accordance with the respective Palmer Square
Management Agreement.
The Palmer Square Manager is an affiliate of the Palmer Square Borrowers.
The managing member of the Palmer Square Manager is JMS Partners L.L.C., a
Delaware limited liability company.
The Palmer Square Borrowers currently pay a management fee of $48,300 per
year to Kinney System, Inc. for management of the Hulfish Street Garage and the
Chambers Street Garage. Such fee is subject to adjustment for inflation.
Under the Palmer Square Loan, the Servicer may require the Palmer Square
Borrowers to terminate the Palmer Square Management Agreement (i) upon the
occurrence of an event of default under the loan documents or (ii) in the event
that, as of the last day of a calendar quarter, the Palmer Square Loan DSCR for
the Palmer Square Properties is less than 1.15. Notwithstanding the foregoing,
however, the Palmer Square Management Agreement will not be terminated prior to
the Palmer Square Anticipated Repayment Date as described in clause (ii) above
if the Palmer Square Borrowers or the Palmer Square Manager can demonstrate to
the Servicer's satisfaction that the cause for the reduction in the Palmer
Square Loan DSCR was directly and solely attributable to the bankruptcy or
insolvency of a tenant or tenants leasing, individually or in the aggregate,
space in excess of 18,000 square feet. Notwithstanding the foregoing sentence,
however, prior to the Palmer Square Anticipated Repayment Date, in the event the
Palmer Square Loan DSCR is still less than 1.15 on the last day of the third
calendar quarter after the date of the computation of the Palmer Square Loan
DSCR, calculated on the basis of the twelve calendar months prior to such last
day of the third calendar quarter, the Management Agreement must be terminated
by the Palmer Square Borrowers at the Servicer's request. The Rating Agencies
must confirm in writing that the employment of any successor property manager
selected, following a termination as described above or otherwise, will not
result in a downgrade, withdrawal or qualification of the then applicable rating
of any Certificates.
Pursuant to a manager's consent and subordination of management agreements
(the 'Manager's Subordination') with respect to the Palmer Square Management
Agreements, the Servicer will have the right to terminate such Palmer Square
Management Agreements upon, or at any time after, an event of default under the
Palmer Square Loan by giving the Palmer Square Manager 30 days' prior written
notice of such termination. The Palmer Square Manager has also agreed in the
Manager's Subordination that its right to receive the management fee, exclusive
of on-site expenses, and all liens, rights and interests owned, claimed or held
by the Palmer Square Manager in and to any of the Palmer Square Properties are
and will be, in all respects, subordinate and inferior to the liens and security
interest created by the Palmer Square Loan.
THE PRIME RETAIL II POOL LOAN AND PROPERTIES
The Loan. The Prime Retail II Pool Loan has a principal balance as of the
Cut-off Date of approximately $358,748,252 and is secured by
cross-collateralized Mortgages encumbering sixteen factory outlet centers
(collectively, the 'Prime Retail II Pool Properties') located in the states of
Colorado, Florida, Georgia, Illinois, Indiana, Mississippi, Missouri, Nebraska,
North Carolina, Ohio, Pennsylvania and Texas. The Mortgages encumbering the
Prime Retail II Pool Properties are cross-collateralized and cross-defaulted.
The Borrowers. The sixteen borrowers under the Prime Retail II Pool Loan
are (i) Coral Isle Factory Shops Limited Partnership ('Coral Isle'), a Delaware
limited partnership, (ii) Gulf Coast Factory Shops Limited Partnership ('Gulf
Coast'), an Illinois limited partnership, (iii) Nebraska Crossing Factory Shops
Limited Partnership ('Nebraska'), a Delaware limited partnership, (iv) San
Marcos Factory Stores, Ltd. ('San Marcos'), a Texas limited partnership, (v)
Triangle Factory Stores Limited Partnership ('Triangle'), an Illinois limited
partnership, (vi) Gainesville Factory Shops Limited Partnership ('Gainesville'),
an Illinois limited partnership, (vii) Florida Keys Factory Shops Limited
Partnership ('Florida Keys'), an Illinois limited partnership, (viii)
Indianapolis Factory Shops Limited Partnership ('Indianapolis'), an Illinois
limited partnership, (ix) Magnolia Bluff Factory Shops Limited Partnership
('Magnolia Bluff'), a Delaware limited partnership, (x) Huntley Factory Shops
Limited Partnership ('Huntley'), an Illinois limited partnership, (xi) Gulfport
Factory Shops Limited Partnership ('Gulfport'), a Delaware limited partnership,
(xii) Kansas City
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Factory Shops Limited Partnership ('Kansas City'), a Delaware limited
partnership, (xiii) Loveland Factory Shops Limited Partnership ('Loveland'), a
Delaware limited partnership (such entities set forth in clauses (i) through
(xiii) are collectively, the 'Prime Retail Limited Partnerships'), (xiv) Ohio
Factory Shops Partnership ('Ohio'), an Ohio general partnership, (xv) Castle
Rock Factory Shops Partnership ('Castle Rock'), a Colorado general partnership
and (xvi) Grove City Factory Shops Partnership ('Grove City'), a Pennsylvania
general partnership (such entities set forth in clauses (xiv) through (xvi) are
collectively, the 'Prime Retail General Partnerships' and with the Prime Retail
Limited Partnerships, the 'Prime Retail II Pool Borrowers'). Prime Retail, L.P.
(the 'Prime Retail Operating Partnership'), a Delaware limited partnership
which, among other things, owns a 98% general partnership interest and a 1%
limited partnership interest in each of the Prime Retail Limited Partnerships
and a 99% general partnership interest in the Prime Retail General Partnerships
and is the managing general partner of each of the Prime Retail II Pool
Borrowers. Prime Retail Finance, Inc., a Maryland corporation ('Prime Retail
Finance I'), owns a 1% general partnership interest in each of Ohio, Coral Isle,
Gulf Coast, Nebraska, San Marcos and Triangle. Prime Retail Finance II, Inc., a
Maryland corporation ('Prime Retail Finance II'), owns a 1% general partnership
interest in each of Florida Keys, Gainesville, Indianapolis, Castle Rock,
Huntley, Magnolia, Gulfport, Kansas City, Loveland and Grove City. Prime Retail,
Inc., a Maryland corporation engaged primarily in the ownership, development,
construction, acquisition, leasing, marketing and management of factory outlet
centers throughout the United States, is the sole general partner of the Prime
Retail Operating Partnership. Prime Retail, Inc. also owns all the outstanding
capital stock of Prime Retail Finance I and Prime Retail Finance II.
An affiliate of NACC has made a $52,290,000 loan and NACC has made a
$16,000,000 loan to the Prime Retail Operating Partnership. See 'Risk Factors
and Other Special Considerations--Other Financing' herein.
Security. The Prime Retail II Pool Loan is a non-recourse loan, secured
only by the fee estate (or in the case of the Mortgaged Properties known as
Magnolia Bluff Factory Shops and Gulfport Factory Shops, the leasehold estate)
of the Prime Retail II Pool Borrowers in the related Mortgaged Properties and
the fee estate of the ground lessor in the Magnolia Bluff Factory Shops and such
other limited assets which have been pledged as collateral therefor (including
assignments of leases and rents, the funds in certain accounts and the Prime
Retail II Pool Borrowers' rights under the Prime Retail Cap Agreement, described
below) and, subject to exceptions for, among other things, fraud or intentional
misrepresentation and misappropriation of certain funds, neither the Prime
Retail II Pool Borrowers, nor any of their affiliates are personally liable for
payment of the Prime Retail II Pool Loan. Because Florida law requires the
payment of a documentary stamp tax based on the principal amount of debt secured
by a mortgage, the Mortgage encumbering Gulf Coast Factory Shops, Coral Isle
Factory Shops and Florida Keys Factory Shops will secure an amount of the loan
equal to only 125% of the sum of (i) the initial Allocated Loan Amount with
respect to such properties plus (ii) a prorated portion of the Expansion Account
(as described herein). The Prime Retail II Pool Borrowers have agreed to
indemnify on a recourse basis the Originator and its successors and assigns and
their respective agents, employees, officers and directors with respect to the
liabilities arising from or in connection with certain environmental matters.
The Prime Retail II Pool Borrowers have made certain environmental
representations and have represented that they own good, marketable and
insurable fee simple title to the related Prime Retail II Pool Property, or, in
the case of Magnolia Bluff Factory Shops and Gulfport Factory Shops, a good,
marketable and insurable leasehold estate, and the ground lessor with respect to
Magnolia Bluff Factory Shops has represented that it owns a good, marketable and
insurable fee simple estate in Magnolia Bluff Factory Shops, subject, in each
case, only to encumbrances permitted by the lender. The Originator is the named
insured under title insurance policies (which will be assigned to the Trustee)
which insure that each related Mortgage constitutes a valid and enforceable
first lien on the applicable Prime Retail II Pool Property subject to certain
exceptions and exclusions from coverage set forth therein.
Payment Terms. The Prime Retail Pool II Loan was originated by the
Originator as of October 31, 1996. The Prime Retail II Pool Loan matures on
November 11, 2026 (the 'Prime Retail Maturity Date') and bears interest at (a)
through and including the earlier to occur of (i) November 10, 1998 and (ii) the
occurrence of an event of default resulting from the failure by the Prime Retail
II Pool Borrowers to make a scheduled interest or principal payment, a floating
rate per annum equal to one-month LIBOR plus 1.51%, (b) thereafter, a fixed rate
per annum equal to 7.782% through and including November 10, 2003 ((a) or (b),
as in effect, the 'Prime Retail Current Interest Rate') and (c) commencing on
November 11, 2003 (the 'Prime Retail Anticipated Repayment Date'), a fixed rate
per annum equal to the greater of (i) the Prime Retail Current Interest Rate
plus 2% and (ii) an interest rate equal to the Treasury Constant Maturity Yield
Index for United States Treasury obligations
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having a maturity date of 7 years plus 2%, determined as of the Prime Retail
Anticipated Repayment Date ((i) or (ii), as in effect, the 'Prime Retail Revised
Interest Rate'). However, the effect of the Interest Rate Floor Agreements (as
described herein) and the Class P-IO Certificates (which are not offered hereby)
is to effectively convert the Prime Retail Current Interest Rate to a fixed rate
equal to 7.782% for purposes of the Pass-Through Rates on the Certificates
(other than the Class P-IO Certificates). See 'Description of the Offered
Certificates' herein. As described below, until the principal balance of the
Prime Retail II Pool Loan has been reduced to zero, the Prime Retail II Pool
Borrowers will only be required to pay interest at the Prime Retail Current
Interest Rate. Interest accrued at the excess of the Prime Retail Revised
Interest Rate over the Prime Retail Current Interest Rate will be deferred until
the principal balance of the Prime Retail II Pool Loan has been reduced to zero
(such accrued and deferred interest and interest accrued thereon at the Prime
Retail Revised Interest Rate, the 'Prime Retail Excess Interest'). Interest is
calculated based on the actual number of days elapsed and a 360-day year.
Gulfport, on behalf of the Prime Retail II Pool Borrowers, has assigned to
the Originator and its successors and assigns payments under an interest rate
protection agreement (the 'Morgan Guaranty Cap Agreement' or a 'Cap Agreement'),
dated November 1, 1996, with Morgan Guaranty Trust Company of New York ('Morgan
Guaranty' or a 'Cap Provider') and an interest rate protection agreement (the
'SBCM Cap Agreement' or a 'Cap Agreement'), dated November 5, 1996, with SBCM
Derivative Products Limited ('SBCM' or a 'Cap Provider'). The Morgan Guaranty
Cap Agreement obligates Morgan Guaranty to make monthly payments through
November 11, 1998, equal to the product of (a) a notional amount equal
$262,000,000 and (b) the excess of (i) LIBOR over (b) the per annum interest
rate of 7.00%. The Morgan Guaranty Cap Agreement is a contractual obligation of
Morgan Guaranty and no collateral is pledged by Morgan Guaranty with respect
thereto other than the uncollateralized guaranty of Union Bank of Switzerland.
The long-term debt obligations of Morgan Guaranty are rated 'AAA' by S&P and
'Aa1' by Moody's and of Union Bank of Switzerland are rated 'AAA' by S&P and
'Aaa' by Moody's. The SBCM Cap Agreement obligates SBCM to make monthly payments
through November 11, 1998, equal to the product of (i) a notional amount equal
to $97,000,000 (which amount will be reduced by an amortization schedule based
on an assumed interest rate of 7.782%, an assumed initial notional balance of
$358,748,252 and 360 months) and (ii) the excess of (a) LIBOR over (b) the per
annum interest rate of 7.00%. The SBCM Cap Agreement is a contractual obligation
of the SBCM and no collateral is pledged by SBCM with respect thereto. The
long-term debt obligations of SBCM are rated 'AAA' by S&P and 'Aaa' by Moody's.
In the event that the long-term unsecured debt obligations of a Cap
Provider are downgraded by the Rating Agencies below 'AA' or its equivalent or a
Cap Provider defaults in any of its obligations under the related Cap Agreement,
the Prime Retail II Pool Borrowers are required, at the request of the Servicer,
to replace such Cap Agreement within 10 business days with an agreement having
identical payment terms and maturity as the Cap Agreement so replaced with a cap
provider whose long-term unsecured debt is rated at least 'AAA' or its
equivalent by each Rating Agency, or which will allow the Rating Agencies to
reaffirm their then current ratings of the Certificates, provided that, if the
Prime Retail II Pool Borrowers obtain written confirmation from each Rating
Agency stating that any failure to replace such Cap Agreement will not cause a
downgrade, qualification or withdrawal of any rating of the Certificates, the
Prime Retail II Pool Borrowers will not be required to replace such Cap
Agreement.
LIBOR for each interest accrual period will equal the rate (expressed as a
percentage per annum) for deposits in U.S. dollars for a one month period that
appears on Telerate Page 3750 (or the successor page thereto) as of 11:00 a.m.,
London time, on the date (the 'Interest Determination Date') which is two LIBOR
Business Days (as defined below) prior to the eleventh day (or if not a business
day, the following business day) of such calendar month. If such rate does not
appear on Telerate Page 3750 as of 11:00 a.m., London time, on the applicable
Interest Determination Date, LIBOR will be the arithmetic mean of the offered
rates (expressed as a percentage per annum) for deposits in U.S. dollars for a
one month period that appear on the Reuters Screen LIBO Page as of 11:00 a.m.,
London time, on such Interest Determination Date, if at least two such offered
rates so appear. If fewer than two such offered rates appear on the Reuters
Screen LIBO Page as of 11:00 a.m., London time, on such Interest Determination
Date, the Servicer will request the principal London office of any four major
reference banks in the London interbank market selected by the Servicer to
provide such bank's offered quotation (expressed as a percentage per annum) to
prime banks in the London interbank market for deposits in U.S. dollars for a
one month period as of 11:00 a.m., London time, on such Interest Determination
Date for amounts of not less than U.S. $1,000,000. If at least two such offered
quotations are so provided, LIBOR will be the arithmetic
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mean of such quotations. If fewer than two such quotations are so provided, the
Servicer will request any three major banks in New York City selected by the
Servicer to provide such bank's rate (expressed as a percentage per annum) for
loans in U.S. dollars to leading European banks for a one month period as of
approximately 11:00 a.m., New York City time on the applicable Interest
Determination Date for amounts of not less than U.S. $1,000,000. If at least two
such rates are so provided, LIBOR will be the arithmetic mean of such rates. If
fewer than two rates are so provided, then LIBOR will be LIBOR as determined on
the preceding Interest Determination Date. A 'LIBOR Business Day' is each
business day on which banks are open for dealing in foreign currency and
exchange in London, England.
The Prime Retail II Pool Loan requires monthly payments of principal based
upon a 360-month amortization schedule and a 7.782% interest rate (together with
monthly interest at the Prime Retail Current Interest Rate, the 'Prime Retail
Monthly Debt Service Payment Amount'). The scheduled payment of principal and
interest during the first two years of the term of the loan will fluctuate due
to the floating interest rate. Thereafter, the Prime Retail II Pool Loan will
require 336 constant monthly payments of principal and interest equal to
$2,579,863.10. Commencing on the first payment date after the Prime Retail
Anticipated Repayment Date, in addition to the Prime Retail Monthly Debt Service
Payment Amount, the Prime Retail II Pool Borrower is required to apply 100% of
Prime Retail Excess Cash Flow (as defined below) for the month preceding the
month in which the payment date occurs in the following order of priority: (a)
to principal until the principal balance of the Prime Retail II Pool Loan is
paid in full and (b) to Prime Retail Excess Interest. 'Prime Retail Excess Cash
Flow' means operating income for all of the related Mortgaged Properties less
(a) the Prime Retail Monthly Debt Service Payment Amount, (b) amounts required
by the related Mortgages to fund the tax, insurance and ground lease escrow
account, the capital expenditure reserve escrow account and the operations and
maintenance reserve escrow account. The scheduled principal balance of the Prime
Retail Pool Loan as of the Prime Retail Anticipated Repayment Date is
approximately $334,563,703.
If any amounts due under the Prime Retail II Pool Loan are not paid when
due, the entire principal balance of the loan will bear interest at a rate equal
to the lesser of (a) the maximum rate allowable by law and (b) the Prime Retail
Current Interest Rate plus 3%.
Expansion. The Prime Retail II Pool Loan provides that the Prime Retail II
Pool Borrowers may fund the expansion of certain of the factory outlet centers
on the real property designated by the Originator on the date of the closing of
the loan (each such designation, an 'Expansion Space'), provided that the
requirements described below are satisfied. On the closing date of the loan, the
Originator established an account (the 'Expansion Account') in the name of the
lender and its successors and assigns, into which it deposited $40,000,000 from
the proceeds of funding of the loan and under which the Prime Retail II Pool
Borrowers do not have a unilateral right of withdrawal. If, among other things,
(a) each Rating Agency has delivered written confirmation that any rating on the
Certificates will not, as a result of such proposed Expansion Funding, be
downgraded, qualified or withdrawn, which confirmation or denial will be based
upon a rating analysis done as of the time of such submission and be at such
Rating Agency's sole discretion, (b) the Servicer has received a written request
from each of the Prime Retail II Pool Borrowers (i) requesting a disbursement of
sums to the borrowers out of the Expansion Account (an 'Expansion Funding') in
an amount not more than the Expansion Funding Amount (as defined below) for each
applicable Expansion Space and not less than $3,000,000 in the aggregate and
(ii) specifying the Mortgaged Properties with respect to which the Expansion
Funding is requested, (c) no event of default exists, (d) a permanent
certificate of occupancy for the building shell and core is issued with respect
to the applicable Expansion Space and tenants of not less than 75% of the GLA of
the Expansion Space are legally permitted to be and are open for business, (e)
evidence that all work on the occupied Expansion Space has been paid in full
(with certain permitted exceptions) has been delivered, (f) any additional
documentation as may reasonably be required by the lender or the Rating Agencies
has been delivered, (g) the Prime Retail Loan DSCR (calculated by subtracting
from net operating income any net cash flow attributable to any Expansion Space
for which an Expansion Funding has occurred within the prior 18 months and by
subtracting from payments of principal and interest any principal or interest
allocable to the Expansion Funding Amount for such Expansion Spaces), as defined
below, is equal or greater than 1.93, (h) funds have previously been disbursed
from the Expansion Account with respect to the Expansion Space for which the
written request relates not more than two times and not more than once in any
9-month period, (i) the Prime Retail II Pool Borrowers have not submitted 20 or
more requests for Expansion Fundings, and (j) the request is delivered to the
Servicer prior to the second anniversary of the first day of the month following
the date of the closing of the Prime Retail II Pool Loan except that, under
limited circumstances, the request may be delivered prior to the third
anniversary, then the Servicer
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will be required to disburse to the applicable Prime Retail II Pool Borrowers
the Expansion Funding out of the Expansion Account. If an event of default
occurs, the proceeds on deposit in the Expansion Account may be applied by the
Servicer in payment of charges affecting any portion of the Prime Retail II Pool
Borrowers, or following an acceleration of the debt, to the repayment of the
debt.
'Expansion Funding Amount' means, an amount equal to the quotient obtained
by dividing (i) a fraction the numerator of which is the pro forma net cash flow
(including rent only from tenants who have entered into space leases having
terms not less than one year and who have occupied Expansion Space for a minimum
of 3 months and who are either (a) tenants in 10 or more factory outlet centers,
(b) manufacturers of retail goods having sales in excess of $50,000,000 per
fiscal year, (c) retailers which have sales in excess of $50,000,000 per fiscal
year, (d) tenants having 25 or more outlet or retail stores, (e) tenants of
similar quality to other tenants occupying a portion of the Prime Retail II Pool
Properties which are approved in writing by the lender and the Rating Agencies
in their sole and absolute discretion or (f) tenants under leases which in the
aggregate make up less than 10% of the gross leaseable area in the Expansion
Space and which do not contribute minimum base rent for the Expansion Space in
excess of 10% in the aggregate which do not fall within any of the categories of
tenants set forth in clauses (a) through (e), provided that, to the extent that
a tenant's lease obligations are guaranteed by an affiliate, the aggregate of
such tenant's and its affiliate's sales or number of stores, as applicable, will
be included for purposes of determining whether the tests set forth in (a)
through (d) are satisfied) for the applicable Expansion Space and the
denominator of which is 1.60 by (ii) 10.09%; provided, that if the quotient
obtained by dividing (a) the aggregate pro forma net cash flow from all
Expansion Spaces for which an expansion occurred within the prior 18 months by
(b) the product of the aggregate Expansion Funding Amounts for such Expansion
Spaces multiplied by 10.09% is less than 1.60, then the Expansion Funding Amount
for the Expansion Space in question will be reduced by the amount which would
cause such quotient to be 1.60 if the Expansion Space in question were included
in the foregoing calculation.
'Prime Retail Loan DSCR' for the Prime Retail II Pool Loan is the quotient
obtained by dividing net operating income (calculated as provided in the Prime
Retail II Pool Loan) by the aggregate amount of principal and interest payments
due during the relevant period (after subtracting any sums received by the Prime
Retail II Pool Borrowers pursuant to the Prime Retail Cap Agreement and not
including Prime Retail Excess Interest or interest or principal due on sums held
in the Expansion Account).
In the event that all sums in the Expansion Account have not been disbursed
prior to the payment date occurring in November, 1999, the remaining sums will
be required to be used to defease a portion of the Prime Retail II Pool Loan as
described under '--Release in Exchange for Substitute Collateral.'
Prepayment. Voluntary prepayment is prohibited under the Prime Retail II
Pool Loan prior to the Prime Retail Anticipated Repayment Date. Commencing on
the Prime Retail Anticipated Repayment Date, and on each payment date
thereafter, the Prime Retail II Pool Loan may be prepaid in whole or in part
without payment of a yield maintenance premium. Principal prepayments on the
Prime Retail II Pool Loan may also occur on scheduled payment dates commencing
on the Prime Retail Anticipated Repayment Date through the application of Prime
Retail Excess Cash Flow as described under 'Payment Terms' above.
In the case of prepayment in part, a Prime Retail II Pool Property will be
released from the lien of the Prime Retail II Pool Loan only if, among other
things, (a) no event of default has occurred and is continuing, (b) (except for
prepayments which are made contemporaneously with the application of insurance
or condemnation proceeds towards the payment of debt where such proceeds
constitute at least 50% of the Prime Retail Release Price (as defined below))
the Prime Retail Loan DSCR of the remaining Prime Retail II Pool Properties
(considered as a whole) would be at least equal to the greater of (i) the Prime
Retail Loan DSCR of all the Prime Retail II Pool Properties (including the
property to be released) calculated immediately prior to the release and (ii)
the Prime Retail Loan DSCR at origination of the loan and (c) the Prime Retail
II Pool Borrower prepays a principal portion of the Prime Retail II Pool Loan in
an amount equal to the sum of (i) 100% of the Allocated Loan Amount (as defined
below), as adjusted for amortization, defeasance or prepayment, plus (ii) 25% of
the Allocated Loan Amount at origination of the loan of the Prime Retail II Pool
Property to be released (the 'Prime Retail Release Price'). The 'Allocated Loan
Amount' of the Prime Retail II Pool Loan with respect to a property is the
portion of the principal amount of the Prime Retail II Pool Loan allocated to
such Prime Retail II Pool Property agreed upon by the Originator and the Prime
Retail II Pool Borrower and was determined as described under the definition of
'Allocated Loan Amount' set forth above in 'Description of the Mortgage Pool.'
Upon the
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occurance of an Expansion Funding, the Allocated Loan Amount with respect to the
Mortgaged Property with respect to which the Expansion Funding relates will be
increased by the amount of each disbursement from the Expansion Account for any
Expansion Space.
No yield maintenance premium is required to be paid by the Prime Retail II
Pool Borrower in connection with any proceeds that are paid with respect to a
taking or a conveyance of all or part of the Prime Retail II Pool Properties as
a result of any condemnation or other eminent domain proceeding by any
governmental authority or proceeds received under any insurance policy.
Release in Exchange for Substitute Collateral. Prior to the calendar month
immediately preceding the Prime Retail Anticipated Repayment Date, the Prime
Retail II Pool Borrower is permitted at any time after the second anniversary of
the Closing Date to defease all or a portion of the Prime Retail II Pool Loan
provided that, among other conditions, the Prime Retail II Pool Borrower pays on
any payment date (the 'Prime Retail Defeasance Date') (a) all interest accrued
and unpaid on the principal balance of the Prime Retail II Pool Loan, (b) all
other sums, excluding scheduled interest or principal, due and payable under the
Prime Retail II Pool Loan, and (c) the Prime Retail Defeasance Deposit (as
defined below). In addition, the Prime Retail II Pool Borrower is required to
deliver to the Servicer, among other things, (a) a security agreement granting
the Trustee a first priority lien on the Prime Retail Defeasance Deposit and the
U.S. Obligations purchased with the Prime Retail Defeasance Deposit and (b) an
opinion of counsel for the Prime Retail Borrower in form satisfactory to the
Servicer stating that the Trustee has a perfected security interest in the Prime
Retail Defeasance Deposit and a first priority perfected security interest in
such U.S. Obligations.
The 'Prime Retail Defeasance Deposit' is an amount equal to the total cost
incurred by the Servicer in purchasing U.S. Obligations providing payments on or
prior to, but as close as possible to, all successive payment dates after the
Prime Retail Defeasance Date upon which interest and principal payments are
required under the Prime Retail II Pool Loan after the Prime Retail Defeasance
Date and through the Prime Retail Anticipated Repayment Date and in amounts
equal to the payments due on such dates, including the amount of the outstanding
principal balance and all accrued interest on the Prime Retail Anticipated
Repayment Date or, in the case of a defeasance of only a portion of the Prime
Retail II Pool Loan, in amounts equal to a portion of the scheduled payments of
interest and principal equal to the amount of each such payment multiplied by a
fraction, the numerator of which is the defeased portion of the loan and the
denominator of which is the outstanding principal indebtedness immediately prior
to such defeasance.
In the event that only a portion of the loan is being defeased, the Prime
Retail II Pool Borrower will be required to amend and restate the related Note
and issue two substitute Notes, one having a principal balance equal to the
defeased portion of the Note and one having a principal balance equal to the
undefeased portion of the Note. Upon receipt of the Prime Retail Defeasance
Deposit, the Servicer will purchase U.S. Obligations on behalf of the Prime
Retail II Pool Borrower and such U.S. Obligations will serve as the sole
collateral for the payment of amounts due with respect to the defeased portion
of the Prime Retail II Pool Loan or, if the Prime Retail II Pool Borrower is
defeasing the entire loan, as the sole collateral for the Prime Retail II Pool
Loan. The Prime Retail II Pool Borrower will have the right to assign to a
successor Mortgagor to be designated by the Originator, which pursuant to the
terms of the Pooling and Servicing Agreement will be a special purpose
bankruptcy remote entity, the obligations under the related loan documents
relating to the principal amount so defeased.
In connection with a defeasance of the Prime Retail II Pool Loan, the Prime
Retail II Pool Borrower will be entitled to obtain the release of a property
from the lien of a related Prime Retail Mortgage if, among other things, (a) no
event of default shall have occurred and be continuing, (b) (except for
defeasances which are made contemporaneously with the application of insurance
or condemnation proceeds towards the defeasance of debt where such proceeds
constitute at least 50% of the Prime Retail Release Price) the Prime Retail Loan
DSCR of the remaining Prime Retail II Pool Properties not being released
(considered as a whole) would be at least equal to the greater of (i) the Prime
Retail Loan DSCR of all of the Prime Retail II Pool Properties (including the
property to be released) calculated immediately prior to the release and (ii)
the Prime Retail Loan DSCR at origination of the loan and (c) the Prime Retail
II Pool Borrower defeases a principal portion of the Prime Retail II Pool Loan
in an amount equal to the Prime Retail Release Price. Upon satisfaction of such
conditions, the applicable Prime Retail II Pool Property will be released from
the lien of the related Mortgage.
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Substitute Properties. In addition to the Prime Retail II Pool Borrowers'
right to obtain releases in connection with a prepayment or defeasance, at any
time prior to the Prime Retail Anticipated Repayment Date, each Prime Retail II
Pool Borrower will also have the right to obtain the release of a Mortgaged
Property from the lien of Prime Retail II Pool Loan, provided that
simultaneously with such release, the Prime Retail II Pool Borrower seeking such
release executes and delivers as security for the loan, a mortgage (a 'Prime
Retail Substitute Mortgage') encumbering a factory outlet center (a 'Prime
Retail Substitute Property') and such other documents (together with the Prime
Retail Substitute Mortgage, the 'Prime Retail Substitute Documents'), as the
Servicer requires in order to grant the Trust a first priority, perfected lien
on and security interest in such Prime Retail Substitute Property on the same
terms and conditions as the liens granted in the released Mortgaged Property.
Such right to obtain a release of a Mortgaged Property is also subject to, among
other things, the following conditions and restrictions: (a) each Rating Agency
has delivered written confirmation that any rating of the Certificates issued by
such Rating Agency will not, as a result of the proposed release and
substitution of the Prime Retail Substitute Property, be downgraded from the
then current ratings thereof, qualified or withdrawn, (b) no event of default
has occurred and is continuing, (c) the Prime Retail II Pool Borrowers
collectively will not be entitled to replace more than two Mortgaged Properties
in any calendar year, (d) the Servicer has received appraisals, prepared by a
third-party real estate professional, indicating that the fair market value for
the proposed Prime Retail Substitute Property is at least equal to the fair
market value of the Mortgaged Property proposed to be released, (e) the Prime
Retail II Pool Borrowers have delivered environmental reports stating that the
Prime Retail Substitute Property complies with all applicable environmental
laws, or if remedial steps are required to effect such compliance, identifying
such steps and projecting the cost thereof, in which case the Prime Retail II
Pool Borrowers will be required to deposit into the engineering escrow reserve
account an amount equal to 150% of such projected costs, (f) the Prime Retail II
Pool Borrowers have delivered an engineering report, stating that the Prime
Retail Substitute Property complies with all applicable building laws and does
not require performance of deferred maintenance or if remedial steps are
required to effect such compliance or such deferred maintenance, identifying
such steps and projecting the cost thereof, in which case the Prime Retail II
Borrowers will be required to deposit into the engineering escrow reserve
account an amount equal to 150% of such projected costs, (g) the Prime Retail II
Pool Borrowers have caused to be delivered all leases, title commitments, title
insurance policies, surveys, hazard and liability insurance, evidence of
compliance with zoning and other laws, legal opinions, and other items of due
diligence with respect to the Prime Retail Substitute Property as the Rating
Agencies may require, (h) the net operating income (as calculated pursuant to
the terms of the loan) of the Prime Retail Substitute Property as of the time of
such release is at least equal to the net operating income of the Mortgaged
Property to be released, (i) the person transferring the Prime Retail Substitute
Property to a Prime Retail II Pool Borrower (i) is solvent and (ii) is making
such transfer on an arm's-length basis and for fair consideration, and the Prime
Retail II Pool Borrower and such person delivers such certifications as the
Servicer reasonably requires to assure itself that the substitution does not
constitute a fraudulent conveyance and (j) title to the Mortgaged Property to be
released is transferred to a party other than the Prime Retail II Pool
Borrowers.
Additional Properties. Each Prime Retail II Pool Borrower has the right to
add any real property to the lien of the applicable Mortgage which it acquires
subsequent to the closing date of the Prime Retail II Pool Loan provided such
real property is immediately adjacent to the Mortgaged Property and is operated
or is to be operated as an outlet center and, provided that, among other things,
conditions similar to those described above in clauses (b), (e), (f), (g) and,
with certain limited exceptions, (a) under '--Substitute Properties' have been
satisfied.
Reserves. Pursuant to the terms of the Prime Retail II Pool Loan, there
have been established (i) an engineering escrow reserve account in the amount of
$174,606 for the purpose of funding certain engineering work required by the
Originator at the time of origination, (ii) a capital expenditures reserve
account for the purpose of funding on-going capital repairs, replacements and
improvements, (iii) an operations and maintenance reserve account for the
purpose of funding certain operating expenses during the continuance of an event
of default and during the period after the Prime Retail Anticipated Repayment
Date, (iv) a curtailment reserve fund account, for the purpose of depositing
certain excess cash flows during an event of default and/or during the period
after the Prime Retail Anticipated Prepayment Date and (v) a tax, insurance and
ground lease rent reserve account to be funded each month by an amount equal to
1/12 of the annual taxes, insurance premiums and ground rents due. The Prime
Retail II Pool Borrowers will fund the capital expenditures reserve account with
deposits each month in the amount of one-twelfth of $0.20 (as adjusted for
inflation) per square foot of GLA per annum.
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As additional security for debt service payments on the Prime Retail II
Pool Loan, the Originator will on the Cut-off Date fund a reserve account (the
'Prime Retail Treasury Reserve Account') which should be assigned to the Trust
Fund consisting of U.S. Treasury obligations having a market value equal to
$10,212,000 (the aggregate of three years' interest payments that would be due
(assuming an interest rate equal to 8.51% per annum) on the principal
attributable to the funding of the Expansion Account. The rate of 8.51% is the
sum of the strike price of the Cap Agreements and 1.51% (the Prime Retail II
Pool Loan spread over LIBOR). If an event of default occurs under the Prime
Retail II Pool Loan, the Servicer will be required to sell U.S. Treasuries
sufficient to pay monthly debt service in the amount of interest at the lesser
of Prime Retail Current Interest Rate and 8.51% per annum on the then-current
balance of the Expansion Account. NACC will be permitted to withdraw U.S.
Treasuries to the extent the market value of the U.S. Treasuries exceeds the
amount necessary to pay such interest payments (due to the passing of scheduled
payment periods, amortization or an increase in the market value of U.S.
Treasuries). The market value of the U.S. Treasuries will be determined monthly
and NACC will be required to fund additional U.S. Treasuries if the market value
has declined below the required funding amount.
Lock-Box. Rents from the Prime Retail II Pool Properties will be remitted
directly into a Lock Box Account. As of the Closing Date, the Prime Retail II
Pool Borrowers will have pledged and assigned to the Trustee a security interest
in the Lock Box Account. The funds in the Lock Box Account will be swept on a
daily basis into a Cash Collateral Account, provided that prior to the Prime
Retail Anticipated Repayment Date, such sweep will cease at such time in each
month as the Servicer notifies the bank maintaining the Lock Box Account that
sufficient funds have been deposited in the Prime Retail Cash Collateral Account
to provide for payment of debt service and the required reserve funds under the
Prime Retail II Pool Loan. The Servicer will distribute funds held in the Prime
Retail Cash Collateral Account in the following order: (a) to the tax, insurance
and ground lease reserve account to meet monthly funding requirements, (b) to
the scheduled monthly payment of interest and principal, (c) to the capital
expenditures reserve account to meet monthly funding requirements, (d) during
the occurrence of an event of default and/or after the Prime Retail Anticipated
Repayment Date, to the operations and maintenance reserve account to meet
monthly funding requirements and (e) during the occurrence of an event of
default and after the Prime Retail Anticipated Repayment Date, until an amount
equal to the Prime Retail Excess Cash Flow has been deposited, to be applied
after an acceleration of the debt (in the case of an event of default) as set
forth in the related Note and after the Prime Retail Anticipated Repayment Date,
as set forth under 'Payment Terms' above.
Transfer of Properties and Interest in Borrowers; Encumbrance. The Prime
Retail II Pool Loan prohibits the transfer, without the consent of the lender,
of any (i) of the Prime Retail II Pool Properties, except as described in the
next paragraph and above under '--Prepayment,' 'Release in Exchange for
Substitute Collateral' and '--Replacement', (ii) partnership interests in any of
the Prime Retail II Pool Borrowers (except for one or more transfers of the
limited partnership interests in a Prime Retail II Pool Borrower which,
individually or in the aggregate, do not exceed 49.9% of the total limited
partnership interests in such borrower), (iii) general partnership interest of
Prime Retail, Inc. in the Prime Retail Operating Partnership, and (iv)
shareholder interest by Prime Retail, Inc. in Prime Retail Finance I or Prime
Retail Finance II. Except for certain permitted encumbrances, no other liens are
permitted on the Prime Retail II Pool Properties.
The Prime Retail II Pool Borrowers are permitted to transfer and obtain the
release from the lien of the related Mortgage of any unimproved out-parcel or
unimproved expansion parcel (each, an 'Out-Parcel') comprising a portion of the
Mortgaged Property if, among other things, (a) no event of default exists, (b)
the use to which the Out-Parcel will be put is consistent with the use to which
out-parcels and expansion parcels are generally put in first class retail
shopping centers, (c) the disposition of the Out-Parcel will not have a material
adverse affect on net operating income, (d) the occupancy rate of the remaining
Mortgaged Property will be not less than 90% (without regard to the portion, if
any, of the remaining Mortgaged Property which constitutes an Expansion Space
for which either no Expansion Funding has been made or an Expansion Funding has
occurred within the prior 18 months) and (e) the Prime Retail Loan DSCR
allocable to the remaining Mortgaged Property (exclusive of net operating income
and principal and interest on aggregate Expansion Funding Amounts allocable to
any Expansion Space for which either no Expansion Funding has been made or an
Expansion Funding has occurred within the prior 18 months) is not less than the
Prime Retail Loan DSCR for such Mortgaged Property at the closing of the loan,
provided that if the conditions described in (d) and (e) are not satisfied, an
Out-Parcel may be released if is sold to a bona-fide third party and all sums
received in consideration are applied to defease the debt as described above
under 'Release in Exchange for Substitute Collateral.'
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Insurance. Each of the Prime Retail II Pool Borrowers is required to
maintain (a) insurance against loss or damage by fire, casualty and other
hazards included in an 'all risk' extended coverage endorsement or its
equivalent in an amount not less than the greater of (i) 100% of the insurable
replacement value of the Mortgaged Property (exclusive of land, footings and
foundations) and (ii) such other amount as is necessary to prevent any insured
person from being a co-insurer, (b) commercial comprehensive general liability
insurance, (c) business interruption rent loss or other similar insurance
containing an extended period endorsement which provides that after the physical
loss to the Mortgaged Property has been repaired, the continued loss of rental
income will be insured until 6 months after completion of such repairs,
notwithstanding that the policy may expire prior to the end of such period, (d)
boiler and sprinkler insurance, (e) if the improvements are located in a
Federally designated flood hazard zone and if flood insurance is available under
the National Flood Insurance Act and required by the Servicer, flood insurance,
(f) workers compensation insurance, and (g) insurance against earthquakes, if
commonly insured against and generally available. The Prime Retail II Pool
Borrowers are required to maintain insurance coverage (other than with respect
to (e) and (f) when such insurance is placed with a governmental agency or
instrumentality) with insurers having a claims paying ability of not less than
'AA' from the Rating Agencies, or if not rated by all of such rating agencies,
than a claims paying ability rating of 'AA' from at least two nationally
recognized statistical rating agencies (one of which must be S&P), except that
with respect to earthquake insurance, such insurance must have a claims paying
ability rating of not less than 'BBB' from the Rating Agencies.
Condemnation and Casualty. Insurance proceeds will be required to be made
available to the Prime Retail II Pool Borrowers unless (a) an event of default
has occurred and is continuing, (b) the Servicer is not reasonably satisfied
that the Prime Retail Loan DSCR after substantial completion of the restoration
will be at least equal to 1.15, (c) any leases covering 30% or more of the total
GLA of the Mortgaged Property are not in full force and effect (except under
certain circumstances where letters of intent with prospective tenants have been
entered into), (d) more than 75% of the reasonably estimated aggregate insurable
value of the Mortgaged Property is damaged or destroyed or (e) the Servicer is
not reasonably satisfied that the restoration can be completed six months prior
to maturity. If any of (a) through (e) occurs, the Servicer will have the option
to apply such proceeds to the prepayment of the debt without payment of any
yield maintenance premium. Condemnation awards will be made available to the
Prime Retail II Pool Borrowers unless a substantial taking occurs such that the
remaining balance of such property does not constitute a complete rentable
facility of the same sort as existed prior to the taking or is not capable of
producing income yielding a projected Prime Retail Loan DSCR of not less than
1.45 for the next three years. Otherwise, the condemnation award will be applied
to prepayment of the loan, without payment of any yield maintenance premium, up
to an amount equal to the release price of the applicable Mortgaged Property.
Financial Reporting. Each of the Prime Retail II Pool Borrowers is
required to provide to the Servicer, among other things, (a) annually, within 90
days following the end of each fiscal year, financial statements audited by an
independent CPA acceptable to the Servicer in accordance with GAAP, (b) monthly,
within 30 days following the end of each month, a cash flow statement and rent
rolls, occupancy reports, and statements of the sales of tenants under space
leases, each dated as of the last day of such month, (c) quarterly, within 30
days following the end of each fiscal quarter, a certified rent roll, (d)
annually, within 90 days after the end of each fiscal year, a report setting
forth (i) the net operating income for such fiscal year, (ii) the average
occupancy rate during such fiscal year and (iii) the capital repairs,
replacements and improvements performed during such fiscal year and the
aggregate recurring capital expenditures made in connection therewith and (e) if
the loan is not repaid on the Prime Retail Anticipated Repayment Date, at least
45 days prior to the end of each fiscal year, an annual operating budget and
capital budget for the forthcoming fiscal year.
The Properties. The Mortgaged Properties securing the Prime Retail II Pool
Loan are sixteen factory outlet centers containing an aggregate of approximately
4,446,984 square feet of GLA and having GLAs ranging from approximately 126,595
to approximately 419,126 square feet.
San Marcos Factory Shops. This outlet center is located on 56 acres in San
Marcos, Texas, at the intersection of Interstate 35 and Center Point Road,
approximately 30 miles south of Austin, the state capital, and 50 miles north of
San Antonio. San Marcos Factory Shops, which was built in 6 phases between 1990
and 1995, contains approximately 419,000 square feet of GLA. San Marcos Factory
Shops, as of November 1, 1996, was approximately 98% leased to 112 tenants.
Major tenants based on GLA include Donna Karan, Gap Outlet,
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Coach, Eddie Bauer, Nike, J. Crew, First Choice/Escada, Ann Taylor and Off 5th
Saks. The appraised value of San Marcos Factory Shops, as of April 16, 1996 was
$64,000,000.
Attached to the San Marcos Factory Shops is an additional approximately
60,000 square feet of GLA on seven acres owned by VF Corporation, which
manufactures such brand names a Lee, Wrangler Jeans and Vanity Fair. VF
Corporation contributes contracted amounts to the common area maintenance and
marketing of the outlet center pursuant to a reciprocal easement agreement. San
Marcos owns contiguous land that is included in the collateral for the Prime
Retail Loan and can accommodate additional GLA. A partnership owned by The Prime
Group, Inc. and other parties owns approximately 63 acres of undeveloped land
across Interstate 35 from the San Marcos Factory Shops. Prime Retail, Inc. has a
right of first refusal to purchase the land from such partnership if the
partnership sells the land for retail use. Such land, or any improvements built
thereon, will not be collateral for the Prime Retail Loan and there can be no
assurance that any such improvements would not compete with the Mortgaged
Property.
The nearest competing outlet center, Tanger Factory Outlet Center, is
located at the interstate intersection adjacent to San Marcos Factory Shops and
contains approximately 219,000 square feet of GLA. There is another competing
outlet center located within 12 miles.
Gulf Coast Factory Shops. This outlet center is located on 48 acres in
Ellenton, Florida at the intersection of Interstate 75 and Highway 301, 40 miles
south of Tampa/St. Petersburg and 20 miles north of Sarasota, and contains
approximately 341,000 square feet of GLA. Phase I, Phase II and Phase IIIA of
the Gulf Coast Factory Shops opened in October 1991, August 1993 and October
1996, respectively. Gulf Coast Factory Stores, as of November 1, 1996 was
approximately 99% leased to 97 tenants. Major tenants include Coach, Jones of
New York, Nike, Sony, Ann Taylor, Donna Karan, Liz Claiborne, Off 5th Saks and
Ellen Tracy. The appraised value of the Gulf Coast Factory Shops, as of April
19, 1996 was $44,500,000. The nearest competing outlet center, Sarasota Outlet
Center, is located 12 miles from the Gulf Coast Factory Shops and contains
approximately 306,000 square feet of GLA.
Triangle Factory Shops. This outlet center is located on 25 acres in
Morrisville, North Carolina at the intersection of Interstate 40 and Airport
Boulevard, 16 miles northwest of Raleigh and 11 miles southeast of Durham. The
property was originally a mall containing approximately 134,000 square feet of
GLA occupied by discount retailers. An affiliate of Triangle acquired the
property in February, 1991, substantially renovated the structure, converted it
to a factory outlet center and expanded it to approximately 194,000 square feet
of GLA. The outlet center re-opened in October 1991 and, as of November 1, 1996,
was approximately 87% leased to 43 tenants. Major tenants include Reading China,
Levi's, Jones New York, Nine West, Off 5th Saks and Bugle Boy. The Appraised
value of Triangle Factory Shops, as of May 6, 1996, was $20,000.000. The nearest
competing outlet center is located 40 miles from the Triangle Factory Shops.
Coral Isle Factory Shops. This outlet center is located on 20 acres in
Marco Island, Florida on Route 951, one mile west of Highway 41, approximately
20 miles south of Naples, Florida, and contains approximately 127,000 square
feet of GLA. Phase I of Coral Isle Factory Shops opened in December 1991 and
Phase II of the outlet center opened in December 1992. The Coral Isle Factory
Shops, as of November 1, 1996, was approximately 98% leased to 39 tenants. Major
tenants include Mikasa, Coach, Jones New York and Anne Klein. The appraised
value of Coral Isle Factory Shops, as of April 12, 1996, was $18,000,000. The
nearest competing outlet center, Sanibel Factory Stores, is located 35 miles
from Coral Isle Factory Shops and contains 185,000 square feet of GLA.
Ohio Factory Shops. This outlet center is located on 51 acres in
Jeffersonville, Ohio at the intersection of Interstate 71 and U.S. Route 35,
approximately 36 miles south of Columbus, 52 miles north of Cincinnati and 34
miles east of Dayton, and contains approximately 309,000 square feet of GLA.
Phase I, Phase II and Phase IIIA of the Ohio Factory Shops opened in July 1993,
November 1993 and August 1996, respectively. The Ohio Factory Shops, as of
November 1, 1996, was approximately 98% leased to 83 tenants. Major tenants
include Design by Levi's, Eddie Bauer, Ann Taylor, Donna Karan, Coach,
Polo/Ralph Lauren and Brooks Brothers. The appraised value of Phases I and II of
the Ohio Factory Shops, as of May 1, 1996, was $42,000,000. The appraised value
of Phase IIIA, as of May 1, 1996, based upon an assumption that construction
would be completed by October 1, 1996, was $2,400,000, and based upon an
assumption of stabilized occupancy was $4,000,000. The nearest competing outlet
center, Jeffersonville Outlet Center, is located four miles from The Ohio
Factory Shops and contains approximately 310,000 square feet of GLA.
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Nebraska Crossing Factory Shops. This outlet center is located on 46 acres
near Gretna, Nebraska, at the intersection of Interstate 80 and Highway 31,
approximately 25 miles west of Omaha and 35 miles east of Lincoln. Nebraska
Crossing Factory Shops, which opened in October 1993, contains approximately
192,000 square feet of GLA and, as of November 1, 1996, was approximately 86%
leased to 50 tenants. Nebraska owns sufficient land to develop 30,000 square
feet of additional GLA and an affiliate of the Prime Retail Operating
Partnership owns an additional four acres of contiguous land sufficient to
expand this factory outlet center by another 25,000 square feet of GLA. The
additional four acres and any future expansion thereon will not be collateral
for the Prime Retail Loan and there can be no assurance that any such expansion
would not compete with the Mortgaged Property. Major tenants include Levi's,
Mikasa, Carter's and Bugle Boy. The appraised value of Nebraska Crossing Factory
Shops, as of May 8, 1996, was $18,630,000. The nearest competing outlet center
is located approximately 60 miles from the Nebraska Crossing Factory Shops.
Magnolia Bluff Factory Shops. This outlet center is located on 45 acres in
McIntosh County, Georgia, at the Interstate 95 and State Road 251 interchange.
Magnolia Bluff Factory Shops, which opened in 1995, contains approximately
299,000 square feet of GLA. Magnolia Bluff Factory Shops, as of November 1,
1996, was approximately 86% leased to 74 tenants. Major tenants include Reebok,
Polo/Ralph Lauren, Coach, Tommy Hilfiger, Levi's, Ann Taylor and Liz Claiborne.
The appraised value of Magnolia Bluff Factory Shops, as of May 9, 1996, was
$45,500,000. The nearest competing outlet center, Brunswick Outlet Plaza, is
located 20 miles from Magnolia Bluff Factory Shops.
Rocky Mountain Factory Stores. This outlet center is located on 37 acres
in Larimar County, Colorado, along Interstate highway 25 just north of the U.S.
34 interchange. Rocky Mountain Factory Stores, which was built in four phases
between 1994 and 1996 and acquired in October, 1996, contains approximately
328,000 square feet of GLA. Rocky Mountain Factory Stores, as of November 1,
1996 and acquired in, was approximately 98% leased to 81 tenants. Major tenants
include Spiegel, Liz Claiborne, Levi's, Reebok, Mikasa, Espirit and Magnovox.
The appraised value of Rocky Mountain Factory Stores, as of October 9, 1996, was
$46,000,000. The nearest competing outlet center, Castle Rock Factory Shops, one
of the Prime Retail II Pool Properties, is located 73 miles away.
Indiana Factory Shops. This outlet center is located on 61 acres in
Delaware County, Indiana, at the Interstate Highway 69 and Route 67 interchange.
Indiana Factory Shops, which was opened in 1994, contains approximately 209,000
square feet of GLA. Indiana Factory Shops, as of November 1, 1996, was
approximately 84% leased to 52 tenants. Major tenants include Jones New York,
Nine West, Carter's and Polo/Ralph Lauren. The appraised value of Indiana
Factory Shops, as of May 6, 1996, was $29,000,000. The nearest competing outlet
center, Hamilton Commons Factory Stores, is located 25 miles from Indiana
Factory Shops and contains approximately 205,000 square feet of GLA.
Additionally, a competing developer has announced plans to open a factory store
outlet located 10 miles from Indiana Factory Shops in fall, 1997, with 150,000
square feet of GLA in its initial phase and a planned additional 200,000 square
feet of GLA in two later phases.
Kansas City Factory Outlets. This outlet center is located on 48 acres in
Lafayette County, Missouri, on West Old Highway 40, just west of the
intersection of Highway 131 and Interstate 79, and contains approximately
191,000 square feet of GLA. Phase I and Phase II of Kansas City Factory Outlets
opened in July 1995 and November 1996, respectively. Kansas City Factory
Outlets, as of November 1, 1996, was approximately 96% leased to 42 tenants.
Major tenants include Spiegel, Levi's, Reebok, Eddie Bauer, Mikasa and Van
Heusen. The appraised value, as of October 15, 1996, for Phase I was $26,400,000
and for Phase II was $13,100,000. The nearest competing outlet centers, Lawrence
Riverfront Factory Outlets and Tanger Factory Outlet Center, are located 70 to
80 miles from Kansas City Factory Outlets and contain approximately 148,000 and
150,000 square feet of GLA, respectively.
Gulfport Factory Shops. This outlet center is located on 100 acres in the
City of Gulfport, Mississippi, near the intersection of Interstate Highway 10
and U.S. Highway 49. Gulfport Factory Shops, which was completed in 1995,
contains approximately 251,000 square feet of GLA. Gulfport Factory Shops, as of
November 1, 1996, was approximately 94% leased to 67 tenants. Major tenants
include Reebok, Levi's, Off 5th Saks, Bass and Mikasa. The appraised value of
the leasehold interest in Gulfport Factory Shops, as of June 14, 1996, was
$30,000,000. The nearest competing outlet center, Slidell Factory Stores, is
located 40 miles from Gulfport Factory Shops.
Huntley Factory Shops. This outlet center is located on 77 acres in
Huntley, Illinois near the intersection of Interstate 90 and State Highway 47.
Phase I of Huntley Factory Shops, which opened in September, 1994, and
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Phase II of the outlet center, which opened in December, 1995, contain, in the
aggregate, approximately 280,000 square feet of GLA. Huntley Factory Shops, as
of November 1, 1996, was approximately 80% leased to 62 tenants. Major tenants
include Reebok, Rockport, Bose, Mikasa and Bugle Boy. The appraised value of
Huntley Factory Shops (including 21 acres of excess land area subject to the
related Mortgage) as of June 19, 1996, was $36,900,000. The nearest competing
outlet center is located 20 miles from Huntley Factory Shops.
Grove City Factory Shops. This outlet center is located on 119 acres in
Grove City, Pennsylvania, near the Interstate Highway 79 and Route 208
interchange. Phases I-III of Grove City Factory Shops, which were built from
1993 to 1996, contain approximately 416,000 square feet of GLA and Phase IV of
the outlet center, which opened in November, 1996, contains approximately
117,000 square feet of GLA. The remaining 50% ownership interest in Grove City
Factory Shops not owned by affiliates of Grove City was acquired in October,
1996. Grove City Factory Shops, as of November 1, 1996, was approximately 99%
leased to 114 tenants. Major tenants include VF Outlet Marketplace, Off 5th
Saks, Levi's, Reebok, Nike, Gap Outlet, Polo/Ralph Lauren, Eddie Bauer, Mikasa
and Espirit. The appraised value, as of September 1, 1996, for Phases I-III was
$71,900,000 and for Phase IV was $6,400,000. The nearest competing outlet
centers, Aurora Farms and Horizon Outlet Center, are each located approximately
50 miles from Grove City Factory Shops and contain approximately 300,000 and
200,000 square feet of GLA, respectively.
Gainesville Factory Shops. This outlet center is located on 129 acres in
the City of Gainesville, Texas, at the intersection of Interstate Highway 35 and
Route 1202, and contains approximately 316,000 square feet of GLA. Phase I and
Phase II of Gainesville Factory Shops was completed in 1993, and 1994,
respectively. Gainesville Factory Shops, as of November 1, 1996, was
approximately 84% leased to 82 tenants. Major tenants include Reebok, Nine West,
Nordic Track, Brooks Brothers and Ann Taylor. The appraised value of Gainesville
Factory Shops Outlet Center, as of April 9, 1996, was $41,000,000. The nearest
competing outlet center, Denton Factory Shops, is located 30 miles from
Gainesville Factory Shops Outlet Center.
Castle Rock Factory Shops. This outlet center is located on 60 acres in
Castle Rock, Colorado, along Interstate Highway 25, just north of the Meadows
Parkway interchange. Castle Rock Factory Shops, which was built during 1992-94,
contains approximately 370,000 square feet of GLA. Castle Rock Factory Shops, as
of November 1, 1996, was approximately 100% leased to 107 tenants. Major tenants
include Sony, Ann Taylor, Coach, Reebok, Tommy Hilfiger, Jones New York, Brooks
Brothers, Baccarat and Nautica. The appraised value of Castle Rock Factory
Shops, as of May 11, 1996, was $61,000,000. The nearest competing outlet center,
Rocky Mountain Factory Stores, one of the Prime Retail II Pool Properties, is
located 73 miles away. Castle Rock intends to construct and open during 1996 a
Phase IV expansion of approximately 105,000 Square Feet of GLA on contiguous
land subject to the related Mortgage.
Florida Keys Factory Shops. This outlet center is located on 46 acres in
Florida City, Florida, where the Florida Turnpike ends at U.S. Route 1. Florida
Keys Factory Shops, which was built in 1994, contains approximately 207,000
square feet of GLA. Florida Keys Factory Shops, as of November 1, 1996, was
approximately 93% leased to 57 tenants. Major tenants include Nike, Levi's,
L'Eggs, Hanes, Bali and Bugle Boy. The appraised value of Florida Keys Factory
Shops, as of June 7, 1996, was $28,200,000. The nearest competing outlet center
is located 60 miles from Florida Keys Factory Shops.
Castle Rock Factory Shops and Kansas City Factory Outlets (the 'JMJ
Acquired Properties') were recently acquired from an unaffiliated third party.
Ground Leases. The Prime Retail II Pool Property known as Gulfport Factory
Shops is a leasehold estate. The lease agreement with respect to Gulfport
Factory Shops is with the Board of Education of Harrison County School District,
as lessor, and has a term of 40 years commencing January 1, 1995, with an option
to extend, at Gulfport's discretion, for an additional 25 years (or such greater
period as allowed by law). Gulfport is required to pay annual rent which ranges
from $72,850 in year one to $422,933 in year forty with rent in any extension
period readjusted based upon an appraisal. The lessor has agreed (a) that in the
event the lender under the Prime Retail II Pool Loan should foreclose, the
lender would have the right to assign the leasehold estate to an entity approved
by the lessor, (b) to send the lender notice of any event of default under the
lease and to grant to the lender a right and additional time to cure any such
default, and (c) if the lessor terminates the lease, to enter into a new lease
with the lender on the same terms as the present lease provided that the lender
has cured any defaults.
The Mortgage relating to the Prime Retail II Pool Property known as
Magnolia Bluff Factory Shops encumbers both the related Prime Retail II Pool
Borrower's leasehold interest and the related ground lessor's fee
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interest. In order to obtain certain benefits, the Mortgaged Property known as
Magnolia Bluff Factory Shops was acquired by the McIntosh County Industrial
Development Authority (the 'Industrial Authority') and then leased to Magnolia
Bluff. Series 1995-A Notes, in the principal amount of $2,900,000 (which as of
the date of closing of the Prime Retail II Pool Loan was $2,826,380) and bearing
interest at a rate of 8.9% per annum, and Series 1995-B Notes, in the principal
amount not to exceed $22,730,000 (which as of the date of closing of the Prime
Retail II Pool Loan was $22,427,225) and bearing interest at a rate of 8.0% per
annum (collectively, the 'Lease Notes'), were issued by the Industrial Authority
for the financing of the acquisition and construction of the project. The
Industrial Authority deposited the proceeds of the Lease Notes into a sinking
fund to be disbursed for the acquisition and construction of the project. The
rental payments paid by Magnolia Bluff under the lease agreement reflect the
annual payments for the Lease Notes, as well as an administrative assessment
charge equal to approximately two percent of the Series 1995-A Note payments.
Magnolia Bluff is the holder of the Series 1995-A Note and the Prime Retail
Operating Partnership is the holder of the Series 1995-B Note, and each such
holder has pledged its Lease Note as security for the Prime Retail II Pool Loan.
Additionally, if certain employment and sales targets are not satisfied,
Magnolia Bluff will be required to pay additional rent. The lease term expires
January 1, 2008, at which point Magnolia Bluff has the option to purchase the
Industrial Authority's fee interest in the property for $100. Magnolia Bluff may
terminate the lease and exercise its option to purchase the fee interest at any
time by delivering funds sufficient to retire the Lease Notes. If there is an
event of default under the Prime Retail II Pool Loan, the lender will have the
option to foreclose on and obtain the Industrial Authority's fee interest in the
property. If Magnolia Bluff defaults on its obligations under the lease, the
Industrial Authority has agreed to give the holder of the Prime Retail II Pool
Loan the opportunity to cure such default.
Property Management. The Prime Retail Operating Partnership, as general
partner of the respective Prime Retail II Pool Borrowers, manages the Prime
Retail II Pool Properties. Each Prime Retail II Pool Borrower has an on-site
property management staff. Such staff monitor the sales performance of each
tenant and monthly sales reports are prepared on a tenant-by-tenant basis for
each factory outlet center. In addition, the Prime Retail Operating Partnership
employs a director of operations, located in its headquarters in Baltimore,
Maryland, to supervise the respective on-site management staffs and to develop
policies and procedures with respect to the Prime Retail II Pool Properties. The
Prime Retail Operating Partnership also conducts leasing activities related to
the Prime Retail II Pool Properties. Under the Mortgages, the Prime Retail II
Pool Borrowers are permitted to receive or pay reasonable compensation for
management services, which means (a) while the Prime Retail Operating
Partnership or its affiliates are the managers, reimbursement for reasonably
incurred direct costs involved in the management of the Mortgaged Properties,
including reimbursement for allocated portions of salaries and overhead and (b)
in the event that an entity other than the Prime Retail Operating Partnership or
an affiliate is the manager, such compensation as is commercially reasonably for
similar properties similarly situated. The right of the Prime Retail Operating
Partnership or its affiliate to receive any compensation, reimbursement of costs
and expenses or other payments in consideration for its management services is
subordinate to the Prime Retail II Pool Loan Mortgages and such management
services may be terminated by the Originator or its successors and assigns (a)
for cause (including but not limited to the manager's gross negligence, willful
misconduct or fraud), (b) following the occurrence and during the continuance of
an event of default under the loan, (c) in the event of a change in control of
the manager, if the manager is a party other than Prime Retail Operating
Partnership, (d) following a decline in the aggregate Loan DSCR for all of the
Prime Retail II Pool Properties to 1.15 or less for any 12 month period
(provided that the Servicer shall have determined that the applicable Prime
Retail II Pool Properties could be more efficiently managed with better results
at competitive rates), (e) if a tenant is moved from a Mortgaged Property to a
factory outlet center owned by an affiliate of the Prime Retail II Pool
Borrowers located within 1 mile from the Mortgaged Property unless (i)(x) the
Mortgaged Property (exclusive of Expansion Space for which either no Expansion
Funding has been made or Expansion Funding has occurred within the prior 18
months) has an occupancy rate of at least 90% on a pro forma basis (including
any replacement lease) and (y) the Prime Retail Loan DSCR (exclusive of net
operating income and principal and interest on aggregate Expansion Funding
Amounts allocable to any Expansion Space for which either no Expansion Funding
has been made or an Expansion Funding has occurred within the prior 18 months)
for such Mortgaged Property and all Mortgaged Properties are not less than such
ratios as of the closing date of the loan or (ii) the Servicer's consent to such
move has been obtained, which consent may not be unreasonably withheld, delayed
or conditioned.
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DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement and will consist of nineteen classes to be designated as the Class
A-1A Certificates, the Class A-1B Certificates, the Class A-1C Certificates, the
Class CS-1 Certificates, the Class CS-2 Certificates, the Class CS-3
Certificates, the Class A-2 Certificates, the Class A-3 Certificates, the Class
A-4 Certificates, the Class A-5 Certificates, the Class A-6 Certificates, the
Class A-7 Certificates, the Class B-1 Certificates, the Class B-1H Certificates,
the Class V-1 Certificates, the Class V-2 Certificates, the Class P-IO
Certificates, the Class R Certificates and the Class LR Certificates. The Class
B-1, Class B-1H, Class V-1, Class V-2, Class P-IO, Class R and Class LR
Certificates (collectively, the 'Private Certificates') are not offered hereby.
The Class CS-1, Class CS-2 and Class CS-3 Certificates are sometimes referred to
herein as the 'Coupon Strip Certificates.'
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund consisting of: (i) the Mortgage Loans and all payments
under and proceeds of the Mortgage Loans due after the Cut-off Date; (ii) any
Mortgaged Property acquired on behalf of the Trust Fund through foreclosure or
deed in lieu of foreclosure (upon acquisition, an 'REO Property'); (iii) the
Floor Agreements and all payments under and proceeds of the Floor Agreements due
after the Cut-Off Date; (iv) such funds or assets as from time to time are
deposited in the Collection Account, the Lower-Tier Distribution Account, the
Upper-Tier Distribution Account, the Certificate Distribution Account, [the
Interest Reserve Account], the Excess Interest Distribution Account, the Default
Interest Distribution Account, the Prime Retail Treasury Reserve Account and any
account established in connection with REO Properties (an 'REO Account'); (v)
the rights of the mortgagee under all insurance policies with respect to the
Mortgage Loans; (vi) the Depositor's rights and remedies under the Mortgage Loan
Purchase and Sale Agreement; and (vii) all of the mortgagee's right, title and
interest in the Reserve Accounts, the Cash Collateral Accounts and Lock Box
Accounts. The Certificates do not represent an interest in or obligation of the
Depositor, the Originator, the Servicer, the Trustee, the Fiscal Agent, the
borrowers, the franchisors, the property managers, the Floor Counterparty, or
any of their respective affiliates.
The Class A-1A, Class A-1B, Class A-1C, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6, Class A-7, Class B-1 and Class B-1H Certificates will have
initial Certificate Balances of $94,311,998, $333,473,178, $171,996,502,
$35,807,861, $35,807,861, $44,759,826, $22,379,913, $49,235,809, $71,615,722,
$35,806,865 and $1,000, respectively. The Class CS-1 Certificates are comprised
of one component: the Class A-1A Component, which will have an initial Component
Balance equal to $94,311,998 (which is equal to the initial Certificate Balance
of the Class A-1A Certificates). The Class CS-1 Certificates will have an
initial Notional Balance equal to the Component Balance of the Class A-1A
Component. The Class CS-2 Certificates are comprised of one component: the Class
A-1B Component, which will have an initial Component Balance equal to
$333,473,178 (which is equal to the initial Certificate Balance of the Class
A-1B Certificates). The Class CS-2 Certificates will have an initial Notional
Balance equal to the Component Balance of the Class A-1B Component. The Class
CS-3 Certificates are comprised of seven components: the Class A-1C Component,
the Class A-2 Component, the Class A-3 Component, the Class A-4 Component, the
Class A-5 Component, the Class A-6 Component and the Class A-7 Component, which
will have initial Component Balances equal to $171,996,502 (which is equal to
the initial Certificate Balance of the Class A-1C Certificates), $35,807,861
(which is equal to the initial Certificate Balance of the Class A-2
Certificates), $35,807,861 (which is equal to the initial Certificate Balance of
the Class A-3 Certificates), $44,759,826 (which is equal to the initial
Certificate Balance of the Class A-4 Certificates), $22,379,913 (which is equal
to the initial Certificate Balance of the Class A-5 Certificates), $49,235,809
(which is equal to the initial Certificate Balance of the Class A-6
Certificates) and $71,615,722, (which is equal to the initial Certificate
Balance of the Class A-7 Certificates), respectively. The Class CS-3
Certificates will have an initial Notional Balance equal to $431,603,494, which
is the sum of the initial Component Balances of the Class A-1C, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Components. Each of the Class
A-1A Component, Class A-1B Component, Class A-1C Component, Class A-2 Component,
Class A-3 Component, Class A-4 Component, Class A-5 Component, Class A-6
Component and Class A-7 Component is sometimes referred to herein as a
'component'. The Class P-IO Certificates will have an initial Notional Balance
equal to $358,748,252 (which is equal to the initial principal balance of the
Prime Retail II Pool Loan).
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None of the Class CS-1, Class CS-2, Class CS-3, Class P-IO, Class R, Class
LR, Class V-1 and Class V-2 Certificates will have a Certificate Balance.
Additionally, the Class R, Class LR, Class V-1 and Class V-2 Certificates will
not have a Notional Balance.
The Certificate Balance of any class of Certificates outstanding at any
time represents the maximum amount which the holders thereof are entitled to
receive as distributions allocable to principal from the cash flow on the
Mortgage Loans and the other assets in the Trust Fund; provided, however, that
in the event that amounts previously allocated to a class of Certificates in
reduction of the Certificate Balance thereof are recovered subsequent to the
reduction of the Certificate Balance of such class to zero, such class may
receive distributions in respect of such recoveries in accordance with the
priorities set forth under '--Distributions--Priorities' herein.
The respective Certificate Balance of each class of Certificates (other
than the Coupon Strip Certificates, the Class P-IO, the Class V-1, Class V-2,
Class R and Class LR Certificates) will in each case be reduced by amounts
actually distributed thereon that are allocable to principal and by any Realized
Losses (as defined herein) allocated to such class of Certificates. The
Component Balances of the Class A-1A, Class A-1B, Class A-1C, Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Components (and therefore the
Notional Balances of the Class CS-1, Class CS-2 and Class CS-3 Certificates)
will be reduced in accordance with distributions of principal on, and
allocations of Realized Losses to, the Certificate Balances of the Class A-1A,
Class A-1B, Class A-1C, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6
and Class A-7, Certificates, as applicable. The Notional Balance of the Class
CS-1 Certificates will at all times equal the Component Balance of the Class
A-1A Component, which at all times will equal the Certificate Balance of the
Class A-1A Certificates. The Notional Balance of the Class CS-2 Certificates
will at all times equal the Component Balance of the Class A-1B Component, which
at all times will equal the Certificate Balance of the Class A-1B Certificates.
The Notional Balance of the Class CS-3 Certificates will at all times equal the
sum of the Component Balances of the Class A-1C Component, the Class A-2
Component, the Class A-3 Component, the Class A-4 Component, the Class A-5
Component, the Class A-6 Component and the Class A-7 Component. Except as
described below under '--Delinquency Reduction Amounts and Appraisal Reduction
Amounts,' the Component Balances of the Class A-1C Component, the Class A-2
Component, the Class A-3 Component, the Class A-4 Component, the Class A-5
Component, the Class A-6 Component and the Class A-7 Component will at all times
equal the Certificates Balances of the Class A-1C, the Class A-2, the Class A-3,
Class A-4, Class A-5, Class A-6 and Class A-7 Certificates, respectively. The
Notional Balance of the Class P-IO Certificates will at all times equal the
Stated Principal Balance of the Prime Retail Outlet Pool Loan.
DISTRIBUTIONS
Method, Timing and Amount. Distributions on the Certificates will be made
on the 13th day of each month or, if such 13th day is not a business day, then
on the next succeeding business day, commencing in January 1997 (each, a
'Distribution Date'); provided, however, that in any month, the Distribution
Date will be no earlier than the second business day following the 11th day of
such month and, provided further, that if the eleventh day of any month is not a
business day the Distribution Date will be the third business day following the
11th day of such month. All distributions (other than the final distribution on
any Certificate) will be made by the Trustee to the persons in whose names the
Certificates are registered at the close of business on the 10th day of the
month in which the related Distribution Date occurs, or if such day is not a
business day, the preceding business day (the 'Record Date'); the Record Date
for the Distribution Date occurring in January 1997 for all purposes other than
the receipt of distributions is the Closing Date. Such distributions will be
made (a) by wire transfer in immediately available funds to the account
specified by the Certificateholder at a bank or other entity having appropriate
facilities therefor, if such Certificateholder provides the Trustee with wiring
instructions no less than five business days prior to the related Record Date
and is the registered owner of Certificates the aggregate Certificate Balance of
which is at least $5,000,000, or otherwise (b) by check mailed to such
Certificateholder. The final distribution on any Offered Certificates will be
made in like manner, but only upon presentment or surrender (for notation that
the Certificate Balance thereof has been reduced to zero) of such Certificate at
the location specified in the notice to the holder thereof of such final
distribution. All distributions made with respect to a class of Certificates on
each Distribution Date will be allocated pro rata among the outstanding
Certificates of such class based on their respective Percentage Interests. The
'Percentage Interest' evidenced by any Offered
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Certificate is equal to the initial denomination thereof as of the Closing Date
divided by the initial Certificate Balance or Notional Balance, as applicable,
of the related class.
The aggregate distribution to be made on the Certificates (other than the
Class P-IO Certificates) on any Distribution Date will equal the Available
Funds. The 'Available Funds' for a Distribution Date will be the sum of (i) all
previously undistributed Monthly Payments or other receipts on account of
principal and interest on or in respect of the Mortgage Loans (including
Unscheduled Payments and Net REO Proceeds, if any) received by the Servicer in
the related Collection Period, (ii) all amounts received by the Servicer in
respect of the Floor Agreements in the related Collection Period, (iii) all
other amounts required to be deposited in the Collection Account by the Servicer
pursuant to the Pooling and Servicing Agreement allocable to the Mortgage Loans
(excluding Subordinated Class Advance Amounts), including all P&I Advances made
by the Servicer, the Trustee or the Fiscal Agent, as applicable, in respect of
such Distribution Date, [(iv) for the Distribution Date occurring in each March,
the 'Withheld Amounts' as described under '--The Pooling and Servicing
Agreement--Accounts--Interest Reserve Account' and required to be deposited in
the Distribution Account pursuant to the Pooling and Servicing Agreement] and
(v) all Servicer Prepayment Interest Shortfalls required to be deposited by the
Servicer in respect of such Distribution Date, but excluding the following:
(a) amounts permitted to be used to reimburse the Servicer, the
Special Servicer, the Trustee or the Fiscal Agent, as applicable, for
previously unreimbursed Advances and interest thereon as described herein
under 'The Pooling and Servicing Agreement--Advances';
(b) the aggregate amount of the Servicing Fee (as defined herein and
which includes the fees for both the Trustee and the Servicer) payable to
the Servicer and the amounts payable to the Special Servicer described
herein under 'The Pooling and Servicing Agreement--Special Servicing'
(together with the Servicing Fees, 'Servicing Compensation'), in each case
in respect of such Distribution Date, and all amounts in the nature of late
fees, loan modification fees, extension fees, loan service transaction
fees, demand fees, beneficiary statement charges, assumption fees,
modification fees and similar fees, and reinvestment earnings on payments
received with respect to the Mortgage Loans which the Servicer or Special
Servicer is entitled to receive as additional servicing compensation;
(c) all amounts representing scheduled Monthly Payments due after the
related Due Date;
(d) to the extent permitted by the Pooling and Servicing Agreement,
that portion of liquidation proceeds, insurance proceeds and condemnation
proceeds with respect to a Mortgage Loan which represents any unpaid
Servicing Compensation together with interest thereon as described herein,
to which the Servicer, the Special Servicer or the Trustee is entitled;
(e) all amounts representing certain expenses reimbursable or payable
to the Servicer, the Special Servicer or the Trustee or Fiscal Agent and
other amounts permitted to be retained by the Servicer or withdrawn
pursuant to the Pooling and Servicing Agreement in respect of various
items, including indemnities;
(f) Prepayment Premiums;
(g) Default Interest;
(h) Excess Interest;
[(i) With respect to the [ ] Loan and the
[ ] Loan and any Distribution Date relating to each
Interest Accrual Period occurring in each January or any December occurring
in a year immediately preceding a year which is not a leap year, an amount
equal to one day of interest on the Stated Principal Balance of each such
Mortgage Loan as of the Due Date occurring in the month preceding the month
in which such Distribution Date occurs at the related Mortgage Rate to the
extent such amounts are to be deposited in the Interest Reserve Account and
held for future distribution;]
(j) all amounts received with respect to each Mortgage Loan previously
purchased or repurchased pursuant to the Pooling and Servicing Agreement
during the related Collection Period and subsequent to the date as of which
the amount required to effect such purchase or repurchase was determined;
(k) the amount reasonably determined by the Trustee to be necessary to
pay any applicable federal, state or local taxes imposed on the Upper-Tier
REMIC or the Lower-Tier REMIC under the circumstances and to the extent
described in the Pooling and Servicing Agreement; and
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(l) Class P-IO Available Funds.
The 'Class P-IO Available Funds' for a Distribution Date will be the excess
of (A) the sum of (i) all the portion of previously undistributed Monthly
Payments and Extended Monthly Payments or other receipts on account of interest
on or in respect of the Prime Retail II Pool Loan (including the interest
portion of Unscheduled Payments and Net REO Proceeds, if any) received by the
Servicer in the related Collection Period, (ii) all other amounts required to be
deposited in the Collection Account by the Servicer pursuant to the Pooling and
Servicing Agreement allocable to or in respect of interest on the Prime Retail
II Pool Loan, including the interest portion of all P&I Advances made by the
Servicer, the Trustee or the Fiscal Agent, as applicable, in respect of the
Prime Retail II Pool Loan and (iii) all Servicer Prepayment Interest Shortfalls
with respect to the Prime Retail II Pool Loan required to be deposited by the
Servicer in respect of such Distribution Date, but excluding the amounts
described in clauses (a) through (h) above over (B) interest accrued on the
Prime Retail II Pool Loan at the Adjusted Mortgage Pass-Through Rate thereof
(minus any Prepayment Interest Shortfalls related to the Prime Retail II Pool
Loan).
The 'Monthly Payment' with respect to any Mortgage Loan (other than any REO
Mortgage Loan) and any Due Date is the scheduled monthly payment of principal
(if any) and interest at the Net Mortgage Rate, which is payable by the related
borrower on the related Due Date. The Monthly Payment with respect to an REO
Mortgage Loan for any Distribution Date is the monthly payment that would
otherwise have been payable on the related Due Date had the related Note not
been discharged, determined as set forth in the Pooling and Servicing Agreement.
'Unscheduled Payments' are all net liquidation proceeds, net insurance
proceeds and net condemnation proceeds payable under the Mortgage Loans, any
prepayment in full of a Mortgage Loan received in advance of its Maturity Date
which is accompanied by interest representing an amount in excess of the
scheduled interest which would be due on such Mortgage Loan through the Due Date
relating to the Collection Period in which such prepayment is received and any
other payments under or with respect to the Mortgage Loans not scheduled to be
made, including Principal Prepayments, but excluding Prepayment Premiums.
'Prepayment Premiums' are payments received on a Mortgage Loan as the
result of a Principal Prepayment thereon, not otherwise due thereon in respect
of principal or interest, other than any amount paid in connection with the
release of the related Mortgaged Property through defeasance, which are intended
to compensate the lender for prepayment.
'Net REO Proceeds' with respect to any REO Property and any related REO
Mortgage Loan (as defined herein) are all revenues received by the Servicer with
respect to such REO Property or REO Mortgage Loan net of any insurance premiums,
taxes, assessments and other costs and expenses permitted to be paid therefrom
pursuant to the Pooling and Servicing Agreement.
'Principal Prepayments' are payments of principal made by a borrower on a
Mortgage Loan which are received in advance of the scheduled Due Date for such
payments and which are not accompanied by an amount of interest representing the
full amount of scheduled interest due on any date or dates in any month or
months subsequent to the month of prepayment, other than any amount paid in
connection with the release of the related Mortgaged Property through
defeasance.
The 'Collection Period' with respect to a Distribution Date and each
Mortgage Loan is the period beginning on the day after the Due Date in the month
preceding the month in which such Distribution Date occurs and ending on the Due
Date in the month in which such Distribution Date occurs.
'Net Default Interest' with respect to any Mortgage Loan is any Default
Interest accrued on such Mortgage Loan less amounts required to pay the
Servicer, the Trustee or Fiscal Agent, as applicable, interest on Advances at
the Advance Rate.
'Default Interest' with respect to any Mortgage Loan is interest accrued on
such Mortgage Loan at the excess of (i) the Default Rate over (ii) the Mortgage
Rate (plus the Excess Rate if required by the applicable Mortgage Loan).
The 'Default Rate' with respect to any Mortgage Loan is the per annum rate
at which interest accrues on such Mortgage Loan following any event of default
on such Mortgage Loan including a default in the payment of a Monthly Payment.
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'Excess Interest' with respect to the Columbia Sussex II Pool Loan, HGI II
Pool Loan, MPH II Pool Loan, Palmer Square Pool Loan and Prime Retail II Pool
Loan, respectively, is CS II Excess Interest, HGI II Excess Interest, MPH II
Excess Interest, Palmer Square Excess Interest and Prime Retail Excess Interest,
respectively.
'Excess Rate' with respect to each of the Mortgage Loans is the excess of
the Revised Interest Rate for such Mortgage Loan over the Current Interest Rate
for such Mortgage Loan.
Priorities. As used below in describing the priorities of distribution of
Available Funds for each Distribution Date, the terms set forth below will have
the following meanings.
The 'Interest Accrual Amount' with respect to any Distribution Date and any
class of Certificates (other than the Class CS-1, Class CS-2, Class CS-3, Class
P-IO, Class V-1, Class V-2, Class R and Class LR Certificates), is equal to
interest for the related Interest Accrual Period at the Pass-Through Rate for
such class on the related Certificate Balance (provided, that for interest
accrual purposes any distributions in reduction of Certificate Balance or
reductions in Certificate Balance as a result of allocations of Realized Losses
on the Distribution Date occurring in an Interest Accrual Period will be deemed
to have been made on the first day of such Interest Accrual Period). The
'Interest Accrual Amount' with respect to any Distribution Date and each of the
Class A-1A, Class A-1B and Class A-1C Components is equal to interest for the
related Interest Accrual Period at the Pass-Through Rate for such component for
such Interest Accrual Period on the Component Balance of such component
(provided, that any reductions in Component Balances of the Class A-1A, Class
A-1B and Class A-1C Components as a result of distributions in reduction of the
Certificate Balance of the Class A-1A, Class A-1B or Class A-1C Certificates,
respectively, or allocations of Realized Losses to the Certificate Balance of
the Class A-1A, Class A-1B or Class A-1C Certificates, respectively, in each
case, on the Distribution Date occurring in an Interest Accrual Period, will be
deemed to have occurred on the first day of such Interest Accrual Period). The
'Interest Accrual Amount' with respect to any Distribution Date and each of the
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Components
is equal to interest for the related Interest Accrual Period at the Pass-Through
Rate for such component for such Interest Accrual Period on the Component
Balance of such component (provided, that (i) any reductions in Component
Balance as a result of (A) distributions of principal to the related Class of
Certificates, (B) allocations of Realized Losses to the Certificate Balance of
the related class of Certificates or (C) allocations of Appraisal Reduction
Amounts or Delinquency Reduction Amounts to such Component Balance and (ii) any
increases in Component Balance as a result of reversals of reductions resulting
from Appraisal Reduction Events and Delinquencies, in each case, on the
Distribution Date occurring in such Interest Accrual Period, will be deemed to
have occurred on the first day of such Interest Accrual Period).
The 'Interest Distribution Amount' with respect to any Distribution Date
and the Class A-1A, Class A-1B, Class A-1C, Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6 and Class A-7 Certificates will equal the Interest Accrual
Amount thereof. The 'Interest Distribution Amount' with respect to any
Distribution Date and any class of Coupon Strip Certificates is the sum of the
Interest Accrual Amounts of the related components of each such class.
The 'Reduction Interest Distribution Amount' with respect to any
Distribution Date for any component (other than the Class A-1A, Class A-1B and
Class A-1C Components) is the amount of interest accrued for the Interest
Accrual Period at the Pass-Through Rate on such component for such Interest
Accrual Period on the aggregate amount of Appraisal Reduction Amounts and
Delinquency Reduction Amounts allocated to such component as of such
Distribution Date set forth herein.
The 'Reduction Interest Shortfalls' with respect to any Distribution Date,
for any component (other than the Class A-1A, Class A-1B and Class A-1C
Components) is any shortfall in the amount of Reduction Interest Distribution
Amounts required to be distributed to the Class CS-3 Certificates on such
Distribution Date.
'Appraisal Reduction Amount' is the amount described under '--Appraisal
Reductions.'
'Delinquency Reduction Amount' is in connection with a Delinquency an
amount equal to the scheduled payment (or portion thereof) due on the related
Due Date (adjusted to the applicable Net Mortgage Pass-Through Rate) and not
received from a borrower under any Mortgage Loan.
'Delinquency' means any failure of the borrower to make a scheduled payment
on a Due Date.
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The 'Interest Accrual Period' means with respect to any Distribution Date
other than the Distribution Date occurring in January 1997, the period
commencing on and including the 11th day of the month preceding the month in
which such Distribution Date occurs and ending on and including the 10th day of
the month in which such Distribution Date occurs; the Interest Accrual Period
with respect to the Distribution Date occurring in January 1997 is assumed to
consist of twenty-four days. Each Interest Accrual Period other than the
Interest Accrual Period with respect to the Distribution Date occuring in
January 1997 is assumed to consist of 30 days.
An 'Interest Shortfall' with respect to any Distribution Date for any class
of Offered Certificates is any shortfall in the amount of interest required to
be distributed on such class on such Distribution Date.
The 'Pass-Through Rate' for any class of Offered Certificates or component
is the per annum rate at which interest accrues on the Certificates of such
class or component during any Interest Accrual Period. The Pass-Through Rate on
the Class A-1A, Class A-1B and Class A-1C Certificates is a per annum rate equal
to [ ]%, [ ]% and [ ]%, respectively. The Pass-Through Rate on the
Class CS-1 Certificates is a per annum rate equal to the Adjusted Weighted
Average Net Mortgage Pass-Through Rate minus [ ]%. The Pass-Through Rate on
the Class CS-2 Certificates is a per annum rate equal to the Adjusted Weighted
Average Net Mortgage Pass-Through Rate minus [ ]%. The Pass-Through Rate on
the Class CS-3 Certificates is a per annum rate equal to the weighted average of
the Pass Through-Rates on the Class A-1C Component, Class A-2 Component, Class
A-3 Component, Class A-4 Component, Class A-5 Component, Class A-6 Component and
Class A-7 Component, weighted on the basis of the respective Component Balances
(without giving effect to any Appraisal Reduction Amounts or Delinquency
Reduction Amounts). The Pass-Through Rate on the Class A-1C Component is a per
annum rate equal to the Adjusted Weighted Average Net Mortgage Pass-Through Rate
minus [ ]%. The Pass-Through Rate on each of the Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6 and Class A-7 Components is a per annum rate equal to
[ ]%, [ ]%, [ ]%, [ ]%, [ ]% and [ ]%, respectively. The
Pass-Through Rate on the Class A-2 Certificates is a per annum rate equal to the
Adjusted Weighted Average Net Mortgage Pass-Through Rate minus [ ]%. The
Pass-Through Rate on the Class A-3 Certificates is a per annum rate equal to the
Adjusted Weighted Average Net Mortgage Pass-Through minus [ ]%. The
Pass-Through Rate on the Class A-4 Certificates is a per annum rate equal to the
Adjusted Weighted Average Net Mortgage Pass-Through Rate minus [ ]%. The
Pass-Through Rate on the Class A-5 Certificates is a per annum rate equal to the
Adjusted Weighted Average Net Mortgage Pass-Through Rate minus [ ]%. The
Pass-Through Rate on the Class A-6 Certificates is a per annum rate equal to the
Adjusted Weighted Average Net Mortgage Pass-Through Rate minus [ ]%. The
Pass-Through Rate on the Class A-7 Certificates is a per annum rate equal to the
Adjusted Weighted Average Net Mortgage Pass-Through Rate minus [ ]%.
The 'Weighted Average Net Mortgage Pass-Through Rate' with respect to any
Interest Accrual Period is the amount (expressed as a percentage) the numerator
of which is the sum of the products of (i) the Net Mortgage Pass-Through Rate
with respect to each Mortgage Loan and (ii) the Stated Principal Balance of such
Mortgage Loan and the denominator of which is the sum of the Stated Principal
Balances of each Mortgage Loan, as of the Due Date occurring in the month
preceding the month in which the related Distribution Date occurs.
The 'Net Mortgage Pass-Through Rate' with respect to any Mortgage Loan and
any Interest Accrual Period is a per annum rate equal to the Mortgage
Pass-Through Rate (as such term is defined below) for such Mortgage Loan minus
the Servicing Fee Rate (as such term is defined herein).
The 'Adjusted Weighted Average Net Mortgage Pass-Through Rate' with respect
to any Interest Accrual Period is the amount (expressed as a percentage) the
numerator of which is the sum of (A) the products of (i) the Net Mortgage
Pass-Through Rate with respect to each Mortgage Loan (other than the Prime
Retail II Pool Loan) and (ii) the Stated Principal Balance of such Mortgage Loan
and (B) the product of (i) the Adjusted Net Mortgage Pass-Through Rate with
respect to the Prime Retail II Pool Loan and (ii) the Stated Principal Balance
of such Mortgage Loan and the denominator of which is the sum of the Stated
Principal Balances of each Mortgage Loan, as of the Due Date occurring in the
month preceding the month in which the related Distribution Date occurs.
The 'Adjusted Net Mortgage Pass-Through Rate' with respect to the Prime
Retail II Pool Loan and any Interest Accrual Period is a per annum rate equal to
the Adjusted Mortgage Pass-Through Rate (as such term is defined below) for the
Prime Retail II Pool Loan minus the Servicing Fee Rate (as such term is defined
herein).
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The 'Mortgage Pass-Through Rate' with respect to the Mortgage Loans (other
than the Prime Retail II Pool Loan) for any Interest Accrual Period is equal to
the Mortgage Rate thereof multiplied by a fraction the numerator of which is the
actual number of days in such Interest Accrual Period and the denominator of
which is 30.
The 'Mortgage Pass-Through Rate' with respect to the Prime Retail II Pool
Loan and any Interest Accrual Period is equal to the Mortgage Rate of such
Mortgage Loan, multiplied by a fraction, the numerator of which is the actual
number of days in such Interest Accrual Period and the denominator of which is
30; provided, however, that in no event will the Mortgage Pass-Through Rate with
respect to the Prime Retail II Pool Loan exceed 7.782% multiplied by a fraction
the numerator of which is the actual number of days in such Interest Accrual
Period and the denominator of which is 30.
The 'Adjusted Mortgage Pass-Through Rate' with respect to the Prime Retail
II Pool Loan and any Interest Accrual Period is equal to 7.782% multiplied by a
fraction the numerator of which is the actual number of days in such Interest
Accrual Period and the demonimator of which is 30.
[The 'Mortgage Pass-Through Rate' with respect to the [ ]
Loan and any Interest Accrual Period (a) commencing in any January, February,
April, June, September and November and in any December occurring in a year
immediately preceding any year which is not a leap year, is equal the Mortgage
Rate thereof and (b) relating to any Interest Accrual Period commencing in any
March, May, July, August and October and in any December occurring in a year
immediately preceding a year which is a leap year, is equal to the Mortgage Rate
thereof multiplied by a fraction the numerator of which is the actual number of
days in such Interest Accrual Period and the denominator of which is 30.]
The 'Mortgage Rate' with respect to the Mortgage Loans is the interest rate
on each Mortgage Loan as stated in the related Note, which does not include the
Excess Rate.
The Mortgage Rate for purposes of calculating the Weighted Average Net
Mortgage Pass-Through Rate and Adjusted Weighted Average Net Mortgage
Pass-Through Rate will be the Mortgage Rate of such Mortgage Loan without taking
into account any reduction in the interest rate by a bankruptcy court pursuant
to a plan of reorganization or pursuant to any of its equitable powers.
The 'Principal Distribution Amount' for any Distribution Date will be equal
to the sum of:
(i) the principal component of all scheduled Monthly Payments which
become due (if received or advanced, including any Subordinated Class
Advance Amounts allocable to principal) on the Mortgage Loans on the
related Due Date;
(ii) the principal component of all Extended Monthly Payments due (if
received or advanced, including any Subordinated Class Advance Amounts
allocable to principal) on the related Due Date with respect to any
Mortgage Loan;
(iii) to the extent not included in the previous clauses, the
principal component of any payment on any Mortgage Loan received on or
after the maturity date thereof;
(iv) the Stated Principal Balance of each Mortgage Loan that was,
during the related Collection Period, repurchased from the Trust Fund in
connection with the breach of a representation or warranty or purchased
from the Trust Fund as described herein under 'The Pooling and Servicing
Agreement--Optional Termination';
(v) the portion of Unscheduled Payments allocable to principal of any
Mortgage Loan which was liquidated during the related Collection Period;
(vi) to the extent not included in the preceding clauses, all other
Principal Prepayments received in the related Collection Period; and
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(vii) to the extent not included in the preceding clauses, any other
full or partial recoveries in respect of principal, including net insurance
proceeds, net liquidation proceeds, net condemnation proceeds and Net REO
Proceeds.
An 'REO Mortgage Loan' is any Mortgage Loan as to which the related
Mortgaged Property has become an REO Property.
On each Distribution Date prior to the Cross-over Date, the Available Funds
for such Distribution Date will be distributed in the following amounts and
order of priority:
(i) First, pro rata, in respect of interest, to the Class A-1A, Class
A-1B, Class A-1C, Class CS-1, Class CS-2 and Class CS-3 Certificates, up to
an amount equal to the aggregate Interest Distribution Amounts of such
classes;
(ii) Second, pro rata, to the Class A-1A, Class A-1B, Class A-1C,
Class CS-1, Class CS-2 and Class CS-3 Certificates, in respect of interest,
up to an amount equal to the aggregate unpaid Interest Shortfalls
previously allocated to such classes;
(iii) Third, to the Class A-1A Certificates, in reduction of the
Certificate Balance thereof, an amount equal to the Principal Distribution
Amount, until the Certificate Balance thereof is reduced to zero;
(iv) Fourth, to the Class A-1B Certificates, in reduction of the
Certificate Balance thereof, an amount equal to the Principal Distribution
Amount less amounts of Principal Distribution Amount distributed pursuant
to all prior clauses, until the Certificate Balance thereof is reduced to
zero;
(v) Fifth, to the Class A-1C Certificates, in reduction of the
Certificate Balance thereof, an amount equal to the Principal Distribution
Amount less amounts of Principal Distribution Amount distributed pursuant
to all prior clauses, until the Certificate Balance thereof is reduced to
zero;
(vi) Sixth, to the Class A-2 Certificates, in respect of interest, up
to an amount equal to the aggregate Interest Distribution Amount of such
class;
(vii) Seventh, pro rata, (A) to the Class A-2 Certificates, in respect
of interest, up to an amount equal to the aggregate unpaid Interest
Shortfalls previously allocated to such class, (B) to the Class CS-3
Certificates in respect of the Reduction Interest Distribution Amount of
the Class A-2 Component, up to an amount equal to the aggregate Reduction
Interest Distribution Amount of the Class A-2 Component and (C) to the
Class CS-3 Certificates, up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such component;
(viii) Eighth, to the Class A-2 Certificates, in reduction of the
Certificate Balance thereof, an amount equal to the Principal Distribution
Amount less amounts of Principal Distribution Amount distributed pursuant
to all prior clauses, until the Certificate Balance of such class is
reduced to zero;
(ix) Ninth, to the Class A-2 Certificates, for the unreimbursed
amounts of Realized Losses, if any, up to an amount equal to the Principal
Distribution Amount less amounts of Principal Distribution Amount
distributed pursuant to all prior clauses, an amount equal to the aggregate
of such unreimbursed Realized Losses previously allocated to such class;
(x) Tenth, to the Class A-3 Certificates, in respect of interest, up
to an amount equal to the aggregate Interest Distribution Amount of such
class;
(xi) Eleventh, pro rata, (A) to the Class A-3 Certificates, in respect
of interest, up to an amount equal to the aggregate unpaid Interest
Shortfalls previously allocated to such class, (B) to the Class CS-3
Certificates in respect of the Reduction Interest Distribution Amount of
the Class A-3 Component, up to an amount equal to the aggregate Reduction
Interest Distribution Amount of the Class A-3 Component and (C) to the
Class CS-3 Certificates, up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such component;
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(xii) Twelfth, to the Class A-3 Certificates, in reduction of the
Certificate Balance thereof, an amount equal to the Principal Distribution
Amount less amounts of Principal Distribution Amount distributed pursuant
to all prior clauses, until the Certificate Balance of such class is
reduced to zero;
(xiii) Thirteenth, to the Class A-3 Certificates, for the unreimbursed
amounts of Realized Losses, if any, up to an amount equal to the Principal
Distribution Amount less amounts of Principal Distribution Amount
distributed pursuant to all prior clauses, an amount equal to the aggregate
of such unreimbursed Realized Losses previously allocated to such class;
(xiv) Fourteenth, to the Class A-4 Certificates in respect of
interest, up to an amount equal to the aggregate Interest Distribution
Amount of such class;
(xv) Fifteenth, pro rata, (A) to the Class A-4 Certificates in respect
of interest, up to an amount equal to the aggregate unpaid Interest
Shortfalls previously allocated to such class, (B) to the Class CS-3
Certificates in respect of the Reduction Interest Distribution Amount of
the Class A-4 Component, up to an amount equal to the aggregate Reduction
Interest Distribution Amount of the Class A-4 Component and (C) to the
Class CS-3 Certificates up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such component;
(xvi) Sixteenth, to the Class A-4 Certificates, in reduction of the
Certificate Balance thereof, an amount equal to the Principal Distribution
Amount less amounts of Principal Distribution Amount distributed pursuant
to all prior clauses, until the Certificate Balance of such class is
reduced to zero;
(xvii) Seventeenth, to the Class A-4 Certificates, for the
unreimbursed amounts of Realized Losses, if any, up to an amount equal to
the Principal Distribution Amount less amounts of Principal Distribution
Amount distributed pursuant to all prior clauses, an amount equal to the
aggregate of such unreimbursed Realized Losses previously allocated to such
class;
(xviii) Eighteenth, to the Class A-5 Certificates in respect of
interest, up to an amount equal to the aggregate Interest Distribution
Amount of such class;
(xvix) Nineteenth, pro rata, (A) to the Class A-5 Certificates in
respect of interest, up to an amount equal to the aggregate unpaid Interest
Shortfalls previously allocated to such class, (B) to the Class CS-3
Certificates in respect of the Reduction Interest Distribution Amount of
the Class A-5 Component, up to an amount equal to the aggregate Reduction
Interest Distribution Amount of the Class A-5 Component and (C) to the
Class CS-3 Certificates up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such component;
(xx) Twentieth, to the Class A-5 Certificates in reduction of the
Certificate Balance thereof, an amount equal to the Principal Distribution
Amount, less the amount of the Principal Distribution Amount distributed
pursuant to all prior clauses, until the Certificate Balance of such class
is reduced to zero;
(xxi) Twenty-first, to the Class A-5 Certificates, for the
unreimbursed amounts of Realized Losses, if any, up to an amount equal to
the Principal Distribution Amount less amounts of Principal Distribution
Amount distributed pursuant to all prior clauses, an amount equal to the
aggregate of such unreimbursed Realized Losses previously allocated to such
class;
(xxii) Twenty-second, to the Class A-6 Certificates in respect of
interest, up to an amount equal to the aggregate Interest Distribution
Amount of such class;
(xxiii) Twenty-third, pro rata, (A) to the Class A-6 Certificates in
respect of interest, up to an amount equal to the aggregate unpaid Interest
Shortfalls previously allocated to such class, (B) to the Class CS-3
Certificates in respect of the Reduction Interest Distribution Amount of
the Class A-6 Component, up to an amount equal to the aggregate Reduction
Interest Distribution Amount of the Class A-6 Component and (C) to the
Class CS-3 Certificates up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such component;
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(xxiv) Twenty-fourth, to the Class A-6 Certificates in reduction of
the Certificate Balance thereof, an amount equal to the Principal
Distribution Amount, less the amount of the Principal Distribution Amount
distributed pursuant to all prior clauses, until the Certificate Balance of
such class is reduced to zero;
(xxv) Twenty-fifth, to the Class A-6 Certificates for the unreimbursed
amounts of Realized Losses, if any, up to an amount equal to the Principal
Distribution Amount less amounts of Principal Distribution Amount
distributed pursuant to all prior clauses, an amount equal to the aggregate
of such unreimbursed Realized Losses previously allocated to such class;
(xxvi) Twenty-sixth, to the Class A-7 Certificates in respect of
interest, up to an amount equal to the aggregate Interest Distribution
Amount of such class;
(xxvii) Twenty-seventh, pro rata, (A) to the Class A-7 Certificates in
respect of interest, up to an amount equal to the aggregate unpaid Interest
Shortfalls previously allocated to such class, (B) to the Class CS-3
Certificates in respect of the Reduction Interest Distribution Amount of
the Class A-7 Component, up to an amount equal to the aggregate Reduction
Interest Distribution Amount of the Class A-7 Component and (C) to the
Class CS-3 Certificates up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such component;
(xxviii) Twenty-eighth, to the Class A-7 Certificates in reduction of
the Certificate Balance thereof, an amount equal to the Principal
Distribution Amount, less the amount of the Principal Distribution Amount
distributed pursuant to all prior clauses, until the Certificate Balance of
such class is reduced to zero;
(xxix) Twenty-ninth, to the Class A-7 Certificates for the
unreimbursed amounts of Realized Losses, if any, up to an amount equal to
the Principal Distribution Amount less amounts of Principal Distribution
Amount distributed pursuant to all prior clauses, an amount equal to the
aggregate of such unreimbursed Realized Losses previously allocated to such
class;
(xxx) Thirtieth, to the Private Certificates (other than the Class
P-IO Certificates) in accordance with the Pooling and Servicing Agreement;
and
(xxxi) Thirty-first, to the Class LR Certificates.
On each Distribution Date occurring on and after the Cross-over Date, an
amount equal to the Principal Distribution Amount will be distributed, first, to
the Class A-1A, Class A-1B and Class A-1C Certificates, pro rata, based on their
respective Certificate Balances, in reduction of their respective Certificate
Balances, until the Certificate Balance of each such class is reduced to zero,
and, second, to the Class A-1A, Class A-1B and Class A-1C Certificates, pro
rata, based on their respective Certificate Balances, for unreimbursed amounts
of Realized Losses previously allocated to such classes. The 'Cross-over Date'
is the Distribution Date on which the Certificate Balance of each class of
Certificates other than the Class A-1A, Class A-1B and Class A-1C Certificates
have been reduced to zero.
Class P-IO Available Funds will be distributed solely to the Class P-IO
Certificates in accordance with the Pooling and Servicing Agreement.
All references to 'pro rata' in the preceding clauses, unless otherwise
specified, mean pro rata based upon the amount distributable pursuant to such
clause.
Prepayment Premiums. Prepayment Premiums with respect to any Unscheduled
Payments received in the related Collection Period shall be distributed on each
Distribution Date to the holders of the Class CS-1, Class CS-2, Class CS-3 and
Class A-1A Certificates outstanding on such Distribution Date, in the following
amounts and order of priority, with respect to the Certificates of each such
class:
(i) First, to the Class CS-1 Certificates, an amount equal to (A) the
present value (discounted at the Discount Rate (as defined below) for the
Class CS-1 Certificates plus the Spread Rate (as defined below) for the
Class CS-1 Certificates) of the aggregate interest that would have been
paid in respect of the Class CS-1 Certificates from the Distribution Date
occurring in the following month until the Notional Balance of the Class
CS-1 Certificates would have been reduced to zero had the related
prepayment not occurred, minus the
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present value (discounted at the Discount Rate for the Class CS-1
Certificates plus the Spread Rate for the Class CS-1 Certificates) of the
aggregate interest that will be paid in respect of the Class CS-1
Certificates from the Distribution Date occurring in the following month
until the Notional Balance of the Class CS-1 Certificates is reduced to
zero following such prepayment (assuming no further prepayments are made
except that all Mortgage Loans prepay on their respective Anticipated
Repayment Dates);
(ii) Second, to the Class CS-2 Certificates, an amount equal to (A)
the present value (discounted at the Discount Rate for the Class CS-2
Certificates plus the Spread Rate for the Class CS-2 Certificates) of the
aggregate interest that would have been paid in respect of the Class CS-2
Certificates from the Distribution Date occurring in the following month
until the Notional Balance of the Class CS-2 Certificates would have been
reduced to zero had the related prepayment not occurred, minus the present
value (discounted at the Discount Rate for the Class CS-2 Certificates plus
the Spread Rate for the Class CS-2 Certificates) of the aggregate interest
that will be paid in respect of the Class CS-2 Certificates from the
Distribution Date occurring in the following month until the Notional
Balance of the Class CS-2 Certificates is reduced to zero following such
prepayment (assuming no further prepayments are made except that all
Mortgage Loans prepay on their respective Anticipated Repayment Dates);
(iii) Third, to the Class CS-3 Certificates, an amount equal to (A)
the present value (discounted at the Discount Rate for the Class CS-3
Certificates plus the Spread Rate for the Class CS-3 Certificates) of the
aggregate interest that would have been paid in respect of the Class CS-3
Certificates from the Distribution Date occurring in the following month
until the Notional Balance of the Class CS-3 Certificates would have been
reduced to zero had the related prepayment not occurred, minus the present
value (discounted at the Discount Rate for the Class CS-3 Certificates plus
the Spread Rate for the Class CS-3 Certificates) of the aggregate interest
that will be paid in respect of the Class CS-3 Certificates from the
Distribution Date occurring in the following month until the Notional
Balance of the Class CS-3 Certificates is reduced to zero following such
prepayment (assuming no further prepayments are made except that all
Mortgage Loans prepay on their respective Anticipated Repayment Dates);
(iv) Fourth, to the Class A-1A Certificates, an amount equal to (A)
the present value (discounted at the Discount Rate for the Class A-1A
Certificates plus the Spread Rate for the Class A-1A Certificates) of the
aggregate principal and interest that would have been paid in respect of
the Class A-1A Certificates from the Distribution Date occurring in the
following month until the Certificate Balance of the Class A-1A
Certificates would have been reduced to zero had the related prepayment not
occurred, minus the sum of (B) the amount of such prepayment distributed in
respect of the Class A-1A Certificates and (C) the present value
(discounted at the Discount Rate for the Class A-1A Certificates plus the
Spread Rate for the Class A-1A Certificates) of the aggregate principal and
interest that will be paid in respect of the Class A-1A Certificates from
the Distribution Date occurring in the following month until the
Certificate Balance of the Class A-1A Certificates is reduced to zero
following such prepayment (assuming no further prepayments are made except
that all Mortgage Loans prepay on their respective Anticipated Repayment
Dates).
Any such Prepayment Premiums remaining following the distributions
described in the preceding clauses (i) through (iii) shall be distributed to
holders of the Private Certificates.
The 'Discount Rate' with respect to any class of Offered Certificates is
the rate determined by the Trustee, in its good faith, to be the rate
(interpolated and rounded to the nearest one-thousandth of a percent, if
necessary) in the secondary market on United States Treasury securities with a
maturity equal to the then computed weighted average life (or, in the case of
the Class CS-1, Class CS-2 and Class CS-3 Certificates, the weighted average
life of the interest payments) of such class (rounded to the nearest month)
(without taking into account the related prepayment).
The 'Spread Rate' for the Class A-1A Certificates is [ ]% per annum,
the Class CS-1 Certificates is [ ]% per annum, the Class CS-2 Certificates
is [ ]% per annum and the Class CS-3 Certificates is [ ]% per annum.
It is not anticipated that any Prepayment Premiums will be received.
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On each Distribution Date, Net Default Interest and Excess Interest
received in the related Collection Period with respect to a default on a
Mortgage Loan will be distributed solely to the Class V-1 and Class V-2
Certificates, respectively, to the extent set forth in the Pooling and Servicing
Agreement. The Class V-1 and Class V-2 Certificates are not entitled to any
other distributions of interest, principal or Prepayment Premiums.
Realized Losses. The Certificate Balance of the Certificates will be
reduced without distribution on any Distribution Date as a write-off to the
extent of any Realized Loss with respect to such Distribution Date. As referred
to herein, the 'Realized Loss' with respect to any Distribution Date shall mean
the amount, if any, by which the aggregate Certificate Balance of the
Certificates after giving effect to distributions made on such Distribution Date
exceeds the aggregate Stated Principal Balance of the Mortgage Loans as of the
Due Date in the month in which such Distribution Date occurs. Any such
write-offs will be applied to the classes of Certificates in the following
order, until each is reduced to zero: first, to the Private Certificates in
accordance with the priorities set forth in the Pooling and Servicing Agreement;
second, to the Class A-7 Certificates; third, to the Class A-6 Certificates;
fourth, to the Class A-5 Certificates; fifth, to the Class A-4 Certificates;
sixth, to the Class A-3 Certificates; seventh, to the Class A-2 Certificates;
and, finally, pro rata, to the Class A-1A, Class A-1B and Class A-1C
Certificates, based on their respective outstanding Certificate Balances. Any
amounts recovered in respect of any amounts previously written off as Realized
Losses will be distributed to the classes of Certificates in reverse order of
allocation of Realized Losses thereto. Shortfalls in Available Funds resulting
from additional Servicer Compensation (including interest on Advances not
covered by Default Interest), extraordinary expenses of the Trust Fund, a
reduction on the interest rate of a Mortgage Loan by a bankruptcy court pursuant
to a plan of reorganization or pursuant to any of its equitable powers, Servicer
Prepayment Interest Shortfalls not paid by the Servicer, Prepayment Interest
Shortfalls or otherwise, will be allocated to each class of Certificates and
each component in the same manner as Realized Losses. The Notional Balance of
the Class CS-1 Certificates will be reduced to reflect reductions in the
Component Balance of the Class A-1A Component resulting from allocations of
Realized Losses; the Notional Balance of the Class CS-2 Certificates will be
reduced to reflect reductions in the Component Balance of the Class A-1B
Component resulting from allocations of Realized Losses; and the Notional
Balance of the Class CS-3 Certificates will be reduced to reflect reductions in
the Component Balances of the Class A-1C Component, Class A-2 Component, Class
A-3 Component, Class A-4 Component, Class A-5 Component, Class A-6 Component and
Class A-7 Component resulting from allocations of Realized Losses. The Notional
Balance of the Class P-IO Certificates will be reduced to the extent of any
Realized Loss with respect to the Prime Retail II Pool Loan.
The 'Stated Principal Balance' of any Mortgage Loan at any date of
determination will equal (a) the principal balance as of the Cut-off Date of
such Mortgage Loan, minus (b) the sum of (i) the principal portion of each
Monthly Payment due on such Mortgage Loan after the Cut-off Date up to such date
of determination, if received from the borrower or advanced by the Servicer,
Trustee or Fiscal Agent and including any Subordinate Class Advance Amounts
allocable to principal and (ii) all voluntary and involuntary principal
prepayments and other unscheduled collections of principal received with respect
to such Mortgage Loan, to the extent distributed to holders of the Certificates
before such date of determination. The Stated Principal Balance of a Mortgage
Loan with respect to which title to the related Mortgaged Property has been
acquired is equal to the principal balance thereof outstanding on the date on
which such title is acquired less any Net REO Proceeds allocated to principal on
such Mortgage Loan. The Stated Principal Balance of a defaulted Mortgage Loan
with respect to which the Servicer has determined that it has received all
payments and recoveries which the Servicer expects to be finally recoverable on
such Mortgage Loan is zero.
The 'Prepayment Interest Shortfall' with respect to any Distribution Date
is equal to the amount of any shortfall in collections of interest, adjusted to
the applicable Net Mortgage Pass-Through Rate (in the case of the Prime Retail
II Pool Loan, without regard to the maximum rate recited in the definition of
the Mortgage Pass-Through Rate thereof), resulting from a Principal Prepayment
on such Mortgage Loan during the related Collection Period and prior to the
related Due Date, but does not include any Servicer Prepayment Interest
Shortfall. Such shortfall may result because interest on a Principal Prepayment
in full is paid by the related borrower only to the date of prepayment.
Prepayment Interest Shortfalls with respect to each Distribution Date will be
allocated to each class of Certificates and each component in the same manner as
Realized Losses. Prepayment Interest Shortfalls occurring with respect to the
Prime Retail II Pool Loan will be allocated in
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reduction of Available Funds (up to the amount thereof allocable to such
Mortgage Loan) prior to any allocation thereof to the Class P-IO Available
Funds.
The 'Servicer Prepayment Interest Shortfall' with respect to any
Distribution Date is equal to the amount of any shortfall in collections of
interest, adjusted to the applicable Net Mortgage Pass-Through Rate (in the case
of the Prime Retail II Pool Loan, without regard to the maximum rate recited in
the definition of the Mortgage Pass-Through Rate thereof), resulting from a
Principal Prepayment on such Mortgage Loan during the related Collection Period
and prior to the related Due Date which prepayment, pursuant to the terms of the
Mortgage Loan, was not permitted to be made on any date other than a Due Date
for such Mortgage Loan, but was nonetheless accepted by the Servicer. The amount
of any Servicer Prepayment Interest Shortfall payable by the Servicer with
respect to any Distribution Date will not exceed the amount of the Servicing Fee
with respect to the related Interest Accrual Period. The amount of any such
Servicer Prepayment Interest Shortfalls for any Collection Period is to be
deposited by the Servicer in the Collection Account on the related Servicer
Remittance Date. Servicer Prepayment Interest Shortfalls will be deemed to be
deposited on any Remittance Date first in respect of any shortfalls arising from
any prepayments on the Prime Retail II Pool Loan during the related Collection
Period before any shortfalls related to prepayments on any other Mortgage Loans
during such Collection Period.
Delinquency Reduction Amounts and Appraisal Reduction Amounts. On or after
any Distribution Date on which the Class A-5 Certificates are the most
subordinate class of Certificates outstanding, the Component Balance of
components (other than the Class A-1A Component, Class A-1B Component and Class
A-1C Component) will be reduced on any Distribution Date to the extent of any
Delinquency Reduction Amounts or Appraisal Reduction Amounts with respect to
such Distribution Date; provided that (i) if a Delinquency and an Appraisal
Reduction Event occur on the same Distribution Date with respect to the same
Mortgage Loan, the reduction will equal the greater of the related Delinquency
Reduction Amount and the Appraisal Reduction Amount, (ii) for any Distribution
Date, the aggregate of the Delinquency Reduction Amounts may not exceed the
Component Balance of the most junior component then outstanding and (iii) except
as described in clause (i), on any Distribution Date, Appraisal Reduction
Amounts will be allocated to the applicable Component Balances prior to
Delinquency Reduction Amounts. Any such reductions will be applied to the
components in the following order, until each is reduced to zero: first, to the
Class A-7 Component; second, to the Class A-6 Component; third, to the Class A-5
Component; fourth, to the Class A-4 Component; fifth, to the Class A-3
Component; sixth, to the Class A-2 Component; and, finally, to the Class A-1C
Component. The Notional Balance of the Class CS-3 Certificates will be reduced
to reflect reductions in the Component Balance of the Class A-1C Component,
Class A-2 Component, Class A-3 Component, Class A-4 Component, Class A-5
Component, Class A-6 Component and Class A-7 Component resulting from
Delinquency Reduction Amounts and Appraisal Reduction Amounts; provided,
however, that such class will retain the right to receive distributions of
interest in respects of such reductions at a lower priority. Any reduction of
the Component Balance of a component as a result of any Delinquency or Appraisal
Reduction Event will be reversed to the extent there is a recovery of any or all
of the Delinquency Amounts or a Realized Loss (which results in the reduction of
the Certificate Balance of the related class and therefore the reduction of the
Component Balance of such component). Additionally, a reversal or additional
reduction will occur to the extent that the Servicer's Appraisal Reduction
Estimate is less than or greater than the Appraisal Reduction as adjusted to
take into account a subsequent independent MAI Appraisal. For purposes of
calculating Interest Accrual Amounts, any such reversal or additional reductions
made on the Distribution Date occurring in an Interest Accrual Period will be
deemed to have been made on the first day of such Interest Accrual Period.
SUBORDINATION
As a means of providing a certain amount of protection to the holders of
the Class A-1A, Class A-1B, Class A-1C, Class CS-1, Class CS-2 and Class CS-3
Certificates (except as set forth below) against losses associated with
delinquent and defaulted Mortgage Loans, the rights of the holders of the Class
A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Certificates and
the Private Certificates (other than the Class P-IO Certificates) to receive
distributions of interest and principal, as applicable, will be subordinated to
such rights of the holders of the Class A-1A, Class A-1B, Class A-1C, Class
CS-1, Class CS-2 and Class CS-3 Certificates. The
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Class A-2 Certificates will likewise be protected by the subordination of the
Class A-3, Class A-4, Class A-5, Class A-6, Class A-7 Certificates and Private
Certificates (other than the Class P-IO Certificates). The Class A-3
Certificates will likewise be protected by the subordination of the Class A-4,
Class A-5, Class A-6, Class A-7 and Private Certificates (other than the Class
P-IO Certificates). The Class A-4 Certificates will be likewise protected by the
subordination of the Class A-5, Class A-6, Class A-7 Certificates and the
Private Certificates (other than the Class P-IO Certificates). The Class A-5
Certificates will be likewise protected by the subordination of the Class A-6
and Class A-7 Certificates and the Private Certificates (other than the Class
P-IO Certificates). The Class A-6 Certificates will likewise be protected by the
subordination of the Class A-7 Certificates and the Private Certificates (other
than the Class P-IO Certificates). The Class A-7 Certificates will likewise be
protected by the subordination of the Private Certificates (other than the Class
P-IO Certificates). This subordination will be effected in two ways: (i) by the
preferential right of the holders of a class of Certificates to receive on any
Distribution Date the amounts of interest and principal distributable in respect
of such Certificates on such date prior to any distribution being made on such
Distribution Date in respect of any classes of Certificates subordinate thereto
and (ii) by the allocation of Realized Losses (as defined herein) first to the
Private Certificates (other than the Class P-IO Certificates); second, to the
Class A-7 Certificates; third, to the Class A-6 Certificates; fourth, to the
Class A-5 Certificates; fifth, to the Class A-4 Certificates; sixth, to the
Class A-3 Certificates; seventh, to the Class A-2 Certificates; and, finally, to
the Class A-1A, the Class A-1B and Class A-1C Certificates, pro rata, based on
their respective outstanding Certificate Balances. No other form of credit
enhancement will be available for the benefit of the holders of the Offered
Certificates. However, with respect to the Class CS-3 Certificates, the
protection against reductions due to Appraisal Reductions and Delinquencies will
only be afforded to the extent described under '--Distributions--Delinquency
Reduction Amounts and Appraisal Reduction Amounts' above.
APPRAISAL REDUCTIONS
On the earliest of (i) the third anniversary of the date on which an
extension of the maturity date of a Mortgage Loan becomes effective as a result
of a modification of such Mortgage Loan by the Special Servicer, which extension
does not change the amount of Monthly Payments on the Mortgage Loan, (ii) 90
days after an uncured delinquency occurs in respect of a Mortgage Loan, (iii) 90
days after the date on which a reduction in the amount of Monthly Payments on a
Mortgage Loan, or a change in any other material economic term of the Mortgage
Loan, becomes effective as a result of a modification of such Mortgage Loan by
the Special Servicer, (iv) 60 days after a receiver has been appointed, (v)
immediately after a borrower declares bankruptcy and (vi) immediately after a
Mortgage Loan becomes an REO Mortgage Loan ((i), (ii), (iii), (iv), (v) and
(vi), collectively, an 'Appraisal Reduction Event'), an Appraisal Reduction
Amount (each, an 'Appraisal Reduction Amount') will be calculated. The Appraisal
Reduction Amount for any Distribution Date and for any Mortgage Loan as to which
any Appraisal Reduction Event has occurred will be an amount equal to the excess
of (a) the outstanding Stated Principal Balance of such Mortgage Loan over (b)
the excess of (i) 90% of the sum of the appraised values of the related
Mortgaged Properties as determined by independent MAI appraisals (the costs of
which shall be paid by the Servicer as an Advance) over (ii) the sum of (A) to
the extent not previously advanced by the Servicer, the Trustee or the Fiscal
Agent, all unpaid interest on such Mortgage Loan at a per annum rate equal to
the Mortgage Rate, (B) all unreimbursed Advances and interest thereon at the
Advance Rate in respect of such Mortgage Loan and (C) all currently due and
unpaid real estate taxes and assessments and insurance premiums and all other
amounts due and unpaid under the Mortgage Loan (which tax, premiums and other
amounts have not been the subject of an Advance by the Servicer). If no
independent MAI appraisal has been obtained prior to the first Distribution Date
on or after an Appraisal Reduction Event has occurred, the Servicer will be
required to estimate the value of the related Mortgaged Properties (the
'Servicer's Appraisal Reduction Estimate') and such estimate will be used for
purposes of the Appraisal Reduction Amount. Within 30 days after the Servicer
receives notice or is otherwise aware of an Appraisal Reduction Event, the
Servicer will be required to obtain an independent MAI appraisal. On the first
Distribution Date occurring on or after the delivery of such independent MAI
appraisal, the Servicer will be required to adjust the Appraisal Reduction
Amount to take into account such appraisal (regardless of whether the
independent MAI appraisal is higher or lower than the Servicer's Appraisal
Reduction Estimate).
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DELIVERY, FORM AND DENOMINATION
The Offered Certificates will be issued, maintained and transferred in the
book-entry form only in denominations of $100,000 initial Certificate Balance
and in multiples of $1 Certificate Balance in excess thereof.
The Offered Certificates will initially be represented by one or more
global Certificates for each such class registered in the name of the nominee of
DTC. The Depositor has been informed by DTC that DTC's nominee will be Cede &
Co. No holder of an Offered Certificate will be entitled to receive a
certificate issued in fully registered, certificated form (each, a 'Definitive
Certificate') representing its interest in such class, except under the limited
circumstances described in the Prospectus under 'Description of the
Certificates--Book-Entry Registration.' Unless and until Definitive Certificates
are issued, all references to actions by holders of the Offered Certificates
will refer to actions taken by DTC upon instructions received from holders of
Offered Certificates through its participating organizations (together with
CEDEL and Euroclear participating organizations, the 'Participants'), and all
references herein to payments, notices, reports, statements and other
information to holders of Offered Certificates will refer to payments, notices,
reports and statements to DTC or Cede & Co., as the registered holder of the
Offered Certificates, for distribution to holders of Offered Certificates
through its Participants in accordance with DTC procedures; provided, however,
that to the extent that the party responsible for distributing any report,
statement or other information has been provided with the name of the beneficial
owner of a Certificate (or the prospective transferee of such beneficial owner),
such report, statement or other information will be provided to such beneficial
owner (or prospective transferee).
Until Definitive Certificates are issued in respect of the Offered
Certificates, interests in the Offered Certificates will be transferred on the
book-entry records of DTC and its Participants. The Trustee will initially serve
as certificate registrar (in such capacity, the 'Certificate Registrar') for
purposes of recording and otherwise providing for the registration of the
Offered Certificates.
A 'Certificateholder' under the Pooling and Servicing Agreement will be the
person in whose name a Certificate is registered in the certificate register
maintained pursuant to the Pooling and Servicing Agreement, except that solely
for the purpose of giving any consent or taking any action pursuant to the
Pooling and Servicing Agreement, any Certificate registered in the name of the
Depositor, the Servicer, the Special Servicer, a manager of a Mortgaged
Property, a Mortgagor or any person affiliated with the Depositor, the Servicer,
the Special Servicer, such manager or a Mortgagor will be deemed not to be
outstanding and the Voting Rights to which it is entitled will not be taken into
account in determining whether the requisite percentage of Voting Rights
necessary to effect any such consent or take any such action has been obtained;
provided, however, that for purposes of obtaining the consent of
Certificateholders to an amendment to the Pooling and Servicing Agreement, any
Certificates beneficially owned by the Servicer, the Special Servicer, or an
affiliate will be deemed to be outstanding, provided that such amendment does
not relate to compensation of the Servicer or the Special Servicer, or otherwise
benefit the Servicer or the Special Servicer, in any material respect; and,
provided, further, that for purposes of obtaining the consent of
Certificateholders to any action proposed to be taken by the Special Servicer
with respect to a Specially Serviced Mortgage Loan, any Certificates
beneficially owned by the Servicer or an affiliate will be deemed to be
outstanding, provided that, the Special Servicer is not the Servicer.
Notwithstanding the foregoing, solely for purposes of providing or distributing
any reports, statements or other information pursuant to the Pooling and
Servicing Agreement, a Certificateholder will include any beneficial owner (or
prospective transferee of a beneficial owner) to the extent that the party
required or permitted to provide or distribute such report, statement or other
information has been provided with the name of such beneficial owner (or
prospective transferee). The Percentage Interest of any class of Offered
Certificate will be equal to the percentage obtained by dividing the
denomination of such Certificate by the aggregate initial Certificate Balance of
such class of Certificates. See 'Description of the Certificates--Book-Entry
Registration and Definitive Certificates' in the Prospectus.
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BOOK-ENTRY REGISTRATION
Holders of Offered Certificates may hold their Certificates through DTC (in
the United States) or CEDEL or Euroclear (in Europe) if they are Participants of
such system, or indirectly through organizations that are participants in such
systems. CEDEL and Euroclear will hold omnibus positions on behalf of the CEDEL
Participants and the Euroclear Participants, respectively, through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries (collectively, the 'Depositaries') which in turn will
hold such positions in customers' securities accounts in the Depositaries' names
on the books of DTC. DTC is a limited purpose trust company organized under the
New York Banking Law, a 'banking organization' within the meaning of the New
York Banking Law, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the New York Uniform Commercial Code and a
'clearing agency' registered pursuant to Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities for its Participants
and to facilitate the clearance and settlement of securities transactions
between Participants through electronic computerized book- entries, thereby
eliminating the need for physical movement of certificates. Participants include
securities brokers and dealers, banks, trust companies and clearing
corporations. Indirect access to the DTC system also is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Participant, either directly or indirectly
('Indirect Participants').
Transfers between DTC Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their applicable rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
its Depositary; however, such cross-market transactions will require delivery of
instructions to the relevant European international clearing system by the
counterparty in such system in accordance with its rules and procedures and
within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to its Depositary to take action to effect
final settlement on its behalf by delivering or receiving securities in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the Depositaries.
Because of time-zone differences, credits of securities in CEDEL or
Euroclear as a result of a transaction with a DTC Participant will be made
during the subsequent securities settlement processing, dated the business day
following the DTC settlement date, and such credits or any transactions in such
securities settled during such processing will be reported to the relevant CEDEL
Participant or Euroclear Participant on such business day. Cash received in
CEDEL or Euroclear as a result of sales of securities by or through a CEDEL
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
CEDEL or Euroclear cash account only as of the business day following settlement
in DTC. For additional information regarding clearance and settlement procedures
for the Offered Certificates and for information with respect to tax
documentation procedures relating to the Offered Certificates, see Exhibit B
hereto.
The holders of Offered Certificates that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, Offered Certificates may do so only through Participants and
Indirect Participants. In addition, holders of Offered Certificates will receive
all distributions of principal and interest from the Trustee through the
Participants who in turn will receive them from DTC. Under a book-entry format,
holders of Offered Certificates may experience some delay in their receipt of
payments, since such payments will be forwarded by the Trustee to Cede & Co., as
nominee for DTC. DTC will forward such payments to its Participants, which
thereafter will forward them to Indirect Participants or holders of Offered
Certificates.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the 'Rules'), DTC is required to make book-entry transfers of
Offered Certificates among Participants on whose behalf it acts
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with respect to the Offered Certificates and to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and Indirect Participants with which the holders of Offered
Certificates have accounts with respect to the Offered Certificates similarly
are required to make book-entry transfers and receive and transmit such payments
on behalf of their respective holders of Offered Certificates. Accordingly,
although the holders of Offered Certificates will not possess the Offered
Certificates, the Rules provide a mechanism by which Participants will receive
payments on Offered Certificates and will be able to transfer their interest.
Because DTC can only act on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a holder of
Offered Certificates to pledge such Certificates to persons or entities that do
not participate in the DTC system, or to otherwise act with respect to such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC has advised the Depositor that it will take any action permitted to be
taken by a holder of an Offered Certificate under the Pooling and Servicing
Agreement only at the direction of one or more Participants to whose accounts
with DTC the Offered Certificates are credited. DTC may take conflicting actions
with respect to other undivided interests to the extent that such actions are
taken on behalf of Participants whose holdings include such undivided interests.
Except as required by law, neither the Depositor, the Servicer, nor the
Trustee will have any liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Offered
Certificates held by Cede & Co., as nominee for DTC, or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interests.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ('CEDEL
Participants') and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL Participants are recognized financial
institutions around the world, including underwriters,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations and may include the Underwriter. Indirect access
to CEDEL is also available to others, such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a CEDEL
Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for participants of the
Euroclear system ('Euroclear Participants') and to clear and settle transactions
between Euroclear Participants through simultaneous electronic book-entry
delivery against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 27 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 generally similar to the arrangements for cross-market transfers with
DTC described above. Euroclear is operated by Morgan Guaranty Trust Company of
New York, Brussels, Belgium office (the 'Euroclear Operator'), under contract
with Euroclear Clearance System, S.C., a Belgian cooperative corporation (the
'Cooperative'). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for the Euroclear system on behalf of Euroclear Participants. Euroclear
Participants include banks (including central banks), securities brokers and
dealers and other professional financial intermediaries and may include the
Underwriter. Indirect access to the Euroclear system is also available to other
firms that clear through or maintain a custodial relationship with a Euroclear
Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which 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.
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Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within the Euroclear system, withdrawal of
securities and cash from the Euroclear system, and receipts of payments with
respect to securities in the Euroclear system. All securities in the Euroclear
system are held on a fungible basis without attribution of specific certificates
to specific securities clearance accounts. The Euroclear Operator acts under the
Terms and Conditions only on behalf of Euroclear Participants and has no record
of or relationship with persons holding through Euroclear Participants.
The information herein concerning DTC, CEDEL and Euroclear and their
book-entry systems has been obtained from sources believed to be reliable, but
the Depositor takes no responsibility for the accuracy or completeness thereof.
DEFINITIVE CERTIFICATES
Offered Certificates issued in fully registered, certificated form
('Definitive Certificates') will be delivered to Certificate Owners (or their
nominees) only if (i) DTC is no longer willing or able properly to discharge its
responsibilities as depository with respect to the Book-Entry Certificates, and
the Trustee is unable to locate a qualified successor, (ii) the Trustee, at its
sole option, elects to terminate the book-entry system through DTC, or (iii)
after the occurrence of an Event of Default under the Pooling and Servicing
Agreement, Certificate Owners representing a majority in principal amount of the
Book-Entry Certificates then outstanding advise DTC through DTC Participants in
writing that the continuation of a book-entry system through DTC (or a successor
thereto) is no longer in the best interest of Certificate Owners.
Upon the occurrence of any of the events described in clauses (i) through
(iii) in the immediately preceding paragraph, DTC is required to notify all DTC
Participants of the availability through DTC of Definitive Certificates. Upon
delivery of Definitive Certificates, the Trustee, Certificate Registrar, and
Servicer will recognize the holders of such Definitive Certificates as holders
under the Pooling and Servicing Agreement ('Holders'). Distributions of
principal of and interest on the Definitive Certificates will be made by the
Trustee directly to Holders of Definitive Certificates in accordance with the
procedures set forth in the Prospectus and the Pooling and Servicing Agreement.
Upon the occurrence of any of the events described in clauses (i) through
(iii) of the second preceding paragraph, requests for transfer of Definitive
Certificates will be required to be submitted directly to the Certificate
Registrar in a form acceptable to the Certificate Registrar (such as the forms
which will appear on the back of the certificate representing a Definitive
Certificate), signed by the Holder or such Holder's legal representative and
accompanied by the Definitive Certificate or Certificates for which transfer is
being requested. The Trustee will be appointed as the initial Certificate
Registrar.
TRANSFER RESTRICTIONS
Each Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7
Certificate will bear a legend substantially to the effect that such Certificate
may not be purchased by a transferee that is (A) an employee benefit plan or
other retirement arrangement, including an individual retirement account of a
Keogh Plan, which is subject to ERISA, the Code, or any Similar Law (each as
defined herein) (each, a 'Plan'), or (B) a collective investment fund in which
Plans are invested, an insurance company using assets of separate accounts or
general accounts which include assets of Plans (or which are deemed pursuant to
ERISA or any Similar Law to include assets of Plans) or other person acting on
behalf of any such Plan or using the assets of any such Plan, other than an
insurance company using the assets of its general account under circumstances
whereby such purchase and the subsequent holding of such Certificate by such
insurance company would not constitute or result in a prohibited transaction
within the meaning of Section 406 or 407 or ERISA, Section 4975 of the Code, or
a materially similar characterization under any Similar Law.
In the event that holders of the Class A-1C, Class A-2, Class A-3, Class
A-4, Class A-5, Class A-6 or Class A-7 Certificates become entitled to receive
Definitive Certificates under the circumstances described under
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'--Definitive Certificates,' each prospective transferee of a Class A-2, Class
A-3, Class A-4, Class A-5, Class A-6 or Class A-7 Certificate that is a
Definitive Certificate will be required to deliver to the Depositor, the
Certificate Registrar and the Trustee a representation letter substantially in
the form set forth as an exhibit to the Pooling and Servicing Agreement stating
that such transferee is not a person or entity referred to in clause (A) or (B)
of the legend. Any transfer of a Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6 or Class A-7 Certificate that would result in a prohibited transaction
under ERISA or Section 4975 of the Code will be deemed absolutely null and void
ab initio.
THE INTEREST RATE FLOOR AGREEMENTS
General. The Depositor will assign to the Trust Fund its rights under 20
interest rate floor agreements (the 'Floor Agreements') that the Depositor will
obtain from Lehman Brothers Financial Products, Inc. (the 'Floor Counterparty').
The Floor Agreements will be governed by and construed in accordance with
the law of the State of New York and will be documented on the ISDA Master
Agreement, as supplemented by a schedule and a confirmation.
Payment Terms. Each Floor Agreement will relate to a particular class of
Certificates or a particular Component and will pay interest on a notional
amount equal to the Certificate Balance or Component Balance of such related
class of Certificates or related Component. The Floor Agreements, taken as a
whole, require the Floor Counterparty to pay to the Trustee the amount, if any,
by which interest accrued on the Prime Retail II Pool Loan at its Mortgage Rate
is less than the interest which would have accrued on such Mortgage Loan at a
fixed interest rate of 7.782%. A default on the Prime Retail II Pool Loan will
result in the conversion of its Mortgage Rate to a fixed rate of 7.782% per
annum and the termination of the Floor Agreements. On each Servicer Remittance
Date, the Floor Counterparty will be obligated to pay to the Trustee for deposit
into the Certificate Distribution Account with respect to each Floor Agreement
an amount equal to the product of the rate calculated for the related Interest
Accrual Period using the formula set forth for such Floor Agreement in the
following table and the notional amount of such Floor Agreement.
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<TABLE>
<CAPTION>
FLOOR AGREEMENTS
FLOOR AGREEMENT NOTIONAL AMOUNT RATE CALCULATION FORMULA
<S> <C> <C>
Class A-1A....... Certificate Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
the Class A-1A Average Net Mortgage Pass-Through Rate and (ii) [ ]%
Certificates over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
Class CS-1....... Certificate Balance of Excess of (A) the Adjusted Weighted Average Net
the Class A-1A Component Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
Class A-1B....... Certificate Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
the Class A-1B Average Net Mortgage Pass-Through Rate and (ii) [ ]%
Certificates over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
Class CS-2....... Component Balance of Excess of (A) the Adjusted Weighted Average Net
Class A-1B Component Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
Class A-1C....... Certificate Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
Class A-1C Certificates Average Net Mortgage Pass-Through Rate and (ii) [ ]%
over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
A-1C Component... Component Balance of Excess of (A) the Adjusted Weighted Average Net
Class A-1C Component Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
Class A-2........ Certificate Balance of Excess of (A) the Adjusted Weighted Average Net
Class A-2 Certificates Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
A-2 Component.... Component Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
Class A-2 Component Average Net Mortgage Pass-Through Rate and (ii) [ ]%
over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
Class A-3........ Certificate Balance of Excess of (A) the Adjusted Weighted Average Net
Class A-3 Certificates Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
A-3 Component.... Component Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
Class A-3 Component Average Net Mortgage Pass-Through Rate and (ii) [ ]%
over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
FLOOR AGREEMENTS
FLOOR AGREEMENT NOTIONAL AMOUNT RATE CALCULATION FORMULA
<S> <C> <C>
Class A-4........ Certificate Balance of Excess of (A) the Adjusted Weighted Average Net
Class A-4 Certificates Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
A-4 Component.... Component Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
Class A-4 Component Average Net Mortgage Pass-Through Rate and (ii) [ ]%
over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
Class A-5........ Certificate Balance of Excess of (A) the Adjusted Weighted Average Net
Class A-5 Certificates Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
A-5 Component.... Component Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
Class A-5 Component Average Net Mortgage Pass-Through Rate and (ii) [ ]%
over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
Class A-6........ Certificate Balance of Excess of (A) the Adjusted Weighted Average Net
Class A-6 Certificates Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
A-6 Component.... Component Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
Class A-6 Component Average Net Mortgage Pass-Through Rate and (ii) [ ]%
over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
Class A-7........ Certificate Balance of Excess of (A) the Adjusted Weighted Average Net
Class A-7 Certificates Mortgage Pass-Through Rate minus [ ]% over (B) the
Weighted Average Net Mortgage Pass-Through Rate minus
[ ]% (but not less than zero).
A-7 Component.... Component Balance of Excess of (A) the lesser of (i) the Adjusted Weighted
Class A-7 Component Average Net Mortgage Pass-Through Rate and (ii) [ ]%
over (B) the lesser of (i) the Weighted Average Net
Mortgage Pass-Through Rate and (ii) [ ]%.
Class B-1........ Sum of the Certificate Excess of (A) the Adjusted Weighted Average Net
Balances of the Class B-1 Mortgage Pass-Through Rate over (B) the Weighted
and Class B-1H Average Net Mortgage Pass-Through Rate.
Certificates
</TABLE>
THE OBLIGATIONS OF THE FLOOR COUNTERPARTY ARE LIMITED TO THOSE SPECIFICALLY
SET FORTH IN THE FLOOR AGREEMENTS AND ARE SUBJECT TO CERTAIN CONDITIONS AS
DESCRIBED IN THE FLOOR AGREEMENTS.
Termination. Unless earlier terminated as described below, each Floor
Agreement will terminate upon the reduction of its notional amount to zero.
S-149
<PAGE>
The Servicer will have the right to terminate the Floor Agreements if the
outstanding senior unsecured indebtedness rating of the Floor Counterparty is
downgraded or withdrawn, to the extent such downgrade or withdrawal results in a
downgrade of any class of Certificates.
In addition, the Servicer will have the right to terminate the Floor
Agreements if any of the following events occur:
(i) the Floor Counterparty fails to make any payment due under a Floor
Agreement and such nonpayment continues for three business days after
notice from the Servicer;
(ii) the Floor Counterparty fails to perform or observe its
obligations under a Floor Agreement (other than its obligation to make any
payment due under such Floor Agreement or to provide certain notices under
such Floor Agreement) and such failure continues for a period of 30 days
after notice from the Servicer;
(iii) certain events of bankruptcy or insolvency occur with respect to
the Floor Counterparty; and
(iv) a change in law occurs after the Closing Date which makes it
unlawful for the Floor Counterparty to perform its obligations in respect
of the Floor Agreements.
Breakage Fee. If a Floor Agreement is terminated by the Servicer, the
market value of such Floor Agreement will be established by the Servicer as the
cost of entering into a replacement floor agreement having substantially the
same terms as such Floor Agreement, in accordance with the procedures set forth
in such Floor Agreement (such amount, the 'Breakage Fee'). Upon a termination of
a Floor Agreement, the Floor Counterparty will be required to use its best
efforts to have its obligations assumed by a substitute counterparty as to which
the Rating Agencies confirm that the succession of such counterparty will not
result in a withdrawal, qualification or downgrade of the then-current ratings
of the Certificates. The Floor Counterparty will be required to pay the Servicer
the amount of any Breakage Fee plus the amount of any payment that became due
prior to the date on which such Floor Agreement is terminated, but remains
unpaid, plus interest thereon; provided that, at the Servicer's direction, the
Floor Counterparty will be required to pay the Breakage Fee directly to any
substitute counterparty. Upon any such termination of a Floor Agreement, to the
extent that the Floor Counterparty fails to have its obligations assumed by a
substitute floor counterparty, the Servicer is required to apply any Breakage
Fee paid to the Servicer by the Floor Counterparty directly to the purchase of a
similar floor agreement from another counterparty. No party will be required to
expend or advance any funds if any Breakage Fee paid by the Floor Counterparty
is insufficient to obtain a substitute floor agreement having substantially the
same terms as the terminated Floor Agreement. Any shortfalls resulting from the
absence of substitute floor agreements will be allocated among the classes of
Certificates in the same manner as Realized Losses.
THE FLOOR COUNTERPARTY
General. The Floor Counterparty is a Delaware corporation and an indirect
wholly owned subsidiary of Lehman Brothers Inc. The Floor Counterparty currently
has a long-term credit rating of 'AAA' from S&P and Fitch, and 'Aaa' from
Moody's. The Floor Counterparty will provide upon request, without charge, to
each person to whom this Prospectus Supplement is delivered, a copy of (i) the
ratings analysis from each of S&P, Fitch and Moody's evidencing those respective
long-term credit ratings and (ii) the annual reports of the Floor Counterparty.
Requests for such information should be directed to Client Services, Lehman
Brothers Financial Products Inc., 3 World Financial Center, 12th Floor, New
York, New York 10285, telephone (212) 526-7319.
Capitalization of Floor Counterparty. On August 31, 1996, total assets of
LBFP were $2,935,212,741, total liabilities were $2,716,309,577 and total
Stockholder's Equity was $218,903,164.
The financial information set forth below is summarized from the LBFP's
Annual Report for the fiscal year ended November 30, 1995. This financial
information is based on generally accepted accounting principles.
S-150
<PAGE>
LEHMAN BROTHERS FINANCIAL PRODUCTS INC.
<TABLE>
<CAPTION>
NOVEMBER 30, 1995 NOVEMBER 30, 1994
(AUDITED) (AUDITED)
----------------- -----------------
<S> <C> <C>
ASSETS
Securities and financial instruments
owned
U.S. Government obligations........... $ 1,198,509,664 $ 306,905,173
Derivative assets--Customers.......... 159,384,000 35,674,426
Derivative assets--LBSF............... 143,882,000 8,124,062
Investments
Money market instruments.............. 239,854,199 207,546,693
U.S. Government Agencies.............. 1,006,966 996,440
Receivable from broker and dealer....... 13,344,084 12,944,967
Equipment (net of accumulated
depreciation of $135,330 in 1995 and
$76,107 in 1994)...................... 0 59,223
Prepaid expenses........................ 202,500 325,926
----------------- -----------------
Total Assets............................ $ 1,756,183,413 $ 572,576,910
----------------- -----------------
----------------- -----------------
<PAGE>
LIABILITIES AND STOCKHOLDER'S EQUITY
Securities and financial instruments
sold but not yet purchased
U.S. Government obligations........... 305,345,498 270,210,739
Derivative liabilities--Customers..... 303,266,000 43,798,488
Securities sold under agreements to
repurchase............................ 884,443,852 33,935,017
Payable to affiliates, principally
LBSF.................................. 24,801,444 16,490,668
Deferred intermediation fee income...... 22,250,364 3,172,082
Income taxes payable.................... 6,023,413 2,193,030
Accrued expenses........................ 292,503 73,293
----------------- -----------------
Total Liabilities....................... $ 1,546,423,074 $ 369,873,317
----------------- -----------------
----------------- -----------------
STOCKHOLDER'S EQUITY
Common Stock, $.01 par value, 1,000
shares authorized, issued and
outstanding........................... 10 10
Additional paid-in capital.............. 200,134,332 200,134,332
Retained earnings....................... 9,625,997 2,569,251
----------------- -----------------
Total Stockholder's Equity.............. 209,760,339 202,703,593
----------------- -----------------
Total Liabilities and Stockholder's
Equity................................ $ 1,756,183,413 $ 572,576,910
----------------- -----------------
----------------- -----------------
</TABLE>
S-151
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
YIELD
The yield to maturity on the Offered Certificates will depend upon the
price paid by the Certificateholder, the rate and timing of the distributions in
reduction of Certificate Balance or Notional Balance, as applicable, of such
Certificates and the rate, timing and severity of Realized Losses on the
Mortgage Loans and the extent to which such losses are allocable in reduction of
the Certificate Balance or Notional Balance, as applicable, of such
Certificates, as well as prevailing interest rates at the time of prepayment or
default.
The rate of distributions in reduction of the Certificate Balance or
Notional Balance, as applicable, of any class of Offered Certificates, the
aggregate amount of distributions on any class of Offered Certificates and the
yield to maturity of any class of Offered Certificates will be directly related
to the rate of payments of principal (both scheduled and unscheduled) on the
Mortgage Loans and the amount and timing of borrower defaults. In addition, such
distributions in reduction of Certificate Balance or Notional Balance, as
applicable, may result from repurchases by the Originator due to breaches of
representations and warranties with respect to the Mortgage Loans as described
herein under 'The Pooling and Servicing Agreement--Representations and
Warranties; Repurchase' or purchases of the Mortgage Loans in the manner
described under 'The Pooling and Servicing Agreement--Optional Termination.'
Disproportionate principal payments (whether resulting from differences in
amortization terms, prepayments following expirations of the respective
Prepayment Lockout Periods or otherwise) on Mortgage Loans having Net Mortgage
Pass-Through Rates (or in the case of the Prime Retail II Pool Loan, an Adjusted
Net Mortgage Pass-Through Rate) that are higher or lower than the current
Pass-Through Rate for each of the Class CS-1, Class CS-2, Class CS-3, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Certificates will
affect the Adjusted Weighted Average Net Mortgage Pass-Through Rate and
accordingly the Pass-Through Rates of such class for future periods and
therefore the yield on such class.
The Certificate Balance (or Notional Balance) of any class of Offered
Certificates may be reduced without distributions thereon as a result of the
allocation of Realized Losses to such class (or the related classes), reducing
the maximum amount distributable to such class in respect of Certificate
Balance, if applicable, as well as the amount of interest that would have
accrued thereon in the absence of such reduction. In general, a Realized Loss
occurs when the aggregate principal balance of a Mortgage Loan is reduced
without an equal distribution to applicable Certificateholders in reduction of
the Certificate Balances of the Certificates. Realized Losses are likely to
occur only in connection with a default on a Mortgage Loan and the liquidation
of the related Mortgaged Properties or a reduction in the principal balance of a
Mortgage Loan by a bankruptcy court.
Certificateholders are not entitled to receive distributions of Monthly
Payments when due except to the extent they are either covered by an Advance or
actually received. Consequently, any defaulted Monthly Payment for which no such
Advance is made will tend to extend the weighted average lives of the
Certificates, whether or not a permitted extension of the due date of the
related Mortgage Loan has been effected.
The rate of payments (including voluntary and involuntary prepayments) on
pools of Mortgage Loans is influenced by a variety of economic, geographic,
social and other factors, including the level of mortgage interest rates and the
rate at which borrowers default on their mortgage loans. The terms of the
Mortgage Loans--in particular, the term of any Prepayment Lockout Period, the
extent to which Prepayment Premiums are due with respect to any principal
prepayments, the right of the lender to apply condemnation and casualty proceeds
to prepay the Mortgage Loan, the availability of certain rights to defease all
or a portion of the Mortgage Loan, and any increase in the interest rate and the
application of Excess Cash Flow to prepay the related Mortgage Loan--may affect
the rate of principal payments on Mortgage Loans, and consequently, the yield to
maturity of the classes of Offered Certificates. See 'Description of the
Mortgage Pool' and 'Description of the Mortgage Loans and the Mortgaged
Properties' herein.
The timing of changes in the rate of prepayment on the Mortgage Loans may
significantly affect the actual yield to maturity experienced by an investor
even if the average rate of principal payments experienced over time is
consistent with such investor's expectation. In general, the earlier a
prepayment of principal on the Mortgage Loans, the greater the effect on such
investor's yield to maturity. As a result, the effect on such investor's yield
of
S-152
<PAGE>
principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Offered Certificates would not be fully offset by a subsequent like
reduction (or increase) in the rate of principal payments.
No representation is made as to the rate of principal payments on the
Mortgage Loans or as to the yield to maturity of any class of Offered
Certificates. In addition, although Excess Cash Flow is applied to reduce
principal of Mortgage Loans after their respective Anticipated Repayment Dates,
there can be no assurance that any of such Mortgage Loans will be prepaid on
that date or any date prior to maturity. An investor is urged to make an
investment decision with respect to any class of Offered Certificates based on
the anticipated yield to maturity of such class of Offered Certificates
resulting from its purchase price and such investor's own determination as to
anticipated Mortgage Loan prepayment rates under a variety of scenarios. The
extent to which any class of Offered Certificates is purchased at a discount or
a premium and the degree to which the timing of payments on such class of
Offered Certificates is sensitive to prepayments will determine the extent to
which the yield to maturity of such class of Offered Certificates may vary from
the anticipated yield. An investor should carefully consider the associated
risks, including, in the case of any Offered Certificates purchased at a
discount, the risk that a slower than anticipated rate of principal payments on
the Mortgage Loans could result in an actual yield to such investor that is
lower than the anticipated yield and, in the case of any Offered Certificates
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield to such investor that is
lower than the anticipated yield.
An investor should consider the risk that rapid rates of prepayments on the
Mortgage Loans, and therefore of amounts distributable in reduction of principal
balance of the Offered Certificates may coincide with periods of low prevailing
interest rates. During such periods, the effective interest rates on securities
in which an investor may choose to reinvest amounts distributed in reduction of
the principal balance of such investor's Offered Certificate may be lower than
the Pass-Through Rate. Conversely, slower rates of prepayments on the Mortgage
Loans, and therefore, of amounts distributable in reduction of principal balance
of the Offered Certificates, may coincide with periods of high prevailing
interest rates. During such periods, the amount of principal distributions
available to an investor for reinvestment at such high prevailing interest rates
may be relatively small.
The effective yield to holders of Offered Certificates will be lower than
the yield otherwise produced by the Pass-Through Rate and applicable purchase
prices because while interest will accrue from the eleventh day of each month,
the distribution of such interest will not be made until the Distribution Date
occurring in such month, and principal paid on any Distribution Date will not
bear interest during the period after the interest is paid and before the
Distribution Date occurs. Additionally, as described under 'Description of the
Offered Certificates--Distributions' herein, if the portion of the Available
Funds distributable in respect of interest on any class of Offered Certificates
on any Distribution Date is less than the amount of interest required to be paid
to the holders of such class, the shortfall will be distributable to holders of
such class of Certificates on subsequent Distribution Dates, to the extent of
Available Funds on such Distribution Dates. Any such shortfall will not bear
interest, however, and will therefore negatively affect the yield to maturity of
such class of Certificates for so long as it is outstanding.
YIELD ON THE CLASS CS-1, CLASS CS-2 AND CLASS CS-3 CERTIFICATES
Because distributions on the Class CS-1, Class CS-2 and Class CS-3
Certificates consist only of a portion of the interest received on the Mortgage
Loans, the yield to maturity of such Certificates will be extremely sensitive to
the rate and timing of principal payments (including voluntary and involuntary
prepayments), delinquencies and liquidations on such Mortgage Loans.
Furthermore, delinquencies and other defaults under a Mortgage Loan could result
in the application of Appraisal Reduction Amounts and Delinquency Reduction
Amounts to the Component Balances of certain of the components that comprise the
Class CS-3 Certificates. In the event of any such application of Appraisal
Reduction Amounts and Delinquency Reduction Amounts, the right of the Class CS-3
Certificates to receive a portion of its interest would be reduced in priority.
Investors should fully consider the associated risks, including the risk that a
rapid rate of principal payments on and liquidations of the Mortgage Loans could
result in the failure of investors in the Coupon Strip Certificates to fully
recoup their initial investments.
S-153
<PAGE>
The following tables indicate the assumed purchase price (including accrued
interest) and the pre-tax yield on the Class CS-1, Class CS-2 or Class CS-3
Certificates to maturity, stated on a corporate bond equivalent basis.
For purposes of preparing the tables, it was assumed that (i) each of the
Mortgage Loans has the following characteristics:
<TABLE>
<CAPTION>
REMAINING TERM
TO ANTICIPATED REMAINING
CUT-OFF REPAYMENT TERM TO INTEREST
MORTGAGE LOAN DATE BALANCE DATE (MONTHS) MATURITY ACCRUAL
- ------------------------------ ---------------- ---------------- --------- --------
<S> <C> <C> <C> <C>
1. Columbia Sussex II Pool
Loan........................
2. HGI II Loan................
3. MHP II Pool Loan...........
4. Palmer Square Loan.........
5. Prime Retail II Pool
Loan........................
</TABLE>
(ii) each Mortgage Loan will pay principal and interest in accordance with its
terms and scheduled payments will be timely received on the 11th day of each
month; (iii) the Originator does not repurchase any Mortgage Loan as described
under 'The Pooling and Servicing Agreement--Representations and
Warranties--Repurchase'; (iv) none of the Depositor, Servicer, or the Class LR
Certificateholders exercise the right to cause early termination of the Trust
Fund; (v) the Servicing Fee for each Distribution Date is an amount equal to a
per annum rate of 0.045% on the Stated Principal Balance of the Mortgage Loans
as of the preceding Due Date; (vi) the date of determination of weighted average
life is December , 1996; and (vii) unless otherwise specified in the Scenarios
described below, the Mortgage Loans do not prepay (assumptions (i) through (vii)
above are collectively referred to as the 'Mortgage Loan Assumptions').
In addition, in the case of Scenario 1 on the tables below, it is assumed
that all of the Mortgage Loans are prepaid in full on their respective
Anticipated Repayment Dates; in the case of Scenario 2, it is assumed that all
Mortgage Loans prepay in full on the first date that such loans may be
voluntarily prepaid without payment of any Prepayment Premium; and in the case
of Scenario 3, it is assumed that each of the Mortgage Loans prepays at the
midpoint of the period during which each Mortgage Loan may be prepaid without
payment of a Prepayment Premium (assuming that any applicable Anticipated
Repayment Date is the maturity date) (collectively, the 'Scenarios').
CLASS CS-1
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE SCENARIO 1 SCENARIO 2 SCENARIO 3
---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
$
$
</TABLE>
CLASS CS-2
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE SCENARIO 1 SCENARIO 2 SCENARIO 3
---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
$
$
</TABLE>
CLASS CS-3
<TABLE>
<CAPTION>
ASSUMED PURCHASE PRICE SCENARIO 1 SCENARIO 2 SCENARIO 3
---------------------- ---------- ---------- ----------
<S> <C> <C> <C>
$
$
</TABLE>
The pre-tax yields to maturity set forth in the preceding tables were
calculated by determining the monthly discount rate that, when applied to the
assumed stream of cash flows to be paid on the Coupon Strip Certificates, would
cause the discounted present value of such assumed cash flows to equal the
assumed purchase price
S-154
<PAGE>
thereof, and by converting such monthly rates to corporate bond equivalent
rates. Such calculations do not take into account variations that may occur in
the interest rates at which investors may be able to reinvest funds received by
them as distributions on the Class CS-1, Class CS-2 or Class CS-3 Certificates
and consequently, do not purport to reflect the return on any investment in the
Class CS-1, Class CS-2 or Class CS-3 Certificates when such reinvestment rates
are considered.
There can be no assurance that the Mortgage Loans will prepay at any of the
times assumed for purposes of calculating the yields shown in the tables or at
any other particular time, that the pre-tax yields on the Class CS-1, Class CS-2
or Class CS-3 Certificates will correspond to any of the pre-tax yields shown
herein or that the aggregate purchase prices of the Class CS-1, Class CS-2 or
Class CS-3 Certificates will be as assumed. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase the Class CS-1, Class CS-2 or Class CS-3 Certificates.
RATED FINAL DISTRIBUTION DATE
The 'Rated Final Distribution Date' is the Distribution Date occurring
three years after the end of the longest amortization period of any Mortgage
Loan. Because certain of the Mortgage Loans have maturity dates that occur
earlier than the latest maturity date, and because certain of the Mortgage Loans
may be prepaid prior to maturity, it is possible that the Certificate Balance or
Notional Balance, as applicable, of each class of Offered Certificates will be
reduced to zero significantly earlier than the Rated Final Distribution Date.
However, delinquencies on Mortgage Loans could result in final distributions in
reduction of the Certificate Balance or Notional Balance, as applicable, of one
or more classes after the Rated Final Distribution Date of such class or
classes.
WEIGHTED AVERAGE LIFE OF OFFERED CERTIFICATES
Weighted average life refers to the average amount of time that will elapse
from the date of determination to the date of distribution to the investor of
each dollar in reduction of Certificate Balance or Notional Balance, as
applicable, is distributed or allocated, respectively. The weighted average
lives of the Offered Certificates will be influenced by, among other things, the
rate at which principal of the Mortgage Loans is paid, which may be in the form
of scheduled amortization, voluntary or involuntary prepayments or liquidations.
The weighted average lives of the Offered Certificates may also be affected
to the extent that additional distributions in reduction of the Certificate
Balance (or allocations in reduction of Notional Balance) of such Certificates
occur as a result of the repurchase or purchase of Mortgage Loans from the Trust
Fund as described under 'The Pooling and Servicing Agreement--Representations
and Warranties; Repurchase' or '--Optional Termination' herein. Such a
repurchase or purchase from the Trust Fund will have the same effect on
distributions to the holders of Certificates as if the related Mortgage Loans
had prepaid in full, except that no Prepayment Premiums are made in respect
thereof. The tables of 'Percentages of Initial Certificate Balance or Notional
Balance Outstanding for the Offered Certificates' set forth below indicate the
weighted average life of each class of Offered Certificates and set forth the
percentage of the initial Certificate Balance or Notional Balance of such
Offered Certificates that would be outstanding after each of the dates shown
based on the assumptions for each of the designated Scenarios described under
'Yield on the Class CS-1, Class CS-2 and Class CS-3 Certificates.' The tables
have also been prepared on the basis of the Mortgage Loan Assumptions described
under 'Yield on the Class CS-1, Class CS-2 and Class CS-3 Certificates.' The
Mortgage Loan Assumptions made in preparing the following tables are expected to
vary from the actual performance of the Mortgage Loans. It is highly unlikely
that principal of the Mortgage Loans will be repaid consistently with
assumptions underlying any one of the Scenarios. Investors are urged to conduct
their own analysis concerning the likelihood that the Mortgage Loans may pay or
prepay on any particular date.
Based on the Mortgage Loan Assumptions and the Scenarios, the tables
indicate the weighted average life of the Offered Certificates and set forth the
percentages of the initial Certificate Balance the Offered Certificates that
would be outstanding after the Distribution Date in March of each of the years
indicated, at each of the Scenarios.
S-155
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE OR NOTIONAL BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-1A AND CLASS CS-1
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 93 93 93
December 13, 1998....................... 80 80 80
December 13, 1999....................... 66 66 66
December 13, 2000....................... 51 51 51
December 13, 2001....................... 35 35 35
December 13, 2002....................... 17 17 17
December 13, 2003....................... 0 0 0
December 13, 2004....................... 0 0 0
December 13, 2005....................... 0 0 0
December 13, 2006....................... 0 0 0
December 13, 2007....................... 0 0 0
December 13, 2008....................... 0 0 0
December 13, 2009....................... 0 0 0
December 13, 2010....................... 0 0 0
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 3.94 3.94 3.94
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-1A and Class CS-1 Certificates is
determined by (i) multiplying the amount of each distribution or allocation
in reduction of Certificate Balance or Notional Balance, as applicable, of
such class by the number of years from the date of determination to the
related Distribution Date, (ii) adding the results and (iii) dividing the
sum by the aggregate distributions or allocations in reduction of
Certificate Balance or Notional Balance, as applicable, referred to in
clause (i).
S-156
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE OR NOTIONAL BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-1B AND CLASS CS-2
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 0 0 0
December 13, 2004....................... 0 0 0
December 13, 2005....................... 0 0 0
December 13, 2006....................... 0 0 0
December 13, 2007....................... 0 0 0
December 13, 2008....................... 0 0 0
December 13, 2009....................... 0 0 0
December 13, 2010....................... 0 0 0
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 6.91 6.91 6.91
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-1B and Class CS-2 Certificates is
determined by (i) multiplying the amount of each distribution or allocation
in reduction of Certificate Balance or Notional Balance, as applicable, of
such class by the number of years from the date of determination to the
related Distribution Date, (ii) adding the results and (iii) dividing the
sum by the aggregate distributions or allocations in reduction of
Certificate Balance or Notional Balance, as applicable, referred to in
clause (i).
S-157
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-1C
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 98 98 98
December 13, 2004....................... 90 90 90
December 13, 2005....................... 80 80 80
December 13, 2006....................... 17 17 17
December 13, 2007....................... 0 0 0
December 13, 2008....................... 0 0 0
December 13, 2009....................... 0 0 0
December 13, 2010....................... 0 0 0
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 9.56 9.56 9.56
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-1C Certificates is determined by
(i) multiplying the amount of each distribution or allocation in reduction
of Certificate Balance or Notional Balance, as applicable, of such class by
the number of years from the date of determination to the related
Distribution Date, (ii) adding the results and (iii) dividing the sum by the
aggregate distributions or allocations in reduction of Certificate Balance
or Notional Balance, as applicable, referred to in clause (i).
S-158
<PAGE>
PERCENTAGE OF INITIAL NOTIONAL BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS CS-3
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 99 99 99
December 13, 2004....................... 96 96 96
December 13, 2005....................... 92 92 92
December 13, 2006....................... 67 67 67
December 13, 2007....................... 13 13 13
December 13, 2008....................... 11 11 11
December 13, 2009....................... 10 10 10
December 13, 2010....................... 8 8 8
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 10.71 10.70 10.70
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class CS-3 Certificates is determined by
(i) multiplying the amount of each distribution or allocation in reduction
of Notional Balance of such class by the number of years from the date of
determination to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions or allocations in
reduction of Notional Balance referred to in clause (i).
S-159
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-2
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 100 100 100
December 13, 2004....................... 100 100 100
December 13, 2005....................... 100 100 100
December 13, 2006....................... 100 100 100
December 13, 2007....................... 0 0 0
December 13, 2008....................... 0 0 0
December 13, 2009....................... 0 0 0
December 13, 2010....................... 0 0 0
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 10.82 10.79 10.82
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-2 Certificates is determined by (i)
multiplying the amount of each distribution or allocation in reduction of
Certificate Balance of such class by the number of years from the date of
determination to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions or allocations in
reduction of Certificate Balance referred to in clause (i).
S-160
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-3
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 100 100 100
December 13, 2004....................... 100 100 100
December 13, 2005....................... 100 100 100
December 13, 2006....................... 100 100 100
December 13, 2007....................... 0 0 0
December 13, 2008....................... 0 0 0
December 13, 2009....................... 0 0 0
December 13, 2010....................... 0 0 0
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 10.82 10.82 10.82
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-3 Certificates is determined by (i)
multiplying the amount of each distribution or allocation in reduction of
Certificate Balance of such class by the number of years from the date of
determination to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions or allocations in
reduction of Certificate Balance referred to in clause (i).
S-161
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-4
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 100 100 100
December 13, 2004....................... 100 100 100
December 13, 2005....................... 100 100 100
December 13, 2006....................... 100 100 100
December 13, 2007....................... 0 0 0
December 13, 2008....................... 0 0 0
December 13, 2009....................... 0 0 0
December 13, 2010....................... 0 0 0
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 10.82 10.82 10.82
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-4 Certificates is determined by (i)
multiplying the amount of each distribution or allocation in reduction of
Certificate Balance of such class by the number of years from the date of
determination to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions or allocations in
reduction of Certificate Balance referred to in clause (i).
S-162
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-5
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 100 100 100
December 13, 2004....................... 100 100 100
December 13, 2005....................... 100 100 100
December 13, 2006....................... 100 100 100
December 13, 2007....................... 0 0 0
December 13, 2008....................... 0 0 0
December 13, 2009....................... 0 0 0
December 13, 2010....................... 0 0 0
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 10.82 10.82 10.82
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-5 Certificates is determined by (i)
multiplying the amount of each distribution or allocation in reduction of
Certificate Balance of such class by the number of years from the date of
determination to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions or allocations in
reduction of Certificate Balance referred to in clause (i).
S-163
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE OR NOTIONAL BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-6
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 100 100 100
December 13, 2004....................... 100 100 100
December 13, 2005....................... 100 100 100
December 13, 2006....................... 100 100 100
December 13, 2007....................... 0 0 0
December 13, 2008....................... 0 0 0
December 13, 2009....................... 0 0 0
December 13, 2010....................... 0 0 0
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 10.87 10.82 10.82
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-6 Certificates is determined by (i)
multiplying the amount of each distribution or allocation in reduction of
Certificate Balance of such class by the number of years from the date of
determination to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions or allocations in
reduction of Certificate Balance referred to in clause (i).
S-164
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-7
--------------------------------------
SCENARIO
--------------------------------------
DISTRIBUTION(1) 1 2 3
- ---------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Initial Percentage...................... 100% 100% 100%
December 13, 1997....................... 100 100 100
December 13, 1998....................... 100 100 100
December 13, 1999....................... 100 100 100
December 13, 2000....................... 100 100 100
December 13, 2001....................... 100 100 100
December 13, 2002....................... 100 100 100
December 13, 2003....................... 100 100 100
December 13, 2004....................... 100 100 100
December 13, 2005....................... 100 100 100
December 13, 2006....................... 100 100 100
December 13, 2007....................... 77 77 77
December 13, 2008....................... 67 67 67
December 13, 2009....................... 57 57 57
December 13, 2010....................... 46 46 46
December 13, 2011....................... 0 0 0
December 13, 2012....................... 0 0 0
December 13, 2013....................... 0 0 0
December 13, 2014....................... 0 0 0
December 13, 2015....................... 0 0 0
December 13, 2016....................... 0 0 0
December 13, 2017....................... 0 0 0
December 13, 2018....................... 0 0 0
December 13, 2019....................... 0 0 0
December 13, 2020....................... 0 0 0
December 13, 2021....................... 0 0 0
December 13, 2022....................... 0 0 0
December 13, 2023....................... 0 0 0
December 13, 2024....................... 0 0 0
December 13, 2025....................... 0 0 0
Weighted Average Life: (years)(2)....... 13.15 13.11 13.11
</TABLE>
- ------------------
(1) Assuming that the 13th day of each of the months indicated is the
Distribution Date occurring in such month.
(2) The weighted average life of the Class A-7 Certificates is determined by (i)
multiplying the amount of each distribution or allocation in reduction of
Certificate Balance of such class by the number of years from the date of
determination to the related Distribution Date, (ii) adding the results and
(iii) dividing the sum by the aggregate distributions or allocations in
reduction of Certificate Balance referred to in clause (i).
S-165
<PAGE>
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of December 1, 1996 (the 'Pooling and Servicing
Agreement'), by and among the Depositor, the Servicer, the Trustee and the
Fiscal Agent.
Reference is made to the Prospectus for important information in addition
to that set forth herein regarding the terms of the Pooling and Servicing
Agreement and terms and conditions of the Offered Certificates. The Depositor
will provide to a prospective or actual holder of an Offered Certificate without
charge, upon written request, a copy (without exhibits) of the Pooling and
Servicing Agreement. Requests should be addressed to Asset Securitization
Corporation, 2 World Financial Center, Building B, New York, New York
10281-1198.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date, the Depositor will sell, transfer or otherwise convey,
assign or cause the assignment of the Mortgage Loans, without recourse, to the
Trustee for the benefit of the holders of Certificates. On or prior to the
Closing Date, the Depositor will deliver to the Trustee, with respect to each
Mortgage Loan (i) the original Mortgage Note endorsed without recourse to the
order of the Trustee, as trustee; (ii) the original mortgage or counterpart
thereof; (iii) the assignment of the mortgage in recordable form in favor of the
Trustee; (iv) if applicable, preceding assignments of mortgages; (v) to the
extent not contained in the Mortgages, the original assignments of leases and
rents or counterpart thereof; (vi) if applicable, the original assignments of
assignments of leases and rents to the Trustee; (vii) if applicable, preceding
assignments of assignments of leases and rents; (viii) where applicable, a
certified copy of the UCC-1 Financing Statements, if any, including UCC-3
continuation statements and UCC-3 assignments; and (ix) the original lender's
title insurance policy (or marked commitments to insure). The Trustee will hold
such documents in trust for the benefit of the holders of Certificates. The
Trustee is obligated to review such documents for each Mortgage Loan within 45
days after the later of delivery or the Cut-off Date and report any missing
documents or certain types of defects therein to the Depositor.
REPRESENTATIONS AND WARRANTIES; REPURCHASE
In the Pooling and Servicing Agreement, the Depositor will assign the
representations and warranties made by the Originator to the Depositor in the
Mortgage Loan Purchase and Sale Agreement to the Trustee for the benefit of
Certificateholders. In the Mortgage Loan Purchase and Sale Agreement the
Originator will represent and warrant, among other things, that (subject to
certain exceptions specified in the Mortgage Loan Purchase and Sale Agreement),
as of the Closing Date (unless otherwise specified):
(i) immediately prior to the transfer and assignment to the Depositor,
each related Note and Mortgage were not subject to an assignment or pledge,
the Originator has good title to, and is the sole owner of, each Mortgage
Loan;
(ii) the Originator has full right and the authority to sell, assign
and transfer such Mortgage Loan;
(iii) the Originator is transferring such Mortgage Loan free and clear
of any and all liens, pledges, charges or security interests of any nature
encumbering such Mortgage Loan;
(iv) (A) each related Note, Mortgage, Assignment of Leases and Rents
(if any) and other agreement executed in connection with such Mortgage Loan
are legal, valid and binding obligations of the related borrower,
enforceable in accordance with their terms, except as such enforcement may
be limited by bankruptcy, insolvency, reorganization, moratorium or other
laws affecting the enforcement of creditors rights generally, or by general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law); or (B) the Originator has
received an opinion of counsel to such effect;
(v) each related Assignment of Leases and Rents, if any, creates a
valid, collateral or first priority assignment of, or a valid first
priority security interest in, certain rights under the related leases,
subject only to a license granted to the related borrower to exercise
certain rights and to perform certain obligations of the
S-166
<PAGE>
lessor under such leases, including the right to operate the related
Mortgaged Property; no person other than the related borrower owns any
interest in any payments due under such leases that is superior to or of
equal priority with the mortgagee's interest therein;
(vi) each related assignment of Mortgage from the Originator to the
Depositor constitutes the legal, valid and binding assignment of such
Mortgage from the Originator to the Depositor, and any related Reassignment
of Assignment of Leases and Rents, if any, or assignment of any other
agreement executed in connection with such Mortgage Loan, from the
Originator to the Depositor constitutes the legal, valid and binding
assignment from the Originator to the Depositor, except as such enforcement
may be limited by bankruptcy, insolvency, reorganization, liquidation,
receivership, moratorium or other laws relating to or affecting creditor's
rights generally, or by general principles or equity (regardless of whether
such enforcement is considered in a proceeding in equity or law);
(vii) since origination, and except as set forth in the related
mortgage file, such Mortgage Loan has not been waived, modified, altered,
satisfied, canceled, subordinated or rescinded and, each related Mortgaged
Property has not been released from the lien of the related Mortgage in any
manner which materially interferes with the security intended to be
provided by such Mortgage;
(viii) each related Mortgage is a valid and enforceable first lien on
the related Mortgaged Property, and such Mortgaged Property (subject to the
matters discussed in clause (xi) below) is free and clear of any mechanics'
and materialmen's liens which are prior to or equal with the lien of the
related Mortgage, except those which are insured against by a lender's
title insurance policy (as set forth in the Mortgage Loan Purchase and Sale
Agreement);
(ix) the Originator has not taken any action that would cause the
representations and warranties made by each related borrower in the
Mortgage Loan not to be true;
(x) the Originator has no knowledge that the representations and
warranties made by each related borrower in such Mortgage Loan are not true
in any material respect;
(xi) the lien of each related Mortgage is insured by an ALTA lender's
title insurance policy (or a binding commitment therefor), or its
equivalent as adopted in the applicable jurisdiction, insuring the
Originator, its successors and assigns, as to a valid and perfected first
priority security interest in the related Mortgaged Property and the first
priority lien of the Mortgage in the original principal of such Mortgage
Loan (as set forth on the Mortgage Loan Schedule which is an exhibit to the
Pooling and Servicing Agreement) after all advances of principal, subject
only to (a) the lien of current real property taxes, ground rents, water
charges, sewer rents and assessments not yet due and payable, (b)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record, none of which, individually or in the aggregate,
materially interferes with the current use of the Mortgaged Property or the
security intended to be provided by such Mortgage or with the borrower's
ability to pay its obligations when they become due or the value of the
Mortgaged Property and (c) the exceptions (general and specific) set forth
in such policy, none of which, individually or in the aggregate, materially
interferes with the security intended to be provided by such Mortgage or
with the borrower's ability to pay its obligations when they become due or
the value of the Mortgaged Property; the Originator or its successors or
assigns is the sole named insured of such policy; such policy is assignable
to the Depositor without the consent of or any notification to the insurer,
and is in full force and effect upon the consummation of the transactions
contemplated by the Mortgage Loan Purchase and Sale Agreement; no claims
have been made under such policy and the Originator has not done anything,
by act or omission, and the Originator has no knowledge of any matter,
which would impair or diminish the coverage of such policy; to the extent
required by applicable law the insurer issuing such policy is qualified to
do business in the jurisdiction in which the related Mortgaged Properties
are located;
(xii) the proceeds of such Mortgage Loan have been fully disbursed and
there is no requirement for future advances thereunder and it covenants
that it will not make any future advances under the Mortgage Loan to the
related borrower;
S-167
<PAGE>
(xiii) each related Mortgaged Property is free of any material damage
that would affect materially and adversely the value of such Mortgaged
Property as security for the Mortgage Loan and is in good repair and there
is no proceeding pending for the total or partial condemnation of such
Mortgaged Property;
(xiv) each of the related borrowers is in possession of all material
licenses, permits and other authorizations necessary and required by all
applicable laws for the conduct of its business; all such licenses, permits
and authorizations are valid and in full force and effect;
(xv) the Originator has inspected or caused to be inspected each
related Mortgaged Property within the past twelve months preceding the
Cut-off Date;
(xvi) such Mortgage Loan does not have a shared appreciation feature,
other contingent interest feature or negative amortization;
(xvii) such Mortgage Loan is a whole loan and no other party holds a
participation interest in the Mortgage Loan;
(xviii) (A) the Mortgage Rate (exclusive of any default interest or
yield maintenance charges) of such Mortgage Loan complied as of the date of
origination with, or is exempt from, applicable state or federal laws,
regulations and other requirements pertaining to usury; any and all other
requirements of any federal, state or local laws, including, without
limitation, truth-in-lending, real estate settlement procedures, equal
credit opportunity or disclosure laws, applicable to such Mortgage Loan
have been complied with as of the date of origination of such Mortgage Loan
or (B) the Originator has received an opinion to such effect;
(xix) no fraudulent acts were committed by the Originator during the
origination process of such Mortgage Loan;
(xx) all taxes and governmental assessments that prior to the Closing
Date became due and owing in respect of each related Mortgaged Property
have been paid, or an escrow of funds in an amount sufficient to cover such
payments has been established;
(xxi) all escrow deposits and payments required pursuant to the
Mortgage Loan are in the possession, or under the control, of the
Originator or its agent and there are no deficiencies in connection
therewith;
(xxii) to the extent required under applicable law, as of the Cut-off
Date, the Originator was authorized to transact and do business in the
jurisdiction in which each related Mortgaged Property is located at all
times when it held the Mortgage Loan;
(xxiii) each related Mortgaged Property is insured by a fire and
extended perils insurance policy, issued by an insurer or reinsured by an
insurer meeting the requirements of the Mortgage Loans, in an amount not
less than the replacement cost and the amount necessary to avoid the
operation of any co-insurance provisions with respect to the Mortgaged
Property; each related Mortgaged Property is also covered by business
interruption insurance and comprehensive general liability insurance in
amounts generally required by institutional lenders for similar properties;
all premiums on such insurance policies required to be paid as of the date
hereof have been paid; such insurance policies require prior notice to the
insured of termination or cancellation, and no such notice has been
received; each related Mortgage obligates the related borrower to maintain
all such insurance and, at such borrower's failure to do so, authorizes the
mortgagee to maintain such insurance at the borrower's cost and expense and
to seek reimbursement therefor from such borrower;
(xxiv) there is no default, breach, violation or event of acceleration
existing under the related Mortgage or the related Note and no event (other
than payments due but not yet delinquent) which, with the passage of time
or with notice and the expiration of any grace or cure period, would and
does constitute a default, breach, violation or event of acceleration;
(xxv) such Mortgage Loan has not been 30 or more days delinquent since
origination and as of the Cut-off Date was not 30 or more days delinquent;
(xxvi) each related Mortgage contains customary and enforceable
provisions such as to render the rights and remedies of the holder thereof
adequate for the realization against the Mortgaged Property of the
S-168
<PAGE>
benefits of the security, including realization by judicial or, if
applicable, non-judicial foreclosure, and there is no exemption available
to the borrower which would interfere with such right to foreclose;
(xxvii) in each related Mortgage or Loan Agreement, the related
borrower represents and warrants that it has not used, caused or permitted
to exist and will not use, cause or permit to exist on the related
Mortgaged Property any Hazardous Materials in any manner which violates
federal, state or local laws, ordinances, regulations, orders, directives
or policies governing the use, storage, treatment, transportation,
manufacture, refinement, handling, production or disposal of Hazardous
Materials; the related borrower agrees to indemnify, defend and hold the
mortgagee and its successors and assigns harmless from and against any and
all losses, liabilities, damages, injuries, penalties, fines, expenses, and
claims of any kind whatsoever (including attorneys' fees and costs) paid,
incurred or suffered by, or asserted against, any such party resulting from
a breach of any representation, warranty or covenant given by the borrower
in such Mortgage or Loan Agreement; a Phase I environmental report was
conducted by a reputable environmental engineer in connection with such
Mortgage Loan, which report, except as otherwise disclosed herein, did not
indicate any material non-compliance or material existence of Hazardous
Materials; to the best of the Originator's knowledge, each related
Mortgaged Property is in material compliance with all applicable federal,
state and local laws pertaining to environmental hazards, and no notice of
violation of such laws has been issued by any governmental agency or
authority; the Originator has not taken any action which would cause the
related Mortgaged Property not to be in compliance with all federal, state
and local laws pertaining to environmental hazards;
(xxviii) each related Mortgage or Loan Agreement contains provisions
for the acceleration of the payment of the unpaid principal balance of such
Mortgage Loan if, without the prior written consent of the mortgagee or the
satisfaction of certain conditions, the related Mortgaged Property, or any
interest therein, is directly or indirectly transferred or sold, or
encumbered in connection with subordinate financing;
(xxix) in connection with the origination of such Mortgage Loan, the
Originator has received an opinion of counsel to the effect that: (A) when
each related Mortgage and Assignment of Leases and Rents, if any, are duly
recorded and indexed in the appropriate state and local offices for such
recording and indexing, and when the related UCC financing statements are
filed and indexed in the appropriate state and local offices for such
filing and indexing, such recordings and filings shall be sufficient to
perfect the lien on the Mortgaged Property described therein; (B) no
re-recording or re-filing of any said instruments will be necessary for the
enforcement of such Mortgage Loan against the related borrower, other than
filing UCC continuation statements with the appropriate state and local
offices as required under the law of the applicable state to continue the
perfection of the liens perfected by the UCC financing statements; and (C)
when recorded and filed as provided above, each related Mortgage and
Assignment of Leases and Rents, if any, shall constitute a valid,
enforceable and perfected lien on, and security interest in, the related
Mortgaged Property;
(xxx) (A) the Mortgage Loan is directly secured by a Mortgage on a
commercial property, and (B) the fair market value of such real property,
as evidenced by an MAI appraisal conducted within 12 months of the
origination of the Mortgage Loan, was at least equal to 80% of the
principal amount of the Mortgage Loan (I) at origination (or if the
Mortgage Loan has been modified in a manner that constituted a deemed
exchange under Section 1001 of the Code at a time when the Mortgage Loan
was not in default or default with respect thereto was not reasonably
foreseeable, the date of the last such modification) or (II) at the Closing
Date; provided that the fair market value of the real property interest
must first be reduced by (1) the amount of any lien on the real property
interest that is senior to the Mortgage Loan (unless such senior lien also
secures a Mortgage Loan, in which event the computation described in (I)
and (II) shall be made on an aggregated basis) and (2) a proportionate
amount of any lien that is in parity with the Mortgage Loan (unless such
other lien secures a Mortgage Loan that is cross-collateralized with such
Mortgage Loan, in which event the computation described in (I) and (II)
shall be made on an aggregate basis); and
(xxxi) with respect to each Mortgaged Property where the estate of the
related borrower therein is a leasehold estate, that
(A) the related ground lease or a memorandum thereof has been or will be
duly recorded; such ground lease or an estoppel letter or lender protective
agreement between the Originator and the lessor under such ground lease
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permits the interest of the lessee thereunder to be encumbered by the related
Mortgage; and, to the best of the Originator's knowledge, there has been no
material amendment or modification of such ground lease since its recordation,
with the exception of written amendments or modifications which are part of the
related Mortgage File;
(B) except as indicated in the related title insurance policy, to the best
of the Originator's knowledge, the lessee's interest in the related ground lease
and the leasehold estate created thereby is not subject to any liens or
encumbrances superior to, or of equal priority with, the related Mortgage;
(C) (except in the case of the lease for Mortgaged Property known as
Magnolia Bluff Factory Shops, under which the Originator's successors and
assigns have the right to foreclose on the fee interest of the ground lessor
upon the occurrence of an event of default under the Prime Retail II Pool Loan)
the Originator and, subsequent to any assignment of the related Mortgage, the
Originator's successors and assigns, have the right to succeed to the borrower's
interest in the related ground lease upon notice to, but without the consent of,
the lessor thereunder (or, if any such consent is required, it has been obtained
prior to the Closing Date), provided, in the event that the Originator, or its
successors and assigns, shall have succeeded to the interest of the borrower, as
lessee under the ground lease, by foreclosure of the related Mortgage or
acceptance of an assignment in lieu thereof, the consent of such lessor may be
required for any subsequent assignment;
(D) as of the date the related Mortgage Loan was made, the related ground
lease was in full force and effect and, to such lessor's knowledge, no default
had occurred under such ground lease, nor, to such lessor's knowledge, was there
any then existing condition which, but with the passage of time or the giving of
notice, would result in a default under the terms of such ground lease and, as
of the date hereof, the Originator has received no written notice of a default
or event of default on the part of a borrower from the lessor of such borrower's
ground lease;
(E) the related ground lease or an estoppel letter or lender protective
agreement requires the lessor thereunder to give notice of any default by the
lessee to the mortgagee, provided that the mortgagee has provided the lessor
with notice of its lien in accordance with the provisions of such ground lease,
estoppel letter or lender protective agreement; the mortgagee has provided the
lessor with such notice;
(F) the related ground lease, estoppel letter or lender protective
agreement provides a mortgagee with a reasonable opportunity (including, where
necessary, sufficient time to gain possession of the interest of the lessee
under such ground lease) to cure any default under such ground lease, which is
curable after the receipt of notice of any such default before the lessor
thereunder may terminate such ground lease;
(G) (except for the lease with respect to the Mortgaged Property known as
Magnolia Bluff Factory Shops, in which case the ground lease has subjected its
fee interest to the related Mortgage) (1) the related ground lease has a term
(including renewals, if exercised) which extends not less than ten years beyond
the maturity date of the related Mortgage Loan and (2) to the extent that the
representation under the foregoing clause (1) is based on the existence of
renewal options, the terms on which the related borrower has the right to enter
into such renewals, and any conditions to the related borrower's right to enter
into such renewals, are commercially reasonable;
(H) under the terms of the related ground lease and the related Mortgage,
taken together, any insurance proceeds other than in respect of a total or
substantially total loss will be applied either (I) to the repair or restoration
of all or part of the related Mortgaged Property, with the lessor, mortgagee or
a depository appointed pursuant to the terms of such ground lease having the
right to hold and disburse such proceeds as the repair or restoration progresses
or (II) to the payment of the outstanding principal balance of the applicable
Mortgage Loan together with any accrued interest thereon, except, in the case of
the ground lease on the Cincinnati Airport Radisson, with respect to a loss not
susceptible to repair in 90 days where the Columbia Sussex II Pool Borrower has,
with the consent of the lender, terminated the ground lease (and depending on
how much time remains in the lease term) the ground lessor may be entitled to
unspecified portions of the proceeds;
(I) the related ground lease does not impose restrictions on subletting of
all or portions of the Mortgaged Property by lessee which would be viewed, as of
the date of origination of such Mortgage Loan, as commercially unreasonable by
the Originator; and
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(J) the related ground lease or an estoppel letter (except for the leases
with respect to the Mortgaged Properties known as Magnolia Bluff Factory Shops
and Gulfport Factory Shops) provides that in the event of a lessee in bankruptcy
rejects any or all of its ground leases, the leasehold mortgagee will have the
right to succeed to the ground lessee's position under the lease, provided that
written notice has been sent to the ground lessor and all defaults with respect
to the ground lease are cured.
The Pooling and Servicing Agreement requires that the Servicer, the Special
Servicer or the Trustee notify the Originator and the Depositor upon its
becoming aware of (a) any breach of any representation or warranty contained in
clauses (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (xi), (xii),
(xv), (xvi), (xvii), (xviii), (xix), (xx), (xxiv), (xxx) or (xxix) and (b) any
breach of any representation or warranty contained in clauses (x), (xiii),
(xiv), (xxi), (xxii), (xxiii), (xxv), (xxvi), (xxvii), (xxviii) or (xxxi) that
materially and adversely affects the value of such Mortgage Loan or the
interests of the holders of the Certificates therein. The Mortgage Loan Purchase
and Sale Agreement provides that, with respect to any such Mortgage Loan, within
90 days after notice from the Servicer, the Special Servicer or the Trustee, the
Originator shall either (a) repurchase such Mortgage Loan at an amount equal to
(i) the outstanding principal balance of the Mortgage Loan as of the Due Date as
to which a payment was last made by the borrower (less any P&I Advances
previously made on account of principal), (ii) accrued interest up to the Due
Date in the month following the month in which such repurchase occurs (less P&I
Advances previously made on account of interest), (iii) the amount of any
unreimbursed Advances (with interest thereon) and any unreimbursed servicing
compensation relating to such Mortgage Loan and (iv) any expenses reasonably
incurred or to be incurred by the Servicer, the Special Servicer or the Trustee
in respect of the breach or defect giving rise to the repurchase obligation
(such price the 'Repurchase Price') or (b) promptly cure such breach in all
material respects, provided, however, that in the event that such breach is
capable of being cured but not within such 90-day period and the Originator as
determined by the Servicer has commenced and is diligently proceeding with the
cure of such breach, the Originator will have an additional 90 days to complete
such cure; provided, further, that with respect to such additional 90-day period
the Originator shall have delivered an officer's certificate to the Trustee and
the Servicer setting forth the reason such breach is not capable of being cured
within the initial 90-day period and what actions the Originator is pursuing in
connection with the cure thereof and stating that the Originator anticipates
that such breach will be cured within the additional 90-day period; and,
provided, further, that in the event the Originator fails to cure such breach
within such additional 90-day period, the Repurchase Price shall include
interest on any Advances made in respect of the related Mortgage Loan during
such period.
Notwithstanding the foregoing, upon discovery by the Trustee, the
Custodian, the Special Servicer or the Servicer of a breach of a representation
or warranty that causes any Mortgage Loan not to be a 'qualified mortgage'
within the meaning of the REMIC provisions of the Code, such person shall give
prompt notice thereof to the Depositor and within 90 days after such discovery,
if such breach cannot be cured within such period, the Depositor shall purchase,
or cause the Originator to purchase, such Mortgage Loan from the Trust Fund at
the Repurchase Price.
The obligations of the Originator to repurchase or cure constitute the sole
remedies available to holders of Certificates or the Trustee for a breach of a
representation or warranty by the Originator. None of the Depositor (except as
described in the previous paragraph), the Servicer, the Special Servicer nor the
Trustee or the Fiscal Agent will be obligated to purchase a Mortgage Loan if the
Originator defaults on its obligation to repurchase or cure, and no assurance
can be given that the Originator will fulfill such obligations. If such
obligation is not met, as to a Mortgage Loan that is not a 'qualified mortgage,'
the Upper-Tier REMIC and Lower-Tier REMIC may be disqualified.
SERVICING OF THE MORTGAGE LOANS; COLLECTION OF PAYMENTS
The Pooling and Servicing Agreement requires the Servicer and Special
Servicer to service and administer the Mortgage Loans on behalf of the Trust
Fund solely in the best interests of and for the benefit of all of the holders
of Certificates (as determined by the Servicer or the Special Servicer in the
exercise of its reasonable judgment) in accordance with, applicable law, the
terms of the Pooling and Servicing Agreement and the Mortgage Loans, and to the
extent not inconsistent with the foregoing, in the same manner in which, and
with the same care, shall, prudence and diligence with which, it (a) (i)
services and administers similar mortgage loans comparable to the Mortgage Loans
and held for other third party portfolios or (b) administers mortgage loans for
its own account, whichever standard is higher, but without regard to (i) any
other relationship that the Servicer or the Special Servicer, or an affiliate of
the Servicer or the Special Servicer, as applicable, may have with the borrowers
or any other parties to the Pooling and Servicing Agreement; (ii) the ownership
of any Certificate by
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the Servicer or the Special Servicer or any affiliate of the Servicer or the
Special Servicer, as applicable, (iii) the Servicer's or the Special Servicer's
obligation, as applicable, to make Advances or to incur servicing expenses with
respect to the Mortgage Loans; (iv) the Servicer's or the Special Servicer's
right to receive compensation for its services under the Pooling and Servicing
Agreement or with respect to any particular transaction; or (v) the ownership,
servicing or management for others or itself, by the Servicer or the Special
Servicer of any other mortgage loans or property (the 'Servicing Standard'). The
Servicer and the Special Servicer are permitted, at their own expense, to employ
subservicers, agents or attorneys in performing any of their respective
obligations under the Pooling and Servicing Agreement, but will not thereby be
relieved of any such obligation, and will be responsible for the acts and
omissions of any such subservicers, agents or attorneys. The Pooling and
Servicing Agreement provides, however, that neither the Servicer, the Special
Servicer, nor any of their respective directors, officers, employees or agents
shall have any liability to the Trust Fund or the Certificateholders for taking
any action or refraining from taking an action in good faith, or for errors in
judgment. The foregoing provision would not protect the Servicer or the Special
Servicer for the breach of its representations or warranties in the Pooling and
Servicing Agreement, the breach of certain specified covenants therein or any
liability by reason of willful misfeasance, bad faith, fraud, gross negligence
or a breach of the Servicing Standard set forth in the Pooling and Servicing
Agreement in the performance of its duties or by reason of its reckless
disregard of obligations or duties under the Pooling and Servicing Agreement.
The Trustee or any other successor Servicer assuming the obligations of the
Servicer under the Pooling and Servicing Agreement will be entitled to the
compensation to which the Servicer would have been entitled after the date of
the assumption of the Servicer's obligations. If no successor Servicer can be
obtained to perform such obligations for such compensation, additional amounts
payable to such successor Servicer will be treated as Realized Losses.
The Pooling and Servicing Agreement requires the Servicer or the Special
Servicer, as applicable, to make reasonable efforts to collect all payments
called for under the terms and provisions of the Mortgage Loans consistent with
the Servicing Standard. Consistent with the above, the Servicer or Special
Servicer may, in its discretion, waive any late payment charge or penalty fee in
connection with any delinquent Monthly Payment with respect to any Mortgage
Loan. For any Specially Serviced Mortgage Loan and with respect to which, under
the terms of the related loan documents, the mortgagee may, in its discretion,
apply insurance proceeds, condemnation awards or escrowed funds to the
prepayment of such loan prior to the expiration of the related Prepayment Lock
Out Period, the Special Servicer may only make such a prepayment if the Special
Servicer has determined in accordance with the Servicing Standard that such
prepayment is in the best interest of all Certificateholders. The Servicer will
be directed in the Pooling and Servicing Agreement not to take any enforcement
action other than requests for payment with respect to payment of Excess
Interest or principal in excess of the principal component of the constant
Monthly Payment prior to the final maturity date. The Servicer will also be
permitted to forgive the payment of Excess Interest under the circumstances
described under '--Realization Upon Mortgage Loans' below. With respect to any
Defaulted Mortgage Loan, subject to the restrictions set forth below under
'--Realization on Mortgage Loans,' the Special Servicer will be entitled to
pursue any of the remedies set forth in the related Mortgage, including the
right to acquire, through foreclosure, all or any of the Mortgaged Properties
securing such Mortgage Loan. The Servicer may elect to extend a Mortgage Loan
(subject to conditions described herein) notwithstanding its decision to
foreclose on certain of the Mortgaged Properties.
ADVANCES
The Servicer will be obligated to advance, on the business day immediately
preceding a Distribution Date (the 'Servicer Remittance Date'), an amount (each
such amount, a 'P&I Advance') equal to the total or any portion of the Monthly
Payment on a Mortgage Loan that was delinquent as of the close of business on
the immediately preceding Due Date (and which delinquent payment has not been
cured as of the Servicer Remittance Date), or, with respect to a Mortgage Loan
for which the Servicer has elected to extend the payments as described in
'--Realization Upon Mortgage Loans' herein, the amount equal to the lesser of
(a) the related Extended Monthly Payment or (b) the constant Monthly Payment
that was due prior to the maturity date; provided, however, that the Servicer
will not be required to make an Advance to the extent it determines that such
advance would not be recoverable. The Servicer (a) will only make one P&I
Advance for the benefit of the most subordinate class of Certificates then
outstanding (for purposes of determining the most subordinate class, (i) the
Class B-1 and Class B1-H Certificates together and (ii) the Class A-1A, Class
A-1B and Class A-1C Certificates and the Coupon Strip Certificates together
will, in each case, be treated as one class and the Class P-IO Certificates will
not be considered a subordinate class and (b) will not make any P&I Advance in
respect of
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Reduction Interest Distribution Amounts and Reduction Interest Shortfalls. On
any Servicer Remittance Date on which the Servicer does not make a P&I Advance
to the most subordinate class of Certificates (as described in the preceeding
sentence), the Servicer will initially make such P&I Advance (for accounting
purposes) but will be required, immediately subsequent to the making of such P&I
Advance, to reimburse itself (without interest) for the P&I Advance from and up
to amounts distributable to the most subordinate class on the related
Distribution Date then outstanding (such amount of reimbursement, the
'Subordinate Class Advance Amount'). On any such Distribution Date, the Servicer
will be required to reduce the amount of any P&I Advance by the amount of any
Appraisal Reduction Amounts or Reduction Interest Distribution Amounts before
reimbursing itself from Subordinate Class Advance Amounts. No interest will
accrue on, or be payable with respect to, any outstanding Subordinate Class
Advance Amount. The Servicer will not be required or permitted to make an
advance for Excess Interest or Default Interest or in respect of Reduction
Interest Distribution Amounts and Reduction Interest Shortfalls. The amount
required to be advanced by the Servicer in respect of scheduled payments (or
Extended Monthly Payments) on Mortgage Loans that have been subject to an
Appraisal Reduction Event will equal the product of (i) the amount required to
be advanced by the Servicer without giving effect to such Appraisal Reduction
Amounts and (ii) a fraction, the numerator of which is the Stated Principal
Balance of the Mortgage Loan less any Appraisal Reduction Amounts thereof and
the denominator of which is the Stated Principal Balance.
The Servicer (and in certain circumstances, the Special Servicer) will also
be obligated (subject to the limitations described herein) to make cash advances
('Property Advances,' and together with P&I Advances, 'Advances') to pay
delinquent real estate taxes, assessments and hazard insurance premiums and to
cover other similar costs and expenses necessary to preserve the priority of or
enforce the related mortgage or to maintain such Mortgaged Property.
The obligation of the Servicer, the Special Servicer, the Trustee or the
Fiscal Agent, as applicable, to make Advances with respect to any Mortgage Loan
pursuant to the Pooling and Servicing Agreement continues through the
foreclosure of such Mortgage Loan and until the liquidation of the Mortgage Loan
or related Mortgaged Properties. Advances are intended to provide a limited
amount of liquidity, not to guarantee or insure against losses. None of the
Servicer, the Special Servicer, the Trustee or the Fiscal Agent will be required
to make any Advance that it determines in its good faith business judgment will
not be recoverable by the Servicer, the Special Servicer, the Trustee or the
Fiscal Agent, as applicable, out of related late payments, net insurance
proceeds, net condemnation proceeds, net liquidation proceeds and certain other
collections with respect to the Mortgage Loan as to which such Advances were
made. In addition, if the Servicer, the Special Servicer, the Trustee or the
Fiscal Agent, as applicable, determines in its good faith business judgment that
any Advance previously made will not be recoverable from the foregoing sources,
then the Servicer, the Special Servicer, the Trustee or the Fiscal Agent, as
applicable, will be entitled to reimburse itself for such Advance, plus interest
thereon, out of amounts payable on or in respect of all of the Mortgage Loans
prior to distributions on the Certificates. Any such judgment or determination
with respect to the recoverability of Advances must be evidenced by an officers'
certificate delivered to the Trustee (or in the case of the Trustee or Fiscal
Agent, the Depositor) setting forth such judgment or determination of
nonrecoverability and the procedures and considerations of the Servicer, the
Special Servicer, the Trustee or the Fiscal Agent, as applicable, forming the
basis of such determination (including but not limited to information selected
by the Servicer or the Special Servicer in its good faith discretion such as
related income and expense statements, rent rolls, occupancy status, property
inspections, inquiries by the Servicer, the Special Servicer, the Trustee or the
Fiscal Agent, as applicable, and an independent appraisal performed in
accordance with MAI standards and methodologies on the applicable Mortgaged
Properties).
To the extent the Servicer or Special Servicer fails to make an Advance it
is required to make under the Pooling and Servicing Agreement, the Trustee,
subject to a determination of recoverability, will make such required Advance
or, in the event the Trustee fails to make such Advance, the Fiscal Agent,
subject to a determination of recoverability, will make such Advance, in each
case pursuant to the terms of the Pooling and Servicing Agreement. Both the
Trustee and the Fiscal Agent will be entitled to rely conclusively on any non-
recoverability determination of the Servicer. See '--Trustee' and '--Fiscal
Agent' below.
The Servicer, the Special Servicer, the Trustee or the Fiscal Agent, as
applicable, will be entitled to reimbursement for any Advance made by it equal
to the amount of such Advance and interest accrued thereon at the Advance Rate
from (i) late payments on the Mortgage Loan by the Mortgagor, (ii) insurance
proceeds, condemnation proceeds or liquidation proceeds from the sale of the
defaulted Mortgage Loan or the related
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Mortgaged Property or (iii) upon determining in good faith that such Advance or
interest is not recoverable in the manner described in the preceding two
clauses, from any other amounts from time to time on deposit in the Collection
Account.
The Servicer, the Special Servicer, the Trustee and the Fiscal Agent will
each be entitled to receive interest on Advances at the Prime Rate plus 1.0% (as
defined herein) (the 'Advance Rate'), compounded monthly, as of each Due Date
and the Servicer will be authorized to pay itself, the Special Servicer, the
Trustee or the Fiscal Agent, as applicable, such interest monthly from general
collections with respect to all of the Mortgage Loans prior to any payment to
holders of Certificates. To the extent that the payment of such interest at the
Advance Rate results in a shortfall in amounts otherwise payable on one or more
classes of Certificates on the next Distribution Date, the Servicer, the Special
Servicer, the Trustee or the Fiscal Agent, as applicable, will be obligated to
make a cash advance to cover such shortfall, but only to the extent the
Servicer, the Special Servicer, the Trustee or the Fiscal Agent, as applicable,
concludes that, with respect to each such Advance, such Advance can be recovered
from amounts payable on or in respect of the Mortgage Loan (or portion of the
Mortgage Loan) to which the Advance is related. If the interest on such Advance
is not recovered from Default Interest on such Mortgage Loan, a shortfall will
result which will have the same effect as a Realized Loss. The 'Prime Rate' is
the rate, for any day, set forth as such in The Wall Street Journal, New York
edition.
ACCOUNTS
Lock Box Accounts. With respect to each Mortgage Loan, other than the MHP
II Pool Loan and the Palmer Square Loan (which will have Lock Boxes only in the
circumstances described under 'Description of the Mortgage Loans and
Properties--The MHP II Pool Loan and Properties--Lockbox--and The Palmer Square
Loan and Properties--Lockbox'), one or more accounts in the name of the related
Borrower (the 'Lock Box Accounts') have been established into which rents or
other revenues from the related Mortgaged Properties are deposited by the
related tenants or manager. See 'Description of the Mortgage Loans and
Properties.' Agreements governing the Lock Box Accounts provide that the
borrower has no withdrawal or transfer rights with respect thereto and that all
funds on deposit in the Lock Box Accounts are periodically swept into the Cash
Collateral Accounts (as defined below). The Lock Box Accounts will not be an
asset of the Trust REMICs.
Cash Collateral Accounts. With respect to each Mortgage Loan, one or more
accounts in the name of the Servicer (the 'Cash Collateral Accounts') have been
established into which funds in the related Lock Box Accounts will be swept on a
regular basis (or in the case of the MHP II Pool Loan or Palmer Square Loan,
when no Lockbox is required, into which funds will be deposited directly by the
related Borrowers). The Reserve Accounts will be sub-accounts of the Cash
Collateral Accounts. Any excess over the amount necessary to fund the Monthly
Payment, the Reserve Accounts and any other amounts due under the Mortgage Loans
will be returned to or retained by the related borrower provided no event of
default of which the Servicer is aware has occurred and is continuing with
respect to such Mortgage Loan. However, after the respective Anticipated
Repayment Date all amounts in the related Cash Collateral Account in excess of
the amount necessary to fund the Monthly Payment and Reserve Accounts will be
applied to (i) operating and capital expenses, (ii) the reduction of the
principal balance of the related Mortgage Loan until such principal is paid in
full and (iii) Excess Interest, in that order. The Cash Collateral Accounts will
not be an asset of the Trust REMICs.
Collection Account. The Servicer will, on each Due Date, withdraw from
each Cash Collateral Account an amount equal to the Monthly Payment on the
related Mortgage Loan and deposit such amount into a segregated account (the
'Collection Account') established pursuant to the Pooling and Servicing
Agreement for application towards the Monthly Payment (including servicing fees)
due on the related Mortgage Loan. The Servicer shall also deposit into the
Collection Account within one business day of receipt all other payments in
respect of the Mortgage Loans, other than amounts deposited into any Reserve
Account.
Distribution Accounts. The Trustee will establish and maintain three
segregated accounts (the 'Lower-Tier Distribution Account,' the 'Upper-Tier
Distribution Account' and the 'Certificate Distribution Account') in the name of
the Trustee for the benefit of the holders of Certificates. With respect to each
Distribution Date, the Servicer will deposit in the Lower-Tier Distribution
Account, to the extent of funds on deposit in the Collection Account, on the
Servicer Remittance Date an aggregate amount of immediately available funds
equal to the sum of (i) the Available Funds and the Class P-IO Available Funds
and (ii) the portion of the Servicing Compensation representing the Trustee's
Fee. The Servicer will deposit all P&I Advances into the Lower-Tier Distribution
Account on the related Servicer Remittance Date. To the extent the Servicer
fails to do so, the Trustee or the Fiscal Agent will deposit all P&I Advances
into the Lower-Tier
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Distribution Account as described herein. On each Distribution Date, the Trustee
will withdraw amounts distributable on such date on the Upper-Tier REMIC Regular
Interests (as defined herein) and on the Class R Certificates from the
Lower-Tier Distribution Account and deposit such amounts in the Upper-Tier
Distribution Account. The Trustee will simultaneously withdraw the amounts
distributable on such date on the Upper-Tier REMIC Regular Interests from the
Upper-Tier Distribution Account and deposit such amounts, together with payments
received from the Floor Counterparty with respect to the Floor Agreements on the
related Remittance Date, in the Certificate Distribution Account. See
'Description of the Offered Certificates--Distributions' herein.
Interest Reserve Account. The Trustee will establish and maintain an
Interest Reserve Account ('Interest Reserve Account') in the name of the Trustee
for the benefit of the holders of the Certificates. On each Servicer Remittance
Date occurring in February and on any Servicer Remittance Date occurring in any
January which occurs in a year immediately preceding a year which is not a leap
year, the Servicer will be required to deposit, in respect of the
Pool Loan, into the Interest Reserve Account, an amount
equal to one day's interest on the Stated Principal Balance of such Mortgage
Loans as of the Due Date occurring in the month preceding the month in which
such Servicer Remittance Date occurs at the related Mortgage Rate, to the extent
a full Monthly Payment or P&I Advance is made in respect thereof (all amounts so
deposited in any consecutive January and February, 'Withheld Amounts'). On each
Servicer Remittance Date occurring in March, the Servicer will be required to
withdraw from the Interest Reserve Account an amount equal to the Withheld
Amounts from the preceding February and January, if any, and deposit such amount
into the Distribution Account.
The Trustee will also establish and maintain one or more segregated
accounts for each of the 'Default Interest Distribution Account' and the 'Excess
Interest Distribution Account', each in the name of the Trustee for the benefit
of the holders of the Class V-1 and Class V-2 Certificates.
The Cash Collateral Accounts, Collection Account, the Lower-Tier
Distribution Account, the Upper-Tier Distribution Account, the Certificate
Distribution Account, the Interest Reserve Account, the Excess Interest
Distribution Account and the Default Interest Distribution Account will be held
in the name of the Trustee (or the Servicer on behalf of the Trustee) on behalf
of the holders of Certificates and the Servicer will be authorized to make
withdrawals from the Cash Collateral Accounts and the Collection Account. Each
of the Cash Collateral Account, Collection Account, any REO Account, the
Lower-Tier Distribution Account, the Upper-Tier Distribution Account, the
Certificate Distribution Account, the Interest Reserve Account, the Excess
Interest Distribution Account and the Default Interest Distribution Account will
be either (i) (A) an account maintained with either a federal or state chartered
depository institution or trust company the long term unsecured debt obligations
(or short-term unsecured debt obligations if the account holds funds for less
than 30 days) or commercial paper of which are rated by each of the Rating
Agencies in its highest rating category at all times (or in the case of the REO
Account, Collection Account, Interest Reserve Account and Escrow Account, the
long term unsecured debt obligations (or short-term unsecured debt obligations
if the account holds funds for less than 30 days) of which are rated at least
'AA' by Fitch and S&P and 'Aa2' by Moody's) or (B) as to which the Trustee has
received written confirmation from each of the Rating Agencies that holding
funds in such account would not cause any Rating Agency to requalify, withdraw
or downgrade any of its ratings on the Certificates, or (ii) a segregated trust
account or accounts maintained with a federal or state chartered depository
institution or trust company acting in its fiduciary capacity (an 'Eligible
Bank'). Amounts on deposit in the Collection Account, Cash Collateral Account,
any REO Account and the Interest Reserve Account may be invested in certain
United States government securities and other high-quality investments specified
in the Pooling and Servicing Agreement ('Permitted Investments'). Interest or
other income earned on funds in the Collection Account and Cash Collateral
Accounts will be paid to the Servicer (except, in the case of the Cash
Collateral Accounts, to the extent required to be paid to the related borrower)
as additional servicing compensation and interest or other income earned on
funds in any REO Account will be payable to the Special Servicer. Interest or
other income earned on funds in the Interest Reserve Account will be paid to the
Underwriter as compensation for arranging for on-going monitoring and
surveillance of the Offered Certificates by the Rating Agencies.
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WITHDRAWALS FROM THE COLLECTION ACCOUNT
The Servicer may make withdrawals from the Collection Account for the
following purposes, to the extent permitted and in the priorities provided in
the Pooling and Servicing Agreement: (i) to remit on or before each Servicer
Remittance Date (A) to the Distribution Account an amount equal to the sum of
(i) Available Funds, the Class P-IO Available Funds and any Prepayment Premiums
and (ii) the portion of the Servicing Fee representing the Trustee's Fee for
such Distribution Date, (B) to the Default Interest Distribution Account an
amount equal to the Net Default Interest received in the related Collection
Period, (C) to the Excess Interest Distribution Account an amount equal to the
Excess Interest received in the related Collection Period, if any, and (D) to
the Interest Reserve Account an amount required to be withheld as described
under '--Accounts--Interest Reserve Account'; (ii) to pay or reimburse the
Servicer, the Special Servicer, the Trustee or the Fiscal Agent, as applicable,
for Advances made by any of them and interest on Advances, the Servicer's, the
Trustee's or the Fiscal Agent's right, as applicable, to reimbursement for items
described in this clause (ii) being limited as described herein under
'--Advances'; (iii) to pay on or before each Servicer Remittance Date to the
Servicer and the Special Servicer as compensation, the aggregate unpaid
Servicing Compensation (not including the portion of the Servicing Compensation
representing the Trustee's Fee) in respect of the immediately preceding calendar
month; (iv) to pay on or before each Distribution Date to the Depositor or other
purchaser with respect to each Mortgage Loan or REO Property that has previously
been purchased or repurchased by it pursuant to the Pooling and Servicing
Agreement, all amounts received thereon during the related Collection Period and
subsequent to the date as of which the amount required to effect such purchase
or repurchase was determined; (v) to the extent not reimbursed or paid pursuant
to any of the above clauses, to reimburse or pay the Servicer, the Special
Servicer, the Trustee, the Fiscal Agent and/or the Depositor for unpaid
Servicing Compensation (in the case of the Servicer, the Special Servicer or the
Trustee) and certain other unreimbursed expenses incurred by such person
pursuant to and to the extent reimbursable under the Pooling and Servicing
Agreement and to satisfy any indemnification obligations of the Trust Fund under
the Pooling and Servicing Agreement; (vi) to pay to the Trustee amounts
requested by it to pay taxes on certain net income with respect to REO
Properties; (vii) to withdraw any amount deposited into the Collection Account
that was not required to be deposited therein; and (viii) to clear and terminate
the Collection Account pursuant to a plan for termination and liquidation of the
Trust Fund.
SUCCESSOR MANAGER
With respect to each Mortgage Loan, the Servicer will enforce the Trustee's
rights with respect to the manager under the related Mortgage Loan and
management agreement. In the event the Servicer is entitled to terminate the
manager under the Mortgage, the Servicer will promptly give notice to the
Trustee (who will copy the holders of Certificates). The most subordinate class
of Certificates then outstanding (provided, however, that for purposes of
determining the most subordinate class, the Class B-1 and Class B-1H
Certificates together will be treated as one class and in the event that the
Class A-1A, Class A-1B and Class A-1C Certificates are the only classes
outstanding (other than any class of Coupon Strip Certificates or the Class P-IO
Certificates) the Class A-1A, Class A-1B and Class A-1C Certificates and the
Coupon Strip Certificates together will be treated as the most subordinate class
of Certificates) will have the right to recommend termination of the manager,
and if so, to recommend a Successor Manager (as defined below). Holders of
Certificates representing Voting Rights of greater than 50% of such subordinate
class of Certificates will have ten business days from the receipt of the
Servicer's notice to respond to such notice. Upon receipt of a recommendation to
terminate the manager and appoint a Successor Manager, the Servicer will give
notice of such recommendation to the Trustee (who will copy the holders of
Certificates) and effect such recommendation unless: (i) within five business
days of the receipt of notice of such recommendation holders of Certificates
representing Voting Rights of greater than 50% of any class of Certificates
which is assigned a rating by any Rating Agency on the Closing Date reject such
proposed Successor Manager in which case the Servicer will procure a Successor
Manager as set forth in the following sentence; or (ii) the Servicer determines
that effecting such recommendation to terminate is not consistent with the
servicing standard set forth herein, in which case the Servicer will only effect
such recommendation if within 30 days of giving notice of such recommendation to
all other holders of Certificates the Servicer has not received a rejection of
such recommendation from holders of Certificates representing Voting Rights of
greater than 50% of any class of Certificates which is assigned a rating by any
Rating Agency on the Closing Date. If the Servicer does not receive a required
response (or if the response received is
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inconsistent) and the Servicer determines it is consistent with the servicing
standard set forth herein to terminate the manager or in the event the manager
is otherwise terminated or resigns under the related Mortgage or management
agreement, the Servicer shall use its best efforts to retain a Successor Manager
(or the recommended Successor Manager, if any) on terms substantially similar to
the existing management agreement or, failing that, on terms as favorable to the
Trust Fund as can reasonably be obtained by the Servicer. For purposes of this
paragraph, a 'Successor Manager' shall be reasonably acceptable to the Servicer,
shall not cause a qualification, withdrawal or downgrading of the ratings
assigned to the Certificates by the Rating Agencies, as evidenced in writing,
and shall be a professional management corporation or business entity which
manages, and is experienced in managing, other comparable commercial properties
and meets any criteria in the related loan documents.
ENFORCEMENT OF 'DUE-ON-SALE' AND 'DUE-ON-ENCUMBRANCE' CLAUSES
The Mortgage Loans contain provisions in the nature of a 'due-on-sale'
clauses, which by their terms (a) provide that the Mortgage Loans shall (or may
at the mortgagee's option) become due and payable upon the sale or other
transfer of an interest in the related Mortgaged Property or (b) provide that
the Mortgage Loans may not be assumed without the consent of the related
mortgagee in connection with any such sale or other transfer. The Servicer or
the Special Servicer, as applicable, will not be required to enforce such
due-on-sale clauses and in connection therewith will not be required to (i)
accelerate payments thereon or (ii) withhold its consent to such an assumption
if (x) such provision is not exercisable under applicable law or such provision
is reasonably likely to result in meritorious legal action by the Borrower or
(y) the Servicer or the Special Servicer, as applicable, determines, in
accordance with the Servicing Standard, that granting such consent would be
likely to result in a greater recovery, on a present value basis (discounting at
the related Mortgage Rate), than would enforcement of such clause. If the
Servicer or the Special Servicer, as applicable, determines that granting such
consent would be likely to result in a greater recovery, the Servicer or the
Special Servicer, as applicable, is authorized to take or enter into an
assumption agreement from or with the proposed transferee as obligor thereon
provided that (a) the credit status of the prospective transferee is in
compliance with the Servicer's or Special Servicer's, as applicable, regular
commercial mortgage origination or servicing standards and criteria and the
terms of the related Mortgage and (b) the Servicer or the Special Servicer, as
applicable, has received written confirmation from each Rating Agency that such
assumption or substitution would not, in and of itself, cause a downgrade,
qualification or withdrawal of the then current ratings assigned to the
Certificates.
The Mortgage Loans contain provisions in the nature of a
'due-on-encumbrance' clause which by their terms (a) provide that the Mortgage
Loans shall (or may at the mortagee's option) become due and payable upon the
creation of any lien or other encumbrance on the related Mortgaged Property, or
(b) require the consent of the related mortgagee to the creation of any such
lien or other encumbrance on the related Mortgaged Property. The Servicer or the
Special Servicer, as applicable, will not be required to enforce such
due-on-encumbrance clauses and in connection therewith will not be required to
(i) accelerate payments thereon or (ii) withhold its consent to such lien or
encumbrance if (x) the Servicer or the Special Servicer, as applicable,
determines, in accordance with the Servicing Standard, that such enforcement
would not be in the best interests of the Trust Fund and (y) receives prior
written confirmation from each Rating Agency that granting such consent would
not, in and of itself, cause a downgrade, qualification or withdrawal of any of
the then current ratings assigned to the Certificates. See 'Certain Legal
Aspects of the Mortgage Loans--Due-on-Sale and Due-on-Encumbrance' in the
Prospectus.
INSPECTIONS
The Servicer (or with respect to any Specially Serviced Mortgage Loan, the
Special Servicer) is required (at its own expense) to inspect each Mortgaged
Property at such times and in such manner as are consistent with the servicing
standards described herein, but in any event (i) the Servicer is required to
inspect each Mortgaged Property with an Allocated Loan Amount of (a) $2,000,000
or more at least once every 12 months and (b) less than $2,000,000 at least once
every 24 months, in each case commencing in January 1997 (or at such other
times, provided each Rating Agency has confirmed in writing to the Servicer that
such schedule will not result in the withdrawal, downgrading or qualification of
the then-current ratings assigned to the Certificates) and (c) if the Mortgage
Loan (i) becomes a 'Specially Serviced Mortgage Loan,' (ii) is delinquent for 60
days or (iii) has a debt service coverage ratio of less than 1.0, the Special
Servicer or Servicer, as applicable, is required to inspect
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the related Mortgaged Properties as soon as practicable and thereafter at least
every twelve months until such condition ceases to exist.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement requires the Servicer to cause a
nationally recognized firm of independent public accountants, which is a member
of the American Institute of Certified Public Accountants, to furnish to the
Trustee on or before March 15 of each year, beginning March 15, 1997, a
statement to the effect that such firm has examined certain documents and
records relating to the servicing of similar mortgage loans for the preceding
twelve months and that their examination, conducted substantially in compliance
with generally accepted auditing standards and the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC, disclosed no exceptions or errors in records relating to the servicing of
similar mortgage loans in accordance with the terms of the Pooling and Servicing
Agreement that in their opinion are material, except for such exceptions as are
set forth in their statement.
The Pooling and Servicing Agreement also requires the Servicer to deliver
to the Trustee, on or before March 15 of each year, beginning March 15, 1997, an
officer's certificate of the Servicer stating that, to the best of such
officer's knowledge, the Servicer has fulfilled its obligations under the
Pooling and Servicing Agreement throughout the preceding year or, if there has
been a default, specifying each default known to such officer.
CERTAIN MATTERS REGARDING THE DEPOSITOR, THE SERVICER AND THE SPECIAL SERVICER
The Servicer may assign its rights and delegate its duties and obligations
under the Pooling and Servicing Agreement in connection with the sale or
transfer of a substantial portion of its mortgage servicing or asset management
portfolio, provided that certain conditions are satisfied including obtaining
the consent of the Trustee and written confirmation of each of the Rating
Agencies that such assignment or delegation will not cause a qualification,
withdrawal or downgrading of the then-current ratings assigned to the
Certificates. The Pooling and Servicing Agreement provides that the Servicer may
not otherwise resign from its obligations and duties as Servicer thereunder,
except upon the determination that performance of its duties is no longer
permissible under applicable law and provided that such determination is
evidenced by an opinion of counsel delivered to the Trustee. The holders of a
Certificates evidencing aggregate Voting Rights of at least 51% may remove the
Servicer upon the occurrence of a good faith dispute under the Pooling and
Servicing Agreement and upon written notice to the Servicer, the Depositor and
the Trustee, provided that each Rating Agency has provided written confirmation
that such removal will not cause a qualification, withdrawal or downgrading of
the ratings assigned to the Certificates, and provided, further, that the
Servicer will be entitled to payment of its portion of unpaid Servicing Fees,
unreimbursed Advances (with interest thereon) and other amounts to which the
Servicer is entitled, in each case which accrued prior to its termination. No
such resignation or removal may become effective until a successor Servicer has
assumed the obligations of the Servicer under the Pooling and Servicing
Agreement. The Trustee or any other successor Servicer assuming the obligations
of the Servicer under the Pooling and Servicing Agreement will be entitled to
the compensation to which the Servicer would have been entitled. If no successor
Servicer can be obtained to perform such obligations for such compensation,
additional amounts payable to such successor Servicer will be treated as
Realized Losses.
The Pooling and Servicing Agreement also provides that neither the
Depositor, the Servicer, the Special Servicer, nor any director, officer,
employee or agent of the Depositor, the Servicer or the Special Servicer will be
under any liability to the Trust Fund or the holders of Certificates for any
action taken or for refraining from the taking of any action in good faith
pursuant to the Pooling and Servicing Agreement, or for errors in judgment;
provided, however, that neither the Depositor, the Servicer, the Special
Servicer nor any such person will be protected against any liability which would
otherwise be imposed by reason of willful misconduct, bad faith, fraud or
negligence (or in the case of the Servicer, by reason of any specific liability
imposed for a breach of the Servicing Standard) in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. The Pooling and Servicing Agreement further provides that the
Depositor, the Servicer, the Special Servicer and any director, officer,
employee or agent of the Depositor, the Servicer and the Special Servicer 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 Pooling and
Servicing Agreement or the Certificates, other than any loss, liability or
expense incurred by reason of willful misconduct, bad faith, fraud or negligence
(or in the
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case of the Servicer, by reason of any specific liability imposed for a breach
of the Servicing Standard) in the performance of duties thereunder or by reason
of reckless disregard of obligations and duties thereunder.
If the Servicer or the Special Servicer is found by a court of competent
jurisdiction to have been negligent (other than for good faith errors in
judgment), the Servicer or the Special Servicer, as applicable, may be removed
upon a vote of greater than 50% of the Certificateholders.
In addition, the Pooling and Servicing Agreement provides that neither the
Depositor, the Servicer, nor the Special Servicer will be under any obligation
to appear in, prosecute or defend any legal action unless such action is related
to its duties under the Pooling and Servicing Agreement and which in its opinion
does not expose it to any expense or liability. The Depositor, the Servicer or
the Special Servicer may, however, in its discretion undertake any such action
which it may deem necessary or desirable with respect to the Pooling and
Servicing Agreement and the rights and duties of the parties thereto and the
interests of the holders of Certificates thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Fund, and the Depositor, the
Servicer and the Special Servicer will be entitled to be reimbursed therefor and
to charge the Collection Account.
The Depositor is not obligated to monitor or supervise the performance of
the Servicer, the Special Servicer or the Trustee under the Pooling and
Servicing Agreement. The Depositor may, but is not obligated to, enforce the
obligations of the Servicer or the Special Servicer under the Pooling and
Servicing Agreement and may, but is not obligated to, perform or cause a
designee to perform any defaulted obligation of the Servicer or the Special
Servicer or exercise any right of the Servicer or the Special Servicer under the
Pooling and Servicing Agreement. In the event the Depositor undertakes any such
action, it will be reimbursed by the Trust Fund in accordance with the standard
set forth above. Any such action by the Depositor will not relieve the Servicer
or the Special Servicer of its obligations under the Pooling and Servicing
Agreement.
Any person into which the Depositor or the Servicer may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Depositor or the Servicer is a party, or any person succeeding to the
business of the Depositor or the Servicer, will be the successor of the
Depositor or the Servicer, as the case may be, under the Pooling and Servicing
Agreement, and shall be deemed to have assumed all of the liabilities and
obligations of the Depositor or the Servicer under the Pooling and Servicing
Agreement.
EVENTS OF DEFAULT
Events of default of the Servicer (each, an 'Event of Default') under the
Pooling and Servicing Agreement consist, among other things, of (i) any failure
by the Servicer to remit to the Collection Account or any failure by the
Servicer to remit to the Trustee for deposit into the Upper-Tier Distribution
Account, Lower-Tier Distribution Account, Certificate Distribution Account,
Excess Interest Distribution Account, Interest Reserve Account or Default
Interest Distribution Account any amount required to be so remitted pursuant to
the Pooling and Servicing Agreement; or (ii) any failure by the 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 under the Pooling
and Servicing Agreement which continues unremedied for thirty (30) days after
the giving of written notice of such failure to the Servicer by the Depositor or
the Trustee, or to the Servicer and to the Depositor and the Trustee by the
holders of Certificates evidencing Percentage Interests of at least 25% of any
affected class; or (iii) any failure by the Servicer to make any Advances as
required pursuant to the Pooling and Servicing Agreement; or (iv) confirmation
in writing by any Rating Agency that not terminating the Servicer would, in and
of itself, cause the then-current rating assigned to any class of Certificates
to be qualified, withdrawn or downgraded; or (v) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings and certain actions by, on behalf of or against the Servicer
indicating its insolvency or inability to pay its obligations.
Events of Default of the Special Servicer under the Pooling and Servicing
Agreement include the items specified in clauses (i), (ii), (iv) and (v) above
with respect to, and to the extent applicable to, the Special Servicer. If a
Special Servicer Event of Default has not been remedied, the Trustee may, and at
the written discretion of holders of 25% of the aggregate Voting Rights of all
Certificate will be required to, terminate the Special Servicer.
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RIGHTS UPON EVENT OF DEFAULT
If an Event of Default with respect to the Servicer (acting as Servicer or
Special Servicer) occurs, then the Depositor or the Trustee may, and at the
direction of the holders of Certificates evidencing at least 25% of the
aggregate Voting Rights of all Certificateholders, the Trustee will, terminate
all of the rights and obligations of the Servicer as servicer under the Pooling
and Servicing Agreement and in and to the Trust Fund. If an Event of Default
with respect to the Servicer (acting as Servicer or Special Servicer) described
in clause (v) above occurs, the rights and obligations of the Servicer under the
Pooling and Servicing Agreement shall automatically terminate. Notwithstanding
the foregoing, upon any termination of the Servicer under the Pooling and
Servicing Agreement the Servicer will continue to be entitled to receive all
accrued and unpaid servicing compensation through the date of termination plus
all Advances and interest thereon as provided in the Pooling and Servicing
Agreement. In the event that the Servicer is also the Special Servicer and the
Servicer is terminated, the Servicer will also be terminated as Special
Servicer.
On and after the date of termination following an Event Of Default by the
Servicer, the Trustee will succeed to all authority and power of the Servicer
(and the Special Servicer if the Special Servicer is also the Servicer) under
the Pooling and Servicing Agreement and will be entitled to the compensation
arrangements to which the Servicer (and the Special Servicer if the Special
Servicer is also the Servicer) would have been entitled. If the Trustee is
unwilling or unable so to act, or if the holders of Certificates evidencing at
least 25% of the aggregate Voting Rights of all Certificateholders so request,
or if the long-term unsecured debt rating of the Trustee or the Fiscal Agent is
not at least 'AA' by Fitch and S&P and 'Aa2' by Moody's or if the Rating
Agencies do not provide written confirmation that the succession of the Trustee
as Servicer or Special Servicer, will not cause a qualification, withdrawal or
downgrading of the then-current ratings assigned to the Certificates, the
Trustee must appoint, or petition a court of competent jurisdiction for the
appointment of, a mortgage loan servicing institution the appointment of which
will not result in the downgrading, qualification or withdrawal of the rating or
ratings then assigned to any class of Certificates as evidenced in writing by
each Rating Agency to act as successor to the Servicer or Special Servicer under
the Pooling and Servicing Agreement. Pending such appointment, the Trustee is
obligated to act in such capacity. The Trustee and any such successor may agree
upon the servicing compensation to be paid.
If the Special Servicer is not the Servicer and an Event of Default with
respect to the Special Servicer occurs, the Trustee will terminate the Special
Servicer and the Servicer will succeed to all the power and authority of the
Special Servicer under the Pooling and Servicing Agreement, unless such
termination and succession would result in the downgrading, qualification or
withdrawal of the rating or ratings assigned to any class of Certificates, as
evidenced in writing by each Rating Agency, in which case, a successor Special
Servicer shall be appointed in accordance with the Pooling and Servicing
Agreement. Any Servicer or other successor Servicer which succeeds to the power
and authority of the Special Servicer will be entitled to the compensation to
which the Special Servicer would have been entitled.
No Certificateholder will have any right under the Pooling and Servicing
Agreement to institute any proceeding with respect to the Pooling and Servicing
Agreement or the Mortgage Loans, unless, with respect to the Pooling and
Servicing Agreement, such holder previously shall have given to the Trustee a
written notice of a default under the Pooling and Servicing Agreement, and of
the continuance thereof, and unless also the holders of Certificates of any
class affected thereby evidencing Percentage Interests of at least 25% of such
class shall have made written request of the Trustee to institute such
proceeding in its own name as Trustee under the Pooling and Servicing Agreement
and shall have offered to the Trustee such reasonable indemnity as it may
require against the costs, expenses and liabilities to be incurred therein or
thereby, and the Trustee, for 60 days after its receipt of such notice, request
and offer of indemnity, shall have neglected or refused to institute such
proceeding.
The Trustee will have no obligation to make any investigation of matters
arising under the Pooling and Servicing Agreement or to institute, conduct or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of Certificates, unless such holders of
Certificates shall have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
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AMENDMENT
The Pooling and Servicing Agreement may be amended at any time by the
Depositor, the Servicer, the Special Servicer, the Trustee and the Fiscal Agent
without the consent of any of the holders of Certificates (i) to cure any
ambiguity; (ii) to correct or supplement any provisions therein which may be
defective or inconsistent with any other provisions therein; (iii) to amend any
provision thereof to the extent necessary or desirable to maintain the status of
each of the Upper-Tier REMIC and Lower-Tier REMIC as a REMIC; (iv) to amend or
supplement a provision which will not adversely affect in any material respect
the interests of any Certificateholder not consenting thereto, as evidenced in
writing by an opinion of counsel or confirmation in writing from each Rating
Agency that such amendment will not result in a qualification, withdrawal or
downgrading of the then-current ratings assigned to the Certificates; (v) to
amend or supplement any provisions therein to the extent necessary or desirable
to maintain the rating assigned to each of the classes of Certificates by each
Rating Agency; and (vi) to make any other provisions with respect to matters
which are not inconsistent with any other provisions therein and will not result
in a qualification withdrawal or downgrading of the then-current ratings
assigned to the Certificates. No such amendment shall cause either of the
Upper-Tier REMIC or Lower-Tier REMIC to fail to qualify as a REMIC.
The Pooling and Servicing Agreement may also be amended from time to time
by the Depositor, the Servicer, the Special Servicer, the Trustee and the Fiscal
Agent with the consent of the holders of Certificates evidencing at least 66 2/3
% of the Percentage Interests of each class of Certificates affected thereby for
the purpose of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Pooling and Servicing Agreement or modifying in any
manner the rights of the holders of Certificates; provided, however, that no
such amendment may (i) reduce in any manner the amount of, or delay the timing
of, payments received on the Mortgage Loans which are required to be distributed
on any Certificate; (ii) alter the obligations of the Servicer, the Special
Servicer, the Trustee or the Fiscal Agent to make a P&I Advance or Property
Advance or alter the servicing standards set forth in the Pooling and Servicing
Agreement; (iii) change the percentages of Voting Rights of holders of
Certificates which are required to consent to any action or inaction under the
Pooling and Servicing Agreement; or (iv) amend the section in the Pooling and
Servicing Agreement relating to the amendment of the Pooling and Servicing
Agreement, in each case without the consent of the holders of all Certificates
representing all the Percentage Interests of the class or classes affected
thereby.
The 'Voting Rights' assigned to each class shall be (a) 0% in the case of
the Class V-1, Class V-2, Class R and Class LR Certificates, (b) % in the case
of the Class CS-1 Certificates, % in the case of the Class CS-2 Certificates,
% in the case of the Class CS-3 Certificates and % in the case of the Class
P-IO Certificates (the sum of such percentages for each such Class outstanding
is the 'Fixed Voting Rights Percentage'), (c) in the case of the Class A-1A,
Class A-1B, Class A-1C, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6
and Class A-7 Certificates, a percentage equal to the product of (i) 100% minus
the Fixed Voting Rights Percentage multiplied by (ii) a fraction, the numerator
of which is equal to the aggregate outstanding Certificate Balance of any such
Class and the denominator of which is equal to the aggregate outstanding
Certificate Balances of all Classes of Certificates, and (d) in the case of the
Class B-1 and B-1H Certificates, a percentage equal to (i) 100% minus the Fixed
Voting Rights Percentage multiplied by (ii) a fraction, the numerator of which
is equal to the Certificate Balance of such class and the denominator of which
is equal to the aggregate outstanding Certificate Balances of all classes of
Certificates. The Voting Rights of any Class of Certificates shall be allocated
among holders of Certificates of such Class in proportion to their respective
Percentage Interests.
REALIZATION UPON MORTGAGE LOANS; MODIFICATION
Specially Serviced Mortgage Loans; Appraisals; Extensions.
Contemporaneously with the occurrence of an Appraisal Reduction Event,
the Servicer will obtain an appraisal (or a letter update from an existing
appraisal which is less than one year old) of the Mortgaged Property or
REO Property, as the case may be, from an independent appraiser who is a member
of the American Institute of Real Estate Appraisers (an 'Updated Appraisal');
provided, that, the Servicer will not be required to obtain an Updated Appraisal
of any Mortgaged Property with respect to which there exists an appraisal which
is less than twelve months old.
Following a default in the payment of any principal balance and accrued
interest remaining unpaid on the maturity date of a Mortgage Loan, the Special
Servicer may either foreclose or elect to grant up to two consecutive one-year
extensions of the Specially Serviced Mortgage Loan; provided that the Special
Servicer
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may only extend such Mortgage Loan if (i) immediately prior to the default on
the maturity date (or the first anniversary thereof in the case of the second
extension), the related borrower had made twelve consecutive Monthly Payments
(or Extended Monthly Payments (as defined below) in the case of the second
extension) on or prior to their Due Dates, (ii) the Special Servicer determines
that (A) extension of such Mortgage Loan is consistent with the servicing
standard set forth herein and (B) extension of such Mortgage Loan is likely to
result in a recovery which on a net present value basis would be greater than
the recovery that would result from a foreclosure, (iii) such extension requires
that all cash flow on all related Mortgage Properties in excess of amounts
required to operate and maintain such Mortgaged Properties be applied to
payments of principal and interest on such Mortgage Loan, (iv) the Special
Servicer terminates the related Manager unless the Special Servicer determines
that retaining such Manager is conducive to maintaining the value of such
Mortgaged Properties and (v) such extension requires the related borrower to
make Extended Monthly Payments. The Special Servicer's determination to extend
shall be made in the Special Servicer's good faith judgment, and may, but is not
required to be, based on an Updated Appraisal.
The Special Servicer will not agree to any extension of a Mortgage Loan
beyond the date which is two years prior to the Rated Final Distribution Date.
If such borrower fails to make an Extended Monthly Payment during the initial
extension period, no further extensions will be granted. The 'Extended Monthly
Payment' with respect to any extension of a Mortgage Loan that is delinquent in
the payment of any principal balance and accrued interest remaining unpaid on
its maturity date, is equal to (a) the principal portion of a revised monthly
payment (which will be calculated based on an amortization schedule of no more
than 24 months (commencing on the maturity date of such Mortgage Loan) and an
interest rate no less than the Mortgage Rate with respect to such Mortgage Loan,
and (b) interest at the applicable Default Rate; provided, however, that the
Special Servicer may agree that the Extended Monthly Payments may include
interest at a rate lower than the related Default Rate (but in no event lower
than the related Mortgage Rate) (the 'Lower Rate'). In no event will the
Servicer be permitted to modify or extend any Mortgage Loan at a rate lower than
the Mortgage Rate.
The Servicer shall be permitted, in its discretion, to waive all or any
accrued Excess Interest if, prior to the related Maturity Date, the related
borrower has requested the right to prepay the Mortgage Loan in full together
with all payments required by the Mortgage Loan in connection with such
prepayment except for all or a portion of accrued Excess Interest, provided that
the Servicers determines that a waiver of the right to such accrued Excess
Interest is reasonably likely to produce a greater payment to Certificateholders
(other than to holders of the Class V-2 Certificates) on a present value basis
than a refusal to waive the right to such Excess Interest. Any such waiver shall
not be effective until such prepayment is tendered.
Standards for Conduct Generally in Effecting Foreclosure or the Sale of
Defaulted Loans. In connection with any foreclosure, enforcement of the loan
documents, or other acquisition, the cost and expenses of any such proceeding
shall be paid by the Special Servicer as a Property Advance.
If the Special Servicer elects to proceed with a non-judicial foreclosure
in accordance with the laws of the state where the Mortgaged Property is
located, the Special Servicer shall not be required to pursue a deficiency
judgment against the related Mortgagor, if available, or any other liable party
if the laws of the state do not permit such a deficiency judgment after a
non-judicial foreclosure or if the Special Servicer determines, in its best
judgment, that the likely recovery if a deficiency judgment is obtained will not
be sufficient to warrant the cost, time, expense and/or exposure of pursuing the
deficiency judgment and such determination is evidenced by an officers'
certificate delivered to the Trustee.
Notwithstanding any provision to the contrary, the Special Servicer shall
not, on behalf of the Trust Fund, obtain title to a Mortgaged Property as a
result of or in lieu of foreclosure or otherwise, and shall not otherwise
acquire possession of, or take any other action with respect to, any Mortgaged
Property if, as a result of any such action, the Trustee, for the Trust Fund or
the holders of Certificates, would be considered to hold title to, to be a
'mortgagee-in-possession' of, or to be an 'owner' or 'operator' of, such
Mortgaged Property within the meaning of CERCLA or any comparable law, unless
the Special Servicer has previously determined, based on an environmental
assessment report prepared by an independent person who regularly conducts
environmental audits, that: (i) such Mortgaged Property is in compliance with
applicable environmental laws or, if not, after consultation with an
environmental consultant that it would be in the best economic interest of the
Trust Fund to take such actions as are necessary to bring such Mortgaged
Property in compliance therewith and (ii) there are no circumstances present at
such Mortgaged Property relating to the use, management or disposal of any
hazardous
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materials for which investigation, testing, monitoring, containment, clean-up or
remediation could be required under any currently effective federal, state or
local law or regulation, or that, if any such hazardous materials are present
for which such action could be required, after consultation with an
environmental consultant it would be in the best economic interest of the Trust
Fund to take such actions with respect to the affected Mortgaged Property.
In the event that title to any Mortgaged Property is acquired in
foreclosure or by deed in lieu of foreclosure, the deed or certificate of sale
shall be issued to the Trustee, or to its nominee, on behalf of holders of
Certificates. Notwithstanding any such acquisition of title and cancellation of
the related Mortgage Loan, such Mortgage Loan shall be considered to be an REO
Mortgage Loan held in the Trust Fund until such time as the related REO Property
shall be sold by the Trust Fund and shall be reduced only by collections net of
expenses.
If the Trust Fund acquires a Mortgaged Property by foreclosure or
deed-in-lieu of foreclosure upon a default of a Mortgage Loan, the Pooling and
Servicing Agreement provides that the Trustee (or the Special Servicer, on
behalf of the Trustee), must administer such Mortgaged Property so that it
qualifies at all times as 'foreclosure property' within the meaning of Code
Section 860G(a)(8). The Pooling and Servicing Agreement also requires that any
such Mortgaged Property be managed and operated by an 'independent contractor,'
within the meaning of applicable Treasury regulations, who furnishes or renders
services to the tenants of such Mortgaged Property. Generally, the REMIC will
not be taxable on income received with respect to the Mortgaged Property to the
extent that it constitutes 'rents from real property,' within the meaning of
Code Section 856(c)(3)(A) and Treasury regulations thereunder. 'Rents from real
property' do not include the portion of any rental based on the net income or
gain of any tenant or sub-tenant. No determination has been made whether rent on
any of the Mortgaged Properties meets this requirement. 'Rents from real
property' include charges for services customarily furnished or rendered in
connection with the rental of real property, whether or not the charges are
separately stated. Services furnished to the tenants of a particular building
will be considered as customary if, in the geographic market in which the
building is located, tenants in buildings which are of similar class are
customarily provided with the service. No determination has been made whether
the services furnished to the tenants of the Mortgaged Properties are
'customary' within the meaning of applicable regulations. It is therefore
possible that a portion of the rental income with respect to a Mortgaged
Property owned by the Trust Fund, presumably allocated based on the value of any
non-qualifying services, would not constitute 'rents from real property.' In
addition to the foregoing, any net income from a trade or business operated or
managed by an independent contractor on a Mortgaged Property owned by the REMIC,
including but not limited to a hotel or skilled nursing care business, will not
constitute 'rents from real property.' Any of the foregoing types of income may
instead constitute 'net income from foreclosure property,' which would be
taxable to the REMIC at the highest marginal federal corporate rate (currently
35%) and may also be subject to state or local taxes. Any such taxes would be
chargeable against the related income for purposes of determining the Net REO
Proceeds available for distribution to holders of Certificates. See 'Certain
Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates' and '--Taxes That May Be Imposed on the REMIC Pool--Net Income
from Foreclosure Property' in the Prospectus.
The Special Servicer may offer to sell to any person any Defaulted Mortgage
Loan or any REO Property, or may offer to purchase any Specially Serviced
Mortgage Loan or any REO Property (in each case at the repurchase price set
forth in the Pooling and Servicing Agreement, which includes unpaid principal
and interest thereon), if and when the Special Servicer determines, consistent
with the servicing standard set forth in the Pooling and Servicing Agreement,
that no satisfactory arrangements can be made for collection of delinquent
payments thereon and such a sale would be in the best economic interests of the
Trust Fund, but shall, in any event, so offer to sell any REO Property no later
than the time determined by the Special Servicer to be sufficient to result in
the sale of such REO Property within the period specified in the Pooling and
Servicing Agreement, including extensions thereof. The Special Servicer shall
give the Trustee not less than five days' prior written notice of its intention
to sell any Specially Serviced Mortgage Loan or REO Property, in which case the
Special Servicer shall accept the highest offer (of at least three offers)
received from any person for any Specially Serviced Mortgage Loan or any REO
Property in an amount at least equal to the Repurchase Price or, at its option,
if it has received no offer at least equal to the repurchase price therefor,
purchase the Specially Serviced Mortgage Loan or REO Property at such repurchase
price.
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In the absence of any such offer (or purchase by the Special Servicer), the
Special Servicer shall accept the highest offer received from any person that is
determined by the Special Servicer to be a fair price for such Specially
Serviced Mortgage Loan or REO Property, if the highest offeror is a person not
affiliated with the Special Servicer, or is determined to be a fair price by the
Trustee (based solely upon updated independent appraisals received by the
Trustee), if the highest offeror is affiliated with the Special Servicer.
Notwithstanding anything to the contrary herein, neither the Trustee, in its
individual capacity, nor any of its affiliates may make an offer for or purchase
any Specially Serviced Mortgage Loan or any REO Property.
The Special Servicer shall not be obligated by either of the foregoing
paragraphs or otherwise to accept the highest offer if the Special Servicer
determines, in accordance with the Servicing Standard, that rejection of such
offer would be in the best interests of the holders of Certificates. In
addition, the Special Servicer may accept a lower offer if it determines, in
accordance with the Servicing Standard, that acceptance of such offer would be
in the best interests of the holders of Certificates (for example, if the
prospective buyer making the lower offer is more likely to perform its
obligations, or the terms offered by the prospective buyer making the lower
offer are more favorable), provided that the offeror is not a person affiliated
with the Special Servicer. The Special Servicer is required to use its best
efforts to sell all Specially Serviced Mortgage Loans and REO Property prior to
the Rated Final Distribution Date.
Modifications. Except as otherwise provided above, the Servicer or the
Special Servicer, as applicable, may not modify any material payment term
(interest rate, principal balance, maturity date, etc.). In addition, the
Special Servicer may not modify any other term unless such modification (i)
would not be 'significant' as such term is defined in Code Section 1001 or
Treasury Regulation Section 1.860G-2(b)(3), as evidenced by an opinion of
counsel and (ii) would be in accordance with the servicing standard set forth in
the Pooling and Servicing Agreement. The Pooling and Servicing Agreement will
require the Servicer or Special Servicer, as applicable, to provide copies of
any modifications or extensions to each Rating Agency.
OPTIONAL TERMINATION
The Depositor and, if the Depositor does not exercise its option, the
Servicer and, if neither the Depositor nor the Servicer exercises its option,
the holders of the Class LR Certificates representing greater than a 50%
Percentage Interest of the Class LR Certificates will have the option to
purchase all of the Mortgage Loans and all property acquired in respect of any
Mortgage Loan remaining in the Trust Fund, and thereby effect termination of the
Trust Fund and early retirement of the then outstanding Certificates, on any
Distribution Date on which the aggregate Stated Principal Balance of the
Mortgage Loans remaining in the Trust Fund is less than 1% of the aggregate
principal balance of such Mortgage Loans as of the Cut-off Date. The purchase
price payable upon the exercise of such option on such a Distribution Date will
be an amount equal to the greater of (i) the sum of (A) 100% of the outstanding
principal balance of each Mortgage Loan included in the Trust Fund as of the
last day of the month preceding such Distribution Date; (B) the fair market
value of all other property included in the Trust Fund as of the last day of the
month preceding such Distribution Date, as determined by an independent
appraiser as of a date not more than 30 days prior to the last day of the month
preceding such Distribution Date; (C) all unpaid interest accrued on such
principal balance of each such Mortgage Loan (including any Mortgage Loans as to
which title to the related Mortgaged Property has been acquired) at the Mortgage
Rate (plus the Excess Rate, to the extent applicable) to the last day of the
month preceding such Distribution Date, and (D) unreimbursed Advances (with
interest thereon) and unpaid servicing compensation, Trustee Fees and Trust Fund
expenses and (ii) the aggregate fair market value of the Mortgage Loans and all
other property acquired in respect of any Mortgage Loan in the Trust Fund, on
the last day of the month preceding such Distribution Date, as determined by an
independent appraiser acceptable to the Servicer, together with one month's
interest thereon at the Mortgage Rate. The holders of greater than a 50%
Percentage Interest in the Class LR Certificates may purchase any Mortgage Loan
on its Anticipated Repayment Date at a price equal to the sum of the following:
(i) 100% of the outstanding principal balance of such Mortgage Loan on such
Anticipated Repayment Date; (ii) all unpaid interest accrued on such principal
balance of such Mortgage Loan at the Mortgage Rate thereof, to the last day of
the Interest Accrual Period preceding such Anticipated Repayment Date; (iii) the
aggregate amount of unreimbursed Advances with respect to such Mortgage Loan,
with interest thereon at the Advance Rate, and unpaid special servicing
compensation, servicing compensation, Trustee Fees and Trust Fund expenses; and
(iv) the amount of any liquidation expenses incurred by the Trust Fund in
connection with such purchase. See 'Description of the
Certificates--Termination' in the Prospectus.
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THE TRUSTEE
LaSalle National Bank, a nationally chartered bank with its principal
offices in Chicago, Illinois, will act as Trustee pursuant to the Pooling and
Servicing Agreement. The Trustee's corporate trust office is located at 135
South LaSalle Street, Suite 1740, Chicago, Illinois 60603, Attention: Asset
Backed Securities Trust Services Nomura MD VI.
The Trustee may resign at any time by giving written notice to the
Depositor, the Servicer and the Rating Agencies, provided that no such
resignation shall be effective until a successor has been appointed. Upon such
notice, the Servicer will appoint a successor trustee. If no successor trustee
is appointed within one month after the giving of such notice of resignation,
the resigning Trustee may petition the court for appointment of a successor
trustee.
The Servicer or the Depositor may remove the Trustee and the Fiscal Agent
if, among other things, the Trustee ceases to be eligible to continue as such
under the Pooling and Servicing Agreement or if at any time the Trustee becomes
incapable of acting, or is adjudged bankrupt or insolvent, or a receiver of the
Trustee or its property is appointed or any public officer takes charge or
control of the Trustee or of its property. The holders of Certificates
evidencing aggregate Voting Rights of at least 50% of all Certificateholders may
remove the Trustee and the Fiscal Agent upon written notice to the Depositor,
the Servicer, the Trustee and the Fiscal Agent. Any resignation or removal of
the Trustee and the Fiscal Agent and appointment of a successor trustee and, if
such trustee is not rated at least 'AA' by Fitch and S&P and Aa2 by Moody's,
fiscal agent, will not become effective until acceptance of the appointment by
the successor trustee and, if necessary, fiscal agent. Notwithstanding the
foregoing, upon any termination of the Trustee and Fiscal Agent under the
Pooling and Servicing Agreement, the Trustee and Fiscal Agent will continue to
be entitled to receive all accrued and unpaid compensation through the date of
termination plus all Advances and interest thereon as provided in the Pooling
and Servicing Agreement. Any successor trustee must have a combined capital and
surplus of at least $50,000,000 and such appointment must not result in the
downgrade, qualification or withdrawal of the then-current ratings assigned to
the Certificates, as evidenced in writing by the Rating Agencies.
Pursuant to the Pooling and Servicing Agreement, the Trustee will be
entitled to withdraw from the Distribution Account a monthly fee (the 'Trustee
Fee'), which constitutes a portion of the Servicing Fee.
The Trust Fund will indemnify the Trustee and the Fiscal Agent against any
and all losses, liabilities, damages, claims or unanticipated expenses
(including reasonable attorneys' fees) arising in respect of the Pooling and
Servicing Agreement or the Certificates other than those resulting from the
negligence, bad faith or willful misconduct of the Trustee or the Fiscal Agent,
as applicable. Neither the Trustee nor the Fiscal Agent will be required to
expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties under the Pooling and Servicing Agreement, or
in the exercise of any of its rights or powers, if in the Trustee's or the
Fiscal Agent's opinion, as applicable, the repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it. The
Servicer indemnifies the Trustee, the Fiscal Agent, and certain related parties
for similar losses incurred related to the willful misconduct, bad faith, fraud
and/or negligence in the performance of the Servicer's duties under the Pooling
and Servicing Agreement or by reason of reckless disregard of its obligations
and duties under the Pooling and Servicing Agreement.
At any time, for the purpose of meeting any legal requirements of any
jurisdiction in which any part of the Trust Fund or property securing the same
is located, the Depositor and the Trustee acting jointly will have the power to
appoint one or more persons or entities approved by the Trustee to act (at the
expense of the Trustee) as co-trustee or co-trustees, jointly with the Trustee,
or separate trustee or separate trustees, of all or any part of the Trust Fund,
and to vest in such co-trustee or separate trustee such powers, duties,
obligations, rights and trusts as the Depositor and the Trustee may consider
necessary or desirable. Except as required by applicable law, the appointment of
a co-trustee or separate trustee will not relieve the Trustee of its
responsibilities, obligations and liabilities under the Pooling and Servicing
Agreement.
DUTIES OF THE TRUSTEE
The Trustee (except for the information under the first paragraph of '--The
Trustee') and Servicer (except for the information under '--The Servicer') will
make no representation as to the validity or sufficiency of the Pooling and
Servicing Agreement, the Certificates or the Mortgage Loans, this Prospectus
Supplement or related
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documents. The Trustee will not be accountable for the use or application by the
Depositor, the Servicer or Special Servicer of any Certificates issued to it or
of the proceeds of such Certificates, or for the use of or application of any
funds paid to the Depositor, the Servicer or the Special Servicer in respect of
the assignment of the Mortgage Loans to the Trust Fund, or any funds deposited
in or withdrawn from the Lock Box Accounts, Cash Collateral Accounts, Reserve
Accounts, Collection Account, Upper-Tier Distribution Account, Lower-Tier
Distribution Account, Certificate Distribution Account, Excess Interest
Distribution Account, Interest Reserve Account and Default Interest Distribution
Account or any other account maintained by or on behalf of the Servicer or
Special Servicer, nor will the Trustee be required to perform, or be responsible
for the manner of performance of, any of the obligations of the Servicer or
Special Servicer under the Pooling and Servicing Agreement.
In the event that the Servicer fails to make a required Advance, the
Trustee, as acting or successor Servicer, will make such Advance, provided that
the Trustee shall not be obligated to make any Advance it deems to be
nonrecoverable. The Trustee shall be entitled to rely conclusively on any
determination by the Servicer that an Advance, if made, would not be
recoverable. The Trustee will be entitled to reimbursement for each Advance made
by it in the same manner and to same extent as the Servicer.
If no Event of Default has occurred, and after the curing of all Events of
Default which may have occurred, the Trustee is required to perform only those
duties specifically required under the Pooling and Servicing Agreement. Upon
receipt of the various certificates, reports or other instruments required to be
furnished to it, the Trustee is required to examine such documents and to
determine whether they conform on their face to the requirements of the Pooling
and Servicing Agreement.
THE FISCAL AGENT
ABN AMRO Bank N.V., a banking corporation organized under the laws of The
Netherlands, will act as Fiscal Agent pursuant to the Pooling and Servicing
Agreement. The Fiscal Agent's office is located at 135 South LaSalle Street,
Chicago, Illinois 60603.
The Fiscal Agent may not resign except in the event of the resignation or
removal of the Trustee or upon determination that it may no longer perform such
obligations and duties under applicable law. Any such determination is required
to be evidenced by an opinion of counsel to such effect delivered to the
Depositor and the Trustee. No resignation or removal of the Fiscal Agent shall
become effective until a successor fiscal agent acceptable to each Rating
Agency, as evidenced in writing (which may be the Trustee) shall have assumed
the Fiscal Agent's obligations and duties under the Pooling and Servicing
Agreement. If at any time the Fiscal Agent resigns or is removed, the Servicer
may remove the Trustee.
DUTIES OF THE FISCAL AGENT
The Fiscal Agent will make no representation as to the validity or
sufficiency of the Pooling and Servicing Agreement, the Certificates, the
Mortgage Loan, this Prospectus Supplement (except for the information under the
preceding section with the heading 'The Fiscal Agent') or related documents. The
duties and obligations of the Fiscal Agent consist only of making Advances as
described below and in '--Advances' above; the Fiscal Agent shall not be liable
except for the performance of such duties and obligations.
In the event that the Servicer and the Trustee fail to make a required
Advance, the Fiscal Agent will make such Advance, provided that the Fiscal Agent
will not be obligated to make any Advance that it deems to be nonrecoverable.
The Fiscal Agent shall be entitled to rely conclusively on any determination by
the Servicer or the Trustee, as applicable, that an Advance, if made, would not
be recoverable. The Fiscal Agent will be entitled to reimbursement for each
Advance made by it in the same manner and to the same extent as the Trustee and
the Servicer.
THE SERVICER
AMRESCO Management, Inc., a Texas corporation will be the Servicer and in
such capacity will be responsible for servicing the Mortgage Loans. AMRESCO
Management, Inc. ('AMI') is a wholly owned subsidiary of AMRESCO, INC.
('AMRESCO'), a publicly traded (NASDAQ) company. The principal offices of AMI
are located at 235 Peachtree Street, NE, Suite 900, Atlanta, Georgia 30303. The
servicing of all performing loans will be performed by the AMRESCO Services
Division of AMI located in Atlanta, Georgia.
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As of September 30, 1996, AMRESCO's portfolio consists of approximately
9,540 loans with an aggregate principal balance of approximately $13.9 billion,
making it the largest commercial servicer according to the 1996 ranking issued
by the Mortgage Banker Association of America. The portfolio is significantly
diversified both geographically and by product type. AMI will provide servicing
for this portfolio as well as other securitized transactions under full,
primary, sub and master servicing contracts for both public and private
placement transactions representing both single and multi-borrower mortgage
pools.
In addition to its loan servicing capabilities, AMI has expertise in all
areas of asset management including loan workouts, asset valuation,
environmental reviews, and REO management and disposition and is an active
purchaser of unrated and sub-investment grade interests in commercial mortgage
backed securities. The principal task of AMI's asset management division is the
management, turnaround, and capital recovery of distressed and underperforming
real estate loans and foreclosed real estate assets. The asset management
division of AMI is also responsible for the valuation of portfolios in
connection with the purchase of commercial mortgage backed securities.
The information concerning the Servicer set forth herein has been provided
by the Servicer, and none of the Mortgage Loan Seller, the Special Servicer, the
Depositor, the Trustee, the Fiscal Agent or the Underwriter makes any
representation or warranty as to the accuracy thereof.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Pursuant to the Pooling and Servicing Agreement, the Servicer will be
entitled to withdraw monthly from the Collection Account its portion of the
Servicing Fee. The monthly servicing fee (the 'Servicing Fee') for any
Distribution Date is an amount per Interest Accrual Period equal to the product
of (i) a per annum rate of 0.0450% (the 'Servicing Fee Rate') and (ii) the
Stated Principal Balance of such Mortgage Loan as of the Due Date and includes
the compensation payable to the Servicer and the Trustee Fee. The Servicer's
portion of the Servicing Fee relating to each Mortgage Loan will be retained by
the Servicer from payments and collections (including insurance proceeds,
condemnation proceeds and liquidation proceeds) in respect of such Mortgage
Loan. The Servicer will also be entitled to retain as additional servicing
compensation all investment income earned on amounts on deposit in the
Collection Account. Notwithstanding the foregoing, (i) the Servicing Fee and
investment income earned on any principal prepayment during the related
Collection Period and due to the Servicer on any Distribution Date will be
reduced by the amount of any Servicer Prepayment Interest Shortfalls.
In addition, the Servicer shall be entitled to receive, as additional
servicing compensation, to the extent permitted by applicable law and the
related Mortgage Loans, any late payment charges, assumption fees, loan
modification fees, extension fees, loan service transaction fees, beneficiary
statement charges, or similar items (but not including any Prepayment Premiums),
in each case to the extent received and not required to be deposited or retained
in the Collection Account pursuant to the Pooling and Servicing Agreement.
The Servicer will pay all expenses incurred in connection with its
responsibilities under the Pooling and Servicing Agreement (subject to
reimbursement as described herein), including all fees of any subservicers
retained by it. The Trustee will withdraw monthly from the Distribution Account
the portion of the Servicing Fee representing the Trustee Fee.
SPECIAL SERVICING
The Servicer will initially be appointed as special servicer (the Servicer
in such capacity, or any party succeeding the Servicer in such capacity, the
'Special Servicer') to, among other things, oversee the resolution of
non-performing Mortgage Loans and act as disposition manager of REO Properties.
The Pooling and Servicing Agreement will provide that more than one Special
Servicer may be appointed, but only one Special Servicer may specially service
any Mortgage Loan.
The Special Servicer will, among other things, oversee the resolution of
non-performing Mortgage Loans and act as disposition manager of REO Properties.
The Pooling and Servicing Agreement provides that holders of Certificates
evidencing greater than 50% of the Percentage Interests of the most subordinate
Class of Certificates then outstanding (provided, however, that for purposes of
determining the most subordinate class, the Class B-1 and Class B-1H
Certificates together will be treated as one class and in the event that the
Class A-1A, Class A-1B and Class A-1C Certificates and the Coupon Strip
Certificates are the only classes outstanding, the Class A-1A Certificates,
Class A-1B Certificates and Class A-1C Certificates and the Coupon Strip
Certificates together will
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be treated as the subordinate class) may replace the Special Servicer, provided
that each Rating Agency confirms to the Trustee in writing that such
replacement, will not cause a qualification, withdrawal or downgrading of the
then-current ratings assigned to any class of Certificates. In the event that a
Mortgage Loan secured by a hotel becomes a Specially Serviced Mortgage Loan, the
Special Servicer will be required to hire a consultant which is experienced in
the operation of such facilities.
The duties of the Special Servicer relate to Specially Serviced Mortgage
Loans and to any REO Property. The Pooling and Servicing Agreement will define a
'Specially Serviced Mortgage Loan' to include any Mortgage Loan with respect to
which: (i) the related borrower has not made two consecutive Monthly Payments
(and has not cured at least one such delinquency by the next due date under the
related Mortgage Loan); (ii) the Servicer, the Trustee and/or the Fiscal Agent
has made four consecutive P&I Advances (regardless of whether such P&I Advances
have been reimbursed); (iii) the borrower has expressed to the Servicer an
inability to pay or a hardship in paying the Mortgage Loan in accordance with
its terms; (iv) the 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; (v) the Servicer has received notice of a
foreclosure or threatened foreclosure of any lien on the Mortgaged Property
securing the Mortgage Loan; (vi) a default of which the Servicer has notice
(other than a failure by the borrower to pay principal or interest) and which
materially and adversely affects the interests of the Certificateholders has
occurred and remained unremedied for the applicable grace period specified in
the Mortgage Loan (or, if no grace period is specified, 60 days); provided, that
a default requiring a Property Advance will be deemed to materially and
adversely affect the interests of Certificateholders; (vii) the Special Servicer
proposes to commence foreclosure or other workout arrangements; or (viii) in the
opinion of the Servicer (consistent with Servicing Standard) a default under a
Mortgage Loan is imminent and such Mortgage Loan deserves the attention of the
Special Servicer; provided, however, that a Mortgage Loan will cease to be a
Specially Serviced Mortgage Loan (i) with respect to the circumstances described
in clauses (i), (ii) and (viii) above, when the borrower thereunder has brought
the Mortgage Loan current and thereafter made three consecutive full and timely
monthly payments, including pursuant to any workout of the Mortgage Loan, (ii)
with respect to the circumstances described in clause (iii), (iv), (v) and (vii)
above, when such circumstances cease to exist in the good faith judgment of the
Servicer, or (iii) with respect to the circumstances described in clause (vi)
above, when such default is cured; provided, in either case, that at that time
no circumstance exists (as described above) that would cause the Mortgage Loan
to continue to be characterized as a Specially Serviced Mortgage Loan.
Pursuant to the Pooling and Servicing Agreement, the Special Servicer will
be entitled to certain fees, including a special servicing fee (and if the
Special Servicer is the Servicer, such fees will be in addition to the Servicing
Fee), payable with respect to each Interest Accrual Period, equal to 1/12 of
0.50% of the Stated Principal Balance of each related Specially Serviced
Mortgage Loan (the 'Special Servicing Fee'). The Special Servicer will be
entitled to, in addition to the Special Servicing Fee, to receive an 'REO
Disposition Fee' equal to 1% of the amount equal to (x) the proceeds of the sale
of any REO Property minus (y) any broker's commission and related brokerage
referral fees and a 'Rehabilitation Fee' with respect to any Mortgage Loan which
ceases to be specially serviced and has made nine consecutive Monthly Payments
on or prior to the related Due Dates after the Mortgage Loan has ceased to be a
Specially Serviced Mortgage Loan in an amount equal to 0.25% of the highest
Stated Principal Balance of such Mortgage Loan during the period in which it was
specially serviced; provided, however, that such Rehabilitation Fee shall be due
only once for each Mortgage Loan during the term of the Pooling and Servicing
Agreement. However, no REO Disposition Fee will be payable in connection with,
or out of, Liquidation Proceeds resulting from the purchase of any Specially
Serviced Mortgage Loan or REO Property (i) by the Originator as described herein
under '--Representations and Warranties; Repurchase,' (ii) by the Servicer, the
Depositor or the Certificateholders as described herein under '--Optional
Termination,' or (iii) in certain other limited circumstances. Each of the
foregoing fees, along with certain expenses related to special servicing of a
Mortgage Loan, shall be payable out of funds otherwise available to pay
principal on the Certificates. Notwithstanding the foregoing, in the event that
the Special Servicer is, or is an affiliate of, or has an economic arrangement
for the purpose of retaining the full Special Servicing Fee, with the holder of
Certificates representing 51% or more of the Voting Rights of the most
subordinate class of Certificates then outstanding (provided, however, that for
purposes of determining the most subordinate class, the Class B-1 and Class B-1H
Certificates will be collectively treated as one class and in the event that the
Class A-1A, Class A-1B, Class A-1C and the Coupon Strip Certificates are the
only classes outstanding, the Class A-1A, Class A-1B, Class A-1C
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Certificates and the Coupon Strip Certificates together will be treated as the
most subordinate class), the Special Servicer will be entitled to receive a
Special Servicing Fee equal to 1/12th of 0.25% of the Stated Principal Balance
of each related Specially Serviced Mortgage Loan.
SERVICER AND SPECIAL SERVICER PERMITTED TO BUY CERTIFICATES
The Servicer and Special Servicer will be permitted to purchase any class
of Certificates. Such a purchase by the Servicer or Special Servicer could cause
a conflict relating to the Servicer's or Special Servicer's duties pursuant to
the Pooling and Servicing Agreement and the Servicer's or Special Servicer's
interest as a holder of Certificates, especially to the extent that certain
actions or events have a disproportionate effect on one or more classes of
Certificates. The Pooling and Servicing Agreement provides that the Servicer or
Special Servicer shall administer the Mortgage Loans in accordance with the
servicing standard set forth therein without regard to ownership of any
Certificate by the Servicer or Special Servicer or any affiliate thereof.
REPORTS TO CERTIFICATEHOLDERS
On each Distribution Date, the Trustee is obligated to furnish to each
Certificateholder, to the Depositor, the Paying Agent, the Servicer, the Special
Servicer and the Rating Agencies a statement setting forth certain information
with respect to the Mortgage Loans and the Certificates required pursuant to the
Pooling and Servicing Agreement. Certain information made available on the
monthly reports to Certificateholders can be retrieved via facsimile through
LaSalle National Bank's ASAP System by calling (312) 904-2200, and requesting
statement No. 224. In addition, to the extent provided to it by the Servicer,
the Trustee shall provide to each Certificateholder and Rating Agency a
quarterly report and an annual summary of quarterly reports setting forth
certain information with respect to the borrowers and the Mortgaged Properties.
Such quarterly and annual summaries will be prepared by the Servicer solely from
information provided to the Servicer pursuant to the Mortgage Loans without
modification, interpretation or analysis (except that the Servicer will use its
best efforts to isolate management fees and funded reserves from borrower
reported expenses, if necessary) and the Servicer shall not be responsible for
the completeness or accuracy of such information (except that the Servicer will
use its best efforts to correct patent errors). Such monthly and quarterly
reports and annual summaries as well as certain other loan level information may
also be obtained electronically for a fee by calling the Trustee. Within a
reasonable period of time after each calendar year, the Trustee is obligated to
furnish to each person who at any time during such calendar year was the holder
of a Certificate a statement containing certain information with respect to the
Certificates required pursuant to the Pooling and Servicing Agreement,
aggregated for such calendar year or portion thereof during which such person
was a Certificateholder. See 'Description of the Certificates--Reports to
Certificateholders' in the Prospectus.
The Servicer, on behalf of the Trust Fund, will (i) mail to the Depositor
and the Trustee (who will copy each Certificateholder upon written request
(provided that each Certificateholder may only make one request per month and
will be required to pay any expenses incurred by the Trustee in connection with
the provision of such information)), and (ii) prepare, sign and file with the
Securities and Exchange Commission as a Current Report on Form 8-K, copies of
all quarterly and annual summaries and a list of all quarterly and annual
financial statements and other financial and property information of the
borrowers provided to the Servicer pursuant to the Mortgage Loans (to the extent
not inconsistent with the related borrower's rights under the Mortgage Loan or
applicable law) as well as notice of certain events with respect to the Mortgage
Loans which may affect Certificateholders, such as amendments, modifications and
waivers, imminent or actual defaults and proposed prepayments. Additionally, the
Servicer shall make available (to the extent not inconsistent with the related
borrower's rights under the Mortgage Loan or applicable law) to the Rating
Agencies and to the Trustee, which shall make available to the
Certificateholders upon written request (provided that each such
Certificateholder will be required to pay any expenses incurred by the Trustee
in connection with the provision of such information), information relating to
the Mortgaged Properties or the borrowers which has been provided to the
Servicer pursuant to the Mortgage Loans, including financial and operating
statements and other information specified on the list described in the previous
sentence and provided to the Servicer pursuant to the Mortgage Loans.
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USE OF PROCEEDS
The net proceeds from the sale of Offered Certificates will be used by the
Depositor to pay the purchase price of the Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, each class of Offered Certificates (other
than the Class CS-3 Cerificates) generally will represent a beneficial ownership
interest in a REMIC regular interest and the related Floor Agreement, and the
Class CS-3 Certificates generally will represent beneficial ownership interests
in seven REMIC regular interests corresponding to the Class A-1C, Class A-2,
Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Components and the
related Floor Agreements. Although the Offered Certificates include beneficial
ownership of their corresponding REMIC regular interests, their tax treatment
may differ from such an investment. The Offered Certificates may not be a
suitable investment for individuals, trusts or estates, certain pass-through
entities the beneficial owners of which are individuals, trusts or estates, and
real estate investment trusts. The Offered Certificates are not a suitable
investment for REMIC prior to the date on which all payments have been made on
the Floor Agreements. Moreover, other special rules may apply to certain
investors, including dealers in securities, dealers in notional principal
contracts, persons holding the Offered Certificates as part of a straddle with
respect to some other investment position, and certain persons whose functional
currency is not the United States dollar.
Elections will be made to treat the Trust Fund, exclusive of the Reserve
Accounts, the Lock Box Accounts, the Cash Collateral Accounts, the Prime Retail
Treasury Reserve Account, the Excess Interest and the Default Interest in
respect of the Mortgage Loans, the Certificate Distribution Account and the
Floor Agreements (such portion of the Trust Fund, the 'Trust REMICs'), and the
Trust REMICs will qualify, as two separate REMICs (the 'Upper-Tier REMIC' and
the 'Lower-Tier REMIC,' respectively) within the meaning of Code Section 860D.
The Reserve Accounts, the Lock Box Accounts and Cash Collateral Accounts will be
treated as beneficially owned by the respective borrowers for federal income tax
purposes. The Lower-Tier REMIC will hold the Mortgage Loans (exclusive of the
Excess Interest and the Default Interest), proceeds therefrom, the Collection
Account, the Lower-Tier Distribution Account and any REO Property, and will
issue (i) certain uncertificated classes of regular interests (the 'Lower-Tier
REMIC Regular Interests') to the Upper-Tier REMIC and (ii) the Class LR
Certificates, which will represent the sole class of residual interests in the
Lower-Tier REMIC. The Upper-Tier REMIC will hold the Lower-Tier REMIC Regular
Interests and the Upper-Tier Distribution Account in which distributions thereon
will be deposited, and will issue (i) certain uncertificated classes of regular
interests represented by the Regular Certificates (the 'Upper-Tier REMIC Regular
Interests') and (ii) the Class R Certificates, which will represent the sole
class of residual interests in the Upper-Tier REMIC. The Trustee will hold the
Upper-Tier REMIC Regular Interests, the Floor Agreements and the Certificate
Distribution Account as part of the Trust Fund which is treated as a grantor
trust for federal income tax purposes, and the Offered Certificates will
represent pro rata undivided beneficial interests in the related portions
thereof. The Class V-1 and Class V-2 Certificates will represent pro rata
undivided beneficial interests in the portions of the Trust Fund consisting of
Excess Interest and Default Interest in respect of the Mortgage Loans,
respectively, and such portions will be treated as part of the grantor trust for
federal income tax purposes.
TAXATION OF OFFERED CERTIFICATES
A beneficial owner of an Offered Certificate generally will be treated for
federal income tax purposes as having purchased an undivided interest in the
corresponding Upper-Tier REMIC Regular Interest or Interests and in the
Trustee's rights under the related Floor Agreement or Agreements. A beneficial
owner of an Offered Certificate (other than a Class CS-3 Certificate) must
allocate its purchase price for such Certificate between the corresponding
Upper-Tier REMIC Regular Interest and the Trustee's rights under the related
Floor Agreement, based on their relative fair market values at the time of
purchase. A beneficial owner of a Class CS-3 Certificate must allocate its
purchase price for such Certificate between the corresponding Upper-Tier REMIC
Regular Interests in the aggregate, on the one hand, and separately among the
Trustee's rights under the seven related Floor Agreements, on the other hand,
based on their relative fair market values at the time of purchase. Subject to
the following discussion, a beneficial owner of an Offered Certificate generally
will recognize ordinary income equal to the beneficial owner's proportionate
share of interest (or original issue discount) accrued on the corresponding
Upper-Tier REMIC Regular Interest or Interests and will take into account a
proportionate share of amounts payable to the Trustee under the corresponding
Floor Agreement or Agreements. Upon sale of an
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Offered Certificate, such a beneficial owner must allocate the sale price
between the corresponding Upper-Tier REMIC Regular Interest (or Interests in the
aggregate, in the case of the Class CS-3 Certificates) and Floor Agreement
rights, based on their relative fair market values at the time of the sale. The
amount allocated to the Floor Agreement rights in connection with a sale would
be considered a termination payment (as described below in '--Taxation of Floor
Agreements--Termination Payments') made to the Certificateholder.
The interest in the Upper-Tier REMIC Regular Interest or Interests and
income thereon will, but the interest in the related Floor Agreement rights and
income thereon will not, constitute, respectively, a 'real estate asset' under
Code Section 856(c)(5)(A) and 'interest on obligations secured by mortgages on
real property' described in Code Section 856(c)(3)(B) for a real estate
investment trust. However, income received under both the Upper-Tier REMIC
Regular Interests and the Floor Agreements should constitute income described in
Code Section 851(b)(2) for a regulated investment company.
A beneficial owner's interest in an Upper-Tier REMIC Regular Interest will
qualify for the foregoing treatments under Sections 856(c)(5)(A) and
856(c)(3)(B) in their entirety if at least 95% of the Trust REMICs' assets
qualify for such treatment, and otherwise will qualify to the extent of the
Trust REMICs' percentage of such assets. A beneficial owner's interest in an
Upper-Tier REMIC Regular Interest or Floor Agreement rights will not constitute
'loans ... secured by an interest in real property which is ... residential real
property' within the meaning of Code Section 7701(a)(19)(C)(v) in the case of a
domestic building and loan association, but the Upper-Tier REMIC Regular
Interest will constitute an 'evidence of indebtedness' within the meaning of
Code Section 582(c) in the case of certain financial institutions.
TAXATION OF UPPER-TIER REMIC REGULAR INTERESTS
The interests of the beneficial owners of the Offered Certificates in the
related class or classes of Upper-Tier REMIC Regular Interests generally will be
treated as newly originated debt instruments for federal income tax purposes.
Beneficial owners of the Offered Certificates will be required to report income
on such regular interests in accordance with the accrual method of accounting.
The Upper-Tier REMIC Regular Interests (other than the regular interest
represented by the Class CS-1, Class CS-2 and Class CS-3 Certificates as
discussed in the following paragraph) may be issued with original issue discount
for federal income tax purposes to the extent the initial Certificate Balances
thereof exceed their respective issue prices (determined based on the portion of
the issue price of the corresponding Class of Offered Certificates allocated
thereto, as discussed above under '--Taxation of Offered Certificates') by more
than a statutory de minimis amount. See 'Certain Federal Income Tax
Consequences--Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Original Issue Discount' in the Prospectus.
Although unclear for federal income tax purposes, it is anticipated that
the Upper-Tier REMIC Regular Interests represented by the Class CS-1, Class CS-2
and Class CS-3 Certificates will be considered to be issued with original issue
discount in an amount equal to the excess of all distributions of interest
expected to be received thereon (assuming the Adjusted Weighted Average Net
Mortgage Pass-Through Rate changes in accordance with Scenario , as described
under the heading 'Prepayment and Yield Considerations--Yield on the Class CS-1,
Class CS-2 and Class CS-3 Certificates') over their respective issue prices
(including accrued interest). For this purpose, the seven Upper-Tier REMIC
Regular Interests represented by the Class CS-3 Certificates will have a single,
aggregate issue price, stated redemption price at maturity and yield to
maturity. Any 'negative' amounts of original issue discount on the Class CS-1,
Class CS-2 or Class CS-3 Certificates attributable to rapid prepayments with
respect to the Mortgage Loans will not be deductible currently, but may be
offset against future positive accruals of original issue discount, if any.
Finally, a holder of a Class CS-1, Class CS-2 or Class CS-3 Certificate may be
entitled to a loss deduction to the extent it becomes certain that such holder
will not recover a portion of its basis in such Certificate allocable to the
related Upper-Tier REMIC Regular Interest or Interests, assuming no further
prepayments. In the alternative, it is possible that rules similar to the
'noncontingent bond method' of the contingent interest rules in the OID
Regulations may be promulgated with respect to the Class CS-1, Class CS-2 and
Class CS-3 Certificates. See 'Certain Federal Income Taxes Federal Income Tax
Consequences for REMIC--Certificates Taxation of Regular Certificates--Original
Issue Discount' in the Prospectus. Under the noncontingent bond method, if the
interest payable for any period is greater or less than the amount projected,
the amount of income included for that period would be either increased or
decreased accordingly. Any reduction in the income accrual for a period below
zero (a 'Negative Adjustment') would be treated by a Certificateholder as
ordinary loss to the extent of prior income accruals and
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may be carried forward to offset future interest accruals. At maturity, any
remaining Negative Adjustment would be treated as a loss on retirement of the
Upper-Tier REMIC Regular Interest or Interests. The legislative history of
relevant Code provisions indicates, however, that negative amounts of original
issue discount on a debt instrument such as a REMIC regular interest may not
give rise to taxable losses in any accrual period prior to the instrument's
disposition or retirement. Thus, it is not clear whether any losses resulting
from a Negative Adjustment would be recognized currently or be carried forward
until disposition or retirement of the debt obligation.
For purposes of accruing original issue discount on Upper-Tier REMIC
Regular Interests, determining whether such original issue discount is de
minimis and amortizing any premium, the Prepayment Assumption will be Scenario
1, as set forth above under the heading 'Prepayment and Yield
Considerations--Yield on the Class CS-1, Class CS-2 and CS-3 Certificates.' No
representation is made as to the rate, if any, at which the Mortgage Loans will
prepay.
See 'Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates--Taxation of Regular Certificates--Treatment
of Losses' in the Prospectus for discussion of the ability of Certificateholders
to deduct losses realized with respect to their beneficial interests in the
Upper-Tier REMIC Regular Interests.
Although not free from doubt, it is anticipated that any Prepayment
Premiums will be treated as ordinary income to beneficial owners of the Offered
Certificates as such amounts become due to such beneficial owners.
TAXATION OF FLOOR AGREEMENTS
General. Beneficial owners of the Offered Certificates will also be
treated for federal income tax purposes as having entered into notional
principal contracts in the form of interest rate floor contracts on the date
such Certificates are purchased. In the case of the Class CS-3 Certificates, the
following discussion applies to the seven Floor Agreements represented by such
Certificates. The Internal Revenue Service has issued final regulations under
Section 446 of the Code relating to notional principal contracts (the 'Swap
Regulations').
Floor Premium. The amount of the purchase price paid by a beneficial owner
which is allocated to the Trustee's rights under the applicable Floor Agreement
will be treated as a floor premium (the 'Floor Premium'). For purposes of tax
information reporting, the Trustee intends (i) to assume that all of the Offered
Certificates will be issued on the Closing Date for an amount equal to the issue
price of the corresponding Upper-Tier REMIC Regular Interests plus the related
Floor Premiums and (ii) to amortize the Floor Premiums under a level payment
method as if the Floor Premiums represented the present value of a series of
equal payments made over the life of the related Floor Agreements (adjusted to
take into account decreases in notional principal amounts) discounted at a rate
equal to the rate used to determine the amount of the Floor Premium (or some
other reasonable rate). Prospective purchasers of an Offered Certificate should
consult their tax advisors regarding the appropriate method of amortization of
the Floor Premium.
The Swap Regulations treat a nonperiodic payment made under a floor
contract as a loan for federal income tax purposes if the payment is
'significant.' For this purpose, certain proposed regulations treat a floor
premium as significant if the floor rate exceeds the current value of the
specified index in the floor agreement by more than 25 basis points. Because it
is anticipated that the Floor Premiums will be treated as significant under this
test, beneficial owners should consider whether the Floor Premiums may be
treated in part as a loan under the final regulations when issued.
Periodic Payments. Under the Swap Regulations, (i) all taxpayers must
recognize periodic payments with respect to a notional principal contract under
the accrual method of accounting, and (ii) any periodic payments received by a
beneficial owner under the Floor Agreements must be netted against payments
deemed made as a result of the Floor Premiums over the beneficial owner's
taxable year, rather than accounted for on a gross basis. Net income or
deduction with respect to net payments under a notional principal contract for a
taxable year should constitute ordinary income or ordinary deduction. The
Internal Revenue Service could contend the amount is capital gain or loss, but
such treatment is unlikely, at least in the absence of further regulations. Any
regulations requiring capital gain or loss treatment presumably would apply only
prospectively.
In the case of a beneficial owner that is an individual, estate or trust,
the deductibility of a net payment made to the Floor Counterparty under the
Floor Agreements will be subject to limitation under Code Section 67. Code
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Section 67 allows certain itemized deductions only to the extent that the
aggregate of such deductions exceeds 2% of the taxpayer's gross income. Also, a
net payment may not be deductible by such taxpayers for purposes of the
alternative minimum tax. A beneficial owner that is an individual, estate or
trust should consult its tax advisor regarding the application of Code Section
67 and the alternative minimum tax to an investment in the Offered Certificates.
Termination Payments. Any amount of sales proceeds that is considered to
be allocated to the Trustee's rights under a Floor Agreement in connection with
the sale or exchange of an Offered Certificate, as described under 'Taxation of
Offered Certificates,' and any Breakage Fee that is payable by the Floor
Counterparty in connection with the termination of a Floor Agreement, would be
considered a 'termination payment' under the Swap Regulations. The Trustee will
account for termination payments for reporting purposes in accordance with the
Swap Regulations, as described below.
A Certificateholder will have gain or loss from termination of the related
Floor Agreement equal to (i) any termination fee it receives or is deemed to
have received minus (ii) the unamortized portion of any Floor Premium paid by
the beneficial owner upon entering into the related Floor Agreement.
Gain or loss upon the termination of a Floor Agreement will generally be
treated as capital gain or loss. Moreover, in the case of a bank or thrift
institution, Code Section 582(c) would likely not apply to treat such gain or
loss as ordinary.
APPLICATION OF THE STRADDLE RULES
The Upper-Tier REMIC Regular Interests and the Floor Agreement rights will
constitute positions in a straddle and, therefore, the straddle rules of Code
Section 1092 will apply. If the Floor Agreements have not previously been
terminated with respect to a selling beneficial owner, the selling beneficial
owner's capital gain or loss with respect to the related Upper-Tier REMIC
Regular Interest or Interests will be short-term because the holding period will
be tolled under the straddle rules. Similarly, capital gain or loss realized in
connection with the termination of the related Floor Agreement will be
short-term. In addition, all or a portion of any loss realized upon termination
of the related Floor Agreement may be deferred until disposition of the interest
in the related Upper-Tier REMIC Regular Interest. If the holder of an Offered
Certicate incurs or continues indebtedness to acquire or hold a Certificate, the
holder will generally be required to capitalize the interest paid on such
indebtedness until termination of the related Floor Agreement or Agreements.
TAXATION OF FOREIGN INVESTORS
For a discussion of the tax consequences of beneficial ownership of an
Upper-Tier REMIC Regular Interest by the holder of an Offered Certificate who is
not a 'U.S. Person,' as defined in the Prospectus, see 'Certain Federal Income
Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Certain Foreign Investors--Regular Certificates' in
the Prospectus. In general, foreign investors that provide the Trustee with an
Internal Revenue Service Form W-8 will not be subject to United States
withholding tax on income or gain from the Floor Agreements.
ERISA CONSIDERATIONS
The purchase by or transfer to an employee benefit plan or other retirement
arrangement, including an individual retirement account or a Keogh plan, which
is subject to Title I of the Employee Retirement Income Security Act of 1974, as
amended ('ERISA') or Section 4975 of the Code or a governmental plan (as defined
in Section 3(32) of ERISA) that is subject to any federal, state or local law
('Similar Law') which is, to a material extent, similar to the foregoing
provisions of ERISA or the Code (each, a 'Plan'), or a collective investment
fund in which such Plans are invested, an insurance company using the assets of
separate accounts or general accounts which include assets of Plans (or which
are deemed pursuant to ERISA or any Similar Law to include assets of Plans) or
other Persons acting on behalf of any such Plan or using the assets of any such
Plan of the Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7,
Certificates is restricted. See 'Description of the Offered
Certificates--Transfer Restrictions.' Accordingly, except as specifically
referenced herein, the following discussion does not purport to discuss the
considerations under ERISA or Code Section 4975 with respect to the purchase,
holding or disposition of the Class A-2, Class A-3, Class A-4, Class A-5, Class
A-6 and Class A-7 Certificates.
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As described in the Prospectus under 'ERISA Considerations,' ERISA and the
Code impose certain duties and restrictions on Plans and certain persons who
perform services for Plans. For example, unless exempted, investment by a Plan
in the Offered Certificates may constitute or give rise to a prohibited
transaction under ERISA or the Code. There are certain exemptions issued by the
United States Department of Labor (the 'Department') that may be applicable to
an investment by a Plan in the Offered Certificates. The Department has granted
to the Underwriter an administrative exemption (Prohibited Transaction Exemption
93-32, 58 Fed. Reg. 28632 (May 14, 1993)), referred to herein as the
'Exemption,' for certain mortgage-backed and asset backed certificates
underwritten in whole or in part by the Underwriter. The Exemption might be
applicable to the initial purchase, the holding, and the subsequent resale by a
Plan of certain certificates, such as the Offered Certificates, underwritten by
the Underwriter, representing interests in pass-through trusts that consist of
certain receivables, loans and other obligations, provided that the conditions
and requirements of the Exemption are satisfied. The loans described in the
Exemption include mortgage loans such as the Mortgage Loans. However, it should
be noted that in issuing the Exemption, the Department may not have considered
interests in pools of the exact nature as some of the Offered Certificates.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of certificates by a Plan is on terms (including
the price for the certificates) that are at least as favorable to the Plan
as they would be in an arm's length transaction with an unrelated party;
(2) The rights and interests evidenced by certificates acquired by the
Plan are not subordinated to the rights and interests evidenced by Private
Certificates of the trust fund;
(3) The certificates acquired by the Plan have received a rating at
the time of such acquisition that is one of the three highest generic
rating categories from any of S&P, Moody's, DCR or Fitch;
(4) The trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of certificates represents not more than
reasonable compensation for underwriting the certificates. The sum of all
payments made to and retained by the depositor pursuant to the assignment
of the mortgage loans to the trust fund represents not more than the fair
market value of such mortgage loans. The sum of all payments made to and
retained by the master servicer and any other servicer represents not more
than reasonable compensation for such person's services under the pooling
and servicing agreement and reimbursement of such person's reasonable
expenses in connection therewith; and
(6) The Plan investing in the certificates is an 'accredited investor'
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
Commission under the Securities Act of 1933.
The trust fund must also meet the following requirements:
(a) the corpus of the trust fund must consist solely of assets of
the type that have been included in other investment pools;
(b) certificates in such other investment pools must have been
rated in one of the three highest rating categories of S&P, Moody's,
Fitch or DCR for at least one year prior to the Plan's acquisition of
the certificates pursuant to the Exemption; and
(c) certificates evidencing interests in such other investment
pools must have been purchased by investors other than Plans for at
least one year prior to any Plan's acquisition of the certificates
pursuant to the Exemption.
If all of the conditions of the Exemption are met, whether or not a Plan's
assets would be deemed to include an ownership interest in the Mortgage Loans in
the Mortgage Pool, the acquisition, holding and resale of the Offered
Certificates by Plans would be exempt from the prohibited transaction provisions
of ERISA and the Code.
Moreover, the Exemption can provide relief from certain
self-dealing/conflict of interest prohibited transactions that may occur if a
Plan fiduciary causes a Plan to acquire certificates in a trust in which the
fiduciary (or its affiliate) is an obligor on the receivables, loans or
obligations held in the trust provided that, among other requirements, (a) in
the case of an acquisition in connection with the initial issuance of
certificates,
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at least fifty percent of each class of certificates in which Plans have
invested is acquired by persons independent of the Restricted Group and at least
fifty percent of the aggregate interest in the trust is acquired by persons
independent of the Restricted Group (as defined below); (b) such fiduciary (or
its affiliate) is an obligor with respect to five percent or less of the fair
market value of the obligations contained in the trust; (c) the Plan's
investment in certificates of any class does not exceed twenty-five percent of
all of the certificates of that class outstanding at the time of the
acquisitions; and (d) immediately after the acquisition no more than twenty-five
percent of the assets of the Plan with respect to which such person is a
fiduciary are invested in certificates representing an interest in one or more
trusts containing assets sold or served by the same entity.
The Exemption does not apply to the purchasing or holding of Certificates
by Plans sponsored by the Depositor, the Underwriter, the Trustee, the Servicer,
any obligor with respect to Mortgage Loans included in the Trust Fund
constituting more than five percent of the aggregate unamortized principal
balance of the assets in the Trust Fund, or any affiliate of such parties (the
'Restricted Group'). Borrowers who are acting on behalf of Plans, or who are
utilizing assets of Plans subject to ERISA and any affiliates of any such
borrowers should not purchase any of the Certificates.
The Underwriter believes that the conditions to the applicability of the
Exemption will generally be met with respect to the Class A-1A, Class A-1B,
Class A-1C, Class CS-1, Class CS-2 and Class CS-3 Certificates, other than
possibly those conditions which are dependent on facts unknown to the
Underwriter or which it cannot control, such as those relating to the
circumstances of the Plan purchaser or the Plan fiduciary making the decision to
purchase any such class of Certificates. However, before purchasing an Offered
Certificate, a fiduciary of a plan should make its own determination as to the
availability of the exemptive relief provided by the Exemption or the
availability of any other prohibited transaction exemptions, and whether the
conditions of any such exemption will be applicable to the Offered Certificates.
THE CLASS A-2, CLASS A-3, CLASS A-4, CLASS A-5, CLASS A-6 AND CLASS A-7
CERTIFICATES ARE SUBORDINATE TO ONE OR MORE OTHER CLASSES OF CERTIFICATES AND,
ACCORDINGLY, SUCH CERTIFICATES SHOULD NOT BE PURCHASED BY OR TRANSFERRED TO A
PLAN OR PERSON ACTING ON BEHALF OF ANY PLAN OR USING THE ASSETS OF ANY SUCH
PLAN, UNLESS SUCH PERSON USING PLAN ASSETS IS AN INSURANCE COMPANY AND THE
PURCHASE AND HOLDING OF ANY SUCH CERTIFICATE WOULD BE EXEMPT FROM THE PROHIBITED
TRANSACTION PROVISION OF ERISA AND THE CODE UNDER PROHIBITED TRANSACTION
EXCEPTION 95-60.
Any fiduciary of a Plan considering whether to purchase an Offered
Certificate should also carefully review with its own legal advisors the
applicability of the fiduciary duty and prohibited transaction provisions of
ERISA and the Code to such investment. See 'ERISA Considerations' in the
Prospectus. A fiduciary of a governmental plan should make its own determination
as to the need for and the availability of any exemptive relief under any
Similar Law.
The sale of Certificates to a Plan is in no respect a representation by the
Depositor or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
The Offered Certificates will not constitute 'mortgage related securities'
for purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA').
The Depositor makes no representations as to the proper characterization of
the Offered Certificates for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase the Offered Certificates under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Offered Certificates. Accordingly, all institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered
Certificates constitute a legal investment or are subject to investment, capital
or other restrictions.
See 'Legal Investment' in the Prospectus.
S-195
<PAGE>
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and the Underwriter, the Offered Certificates will be
purchased from the Depositor by the Underwriter, an affiliate of the Depositor,
upon issuance. Distribution of the Offered Certificates will be made by the
Underwriter from time to time in negotiated transactions or otherwise at varying
prices to be determined at the time of sale. Proceeds to the Depositor from the
sale of the Offered Certificates will be % of the initial principal balance
thereof as of the Cut-off Date, plus accrued interest, if any, from the Cut-off
Date, before deducting expenses payable by the Depositor.
In connection with the purchase and sale of the Offered Certificates, the
Underwriter may be deemed to have received compensation from the Depositor in
the form of underwriting discounts. The Underwriter has agreed to arrange for
ongoing Rating Agency monitoring and surveillance of the Offered Certificates
and will receive as compensation for such services the reinvestment income
earned from amounts on deposit in the Interest Reserve Account. The Originator
and the Underwriter are wholly owned subsidiaries of Nomura Holding America Inc.
The Depositor is a wholly owned subsidiary of the Originator. The Originator and
an affiliate currently own debt issued by an affiliate of the Prime Retail II
Pool Borrowers. The Originator or an affiliate may, in the future, enter into
other financing arrangements with affiliates of the Borrowers. Certain officers
and directors of the Originator and its affiliates own publicly traded equity
interests in affiliates of the Borrowers.
The Depositor also has been advised by the Underwriter that it currently
expects to make a market in the Offered Certificates, however, it has no
obligation to do so. Any market making may be discontinued at any time, and
there can be no assurance that an active public market for the Offered
Certificates will develop.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933.
This Prospectus Supplement dated March 25, 1996 and the Prospectus dated
March 18, 1996 may only be issued or passed on in the United Kingdom to a person
who is of a kind described in Article 9(3) of the Financial Services Act 1986
(Investment Advertisements) (Exemptions) Order 1988 or is a person to whom this
Prospectus Supplement dated March 25, 1996 and the Prospectus dated March 18,
1996 may otherwise lawfully be issued or passed on.
The Trust Fund described in this Prospectus Supplement may only be promoted
(whether by the issuing or passing on of documents as referred to in the
foregoing restriction or otherwise) by an authorized person under Chapter III of
the Financial Services Act 1986 of the United Kingdom ('FSA') to a person in the
United Kingdom if that person is of a kind described in section 76(2) of the FSA
or as permitted by the Financial Services (Promotion of Unregulated Schemes)
Regulations 1991.
EXPERTS
The combined financial statements of Prime Retail Properties at December
31, 1995 and 1994, and for each of the three years in the period ended December
31, 1995, and the Statement of Revenues and Certain Expenses of the JMJ Acquired
Properties for the year ended December 31, 1995, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein and
in the Registration Statement, and are included in reliance upon such reports
given upon the authority of such firm as experts in accounting and auditing.
The financial statements of Marriott Hotel Properties II Limited
Partnership and Santa Clara Marriott Hotel Limited Partnership included in this
Prospectus Supplement and elsewhere in the Registration Statement have been
audited by Arthur Andersen LLP, independent public accountants as indicated in
their reports with respect thereto, and are included herein and in reliance upon
the authority of said firm as experts in giving said reports.
S-196
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and for the
Underwriter by Cadwalader, Wickersham & Taft, New York, New York.
RATING
It is a condition to the issuance of the Offered Certificates that (i) each
of the Class A-1A, Class A-1B and Class A-1C Certificates be rated 'Aaa' by
Moody's Investors Service, Inc. ('Moody's') and 'AAA' by Standard & Poor's
Rating Group, a division of McGraw Hill, Inc. ('S&P'); (ii) the Class CS-1 and
Class CS-2 Certificates be rated 'Aaa' by Moody's and 'AAAr' by S&P; (iii) the
Class CS-3 Certificates be rated 'AAa' by Moody's; (iv) the Class A-2
Certificates be rated 'Aa1' by Moody's and 'AA' by S&P; (v) the Class A-3
Certificates be rated 'Aa2' by Moody's; (vi) the Class A-4 Certificates be rated
'A2' by Moody's and 'A' by Fitch Investors Service, L.P. ('Fitch' and, together
with Moody's and S&P, the 'Rating Agencies'); (vii) the Class A-5 Certificates
be rated 'A3' by Moody's and 'A-' by Fitch; (viii) the Class A-6 Certificates be
rated 'Baa2' by Moody's, and 'BBB' by Fitch and S&P; and (ix) the Class A-7
Certificates be rated 'BBB-' by Fitch. A security rating is not a recommendation
to buy, sell or hold securities and may be subject to revision or withdrawal at
any time by the assigning rating organization. A security rating does not
address the frequency of prepayments (both voluntary and involuntary) or the
possibility that Certificateholders might suffer a lower than anticipated yield,
nor does a security rating address the likelihood of receipt of Prepayment
Premiums, Net Default Interest or Excess Interest or the tax treatment of the
Certificates. The ratings do not address the fact that the Pass-Through Rates of
the Offered Certificates, to the extent that they are based on the Weighted
Average Net Mortgage Pass-Through Rate, will be affected by changes therein. See
'Risk Factors and Other Special Considerations' and 'Rating' herein and 'Yield
Considerations' in the Prospectus.
The Rating Agencies' ratings on mortgage pass-through certificates address
the likelihood of the receipt by holders of payments to which they are entitled
by the Rated Final Distribution Date. The Rating Agencies' ratings take into
consideration the credit quality of the mortgage pool, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under the
Certificates. Ratings on mortgage pass-through certificates do not, however,
represent an assessment of the likelihood, timing or frequency of principal
prepayments (both voluntary and involuntary) by mortgagors, or the degree to
which such prepayments might differ from those originally anticipated. The
security ratings do not address the possibility that Certificateholders might
suffer a lower than anticipated yield. In addition, ratings on mortgage
pass-through certificates do not address the likelihood of receipt of Prepayment
Premiums, Net Default Interest or Excess Interest or the timing or frequency of
the receipt thereof. In general, the ratings thus address credit risk and not
prepayment risk. Also, a security rating does not represent any assessment of
the yield to maturity that investors may experience or the possibility that the
holders of the Class CS-1, Class CS-2 or Class CS-3 Certificates might not fully
recover their initial investment in the event of delinquencies or rapid
prepayments of the Mortgage Loans (including both voluntary and involuntary
prepayments, application of Realized Losses, Appraisal Reduction Amounts or
Delinquency Reduction Amounts). As described herein, the amounts payable with
respect to the Class CS-1, Class CS-2 or Class CS-3 Certificates consist only of
interest. If all of the Mortgage Loans were to prepay in the initial month, with
the result that the Class CS-1, Class CS-2 or Class CS-3 Certificateholders
receive only a single month's interest and thus suffer a nearly complete loss of
their investment, all amounts 'due' to such holders will nevertheless have been
paid, and such result is consistent with the rating received on each of the
Class CS-1, Class CS-2 or Class CS-3 Certificates. Accordingly, the ratings of
the Class CS-1, Class CS-2 or Class CS-3 Certificates should be evaluated
independently from similar ratings on other types of securities. S&P assigns the
additional rating of 'r' to highlight classes of securities that S&P believes
may experience high volatility in expected returns due to non-credit risks.
There can be no assurance as to whether any rating agency not requested to
rate the Offered Certificates will nonetheless issue a rating and, if so, what
such rating would be. A rating assigned to the Offered Certificates by a rating
agency that has not been requested by the Depositor to do so may be lower than
the rating assigned by the Rating Agencies pursuant to the Depositor's request.
The rating of the 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.
S-197
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
A
ACMs........................................................ S-37
ADA......................................................... S-45
Adjusted Mortgage Pass-Through Rate......................... S-22
Adjusted Weighted Average Net Mortgage Pass-Through Rate.... S-21
ADR......................................................... S-66
Advance Rate................................................ S-178
Advances.................................................... S-176
Anticipated Repayment Date.................................. S-53
B
Best's...................................................... S-43
C
Cash Collateral Accounts.................................... S-178
CEDEL....................................................... S-1
CEDEL Participants.......................................... S-146
CERCLA...................................................... S-37
Certificate Balance......................................... S-2
Certificates................................................ S-1
Collection Account.......................................... S-178
Columbia Sussex II Pool Borrower............................ S-10
Columbia Sussex II Pool Properties.......................... S-10
Component Balance........................................... S-2
Cooperative................................................. S-146
CS II Anticipated Repayment Date............................ S-10
CS II Current Interest Rate................................. S-10
CS II Maturity Date......................................... S-10
CS II Monthly Debt Service.................................. S-10
CS II Mortgages............................................. S-10
CS II Revised Interest Rate................................. S-10
CS II Substitute Property................................... S-18
Cross-over Date............................................. S-24
Cut-off Date................................................ S-1
D
Defeasance Deposit.......................................... S-54
Defeasance Lockout Period................................... S-17
Definitive Certificates..................................... S-147
Depositaries................................................ S-144
Depositor................................................... S-1
Distribution Date........................................... S-2
DTC......................................................... S-1
E
Eligible Bank............................................... S-179
EPA......................................................... S-38
ERISA....................................................... S-29
Euroclear................................................... S-1
Euroclear Operator.......................................... S-146
Euroclear Participants...................................... S-146
Event of Default............................................ S-183
Excess Cash Flow............................................ S-49
</TABLE>
S-198
<PAGE>
<TABLE>
<S> <C>
Excess Interest............................................. S-49
Exemption................................................... S-29
F
Fiscal Agent................................................ S-2
Fitch....................................................... S-2
Form 8-K.................................................... S-75
G
GAAP........................................................ S-54
GLA......................................................... S-57
Global Securities........................................... S-203
H
HGI II Anticipated Repayment Date........................... S-11
HGI II Current Interest Rate................................ S-11
HGI II Maturity Date........................................ S-11
HGI II Monthly Debt Service Payment......................... S-11
HGI II Pool Borrower........................................ S-11
HGI II Pool Loan............................................ S-11
HGI II Pool Mortgages....................................... S-11
HGI II Pool Properties...................................... S-11
HGI II Revised Interest Rate................................ S-11
I
Interest Distribution Amount................................ S-23
Interest Reserve Account.................................... S-179
L
Lock Box.................................................... S-112
Lock Box Account............................................ S-41
Louisiana Property.......................................... S-12
Lower Rate.................................................. S-186
Lower-Tier REMIC............................................ S-2
Lust........................................................ S-38
M
MHPLP Borrower.............................................. S-12
MHPLP Notes................................................. S-12
MHPLP Properties............................................ S-12
MHP II Anticipated Repayment Date........................... S-12
MHP II Current Interest Rate................................ S-12
MHP II Maturity Date........................................ S-13
MHP II Pool Borrowers....................................... S-12
MHP II Pool Loan............................................ S-12
MHP II Pool Notes........................................... S-12
MHP II Pool Properties...................................... S-12
MHP II Revised Interest Rate................................ S-12
Moody's..................................................... S-2
Mortgage Loans.............................................. S-1
Mortgage Pool............................................... S-1
Mortgage Rate............................................... S-22
Mortgage Pass-Through Rate.................................. S-22
Mortgaged Properties........................................ S-1
Mortgages................................................... S-9
</TABLE>
S-199
<PAGE>
<TABLE>
<S> <C>
N
Net Mortgage Pass-Through Rate.............................. S-22
Note........................................................ S-9
Notional Balance............................................ S-2
O
Offered Certificates........................................ S-1
Originator.................................................. S-1
P
Palmer Square Anticipated Repayment Date.................... S-14
Palmer Square Current Interest Rate......................... S-14
Palmer Square Excess Interest............................... S-14
Palmer Square Maturity Date................................. S-14
Palmer Square Monthly Debt Service Payment Amount........... S-14
Palmer Square Properties.................................... S-13
Palmer Square Revised Interest Rate......................... S-14
Pass-Through Rate........................................... S-2
PCBs........................................................ S-38
Permitted Investments....................................... S-179
P&I Advances................................................ S-25
Plan........................................................ S-197
Plans....................................................... S-29
Pooling and Servicing Agreement............................. S-7
Prepayment Lockout Period................................... S-48
Prime Retail Anticipated Repayment Date..................... S-15
Prime Retail Current Interest Rate.......................... S-15
Prime Retail Revised Interest Rate.......................... S-15
Prime Retail Substitute Property............................ S-19
Prime Retail II Pool Borrowers.............................. S-15
Prime Retail II Pool Loan................................... S-15
Prime Retail II Pool Mortgages.............................. S-15
Prime Retail II Pool Properties............................. S-15
Principal Distribution Amount............................... S-24
Private Certificates........................................ S-1
Property Advances........................................... S-177
R
Rating Agencies............................................. S-2
Regular Certificates........................................ S-2
REMIC....................................................... S-2
REO Account................................................. S-130
REO Property................................................ S-130
Repurchase Price............................................ S-175
Reserve Accounts............................................ S-16
Residual Certificate........................................ S-28
Restricted Group............................................ S-30
Revised Interest Rate....................................... S-49
S
Santa Clara Borrower........................................ S-12
Santa Clara Note............................................ S-12
Santa Clara Property........................................ S-12
S&P......................................................... S-2
SEL......................................................... S-2
</TABLE>
S-200
<PAGE>
<TABLE>
<S> <C>
Servicer.................................................... S-2
Servicer Remittance Date.................................... S-176
Servicing Fee............................................... S-191
Servicing Fee Rate.......................................... S-191
Similar Law................................................. S-197
SMMEA....................................................... S-199
Special Servicer............................................ S-191
T
Terms and Conditions........................................ S-146
Trust Fund.................................................. S-1
Trust REMICs................................................ S-2
Trustee..................................................... S-1
Trustee Fee................................................. S-189
U
U.S. Obligations............................................ S-17
Underwriter................................................. S-1
Updated Appraisal........................................... S-185
Upper-Tier REMIC............................................ S-2
Upper-Tier REMIC Regular Interests.......................... S-28
W
Withheld Amounts............................................ S-179
</TABLE>
S-201
<PAGE>
EXHIBIT A-1
MHP II POOL PROPERTIES
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
Marriott Hotel Properties II Limited Partnership
Report of Independent Public Accountants.................. A-1-1
Statement of Operations................................... A-1-2
Balance Sheet............................................. A-1-3
Statement of Changes in Partners' Capital................. A-1-4
Statement of Cash Flows................................... A-1-5
Notes to Financial Statement.............................. A-1-6
Condensed Statement of Operations (Unaudited)............. A-1-16
Condensed Balance Sheet (Unaudited)....................... A-1-17
Condensed Statement of Cash Flows (Unaudited)............. A-1-18
Notes to Condensed Financial Statements (Unaudited)....... A-1-19
Santa Clara Marriott Hotel Limited Partnership
Report of Independent Public Accountants.................. A-1-23
Statement of Operations................................... A-1-24
Balance Sheet............................................. A-1-25
Statement of Changes in Partners' Capital (Deficit)....... A-1-26
Statement of Cash Flows................................... A-1-27
Notes to Financial Statement.............................. A-1-28
Condensed Statement of Income (Unaudited)................. A-1-36
Condensed Balance Sheet (Unaudited)....................... A-1-37
Condensed Statement of Cash Flows (Unaudited)............. A-1-38
Notes to Condensed Financial Statements (Unaudited)....... A-1-39
</TABLE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF MARRIOTT HOTEL PROPERTIES II LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Marriott Hotel Properties II
Limited Partnership (a Delaware limited partnership) as of December 31, 1995
and 1994, and the related statements of operations, changes in partners'
capital and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the General
Partner's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Marriott Hotel Properties II
Limited Partnership as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 22, 1996
(except for the matter discussed in Note 10,
as to which the date is November 8, 1996)
1
<PAGE>
STATEMENT OF OPERATIONS
Marriott Hotel Properties II Limited Partnership
For the Three Years in the Period Ended December 31, 1995
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
REVENUES (Note 3)............................................ $ 64,002 $ 58,703 $ 57,003
---------- ----------- ----------
OPERATING COSTS AND EXPENSES
Interest ................................................ 17,803 17,884 17,803
Depreciation and amortization............................ 13,364 12,246 12,737
Incentive management fees................................ 9,412 8,507 8,200
Property taxes........................................... 5,526 5,307 5,324
Base management fees..................................... 4,281 3,989 3,926
Ground rent, insurance and other......................... 690 1,557 1,538
---------- ----------- ----------
51,076 49,490 49,528
---------- ----------- ----------
INCOME BEFORE EQUITY IN INCOME/(LOSSES)
OF SANTA CLARA PARTNERSHIP............................... 12,926 9,213 7,475
EQUITY IN INCOME/(LOSSES)
OF SANTA CLARA PARTNERSHIP............................... 119 (785) (606)
---------- ----------- ----------
NET INCOME................................................... $ 13,045 $ 8,428 $ 6,869
========== =========== ==========
ALLOCATION OF NET INCOME
General Partner.......................................... $ 130 $ 84 $ 69
Limited Partners......................................... 12,915 8,344 6,800
---------- ----------- ----------
$ 13,045 $ 8,428 $ 6,869
========== =========== ==========
NET INCOME PER LIMITED PARTNER UNIT (745 Units).............. $ 17,336 $ 11,200 $ 9,128
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
BALANCE SHEET
Marriott Hotel Properties II Limited Partnership
December 31, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1995 1994
----------- ----------
<S> <C> <C>
ASSETS
Property and equipment, net........................................................ $ 203,990 $ 211,811
Due from Marriott International, Inc............................................... 7,275 6,849
Property improvement fund.......................................................... 11,940 10,587
Deferred financing and organization costs, net of accumulated amortization......... 114 603
Restricted cash reserve............................................................ 9,193 2,847
Cash and cash equivalents.......................................................... 21,601 17,764
----------- ----------
$ 254,113 $ 250,461
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Mortgage debt ..................................................................... $ 222,500 $ 222,500
Due to Marriott International, Inc................................................. 2,615 2,031
Investment in Santa Clara Partnership.............................................. 8,244 6,994
Accounts payable and accrued expenses.............................................. 433 372
----------- ----------
Total Liabilities.............................................................. 233,792 231,897
----------- ----------
PARTNERS' CAPITAL
General Partner
Capital contribution, net of offering costs of $22.......................... 731 731
Capital distributions....................................................... (626) (513)
Cumulative net income ...................................................... 243 113
----------- ----------
348 331
----------- ----------
Limited Partners
Capital contribution, net of offering costs of $8,426....................... 64,689 64,689
Capital distributions....................................................... (68,779) (57,604)
Cumulative net income ...................................................... 24,063 11,148
----------- ----------
19,973 18,233
----------- ----------
Total Partners' Capital........................................................ 20,321 18,564
----------- ----------
$ 254,113 $ 250,461
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
Marriott Hotel Properties II Limited Partnership
For the Three Years in the Period Ended December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------- -------- -------
<S> <C> <C> <C>
Balance, December 31, 1992................................................$ 408 $ 25,899 $ 26,307
Payments received on investor notes receivable........................ -- 31 31
Capital distributions................................................. (117) (11,609) (11,726)
Net income............................................................ 69 6,800 6,869
---------- ----------- ----------
Balance, December 31, 1993................................................ 360 21,121 21,481
Capital distributions................................................. (113) (11,232) (11,345)
Net income............................................................ 84 8,344 8,428
---------- ----------- ----------
Balance, December 31, 1994................................................ 331 18,233 18,564
Capital distributions................................................. (113) (11,175) (11,288)
Net income............................................................ 130 12,915 13,045
---------- ----------- ----------
Balance, December 31, 1995................................................$ 348 $ 19,973 $ 20,321
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
STATEMENT OF CASH FLOWS
Marriott Hotel Properties II Limited Partnership
For the Three Years in the Period Ended December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
---------- ----------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income ................................................................$ 13,045 $ 8,428 $ 6,869
Noncash items:
Depreciation and amortization........................................... 13,364 12,246 12,737
Deferred portion of incentive management fees........................... 461 363 777
Equity in (income)/losses of Santa Clara Partnership.................... (119) 785 606
Amortization of deferred financing costs as interest.................... 489 489 489
Loss on retirement of assets............................................ 10 113 1
Changes in operating accounts:
Due from Marriott International, Inc.................................... (426) 1,742 (1,106)
Accounts payable and accrued expenses................................... 61 15 (59)
Due to Marriott International, Inc...................................... 123 (3,286) 2,374
---------- ----------- ----------
Cash provided by operations........................................... 27,008 20,895 22,688
---------- ----------- ----------
INVESTING ACTIVITIES
Additions to property and equipment........................................ (5,566) (6,542) (3,427)
Change in property improvement funds....................................... (1,341) 147 (2,807)
Distributions from Santa Clara Partnership................................. 1,370 1,317 1,210
Additions to restricted cash reserve....................................... (6,346) (2,847) --
---------- ----------- ----------
Cash used in investing activities..................................... (11,883) (7,925) (5,024)
---------- ----------- ----------
FINANCING ACTIVITIES
Capital distributions...................................................... (11,288) (11,345) (11,726)
Payments received on investor notes receivable............................. -- -- 31
---------- ----------- ----------
Cash used in financing activities..................................... (11,288) (11,345) (11,695)
---------- ----------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS......................................... 3,837 1,625 5,969
CASH AND CASH EQUIVALENTS at beginning of year................................ 17,764 16,139 10,170
---------- ----------- ----------
CASH AND CASH EQUIVALENTS at end of year......................................$ 21,601 $ 17,764 $ 16,139
========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest............................................$ 17,267 $ 17,361 $ 17,267
========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Marriott Hotel Properties II Limited Partnership
December 31, 1995 and 1994
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Marriott Hotel Properties II Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire, own and operate (i) the 1,290-room
New Orleans Marriott Hotel and underlying land in New Orleans, Louisiana (the
"New Orleans Hotel"); (ii) the 999-room Marriott Rivercenter Hotel in San
Antonio, Texas (the "San Antonio Hotel"); (iii) the 368-room Bishop Ranch
Marriott Hotel in San Ramon, California (the "San Ramon Hotel"); (collectively,
the "Hotels") and (iv) a 50% limited partner interest in the Santa Clara
Marriott Hotel Limited Partnership (the "Santa Clara Partnership"), a Delaware
limited partnership, which owns the 754-room Santa Clara Marriott Hotel in Santa
Clara, California (the "Santa Clara Hotel"). The remaining 50% interest in the
Santa Clara Partnership is owned by Marriott MHP Two Corporation (the "General
Partner") with a 1% interest, and HMH Properties, Inc., a wholly-owned indirect
subsidiary of Host Marriott (as defined below) with a 49% limited partner
interest.
On October 8, 1993, Marriott Corporation's operations were divided into two
separate companies: Host Marriott Corporation and Marriott International, Inc.
("MII"). On December 29, 1995, Host Marriott Corporation's operations were
divided into two separate companies: Host Marriott Corporation ("Host Marriott")
and Host Marriott Services Corporation. The sole general partner of the
Partnership, with a 1% interest, is MHP Two Corporation, a wholly-owned
subsidiary of Host Marriott. The General Partner made a capital contribution of
$752,525 for its 1% general partner interest. On March 20, 1989 (the "Closing
Date"), 745 limited partner interests (the "Units"), representing a 99% interest
in the Partnership, were sold in a private placement. The offering price per
unit was $100,000, payable in three annual installments through June 1, 1991
(the "Investor Notes"), or as an alternative, $89,247 in cash on the Closing
Date as full payment of the subscription price. On the Closing Date, the
Partnership executed a purchase agreement (the "Purchase Agreement") with Host
Marriott to acquire the Hotels and the 50% limited partner interest in the Santa
Clara Partnership for $319.5 million. Of the total purchase price, $222.5
million was paid from proceeds of the mortgage loan (the "Mortgage Debt"), $43.4
million was evidenced by a promissory note payable to Host Marriott (the
"Deferred Purchase Note"), $43.5 million was paid from a cash distribution by
the Santa Clara Partnership and the remainder from the initial payment on the
sale of the Units. The principal outstanding on the Deferred Purchase Note was
fully repaid in 1991 with the proceeds of the Investor Notes.
The New Orleans and San Antonio Hotels and the limited partner interest in the
Santa Clara Partnership were conveyed to the Partnership on the Closing Date and
the San Ramon Hotel was conveyed to the Partnership upon completion of its
construction on May 31, 1989. The Hotels and the Santa Clara Hotel are managed
by MII (the "Manager") under long-term management agreements.
Partnership Allocations and Distributions
Pursuant to the terms of the Partnership agreement, Partnership allocations,
for Federal income tax purposes, and distributions are generally made as
follows:
a. Cash available for distribution is distributed for each fiscal year
semi-annually as follows: (i) 100% to the limited partners until the
limited partners have received with respect to such fiscal year a
non-cumulative 10% preferred distribution on their Invested Capital, as
defined; (ii) 100% to the General Partner until the General Partner has
received an amount equal to 1/99th of the amount distributed to the limited
partners; (iii) 1% to the General Partner and 99% to the limited partners
until such time as the limited partners have received the 15% Preferred
Distribution, as defined, plus $50,000 per Unit, payable only from Capital
Receipts, as defined, to the extent available after the payment of the 15%
Preferred Distribution; and (iv) thereafter, 20% to the General Partner and
80% to the limited partners.
6
<PAGE>
b. Refinancing and sales proceeds ("Capital Receipts") available for
distribution to the partners will be distributed as follows: (i) 1% to the
General Partner and 99% to the limited partners until the limited partners
have received cumulative distributions from Capital Receipts equal to the
15% Preferred Distribution plus $100,000 per Unit; and (ii) 20% to the
General Partner and 80% to the limited partners.
c. Net profits generally will be allocated to the partners in proportion to
the distributions of cash available for distribution.
d. Net losses generally will be allocated 75% to the General Partner and 25%
to the limited partners.
e. Gains recognized by the Partnership will be allocated in the following
order of priority: (i) to all partners up to the amount necessary to bring
the limited partners' capital account balances to an amount equal to the
limited partners' 15% Preferred Distribution plus the limited partners'
Invested Capital and to bring the General Partner's capital account balance
to an amount equal to 1/99th of the capital account balance of the limited
partners; and (ii) 20% to the General Partner and 80% to the limited
partners.
For financial reporting purposes, profits and losses are generally allocated
among the partners based on their stated interests in cash available for
distribution.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenues and Expenses
Hotel revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotels to the Manager. House profit
reflects hotel operating results which flow to the Partnership as property owner
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, real and
personal property taxes, ground and equipment rent, insurance and certain other
costs, which are disclosed separately in the statement of operations.
7
<PAGE>
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives as follows:
Land improvements 40 years
Building and improvements 30 to 40 years
Leasehold improvements 40 to 50 years
Furniture and equipment 3 to 10 years
All property and equipment is pledged as security against the Mortgage Debt
described in Note 7.
Deferred Financing and Organization Costs
Deferred financing and organization costs consist of loan fees and legal and
accounting costs incurred in connection with obtaining Partnership financing and
the formation of the Partnership. Financing costs are amortized using the
straight-line method over the seven year loan term and organization costs are
amortized using the straight-line method over five years. At December 31, 1995
and 1994, accumulated amortization of deferred financing and organization costs
totalled $3,166,000 and $2,812,000, respectively. As of December 31, 1995, the
organization costs were fully amortized and written off.
Restricted Cash Reserve
A restricted cash reserve consisting of funds generated in excess of an annual
17.5% return on partners invested capital, as defined, has been established in
an escrow account maintained by the lender. Deposits are made in conjunction
with the bi-annual distributions to the limited partners. These funds will be
applied to the principal balance of the mortgage loan upon maturity of the loan
in 1996 or upon earlier prepayment at the Partnership's option. As of December
31, 1995 and 1994, the balance in the reserve was $9,193,000 and $2,847,000,
respectively.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
Investment in Santa Clara Partnership
The Partnership's earnings from the Santa Clara Partnership are recorded based
on the equity method of accounting. Equity in earnings from the Santa Clara
Partnership includes 100% of the interest expense related to the debt incurred
by the Santa Clara Partnership, the proceeds of which were distributed to the
Partnership. The $28.4 million excess of the purchase price of the Santa Clara
Partnership interest over the Partnership's proportionate share of the net book
value of the assets acquired is being amortized over the related remaining lives
of those assets. Amortization is included in Equity in Income/(Losses) of Santa
Clara Partnership in the accompanying statement of operations. At December 31,
1995 and 1994, accumulated amortization of the excess purchase price of the
Santa Clara Partnership investment was $10,095,000 and $9,383,000, respectively.
Prior to December 31, 1995, the Partnership is required to make capital
contributions to the Santa Clara Partnership if Santa Clara's debt service is
greater than its cash available for debt service, as defined. After December 31,
1995, capital
8
<PAGE>
contributions are required by the Partnership if Santa Clara's debt service
exceeds 50% of its cash available for debt service. No capital contributions
have been required as of December 31, 1995.
Interest Rate Swap Agreements
The Partnership is a party to an interest rate swap agreement to reduce the
Partnership's exposure to floating interest rates. The Partnership accounts for
the swap arrangement as a hedge of an obligation to pay floating rates of
interest and accordingly, records interest expense based upon its payment
obligation at a fixed rate.
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use, for income tax purposes, of
accelerated depreciation methods and shorter depreciable lives of the assets and
differences in the timing of recognition of incentive management fee expense. As
a result of these differences, the excess of the net assets reported in the
accompanying financial statements over the tax basis in net Partnership assets
is $38,000 and $4,023,000 as of December 31, 1995 and 1994, respectively. The
difference in 1995 is significantly less than 1994 due primarily to greater book
depreciation compared to tax depreciation in 1995.
New Statement of Financial Accounting Standards
The Partnership is required to adopt Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" no later than its year ending December 31,
1996. The Partnership does not expect that the adoption of SFAS No. 121 will
have a material effect on its financial statements.
NOTE 3. REVENUES
Partnership revenues consist of the Hotels' operating results for the three
years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
HOTEL SALES
Rooms.........................................................$ 93,292 $ 88,436 $ 84,997
Food and beverage............................................. 42,198 37,972 39,763
Other......................................................... 7,215 6,548 6,089
----------- ------------ -----------
142,705 132,956 130,849
----------- ------------ -----------
HOTEL EXPENSES
Departmental direct costs
Rooms...................................................... 18,416 17,490 16,714
Food and beverage.......................................... 28,975 26,338 27,178
Other hotel operating expenses................................ 31,312 30,425 29,954
----------- ------------ -----------
78,703 74,253 73,846
----------- ------------ -----------
REVENUES..........................................................$ 64,002 $ 58,703 $ 57,003
=========== ============ ===========
</TABLE>
9
<PAGE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1995 1994
----------- ------------
Land and improvements........................$ 17,091 $ 17,091
Building and improvements.................... 105,374 105,318
Leasehold improvements....................... 108,848 107,345
Furniture and equipment...................... 55,335 51,772
----------- ------------
286,648 281,526
Less accumulated depreciation................ (82,658) (69,715)
----------- ------------
$ 203,990 $ 211,811
=========== ============
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The fair
values of financial instruments not included in this table are estimated to be
equal to their carrying amounts.
<TABLE>
<CAPTION>
As of December 31, 1995 As of December 31, 1994
----------------------- ------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Debt and other liabilities
Mortgage debt $ 222,500 $ 222,500 $ 222,500 $ 222,500
Incentive management fees due to Marriott International, Inc. $ 2,164 $ 92 $ 1,703 $ --
Other financial instruments
Loss on interest rate swap ($222,500,000 notional amount) $ -- $ 581 $ -- $ 2,600
</TABLE>
The 1995 estimated fair value of mortgage debt obligations are based on their
carrying value as the debt matures March 21, 1996, and the General Partner
believes that it will be able to refinance the debt, as discussed in Note 7.
Incentive management fees due are valued based on the expected future payments
from operating cash flow discounted at risk adjusted rates.
The fair value of the interest rate swap agreement is based on the estimated
amount the Partnership would pay to terminate the agreement.
10
<PAGE>
NOTE 6. SANTA CLARA PARTNERSHIP
Summarized financial information for the Santa Clara Partnership is as follows:
<TABLE>
<CAPTION>
December 31, December 31,
1995 1994
-------------- --------------
Balance Sheet
<S> <C> <C>
Property and equipment..................................................$ 28,406 $ 29,133
Due from Marriott International, Inc.................................... 1,976 1,855
Other assets............................................................ 1,614 1,762
Cash and cash equivalents............................................... 1,614 1,216
-------------- --------------
Total Assets.....................................................$ 33,610 $ 33,966
============== ==============
Mortgage debt ..........................................................$ 43,500 $ 43,500
Due to Marriott International, Inc...................................... 1,086 468
Accounts payable and accrued expenses................................... 117 132
Partners' Deficit....................................................... (11,093) (10,134)
-------------- --------------
Total Liabilities and Partners' Deficit..........................$ 33,610 $ 33,966
============== ==============
<CAPTION>
For the Years Ended December 31,
----------------------------------------------
Statement of Operations 1995 1994 1993
----------- ---------- -----------
<S> <C> <C> <C>
REVENUES...................................................................$ 14,516 $ 12,131 $ 11,203
----------- ---------- -----------
OPERATING COSTS AND EXPENSES
Depreciation and amortization........................................... 2,765 2,359 2,291
Interest................................................................ 3,063 2,295 1,809
Incentive management fees............................................... 2,175 1,761 1,577
Base management fees.................................................... 1,079 967 906
Property taxes.......................................................... 508 501 506
Ground rent, insurance and other........................................ 201 270 264
----------- ---------- -----------
9,791 8,153 7,353
----------- ---------- -----------
NET INCOME.................................................................$ 4,725 $ 3,978 $ 3,850
=========== ========== ===========
</TABLE>
11
<PAGE>
NOTE 7. DEBT
Mortgage Debt
The Partnership borrowed $222.5 million pursuant to the terms of the variable
rate Mortgage Debt to finance the acquisition of the Hotels. The Mortgage Debt
is non-recourse to the Partnership and is secured by a first mortgage on each of
the Hotels including the grant of a security interest in the Partnership's
furniture, fixtures and equipment, contracts and other intangibles and an
assignment of the Partnership's rights under the Management and Purchase
Agreements.
At the option of the Partnership, the Mortgage Debt loan agreement provides for
interest rate options which are tied to a Eurodollar rate, an adjusted CD rate
or the fluctuating corporate base rate. For Eurodollar or CD elections, the
Partnership pays the applicable rate plus an increment equal to .9 percentage
points. In April 1992, the Partnership entered into an interest rate swap
agreement for the entire loan amount with the primary lender to effectively fix
the interest rate on the Mortgage Debt at 7.8% per annum from May 1992 through
loan maturity. The Partnership does not anticipate nonperformance by the lender.
The Partnership's obligations under the swap agreement are secured by a pledge
of collateral by the General Partner. The weighted average interest rate on the
Mortgage Debt for the three years in the period ended December 31, 1995 was
7.8%. The Mortgage Debt matures March 21, 1996. Although no agreement has been
reached with a lender, the General Partner has had several discussions with
lenders and believes that it will be able to refinance the loan at maturity.
However, if the Partnership is not successful in refinancing the loan, repayment
of the Mortgage Debt could only be made through the sale of the Hotels.
In March of 1994, the Partnership established a reserve with the mortgage lender
which eliminates any potential conflict under the loan agreement resulting from
the October 8, 1993 division of Marriott Corporation's operations into two
separate companies. Under an agreement reached between the Partnership, the
Manager and the lender, the Partnership will deposit funds generated in excess
of an annual 17.5% return on invested capital into an escrow account maintained
by the lender in conjunction with the bi-annual distributions to the limited
partners. Such funds could be applied to the principal balance of the Mortgage
Debt upon maturity of the loan in 1996 or upon an earlier prepayment at the
Partnership's option. The balance in the reserve as of December 31, 1995 and
1994 was $9,193,000 and $2,847,000, respectively, and is included as a
restricted cash reserve in the accompanying balance sheet.
Debt Guarantees
Host Marriott provided an unconditional debt service guarantee to the lenders of
up to $22.8 million to cover shortfalls in principal and interest payments due
under the Mortgage Debt. In accordance with the terms of the debt service
guarantee, Host Marriott was released from this obligation as of December 31,
1992, as a result of the Partnership's debt service coverage, as defined,
exceeding 1.20 for a specified time period. There were no amounts advanced to
the Partnership under the debt service guarantee. The General Partner has also
guaranteed that in the event of a foreclosure of the Hotels, proceeds to the
lender will be at least $40 million.
NOTE 8. LAND LEASES
The San Antonio and San Ramon Hotels are located on sites with ground leases
from unrelated third parties. The initial lease terms expire in 2013 and 2014,
respectively. The Partnership is obligated to pay annual rent equal to the
greater of a minimum rent or a percentage rent and has the option to extend the
terms for up to five successive ten-year terms each. Ground rent on the San
Antonio Hotel is equal to the greater of $700,000 or 3.5% of annual gross room
sales. Ground rent
12
<PAGE>
on the San Ramon Hotel is equal to the greater of $350,000 or 3% of annual gross
sales for the first five years. San Ramon's minimum rent will be adjusted upward
every five years, beginning in 1989, to an amount equal to 75% of the average
rent paid during the three years immediately preceding the applicable five-year
period. Ground rent expense for the San Antonio and San Ramon Hotels totalled
$1,879,000, $1,746,000 and $1,762,000, for the years ended December 31, 1995,
1994 and 1993, respectively.
Future minimum annual rental commitments for all land leases entered into by the
Partnership, as described above, are as follows (in thousands):
Fiscal Year Land Leases
----------- -----------
1996 $ 1,050
1997 1,050
1998 1,050
1999 1,050
2000 1,050
Thereafter 14,000
-------------
Total Minimum Lease Payments $ 19,250
=============
NOTE 9. MANAGEMENT AGREEMENTS
The Partnership entered into long-term hotel management agreements (the
"Management Agreements") with the Manager to manage the Hotels as part of the
Marriott International, Inc. full-service hotel system. The Management Agreement
for each Hotel has an initial term expiring on December 31, 2008. The Manager
has the option to renew the Management Agreements for up to four additional
10-year terms. The Manager also manages the Santa Clara Hotel on behalf of the
Santa Clara Partnership. The Manager is paid a base management fee equal to 3%
of gross hotel sales. Base management fees paid in 1995, 1994 and 1993 were
$4,281,000, $3,989,000 and $3,926,000, respectively.
In addition, the Manager is entitled to an incentive management fee equal to 20%
of each Hotel's Operating Profit, as defined. The incentive management fee with
respect to each Hotel is payable only out of 55% of each Hotel's Operating
Profit after the Partnership's payment or retention for such fiscal year of the
following: (i) the Ground Rent, if any, with respect to such Hotel; (ii) the
Qualifying Debt Service, as defined, with respect to such Hotel; (iii) such
Hotel's Pro-Rata Share of Total Mortgage Debt Service Shortfall, as defined, if
any, with respect to all Hotels; (iv) the Partnership's non-cumulative 10%
Priority Return on the Adjusted Contributed Capital, as defined, with respect to
such Hotel; (v) through December 31, 1991, such Hotel's Pro-Rata Share of Total
Equity Priority Shortfall, if any, with respect to all Hotels; and (vi) through
December 31, 1992, such Hotel's pro-rata share of required repayments of any
outstanding advances and accrued interest thereon under the Debt Service
Guarantee.
Through 1991, the Manager was not entitled to accrue any unpaid incentive
management fees. Beginning in 1992, unpaid incentive management fees are accrued
without interest and are paid from cash flow available for incentive management
fees following payment of any then current incentive management fees. Incentive
management fees earned for the years ended December 31, 1995, 1994 and 1993 were
$9,412,000, $8,507,000 and $8,200,000, respectively. Deferred incentive
management fees for the years ended December 31, 1995 and 1994 were $2,164,000
and $1,703,000, respectively, and are included in Due to Marriott International,
Inc. in the accompanying balance sheet.
13
<PAGE>
Pursuant to the Management Agreements, the Manager is required to furnish the
Hotels with certain services ("Chain Services") which are generally provided on
a central or regional basis to all hotels in the Manager's full-service hotel
system. Chain Services include central training, advertising and promotion, a
national reservations system, computerized payroll and accounting services and
such additional services as needed which may be more efficiently performed on a
centralized basis. Costs and expenses incurred in providing such services are
allocated among all domestic full-service hotels managed, owned or leased by the
Manager or its subsidiaries. In addition, the Hotels also participate in the
Manager's Honored Guest Awards Program ("HGA"). The cost of this program is
charged to all hotels in the Manager's full-service hotel system based upon the
HGA sales at each hotel. The total amount of Chain Services and HGA costs
charged to the Partnership for the years ended December 31, 1995, 1994 and 1993
were $5,151,000, $4,448,000 and $3,497,000, respectively, and are included in
Revenues (as defined in Note 3) in the accompanying statement of operations.
The Management Agreements provide for the establishment of a property
improvement fund for each Hotel to cover the cost of certain non-routine repairs
and maintenance to the Hotels which are normally capitalized and the cost of
replacements and renewals to the Hotels' property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales. In the case of the San Antonio Hotel, contributions to the property
improvement fund are 4% in 1991 through 1998 and 5% thereafter. Contributions to
the property improvement fund for the San Ramon Hotel are 4% in 1994 through
1998 and 5% in 1999. Contributions to the property improvement fund for the New
Orleans Hotel are 5% each year. Total contributions to the property improvement
fund for the years ended December 31, 1995 and 1994 were $6,342,000 and
$5,935,000, respectively.
Pursuant to the terms of the Management Agreements, the Partnership is required
to provide the Manager with working capital and supplies to meet the operating
needs of the Hotels. The Manager converts cash advanced by the Partnership into
other forms of working capital consisting primarily of operating cash,
inventories, and trade receivables and payables which are maintained and
controlled by the Manager. Upon termination of any of the Management Agreements,
the working capital and supplies of the related Hotel will be returned to the
Partnership. The individual components of working capital and supplies
controlled by the Manager are not reflected in the Partnership's balance sheet.
As of December 31, 1995 and 1994, $6,633,000 has been advanced to the Manager
for working capital and supplies which is included in Due from Marriott
International, Inc. in the accompanying balance sheet. The supplies advanced to
the Manager are recorded at their estimated net realizable value.
NOTE 10. SUBSEQUENT EVENTS
On March 21, 1996, the Mortgage Debt and the Santa Clara Mortgage Debt matured.
An extension was entered into between the Partnership and the Santa Clara
Partnership and the current lenders that extended the maturity date on the two
loans for an additional six months until an agreement could be reached with
another lender. On July 10, 1996, the General Partner signed a commitment letter
with a new third party lender. Under the terms of the extension, interest
accrued at the London interbank offered rate ("LIBOR") plus 187.5 basis points
for the first three months and accrued at LIBOR plus 225.0 basis points for the
second three months. No principal amortization was required during the extension
period. However, under the terms of the extension, the Partnership applied the
$9.2 million accumulated in the primary lender reserve account to pay down the
principal balance of the Mortgage Debt to $213.3 million and deposited $19.1
million into the primary lender reserve account. The $19.1 million deposit
represented the balance ($16.8 million) from the unrestricted reserve account
included in Cash in the accompanying balance sheet as of December 31, 1995
previously established by the General Partner in 1992 (the "General Partner
Reserve") and cash flow from the Partnership for the first two periods of 1996
($2.3 million). During the extension period, the Partnership also was required
to deposit into the primary lender reserve account all cash flow from the
Partnership's Hotels plus all the Partnership's cash flow from the Santa Clara
Partnership, net of (i)
14
<PAGE>
$500,000 per accounting period, (ii) debt service and (iii) current incentive
management fees paid. The $500,000 per accounting period was deposited into a
separate expense reserve account which was used by the Partnership to fund
administrative expenses and refinancing costs, any owner-funded capital
expenditures of the Partnership, as well as the Partnership's share of any such
costs incurred by the Santa Clara Partnership in the six month extension period.
On September 23, 1996 (the "Closing Date") the General Partner was successful in
refinancing the Partnership's Mortgage Debt as well as the $43.5 million
mortgage debt of the Santa Clara Partnership under substantially identical
terms. A total of $266.0 million was borrowed pursuant to the July 10, 1996
commitment letter with the new third party lender, $222.5 million of which is
recorded on the Partnership's financial statements. The Partnership's Mortgage
Debt will continue to be non-recourse to the Partnership and is secured by first
mortgage on the Hotels, as well as a pledge of its limited partner interest in
the Santa Clara Partnership. The debt will bear interest at a fixed rate of
8.22% based upon actual number of days over a 360 day year for an 11-year term
expiring October 11, 2007, requires payments of interest only during the first
loan year (October 1996 through September 1997) and then principal amortization
based upon a 20-year amortization schedule beginning with the second loan year.
Additionally, the refinancing substantially restricts the ability of the
Partnership to sell the Hotels during such term and prohibits the Partnership
from prepaying any debt for an extended period without paying a substantial
premium during such term. While Partnership debt service will increase as a
result of this refinancing when compared to 1995, the refinancing is expected to
improve the financial condition of the Partnership by reducing the Partnership's
long-term indebtedness.
On the Closing Date the Partnership was required to establish certain reserves
including:
o $7.0 million for various renewals and replacements and site
improvements;
o $1.1 million for Americans with Disabilities Act of 1990
modifications, deferred maintenance work and environmental remediation
projects identified during the course of the appraisal and
environmental studies undertaken in conjunction with the refinancing;
o $4.5 million debt service reserve - Based upon current forecasts, it
is expected that cash from operations will be sufficient for the
required payment terms of the Mortgage Debt. However due to the
seasonality of the Hotels and the Santa Clara Hotel operations, the
timing of debt service payments reserve for both the Partnership
Mortgage Debt and the Santa Clara Partnership mortgage debt containing
two months of debt service; and
o $155,000 ground rent reserve equal to one month of ground rent.
These reserves were primarily funded from the General Partner Reserve with a
portion also funded from the Partnership property improvement funds. In
addition, the General Partner Reserve will be utilized to pay estimated
transaction costs which include property appraisals, legal expenses, bank fees,
environmental studies and other transaction costs, as well as any additional
reserves deemed necessary by the General Partner for future capital expenditure
needs of the Partnership.
On June 13, 1996, MHP II Acquisition Corp. (the "Company"), a wholly-owned
subsidiary of Host Marriott, completed its tender offer for the limited
partnership units in the Partnership. The Company purchased 377 units for an
aggregate consideration of $56,550,000 or $150,000 per unit. As a result of this
transaction, the Company became the majority limited partner in the Partnership,
owning 382 units or approximately 51% of the total units outstanding.
Additionally, in a Partnership vote held in conjunction with the tender offer,
the limited partners approved certain amendments to the partnership agreement
that were conditions to the tender offer.
15
<PAGE>
Marriott Hotel Properties II Limited Partnership
Condensed Statement of Operations
(Unaudited)
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
------------------ ----------------------
September 6, September 8, September 6, September 8,
1996 1995 1996 1995
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Hotel..........................................$ 11,793 $ 10,910 $ 45,605 $ 43,651
Interest income................................ 531 684 1,455 1,428
------------- ------------- -------------- -------------
12,324 11,594 47,060 45,079
------------- ------------- -------------- -------------
OPERATING COSTS AND EXPENSES
Interest expense............................... 3,831 4,116 11,542 12,263
Depreciation and amortization.................. 3,140 3,123 9,051 9,051
Incentive management fees...................... 1,611 1,468 6,678 6,399
Property taxes................................. 1,264 1,270 3,825 3,830
Base management fees........................... 890 859 3,036 2,936
Ground rent ................................... 417 407 1,370 1,304
Insurance and other............................ 304 242 837 690
------------- ------------- -------------- -------------
11,457 11,485 36,339 36,473
------------- ------------- -------------- -------------
INCOME BEFORE EQUITY IN
(LOSSES) INCOME OF SANTA
CLARA PARTNERSHIP.............................. 867 109 10,721 8,606
EQUITY IN (LOSSES) INCOME
OF SANTA CLARA PARTNERSHIP..................... (22) 52 548 227
------------- ------------- -------------- -------------
NET INCOME.........................................$ 845 $ 161 $ 11,269 $ 8,833
============= ============= ============== =============
ALLOCATION OF NET INCOME
General Partner................................$ 8 $ 2 $ 113 $ 88
Limited Partners............................... 837 159 11,156 8,745
------------- ------------- -------------- -------------
$ 845 $ 161 $ 11,269 $ 8,833
============= ============= ============== =============
NET INCOME PER LIMITED
PARTNER UNIT (745 Units).......................$ 1,123 $ 214 $ 14,976 $ 11,738
============= ============= ============== =============
</TABLE>
See Notes To Condensed Financial Statements.
16
<PAGE>
Marriott Hotel Properties II Limited Partnership
Condensed Balance Sheet
(in thousands)
<TABLE>
<CAPTION>
September 6, December 31,
1996 1995
------------- ---------------
(unaudited)
ASSETS
<S> <C> <C>
Property and equipment, net...................................................$ 200,352 $ 203,990
Due from Marriott International, Inc.......................................... 7,757 7,275
Property improvement fund..................................................... 11,440 11,940
Deferred financing and organization costs, net................................ 1,472 114
Restricted cash reserves...................................................... 29,608 9,193
Cash and cash equivalents..................................................... 2,924 21,601
------------- ---------------
$ 253,553 $ 254,113
============= ===============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt..............................................................$ 213,307 $ 222,500
Due to Marriott International, Inc......................................... 3,177 2,615
Investment in Santa Clara Partnership...................................... 8,336 8,244
Accounts payable and accrued expenses...................................... 616 433
------------- ---------------
Total Liabilities....................................................... 225,436 233,792
------------- ---------------
PARTNERS' CAPITAL
General Partner............................................................ 427 348
Limited Partners........................................................... 27,690 19,973
------------- ---------------
Total Partners' Capital................................................. 28,117 20,321
------------- ---------------
$ 253,553 $ 254,113
============= ===============
</TABLE>
See Notes To Condensed Financial Statements.
17
<PAGE>
Marriott Hotel Properties II Limited Partnership
Condensed Statement of Cash Flows
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Thirty-Six Weeks Ended
---------------------------------
September 6, September 8,
1996 1995
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income ...................................................................$ 11,269 $ 8,833
Noncash items................................................................. 8,765 9,471
Change in operating accounts.................................................. 114 (1,025)
------------- -------------
Cash provided by operations............................................. 20,148 17,279
------------- -------------
INVESTING ACTIVITIES
Additions to restricted cash reserves......................................... (20,415) (1,886)
Additions to property and equipment........................................... (5,413) (4,409)
Distributions from Santa Clara Partnership.................................... 640 967
Change in property improvement fund........................................... 500 (357)
------------- --------------
Cash used in investing activities....................................... (24,688) (5,685)
------------- -------------
FINANCING ACTIVITIES
Repayment of mortgage debt.................................................... (9,193) --
Distributions................................................................. (3,473) (3,473)
Payment of financing costs.................................................... (1,471) --
------------- -------------
Cash used in financing activities....................................... (14,137) (3,473)
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................. (18,677) 8,121
CASH AND CASH EQUIVALENTS at beginning of period................................. 21,601 17,764
------------- -------------
CASH AND CASH EQUIVALENTS at end of period.......................................$ 2,924 $ 25,885
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for mortgage interest...............................................$ 11,207 $ 11,574
============= =============
</TABLE>
See Notes To Condensed Financial Statements.
18
<PAGE>
Marriott Hotel Properties II Limited Partnership
Notes to Condensed Financial Statements
(Unaudited)
1. The accompanying condensed financial statements have been prepared by
Marriott Hotel Properties II Limited Partnership (the "Partnership")
without audit. Certain information and footnote disclosures normally
included in financial statements presented in accordance with generally
accepted accounting principles have been condensed or omitted from the
accompanying statements. The Partnership believes the disclosures made are
adequate to make the information presented not misleading. However, the
condensed financial statements should be read in conjunction with the
Partnership's financial statements and notes thereto included in the
Partnership's Form 10 for the fiscal year ended December 31, 1995
In the opinion of the Partnership, the accompanying condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position
of the Partnership as of September 6, 1996 and December 31, 1995, the
results of operations for the twelve weeks and thirty-six weeks ended
September 6, 1996 and September 8, 1995 and cash flows for the thirty-six
weeks ended September 6, 1996 and September 8, 1995. Interim results are
not necessarily indicative of fiscal year performance because of seasonal
and short-term variations.
2. The Partnership owns the New Orleans, San Antonio Rivercenter and San Ramon
Marriott Hotels (the "Hotels"). In addition, the Partnership owns a 50%
limited partnership interest in the Santa Clara Marriott Hotel Limited
Partnership (the "Santa Clara Partnership") which owns the Santa Clara
Marriott Hotel (the "Santa Clara Hotel"). The sole general partner of the
Partnership and the Santa Clara Partnership, with a 1% interest in each, is
Marriott MHP Two Corporation (the "General Partner"), a wholly-owned
subsidiary of Host Marriott Corporation ("Host Marriott"). The remaining
49% interest in the Santa Clara Partnership is owned by HMH Properties,
Inc., a wholly-owned subsidiary of Host Marriott. The Partnership's income
from the Santa Clara Partnership is reported as Equity in Income of the
Santa Clara Partnership. In arriving at Equity in Income from the Santa
Clara Partnership, the Partnership is allocated 100% of the interest
expense related to the debt incurred to purchase the Santa Clara
Partnership interest. Summarized financial information for the Santa Clara
Partnership is presented in Note 5 below.
3. For financial reporting purposes, net profits and net losses of the
Partnership are allocated 99% to the Limited Partners and 1% to the General
Partner. Significant differences exist between the net profits and net
losses for financial reporting purposes and the net profits and net losses
reported for Federal income tax purposes. These differences are due
primarily to the use, for income tax purposes, of accelerated depreciation
methods and shorter depreciable lives of the assets and differences in the
timing of recognition of incentive management fee expense.
4. Hotel revenues represent house profit of the Partnership's Hotels since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Hotels to Marriott
International, Inc. (the "Manager"). House profit reflects hotel operating
results which flow to the Partnership as property owner and represents
gross hotel sales less property-level expenses, excluding depreciation and
amortization, base and incentive management fees, real and personal
property taxes, ground and equipment rent, insurance and certain other
costs, which are disclosed separately in the condensed statement of
operations.
19
<PAGE>
Partnership revenues generated by the Hotels for 1996 and 1995 consist of
(in thousands):
<TABLE>
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
----------------------------- ------------------------------
September 6, September 8, September 6, September 8,
1996 1995 1996 1995
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
HOTEL REVENUES
Rooms......................................$ 19,801 $ 18,352 $ 67,637 $ 64,275
Food and beverage.......................... 8,049 8,825 27,835 28,503
Other...................................... 1,827 1,456 5,736 5,078
----------- ----------- ------------ ------------
29,677 28,633 101,208 97,856
----------- ----------- ------------ ------------
HOTEL EXPENSES
Departmental direct costs
Rooms................................... 4,242 4,223 12,899 12,873
Food and beverage....................... 6,318 6,419 20,070 19,561
Other hotel operating expenses............. 7,324 7,081 22,634 21,771
----------- ----------- ------------ ------------
17,884 17,723 55,603 54,205
----------- ----------- ------------ ------------
REVENUES.......................................$ 11,793 $ 10,910 $ 45,605 $ 43,651
=========== =========== ============ ============
5. Summarized financial information for the Santa Clara Partnership for 1996
and 1995 is as follows (in thousands):
<CAPTION>
Twelve Weeks Ended Thirty-Six Weeks Ended
----------------------------- --------------------------------
September 6, September 8, September 6, September 8,
1996 1995 1996 1995
------------- ------------- -------------- --------------
Condensed Statement of Operations
<S> <C> <C> <C> <C>
REVENUES....................................$ 3,541 $ 3,496 $ 11,772 $ 10,288
OPERATING COSTS AND EXPENSES
Interest expense......................... 781 695 2,177 2,138
Depreciation and amortization............ 638 638 1,896 1,896
Incentive management fees................ 529 530 1,788 1,551
Base management fees..................... 266 252 835 753
Property taxes........................... 113 117 344 351
Ground rent, insurance and other......... 56 45 197 145
----------- ------------ ------------ ------------
2,383 2,277 7,237 6,834
----------- ------------ ------------ ------------
NET INCOME..................................$ 1,158 $ 1,219 $ 4,535 $ 3,454
=========== ============ ============ ============
<CAPTION>
September 6, December 31,
1996 1995
------------- ---------------
Condensed Balance Sheet
<S> <C> <C>
Property and equipment, net.................................................$ 30,048 $ 28,406
Other assets................................................................ 3,618 3,590
Cash and cash equivalents................................................... 2,849 1,614
------------- ---------------
Total Assets.............................................................$ 36,515 $ 33,610
============= ===============
Mortgage debt...............................................................$ 43,500 $ 43,500
Due to Marriott International, Inc.......................................... 2,382 1,086
Accounts payable and accrued expenses....................................... 151 117
Partners' deficit........................................................... (9,518) (11,093)
------------- ---------------
Total Liabilities and Partners' Deficit..................................$ 36,515 $ 33,610
============= ===============
</TABLE>
20
<PAGE>
6. On March 21, 1996, the Mortgage Debt and the Santa Clara Mortgage Debt
matured. An extension was entered into between the Partnership and the
Santa Clara Partnership and the current lenders that extends the maturity
date on the two loans for an additional six months. On July 10, 1996, the
General Partner signed a commitment letter with a new third party lender.
Pursuant to the terms of the extension, interest accrued at the London
interbank offered rate ("LIBOR") plus 187.5 basis points through June 18,
1996 and accrues at LIBOR plus 225.0 basis points through September 21,
1996. No principal amortization is required during the extension period.
The Partnership was required to apply the $9.2 million accumulated in the
Partnership's primary lender reserve account to pay down the principal
balance of the Mortgage Debt to $213.3 million and deposited $19.1 million
into the primary lender reserve account. The $19.1 million deposit
represented the balance ($16.8 million) from the reserve account previously
established by the General Partner (the "General Partner Reserve") in 1992
and cash flow from the Partnership for the first two periods of 1996 ($2.3
million). Additionally, the Partnership is also required to deposit into
the primary lender reserve account all cash flow from the Hotels plus all
the Partnership's cash flow from the Santa Clara Partnership, net of (i)
$500,000 per four week accounting period, (ii) debt service and (iii)
current incentive management fees paid. The $500,000 per accounting period
will be deposited into a separate expense reserve account which will be
used by the Partnership to fund administrative expenses and refinancing
costs, any owner-funded capital expenditures of the Partnership, as well as
the Partnership's share of any such costs incurred by the Santa Clara
Partnership in the six month extension period. As of September 6, 1996, the
balances in the primary lender reserve and in the expense reserve totaled
$27.7 million and $1.9 million, respectively. This reserve account is
classified as restricted cash on the accompanying condensed balance sheet.
Subsequent to the close of the quarter, on September 23, 1996 (the "Closing
Date") the General Partner was successful in refinancing the Partnership's
Mortgage Debt as well as the $43.5 million mortgage debt of the Santa Clara
Partnership under substantially identical terms. A total of $266.0 million
was borrowed pursuant to the July 10, 1996 commitment letter with the new
third party lender, $222.5 million of which is recorded on the
Partnership's financial statements. The Partnership's Mortgage Debt will
continue to be non-recourse to the Partnership and is secured by first
mortgage on the Hotels, as well as a pledge of its limited partner interest
in the Santa Clara Partnership. The debt will bear interest at a fixed rate
of 8.22% based upon actual number of days over a 360 day year for an
11-year term expiring October 11, 2007, requires payments of interest only
during the first loan year (October 1996 through September 1997) and then
principal amortization based upon a 20-year amortization schedule beginning
with the second loan year. Additionally, the refinancing substantially
restricts the ability of the Partnership to sell the Hotels during such
term and prohibits the Partnership from prepaying any debt for an extended
period without paying a substantial premium during such term. While
Partnership debt service will increase as a result of this refinancing when
compared to 1995, the refinancing is expected to improve the financial
condition of the Partnership by reducing the Partnership's long-term
indebtedness.
On the Closing Date the Partnership was required to establish certain
reserves including:
o $7.0 million for various renewals and replacements and site
improvements;
o $1.1 million for Americans with Disabilities Act of 1990
modifications, deferred maintenance work and environmental remediation
projects identified during the course of the appraisal and
environmental studies undertaken in conjunction with the refinancing;
o $4.5 million debt service reserve - Based upon current forecasts, it
is expected that cash from operations will be sufficient for the
required payment terms of the Mortgage Debt. However due to the
seasonality of the Hotels and the Santa Clara Hotel operations, the
timing of debt service payments reserve for both the Partnership
Mortgage Debt and the Santa Clara Partnership mortgage debt containing
two months of debt service; and
o $155,000 ground rent reserve equal to one month of ground rent.
These reserves were primarily funded from the General Partner Reserve with
a portion also funded from the Partnership property improvement funds. In
addition, the General Partner Reserve will be utilized
21
<PAGE>
to pay estimated transaction costs which include property appraisals, legal
expenses, bank fees, environmental studies and other transaction costs, as
well as any additional reserves deemed necessary by the General Partner for
future capital expenditure needs of the Partnership.
7. In the first quarter of 1996, the Partnership adopted Statement of
Financial Accounting Standards ("SFAS") No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". Adoption of SFAS No. 121 did not have an effect on its financial
statements.
8. On June 13, 1996, MHP II Acquisition Corp. (the "Company"), a wholly-owned
subsidiary of Host Marriott Corporation ("Host"), completed its tender
offer for the limited partnership units in Marriott Hotel Properties II
Limited Partnership (the "Partnership"). The Company purchased 377 units
for an aggregate consideration of $56,550,000 or $150,000 per unit. As a
result of this transaction, the Company became the majority limited partner
in the Partnership, owning 382 units or approximately 51% of the total
units outstanding. Additionally, in a Partnership vote held in conjunction
with the tender offer, the limited partners approved certain amendments to
the partnership agreement that were conditions to the tender offer.
22
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF SANTA CLARA MARRIOTT HOTEL LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Santa Clara Marriott Hotel
Limited Partnership (a Delaware limited partnership) as of December 31, 1995 and
1994, and the related statements of operations, changes in partners' capital
(deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
General Partner's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Santa Clara Marriott Hotel
Limited Partnership as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 12, 1996
(except for the matter discussed in Note 9,
as to which the date is November 8, 1996)
23
<PAGE>
STATEMENT OF OPERATIONS
Santa Clara Marriott Hotel Limited Partnership
For the Three Years in the Period Ended December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------- ------------
<S> <C> <C> <C>
REVENUES (Note 3).............................................................$ 14,516 $ 12,131 $ 11,203
----------- ------------- ------------
OPERATING COSTS AND EXPENSES
Depreciation and amortization............................................ 2,765 2,359 2,291
Interest ............................................................... 3,063 2,295 1,809
Incentive management fees................................................ 2,175 1,761 1,577
Base management fees..................................................... 1,079 967 906
Property taxes........................................................... 508 501 506
Ground rent, insurance and other......................................... 201 270 264
----------- ------------- ------------
9,791 8,153 7,353
----------- ------------- ------------
NET INCOME....................................................................$ 4,725 $ 3,978 $ 3,850
=========== ============= ============
ALLOCATION OF NET INCOME
Marriott MHP Two Corporation.............................................$ 78 $ 63 $ 56
Marriott Hotel Properties II Limited Partnership......................... 831 841 1,021
HMH Properties, Inc...................................................... 3,816 3,074 2,773
----------- ------------- ------------
$ 4,725 $ 3,978 $ 3,850
=========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE>
BALANCE SHEET
Santa Clara Marriott Hotel Limited Partnership
December 31, 1995 and 1994
(in thousands)
<TABLE>
<CAPTION>
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Property and equipment, net (Note 4)........................................$ 28,406 $ 29,133
Due from Marriott International, Inc........................................ 1,976 1,855
Other assets .............................................................. 1,614 1,762
Cash and cash equivalents................................................... 1,614 1,216
------------- ------------
$ 33,610 $ 33,966
============= ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgage debt (Note 6)......................................................$ 43,500 $ 43,500
Due to Marriott International, Inc.......................................... 1,086 468
Accounts payable and accrued expenses ...................................... 117 132
------------- ------------
Total Liabilities....................................................... 44,703 44,100
------------- ------------
Partners' Capital (Deficit)
General Partner
Capital contribution................................................. 368 368
Capital distributions................................................ (517) (431)
Cumulative net income................................................ 483 405
------------- ------------
Marriott MHP Two Corporation..................................... 334 342
------------- ------------
Limited Partners
Capital contribution................................................. 18,390 18,390
Capital distributions................................................ (50,109) (48,739)
Cumulative net income................................................ 3,959 3,128
------------- ------------
Marriott Hotel Properties II Limited Partnership................. (27,760) (27,221)
------------- ------------
Capital contribution................................................. 18,022 18,022
Capital distributions................................................ (25,341) (21,113)
Cumulative net income................................................ 23,652 19,836
------------- ------------
HMH Properties, Inc. ............................................ 16,333 16,745
------------- ------------
Total Partners' Deficit................................................. (11,093) (10,134)
------------- ------------
$ 33,610 $ 33,966
============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
STATEMENT OF CHANGES IN
PARTNERS' CAPITAL (DEFICIT)
Santa Clara Marriott Hotel Limited Partnership
For the Three Years in the Period Ended December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
Limited Partners
General ---------------------------------
Partner MHPII MPI/HMH Total
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1992........................$ 351 $ (26,556) $ 17,146 $ (9,059)
Capital distributions......................... (60) (1,210) (2,943) (4,213)
Net income.................................... 56 1,021 2,773 3,850
-------------- -------------- -------------- --------------
Balance, December 31, 1993........................ 347 (26,745) 16,976 (9,422)
Capital distributions......................... (68) (1,317) (3,305) (4,690)
Net income.................................... 63 841 3,074 3,978
-------------- -------------- -------------- --------------
Balance, December 31, 1994........................ 342 (27,221) 16,745 (10,134)
Capital distributions......................... (86) (1,370) (4,228) (5,684)
Net income.................................... 78 831 3,816 4,725
-------------- -------------- -------------- --------------
Balance, December 31, 1995........................$ 334 $ (27,760) $ 16,333 $ (11,093)
============== ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE>
STATEMENT OF CASH FLOWS
Santa Clara Marriott Hotel Limited Partnership
For the Three Years in the Period Ended December 31, 1995
(in thousands)
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................$ 4,725 $ 3,978 $ 3,850
Noncash items:
Depreciation and amortization........................................... 2,765 2,359 2,291
Deferred portion of incentive management fees........................... 303 190 --
Loss on retirement of assets............................................ -- 55 52
Changes in operating accounts:
Due from Marriott International, Inc.................................... (121) (374) 677
Due to Marriott International, Inc...................................... 315 (144) (61)
Deferred incentive management fees due to Marriott
International, Inc................................................... -- -- (33)
Accounts payable and accrued expenses................................... (15) 79 (23)
----------- ------------- ------------
Cash provided by operations............................................. 7,972 6,143 6,753
----------- ------------- ------------
INVESTING ACTIVITIES
Additions to property and equipment, net................................... (2,038) (1,148) (1,722)
Change in property improvement fund........................................ 148 (514) 75
----------- ------------- ------------
Cash used in investing activities....................................... (1,890) (1,662) (1,647)
----------- ------------- ------------
FINANCING ACTIVITIES
Capital distributions...................................................... (5,684) (4,690) (4,213)
----------- ------------- ------------
Cash used in financing activities....................................... (5,684) (4,690) (4,213)
----------- ------------- ------------
INCREASE/(DECREASE) IN CASH
AND CASH EQUIVALENTS........................................................ 398 (209) 893
CASH AND CASH EQUIVALENTS at beginning of year................................ 1,216 1,425 532
----------- ------------- ------------
CASH AND CASH EQUIVALENTS at end of year......................................$ 1,614 $ 1,216 $ 1,425
=========== ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for mortgage interest.........................................$ 3,083 $ 2,267 $ 1,804
=========== ============= ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Santa Clara Marriott Hotel Limited Partnership
December 31, 1995 and 1994
NOTE 1. THE PARTNERSHIP
Description of the Partnership
The Santa Clara Marriott Hotel Limited Partnership (the "Partnership"), a
Delaware limited partnership, was formed to acquire, own and operate the
754-room Santa Clara Marriott Hotel (the "Hotel"), which is situated on
approximately 22 acres in Santa Clara, California. On October 8, 1993, Marriott
Corporation's operations were divided into two separate companies: Host Marriott
Corporation and Marriott International, Inc. (the "Manager"). On December 29,
1995, Host Marriott Corporation's operations were divided into two separate
companies: Host Marriott Corporation ("Host Marriott") and Host Marriott
Services Corporation. The sole general partner of the Partnership, with a 1%
interest, is Marriott MHP Two Corporation (the "General Partner") and the
initial limited partner was Marriott Properties, Inc. ("MPI") with a 99% limited
partner interest. The General Partner is a wholly-owned direct subsidiary of
Host Marriott. MPI is a wholly-owned direct subsidiary of Host Marriott. The
Hotel, which opened in June 1976, is managed as a part of the Marriott
International, Inc. full service hotel system by the Manager.
The Partnership was formed on January 9, 1989, with the General Partner and MPI
contributing the Hotel, including furniture, fixtures, equipment and leasehold
assignments thereon, to the Partnership. On March 20, 1989 (the "Closing Date"),
MPI sold a 50% limited partnership interest to Marriott Hotel Properties II
Limited Partnership ("MHP II") for $48 million. Concurrent with the admittance
of MHP II, the Partnership borrowed $43.5 million under a mortgage loan (see
Note 6) which was distributed to MHP II. MHP II in turn used such proceeds to
pay MPI for a portion of its purchase price.
Effective February 26, 1994, MPI's remaining 49% limited partnership interest in
the Partnership was sold by MPI to HMH Properties, Inc. ("HMH"), a wholly-owned
indirect subsidiary of Host Marriott.
Partnership Allocations and Distributions
The Partnership Agreement generally provides for the allocation of net profits
and net losses in the ratio of ownership interests with interest expense on the
mortgage debt specifically allocated to MHP II. Gains are generally allocated
first to reduce negative capital accounts to zero and then in the ratio of
ownership interests. For financial reporting purposes, profits and losses are
generally allocated among the partners based on their stated interests in cash
available for distribution.
Cash available for distribution, as defined, after payment of mortgage debt
service, is distributed 2% to the General Partner and 98% to HMH until these
partners have received an amount equal to mortgage debt service. Thereafter,
cash available is distributed in the ratio of ownership interests.
28
<PAGE>
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The Partnership records are maintained on the accrual basis of accounting and
its fiscal year coincides with the calendar year.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Revenues and Expenses
Hotel revenues represent house profit of the Partnership's Hotel since the
Partnership has delegated substantially all of the operating decisions related
to the generation of house profit of the Hotel to the Manager. House profit
reflects hotel operating results which flow to the Partnership as property owner
and represents gross hotel sales less property-level expenses, excluding
depreciation and amortization, base and incentive management fees, real and
personal property taxes, ground and equipment rent, insurance and certain other
costs, which are disclosed separately in the statement of operations.
Property and Equipment
The original property and equipment was recorded at its net carrying value on
the date of acquisition. Subsequent additions to property and equipment are
recorded at cost. Depreciation and amortization is computed using the
straight-line method over the following estimated useful lives of the assets:
Leasehold improvements 40 years
Furniture and equipment 3 to 10 years
On the Closing Date, the remaining useful life for leasehold improvements was 27
years. All property and equipment is pledged as security against the mortgage
debt described in Note 6.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments with a maturity of three
months or less at date of purchase to be cash equivalents.
29
<PAGE>
Income Taxes
Provision for Federal and state income taxes has not been made in the
accompanying financial statements since the Partnership does not pay income
taxes but rather allocates its profits and losses to the individual partners.
Significant differences exist between the net income for financial reporting
purposes and the net income as reported in the Partnership's tax return. These
differences are due primarily to the use of different accounting rules to
measure the basis of the assets at inception of the Partnership.
New Statement of Financial Accounting Standards
The Partnership is required to adopt Statement of Financial Accounting Standards
("SFAS") No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" no later than its year ending December 31,
1996. The Partnership does not expect that the adoption of SFAS No. 121 will
have a material effect on its financial statements.
NOTE 3. REVENUES
Partnership revenues consist of Hotel operating results for the three years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
----------- ------------ -----------
<S> <C> <C> <C>
HOTEL SALES
Rooms..................................................$ 22,327 $ 19,433 $ 18,136
Food and beverage...................................... 11,312 10,752 10,221
Other.................................................. 2,342 2,040 1,836
----------- ------------ -----------
35,981 32,225 30,193
----------- ------------ -----------
HOTEL EXPENSES
Departmental direct costs
Rooms............................................... 5,422 4,731 4,416
Food and beverage................................... 8,428 8,165 7,510
Other hotel operating expenses......................... 7,615 7,198 7,064
----------- ------------ -----------
21,465 20,094 18,990
----------- ------------ -----------
REVENUES...................................................$ 14,516 $ 12,131 $ 11,203
=========== ============ ===========
</TABLE>
30
<PAGE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
1995 1994
----------- ----------
Leasehold improvements $ 31,351 $ 30,353
Furniture and equipment 11,067 10,072
----------- ----------
42,418 40,425
Less accumulated depreciation
and amortization (14,012) (11,292)
----------- ----------
$ 28,406 $ 29,133
=========== ==========
NOTE 5. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of financial instruments are shown below. The
estimated fair values of current assets, current liabilities and the property
improvement fund are assumed to be equal to their reported carrying amounts.
<TABLE>
<CAPTION>
As of December 31, 1995
-------------------------------
Estimated
Carrying Fair
Amount Value
------------ -------------
(in thousands)
<S> <C> <C>
Mortgage debt $ 43,500 $ 43,500
Incentive management fees due to Marriott International, Inc. $ 601 $ 103
</TABLE>
The 1995 estimated fair value of mortgage debt obligations are based on their
carrying value as the debt matures March 21, 1996, and refinancing is likely, as
discussed in Note 6. Incentive management fees due are valued based on the
expected future payments from operating cash flow discounted at risk adjusted
rates.
31
<PAGE>
NOTE 6. DEBT
Mortgage Debt
On March 20, 1989, the Partnership borrowed $43.5 million pursuant to the terms
of a variable rate mortgage loan (the "Mortgage Debt"). At the option of the
Partnership, the Mortgage Debt provides for interest rate options which are tied
to a Eurodollar rate, an adjusted CD rate or the fluctuating corporate base
rate. For Eurodollar or CD elections, the Partnership pays the applicable rate
plus an increment equal to .85 percentage points. The Mortgage Debt's weighted
average interest rate for the years ended December 31, 1995, 1994 and 1993 was
7.0%, 5.4% and 4.2%, respectively. The Mortgage Debt is non-recourse to the
Partnership and is secured by a first mortgage on the Hotel including furniture,
fixtures and equipment, contracts and other intangibles and an assignment of the
Partnership's rights under the management and purchase agreements. The Mortgage
Debt matures March 21, 1996. Although no agreement has been reached with a
lender, the General Partner has had several discussions with lenders and
believes that it will be able to refinance the loan at maturity. However, if the
Partnership is not successful in refinancing the loan, repayment of the Mortgage
Debt could only be made through the sale of the Hotel.
Debt Service Advances
Through December 31, 1995, all cash flow and capital proceeds from the Hotel,
including amounts that otherwise would be distributable to the General Partner
and HMH (the"Other Santa Clara Partners"), are available to make required debt
service payments on the Mortgage Debt. To the extent, however, that the debt
service payments on the Mortgage Debt exceed 50% of the cash flow available
before debt service, as defined, the Other Santa Clara Partners will be
considered to have made an advance to the Partnership (the "Debt Service
Advances"). No additional Debt Service Advances will be available to the
Partnership after December 31, 1995. Debt Service Advances bear interest at the
prime rate plus one percentage point. After December 31, 1995, to the extent
debt service is greater than 50% of cash flow available before debt service, MHP
II must make capital contributions to cover such amounts.
Any outstanding Debt Service Advances, together with accrued interest, will be
repayable prior to certain distributions and will be due, in any event, ten
years after the date of each advance. There have been no Debt Service Advances
since inception of the Partnership.
32
<PAGE>
NOTE 7. THE GROUND LEASE
The Hotel is located on a site that is leased from unrelated parties for an
initial term expiring November 30, 2028. The Partnership has the option to
extend the term of each ground lease for up to three successive terms of ten
years each. Rent expense for the years ended December 31, 1995, 1994 and 1993
was $67,000, $80,000 and $64,000, respectively. Aggregate minimum annual ground
rentals during the term of the leases are as follows:
Lease Year
----------
1996 $ 72,746
1997 72,746
1998 72,746
1999 72,746
2000 72,746
Thereafter 2,533,970
-----------
$ 2,897,700
===========
NOTE 8. MANAGEMENT AGREEMENT
The Partnership entered into a long-term hotel management agreement (the
"Management Agreement") with the Manager to manage the Hotel for an initial
20-year term expiring on December 31, 2008. The Manager also manages the New
Orleans Marriott Hotel, the Marriott Rivercenter Hotel, and the Bishop Ranch
Marriott Hotel (the "Other Hotels") on behalf of the Marriott Hotel Properties
II Limited Partnership. The Manager has the option to renew the Management
Agreement for up to four additional 10-year terms. The Manager is paid a base
management fee equal to 3% of gross hotel sales. Base management fees paid in
1995, 1994 and 1993 were $1,079,000, $967,000 and $906,000, respectively.
In addition, the Manager is entitled to an incentive management fee equal to 20%
of Hotel Operating Profit, as defined. The incentive management fee is payable
only out of 55% of Hotel operating profit after payments of ground rent and 200%
of each of the following: (i) qualifying debt service, as defined; (ii) the
pro-rata share of total debt service shortfall, as defined; (iii) owner's 10%
priority return, as defined; and (iv) through the year ending December 31, 1995,
any amounts due under the Debt Service Advance agreement. Deferred incentive
management fees earned accrue without interest and are payable from future
operating cash flow, as defined. Incentive management fees earned by the Manager
for the years ended December 31, 1995, 1994 and 1993 were $2,175,000, $1,761,000
and $1,577,000, respectively. Deferred incentive management fees as of December
31, 1995 and 1994 were $601,000 and $298,000, respectively.
33
<PAGE>
Pursuant to the terms of the Management Agreement, the Manager is required to
furnish the Hotel with certain services ("Chain Services") which are generally
provided on a central or regional basis to all hotels in the Manager's full
service hotel system. Chain Services include central training, advertising and
promotion, a national reservations system, computerized payroll and accounting
services, and such additional services as needed which may be more efficiently
performed on a centralized basis. Costs and expenses incurred in providing such
services are allocated among all domestic full service hotels managed, owned or
leased by the Manager. In addition, the Hotel also participates in the Manager's
Honored Guest Awards Program ("HGA"). The cost of this program is charged to all
hotels in the Manager's full service hotel system based upon the HGA sales at
each hotel. The total amount of Chain Services and HGA costs charged to the
Partnership for the years ended December 31, 1995, 1994 and 1993 were
$1,537,000, $1,241,000 and, $835,000, respectively.
The Management Agreement also provides for the establishment of a property
improvement fund for the Hotel to cover (a) the cost of certain non-routine
repairs and maintenance to the Hotel which are normally capitalized; and (b) the
cost of replacements and renewals to the Hotel's property and improvements.
Contributions to the property improvement fund are equal to 5% of gross Hotel
sales. Contributions to the property improvement fund were $1,799,000,
$1,611,000 and $1,510,000 in 1995, 1994 and 1993, respectively. The property
improvement fund is included in Other Assets on the accompanying balance sheet.
Pursuant to the terms of the Management Agreement, the Partnership is required
to provide the Manager with working capital to meet the operating needs of the
Hotel. The Manager converts cash advanced by the Partnership into other forms of
working capital consisting primarily of operating cash, inventories, and trade
receivables and payables which are maintained and controlled by the Manager.
Upon termination of the Management Agreement, the working capital will be
returned to the Partnership. The individual components of working capital
controlled by the Manager are not reflected in the Partnership's balance sheet.
As of December 31, 1995 and 1994, $1,400,000 has been advanced to the Manager
for working capital and is included in Due from Marriott International, Inc. on
the accompanying balance sheet.
NOTE 9. SUBSEQUENT EVENTS
The Mortgage Debt of the Partnership totaling $43.5 million matured on March 21,
1996. An extension between the Partnership and the current lenders extended the
maturity date for an additional six months until an agreement could be reached
with another lender. On July 10, 1996, the General Partner signed a commitment
letter with a new third party lender. Under the terms of the extension, interest
accrued at the London interbank offered rate ("LIBOR") plus 187.5 basis points
for the first three months and LIBOR plus 225.0 basis points for the second
three months. No principal amortization was required during the extension.
On September 23, 1996 (the "Closing Date") the General Partner was successful in
refinancing the Partnership's Mortgage Debt, as well as the $222.5 million
Mortgage Debt of the Marriott Hotel Properties II Limited Partnership ("MHPII")
under substantially identical terms. A total of $266.0 million was borrowed
pursuant to the July 10, 1996 commitment letter with the new third party lender,
$43.5 million of which is recorded on the
34
<PAGE>
Partnership's financial statements. The Partnership's Mortgage Debt will
continue to be non-recourse to the Partnership and is secured by a first
mortgage on the Hotel. The debt will bear interest at a fixed rate of 8.22%
based upon actual number of days over a 360 day year for an 11-year term
expiring October 11, 2007, requires payments of interest only during the first
loan year (October 1996 through September 1997) and then principal amortization
based upon a 20-year amortization schedule beginning with the second loan year.
Additionally, the refinancing substantially restricts the ability of the
Partnership to sell the Hotel during such term and prohibits the Partnership
from prepaying any debt for an extended period without paying a substantial
premium during such term.
On the Closing Date, MHPII was required to establish certain reserves for the
Partnership including:
o $426,000 for Americans with Disabilities Act of 1990 modifications,
deferred maintenance work and environmental remediation projects
identified during the course of the appraisal and environmental
studies undertaken in conjunction with the refinancing;
o A debt service reserve equal to two months of debt service - Based
upon current forecasts, it is expected that cash from operations will
be sufficient for the required payment terms of the Mortgage Debt.
However, due to the seasonality of the Hotel's operations, the timing
of debt service payments and the lender's desire for additional
security, MHPII was required to establish this debt service reserve;
and
o A ground rent reserve equal to one month of ground rent.
These reserves were primarily funded from reserves established by the General
Partner held by MHPII with a portion also funded from the Partnership's property
improvement fund.
35
<PAGE>
SANTA CLARA MARRIOTT HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF INCOME
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Quarter-to-Date Year-to-Date
------------------------------------- ------------------------------------
For The For The For The For The
Twelve-Weeks Twelve-Weeks Thirty-Six Thirty-Six
Ended Ended Weeks Ended Weeks Ended
September 6, 1996 September 8, 1995 September 6, 1996 September 8, 1995
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES $3,541 $3,496 $11,772 $10,288
------ ------ ------- -------
OPERATING COSTS AND EXPENSES
Depreciation and amortization 638 638 1,696 1,896
Interest 781 695 2,177 2,138
Incentive management fee 529 530 1,788 1,551
Base management fee 266 252 835 753
Property taxes 113 117 344 351
Ground rent and other 56 45 197 145
------ ------ ------ -------
2,383 2,277 7,237 6,834
------ ------ ------ -------
NET INCOME $1,158 $1,219 $4,535 $ 3,454
====== ====== ====== =======
ALLOCATION OF NET INCOME
MHP Two Corporation $19 $19 $67 $56
MHP II Limited Partnership 188 262 1,179 658
HMH Properties, Inc. 951 938 3,289 2,740
------ ------ ------- ------
$1,158 $1,219 $4,535 $3,454
====== ====== ======= ======
</TABLE>
36
<PAGE>
SANTA CLARA MARRIOTT HOTEL LIMITED PARTNERSHIP
CONDENSED BALANCE SHEET
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
September 6, December 31,
ASSETS 1996 1995
----------------- ------------------
<S> <C> <C>
Property and Equipment, net $ 30,048 $ 28,406
Due from Marriott International, Inc. 2,099 1,976
Property Improvement Fund 1,519 1,614
Cash and Cash Equivalents 2,849 1,614
-------- ---------
$ 36,515 $ 33,610
======== ========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Mortgage Debt $ 43,500 $ 43,500
Due to Marriott International, Inc. 2,382 1,086
Accounts Payable and Accrued Expenses 151 117
-------- ---------
Total Liabilities 46,033 44,703
-------- ---------
PARTNERS' CAPITAL (DEFICIT)
General Partner
Marriott MHP Two Corporation 374 334
-------- ---------
Limited Partners
Marriott Hotel Properties II
Limited Partnership (27,221) (27,760)
HMH Properties, Inc. 17,329 16,333
-------- ---------
Total Partners' Capital (Deficit) (9,518) (11,093)
-------- ---------
$ 36,515 $ 33,610
======== =========
</TABLE>
37
<PAGE>
SANTA CLARA MARRIOTT HOTEL LIMITED PARTNERSHIP
CONDENSED STATEMENT OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
For The For The
Thirty-Six Thirty-Six
Weeks Ended Weeks Ended
September 6, 1996 September 8, 1995
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $4,535 $3,454
Noncash items 1,896 1,896
Changes in operating accounts 1,207 151
------- ------
Cash provided by operations 7,638 5,501
------- ------
INVESTING ACTIVITIES
Additions to property and equipment, net (3,538) (1,239)
Change in property improvement fund 95 (71)
------- ------
Cash used in investing acitivities (3,443) (1,310)
------- ------
FINANCING ACTIVITIES
Capital Distributions (2,960) (4,183)
------- ------
Cash used in financing activities (2,960) (4,183)
------- ------
INCREASE IN CASH AND
CASH EQUIVALENTS 1,235 8
CASH AND CASH EQUIVALENTS
at beginning of period 1,614 1,216
------- ------
CASH AND CASH EQUIVALENTS
at end period $ 2,849 $1,224
======= ======
SUPPLEMENTAL DISCLOSURE:
Cash paid for mortgage interest $2,126 $2,091
======= ======
</TABLE>
38
<PAGE>
Notes to Condensed Financial Statements
(Unaudited)
The accompanying condensed financial statements have been prepared by the Santa
Clara Marriott Hotel Limited Partnership (the "Partnership") without audit.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted from the accompanying statements. The Partnership
believes the disclosures made are adequate to make the information presented not
misleading. However, the condensed financial statements should be read in
conjunction with the Partnership's 1995 Financial Statements.
In the opinion of the Partnership, the accompanying condensed unaudited
financial statements reflect all adjustments (which include only normal
recurring adjustments) necessary to present fairly the financial position of the
Partnership as of September 6, 1996, the results of operations for the twelve
weeks and thirty-six weeks ended September 6, 1996 and September 8, 1995 and
cash flows for the thirty-six weeks ended September 6, 1996 and September 8,
1995. Interim results are not necessarily indicative of fiscal year performance
because of seasonal and short-term variations.
39
<PAGE>
EXHIBIT A-2
PRIME RETAIL PROPERTIES
INDEX TO UNAUDITED COMBINED INTERIM FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
UNAUDITED INTERIM COMBINED FINANCIAL STATEMENTS
Combined Balance Sheets of Prime Retail Properties as of September 30, 1996
and December 31, 1995................................................................................ F-2
Combined Statements of Operations of Prime Retail Properties for the nine months ended September 30,
1996 and 1995........................................................................................ F-3
Combined Statements of Cash Flows of Prime Retail Properties for the nine months ended September 30,
1996 and 1995........................................................................................ F-4
Notes to Interim Combined Financial Statements of Prime Retail Properties.............................. F-5
</TABLE>
INDEX TO AUDITED COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
COMBINED AUDITED FINANCIAL STATEMENTS
PRIME RETAIL PROPERTIES
Report of Independent Auditors......................................................................... F-8
Combined Balance Sheets of Prime Retail Properties as of December 31, 1995
and December 31, 1994................................................................................ F-9
Combined Statements of Operations of Prime Retail Properties for the years ended
December 31, 1995, 1994 and 1993..................................................................... F-10
Combined Statements of Cash Flows of Prime Retail Properties for the years ended
December 31, 1995, 1994 and 1993..................................................................... F-11
Combined Statements of Parters' Capital of Prime Retail Properties..................................... F-12
Notes to Combined Financial Statements of Prime Retail Properties...................................... F-13
JMJ ACQUIRED PROPERTIES
Report of Independent Auditors......................................................................... F-22
Statements of Revenue and Certain Expenses and Notes thereto........................................... F-23
</TABLE>
F-1
<PAGE>
PRIME RETAIL PROPERTIES
COMBINED BALANCE SHEETS
(in thousands)
(Unaudited)
September 30, December 31,
1996 1995
------------- ------------
Assets
Investment in rental property, at cost:
Land...................................... $ 30,080 $ 29,516
Buildings and improvements................ 400,002 390,779
Property under development................ 19,277 848
Furniture and equipment................... 2,309 2,010
----- -----
451,668 423,153
Accumulated depreciation.................. (43,636) (31,573)
-------- -------
408,032 391,580
Cash and cash equivalents...................... 4,087 3,507
Restricted cash................................ 2,122 1,975
Accounts receivable, net....................... 4,750 6,253
Deferred charges, net.......................... 5,869 14,424
Other assets................................... 355 265
--- --
Total assets................................... $425,215 $ 418,004
======== =========
Liabilities and Partners' Capital
Notes payable.................................. $298,908 $ 296,620
Accrued interest............................... 1,739 2,005
Real estate taxes payable...................... 3,329 1,310
Due to affiliates, net......................... 1,668 14,767
Construction costs payable..................... 5,875 7,999
Accounts payable and other liabilities......... 6,965 6,139
----- -----
Total liabilities......................... 318,484 328,840
Partners' capital.............................. 106,731 89,164
------- ------
Total liabilities and partners' capital........ $425,215 $ 418,004
======== =========
See accompanying notes to combined financial statements.
F-2
<PAGE>
PRIME RETAIL PROPERTIES
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
Nine months ended September 30
---------------------------------
1996 1995
------------ -------------
Revenue
Base rents................................. $38,697 $32,796
Percentage rents........................... 1,461 1,345
Tenant reimbursements...................... 18,394 16,109
Interest and other......................... 2,180 1,625
--------- ----------
Total revenues......................... 60,732 51,875
Expenses
Property operating......................... 14,283 11,957
Real estate taxes.......................... 3,884 3,889
Depreciation and amortization.............. 13,186 10,480
General and administrative................. 1,066 432
Interest................................... 19,276 14,646
Property management fee.................... 267 192
Other charges.............................. 1,455 --
--------- ----------
Total expenses......................... 53,417 41,596
--------- ----------
Income before extraordinary item........... 7,315 10,279
Extraordinary item-loss on early
extinguishment of notes payable........ (4,280) --
--------- ----------
Net income................................. $ 3,035 $10,279
========= ==========
See accompanying notes to combined financial statements.
F-3
<PAGE>
PRIME RETAIL PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Nine months ended
September 30
1996 1995
---- ----
Operating Activities
Net income.............................................. $ 3,035 $ 10,279
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization....................... 13,186 10,618
Amortization of deferred financing cost and
interest rate protection contracts............... 2,586 2,312
Extraordinary item.................................. 4,280 --
Write off of financing costs........................ 1,806 --
Provision for uncollectible accounts receivable..... 435 197
Gain on sale of land and improvements............... -- (288)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable.......... 1,068 (1,608)
Increase in restricted cash......................... (147) (256)
Increase (decrease) in due to affiliates, net....... (13,099) 10,101
Increase in other assets............................ (90) (32)
Increase (decrease) in accrued interest............. (266) 520
Increase in accounts payable and other liabilities.. 2,845 1,826
-------- -------
Net cash provided by operating activities.......... 15,639 33,669
Investing Activities
Purchase of land........................................ (564) (3,087)
Net proceeds from sale of land and improvements......... -- 377
Purchase of buildings and improvements.................. (11,717) (28,253)
Construction costs...................................... (18,348) (40,110)
Leasing commissions..................................... (9)
-------- -------
Cash used in investing activities.................. (30,638) (71,066)
Financing Activities
Proceeds from notes payable............................. 104,175 133,078
Principal repayments on notes payable...................(101,887) (41,421)
Deferred financing costs................................ (1,241) (3,204)
Partners' capital contributions......................... 25,720 71,683
Distributions to partners............................... (11,188) (122,871)
-------- -------
Net cash provided by financing activities.......... 15,579 37,265
-------- -------
Increase (decrease) in cash and cash equivalents........ 580 (132)
Cash and cash equivalents at beginning of period........ 3,507 3,115
-------- -------
Cash and cash equivalents at end of period..............$ 4,087 $ 2,983
======== ==========
See accompanying notes to combined financial statements.
F-4
<PAGE>
PRIME RETAIL PROPERTIES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS
(Amounts in thousands)
(Unaudited)
Note 1 - Interim Financial Presentation
The accompanying unaudited combined financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") for interim
financial information and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for
such interim periods are not necessarily indicative of the results which may be
expected for a full fiscal year. For further information, refer to the combined
financial statements for the year ended December 31, 1995 and notes thereto
included elsewhere in this Prospectus.
Organization
Prime Retail, Inc. (the "Company") was organized as a Maryland corporation on
July 16, 1993. The Company is a self-administered, self-managed real estate
investment trust engaged in the ownership, development, construction,
acquisition, leasing, marketing and management of factory outlet centers.
The Company commenced operations on March 22, 1994, upon completion of its
initial public offerings (the "Offerings"). The Company received proceeds from
the Offerings, which were contributed by the Company to Prime Retail, L.P. (the
"Operating Partnership") in exchange for certain partnership interests therein.
Basis of Presentation
The accompanying combined balance sheets, statements of operations, and cash
flows for the nine months ended September 30, 1996 and 1995, have been prepared
for the purpose of presenting combined historical information for fourteen of
the properties (the "Prime Retail Properties") under common control and/or
management of the Company. At September 30, 1996, Prime Retail Properties
included:
Name of Property Location
- ---------------- --------
San Marcos Factory Shops San Marcos, Texas
Grove City Factory Shops Grove City, Pennsylvania
Castle Rock Factory Shops Castle Rock, Colorado
Ohio Factory Shops Jeffersonville, Ohio
Gainesville Factory Shops Gainesville, Texas
Magnolia Bluff Factory Shops Darien, Georgia
Gulf Coast Factory Shops Ellenton, Florida
Huntley Factory Shops Huntley, Illinois
Gulfport Factory Shops Gulfport, Mississippi
Florida Keys Factory Shops Florida City, Florida
Indiana Factory Shops Daleville, Indiana
Nebraska Crossing Factory Shops Gretna, Nebraska
Triangle Factory Shops Raleigh-Durham, North Carolina
Coral Isle Factory Shops Naples/Marco Island, Florida
F-5
<PAGE>
PRIME RETAIL PROPERTIES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
(Unaudited)
Note 1 - Interim Financial Presentation (Continued)
Profits and losses are allocated in accordance with the terms of the respective
agreement of partnership. The preparation of combined financial statements in
conformity with GAAP requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the combined financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
intercompany accounts and transactions have been eliminated in combination.
Note 2 -- Notes Payable
On August 1, 1996, Prime Retail Properties closed on the refinancing of certain
credit facilities (the "Nomura Credit Facilities") with Nomura Asset Capital
Corporation ("Nomura"). The Nomura Credit Facilities provided an aggregate of
$253,000 of financing to Prime Retail Properties. The Nomura Credit Facilities
were used (i) to refinance $151,323 which was outstanding under a revolving
credit facility, (ii) to refinance $97,411 which was outstanding under a
securitized mortgage loan, (iii) to pay loan fees and transaction costs of
$3,600, and (iv) for working capital purposes. Under the terms of the
refinancing, the Nomura Credit Facilities consisted of two notes, one in the
amount of $218,000 and the other in the amount of $35,000. Each note required
monthly payments of interest-only at a rate equal to 30-day LIBOR plus 1.513%.
At September 30, 1996, the outstanding balance of the Nomura Credit Facilities
was $253,000. The Nomura Credit Facilities were repaid on November 1, 1996 in
connection with the closing of certain loan transactions as described below.
In connection with the execution of the binding commitment for the Nomura
Credit Facilities, Prime Retail Properties incurred a nonrecurring charge and
extraordinary loss of $1,806 and $4,280, respectively, during the second
quarter of 1996. The nonrecurring loss resulted from (i) the unamortized cost
of certain interest rate protection contracts of $3,696 and (ii) other
nonrefundable deferred financing costs of $350, less the estimated fair market
value of the interest rate protection contracts of $2,240 based on their fair
market value at May 31, 1996. The extraordinary loss resulted from (i) the
write-off of unamortized deferred financing costs of $3,458 relating to the
early extinguishment of debt, and (ii) debt prepayment penalties of $822.
On November 1, 1996, Prime Retail Properties closed on a $283,200 non-recourse
first mortgage loan (the "First Mortgage Loan") with Nomura and a $40,000
non-recourse expansion loan (the "Expansion Loan"). The First Mortgage Loan and
the Expansion Loan (i) are cross-collateralized by first mortgages on the
fourteen factory outlet centers included in Prime Retail Properties, (ii) bear
a variable interest rate of 30-day LIBOR plus 1.51% during the first two years
and a fixed interest rate of 7.782% for the balance of the seven-year term, and
(iii) require monthly principal and interest payments pursuant to a level
payment 360 - month amortization schedule. The First Mortgage Loan and the
Expansion Loan can be prepaid only after year two by the use of certain debt
defeasance and yield maintenance provisions and are effectively due at the end
of year seven.
F-6
<PAGE>
PRIME RETAIL PROPERTIES
NOTES TO INTERIM COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
(Unaudited)
Note 2 -- Notes Payable (Continued)
On November 1, 1996, Prime Retail Properties amended certain of its interest
rate protection contracts with an aggregate notional amount of $96,441 at
September 30, 1996. The significant terms that were amended included (i) an
increase in the notional amount to $262,000, and (ii) a change in the
termination date from July 1, 2000 to November 11, 1998. In addition, on
November 1, 1996, Prime Retail Properties purchased an interest rate protection
contract with a notional amount of $61,200 that provides for a cap to the
variable interest rate index at 7.00% and a termination date of November 11,
1998. As a result, Prime Retail Properties held interest rate protection
contracts with an aggregate notional amount of $323,200 as of November 1, 1996
to reduce its exposure to increases in short-term interest rates with respect
to the First Mortgage Loan and the Expansion Loan, prior to the fixed interest
rate period which commences after twenty-four months.
F-7
<PAGE>
Report of Independent Auditors
To the Board of Directors
Prime Retail, Inc.
We have audited the accompanying combined balance sheets of Prime Retail
Properties as of December 31, 1995 and 1994 and the related combined statements
of operations, partners' capital (deficit) and cash flows for each of the three
years in the period ended December 31, 1995. These financial statements are the
responsibility of Prime Retail Properties' management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Prime Retail
Properties at December 31, 1995 and 1994, the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Baltimore, Maryland
January 30, 1996
except for Note 5, as to which the date is
November 1, 1996
F-8
<PAGE>
PRIME RETAIL PROPERTIES
COMBINED BALANCE SHEETS
(in thousands)
December 31
---------------------------------
1995 1994
-------------- --------------
Assets
Investment in rental property, at cost:
Land.................................... $ 29,516 $ 25,113
Buildings and improvements.............. 390,779 311,649
Property under development.............. 848 2,110
Furniture and equipment................. 2,010 1,410
----------- -----------
423,153 340,282
Accumulated depreciation................ (31,573) (18,746)
----------- -----------
391,580 321,536
Cash and cash equivalents.................... 3,507 3,115
Restricted cash.............................. 1,975 2,036
Accounts receivable, net..................... 6,253 5,382
Deferred charges, net........................ 14,424 15,026
Other assets................................. 265 131
----------- -----------
Total assets................................. $ 418,004 $ 347,226
=========== ===========
Liabilities and Partners' Capital
Notes payable................................ $ 296,620 $ 165,411
Accrued interest............................. 2,005 971
Real estate taxes payable.................... 1,310 479
Due to affiliates, net....................... 14,767 1,182
Construction costs payable................... 7,999 13,989
Accounts payable and other liabilities....... 6,139 6,172
----------- -----------
Total liabilities....................... 328,840 188,204
Partners' capital............................ 89,164 159,022
----------- -----------
Total liabilities and partners' capital...... $ 418,004 $ 347,226
=========== ===========
See accompanying notes to combined financial statements.
F-9
<PAGE>
PRIME RETAIL PROPERTIES
COMBINED STATEMENTS OF OPERATIONS
(in thousands)
Year ended December 31
-----------------------------------------
1995 1994 1993
---- ---- ---
Revenue
Base rents........................... $45,381 $29,383 $13,809
Percentage rents..................... 2,005 1,858 1,360
Tenant reimbursements................ 22,219 13,577 6,357
Interest and other................... 2,168 2,176 797
--------- --------- ---------
Total revenues................... 71,773 46,994 22,323
Expenses
Property operating................... 16,800 11,049 5,338
Real estate taxes.................... 4,658 2,386 965
Depreciation and amortization........ 14,543 9,707 6,719
General and administrative........... 761 862 606
Interest............................. 20,083 9,624 7,388
Property management fee.............. 265 407 782
Other charges........................ 25 50 127
--------- -------- ---------
Total expenses................... 57,135 34,085 21,925
--------- --------- ---------
Income before extraordinary item..... 14,638 12,909 398
Extraordinary item-loss on early
extinguishment of notes payable.. -- (1,098) --
--------- --------- ---------
Net income........................... $14,638 $11,811 $ 398
======= ======= =========
See accompanying notes to combined financial statements.
F-10
<PAGE>
PRIME RETAIL PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended December 31
-------------------------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Operating Activities
Net income.............................................. $ 14,638 $ 11,811 $ 398
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization....................... 14,543 9,707 6,719
Amortization of deferred financing costs and
interest rate protection contracts................ 3,134 2,006 391
Extraordinary item.................................. -- 1,098 --
Provision for uncollectible accounts receivable..... 364 394 166
Gain on sale of land and improvements............... (288) -- (259)
Changes in operating assets and liabilities:
Increase in accounts receivable..................... (1,235) (1,813) (2,879)
Increase (decrease) in restricted cash.............. 61 (1,747) (5)
Increase (decrease) in due to affiliates, net....... 13,585 978 (1,027)
Increase in other assets............................ (134) (216) (150)
Increase (decrease) in accrued interest............. 1,034 (1,075) 1,772
Increase in accounts payable and other liabilities.. 798 3,825 1,044
----------- ----------- -----------
Net cash provided by operating activities.......... 46,500 24,968 6,170
Investing Activities
Purchase of land........................................ (4,403) (11,253) (13,282)
Net proceeds from sale of land and improvements......... 377 -- 297
Purchase of buildings and improvements.................. (80,041) (131,947) (31,607)
Construction costs...................................... (4,728) (665) (26,056)
Leasing commissions..................................... (383) (1,422) (2,895)
----------- ----------- -----------
Cash used in investing activities.................. (89,178) (145,287) (73,543)
Financing Activities
Proceeds from notes payable............................. 173,677 161,064 92,084
Principal repayments on notes payable................... (42,468) (163,897) (18,021)
Deferred financing costs................................ (3,643) (9,936) (1,442)
Partners' capital contributions......................... 87,534 220,221 --
Distributions to partners............................... (172,030) (88,791) (1,279)
----------- ----------- -----------
Net cash provided by financing activities.......... 43,070 118,661 71,342
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents........ 392 (1,658) 3,969
Cash and cash equivalents at beginning of year.......... 3,115 4,773 804
----------- ----------- -----------
Cash and cash equivalents at end of year................ $ 3,507 $ 3,115 $ 4,773
=========== =========== ===========
Schedule of Noncash Investing Activities
Basis adjustment........................................$ -- $ 22,595 $ --
Distribution of land.................................... -- (2,405) --
</TABLE>
See accompanying notes to combined financial statements.
F-11
<PAGE>
PRIME RETAIL PROPERTIES
COMBINED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(in thousands)
Balance at January 1, 1993......... $ (4,781)
Distributions...................... (1,279)
Net income......................... 398
Balance at December 31, 1993....... (5,662)
Contributions...................... 242,816
Distributions...................... (89,943)
Net income......................... 11,811
Balance at December 31, 1994....... 159,022
Contributions...................... 87,534
Distributions...................... (172,030)
Net income......................... 14,638
Balance at December 31, 1995....... $ 89,164
See accompanying notes to combined financial statements.
F-12
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
(Amounts in thousands)
Note 1 - Organization and Basis of Presentation
Organization
Prime Retail, Inc. (the "Company") was organized as a Maryland corporation on
July 16, 1993. The Company is a self-administered, self-managed real estate
investment trust engaged in the ownership, development, construction,
acquisition, leasing, marketing and management of factory outlet centers.
The Company commenced operations on March 22, 1994, upon completion of its
initial public offerings (the "Offerings"). The Company received proceeds from
the Offerings, which were contributed by the Company to Prime Retail, L.P. (the
"Operating Partnership") in exchange for certain partnership interests therein.
Basis of Presentation
The accompanying combined balance sheets, statements of operations, and cash
flows have been prepared for the purpose of presenting combined historical
information for fourteen of the properties (the "Prime Retail Properties")
under common control and/or management of the Company. At December 31, 1995,
Prime Retail Properties included:
Name of Property Location
- ---------------- --------
San Marcos Factory Shops San Marcos, Texas
Grove City Factory Shops Grove City, Pennsylvania
Castle Rock Factory Shops Castle Rock, Colorado
Gainesville Factory Shops Gainesville, Texas
Gulf Coast Factory Shops Ellenton, Florida
Ohio Factory Shops Jeffersonville, Ohio
Magnolia Bluff Factory Shops Darien, Georgia
Huntley Factory Shops Huntley, Illinois
Gulfport Factory Shops Gulfport, Mississippi
Florida Keys Factory Shops Florida City, Florida
Indiana Factory Shops Daleville, Indiana
Nebraska Crossing Factory Shops Gretna, Nebraska
Triangle Factory Shops Raleigh-Durham, North Carolina
Coral Isle Factory Shops Naples/Marco Island, Florida
F-13
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
Note 1 - Organization and Basis of Presentation (Continued)
Profits and losses are allocated in accordance with the terms of the respective
agreement of partnership. The preparation of combined financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the combined financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
Significant intercompany accounts and transactions have been eliminated in
combination.
Risks and Uncertainties
Prime Retail Properties' results of operations are significantly dependent on
the overall health of the retail industry. Prime Retail Properties' tenant base
is comprised almost exclusively of merchants in the retail industry. The retail
industry is subject to external factors such as inflation, consumer confidence,
unemployment rates and consumer tastes and preferences. A decline in the retail
industry could reduce merchant sales, which could adversely affect the
operating results of Prime Retail Properties. A number of the merchants have
occupied space in more than one of Prime Retail Properties' factory outlet
centers; however, no single merchant accounted for more than 10% of the
Company's revenues.
Note 2 - Summary of Significant Accounting Policies
Rental Property
Depreciation is calculated on the straight-line basis over the estimated useful
lives of the assets which are as follows:
Land improvements.................................. 20 years
Building and improvements.......................... Principally 40 years
Tenant improvements................................ Term of related lease
Furniture and equipment............................ 5 years
Rental property is carried at the lower of depreciated cost or net realizable
value. Development costs, which include fees and costs incurred in developing
new properties or phases, are capitalized as incurred. Upon completion of
construction, development costs are amortized over the useful lives of the
respective properties or phases on a straight-line basis.
Expenditures for ordinary maintenance and repairs are expensed to operations as
incurred. Significant renovations and improvements which improve and/or extend
the useful life of assets are capitalized and depreciated over their estimated
useful lives.
F-14
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
Note 2 - Summary of Significant Accounting Policies (Continued)
Prime Retail Properties evaluates its rental properties periodically to assess
whether any impairment indications are present, including recurring operating
losses and significant adverse changes in the business climate that affect the
recovery of recorded asset value. If any rental property is considered
impaired, a loss is provided to reduce the carrying value of the asset to its
estimated net realizable value. No impairment losses have been recorded in any
of the periods presented.
Effective April 1, 1994, Prime Retail Properties changed the estimated useful
lives used to compute depreciation for certain buildings and improvements from
5 to 10 years to useful lives ranging from 10 to 40 years. This change was made
to better reflect the estimated periods during which such assets will remain in
service. The change had the effect of reducing depreciation expense and
increasing net income by approximately $545 and $1,663 for the years ended
December 31, 1995 and 1994, respectively.
Cash Equivalents
Prime Retail Properties considers highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
Accounts Receivable
Management regularly reviews accounts receivable and determines an appropriate
range for the allowance for doubtful accounts based upon the impact of economic
conditions on the merchants' ability to pay, past collection experience and
such other factors which, in management's judgment, deserve current
recognition. In turn, a provision is charged against earnings in order to
maintain the allowance level within this range. The allowance for doubtful
accounts at December 31, 1995 and 1994 was $495 and $414, respectively.
Accounts receivable due after one year relating to straight-line rents were
$2,707 and $1,510 at December 31, 1995 and 1994, respectively.
Deferred Charges
Deferred charges consist of leasing commissions and financing costs. Deferred
leasing commissions incurred to originate and renew operating leases are
amortized on a straight-line basis over the term of the related lease. Fees and
costs incurred to obtain financing are deferred and are amortized over the
terms of the respective loans on a basis that approximates the interest method.
Revenue Recognition
Leases with tenants are accounted for as operating leases. Minimum rental
income is recognized on a straight-line basis over the term of the lease and
unpaid rents are included in accounts receivable in the accompanying balance
sheets. Certain lease agreements contain provisions which provide for rents
based on a percentage of sales or based on a percentage of sales volume above a
specified threshold. In addition, the lease agreements generally provide for
the reimbursement of real estate taxes, insurance, advertising and certain
common area maintenance costs. These additional rents and tenant reimbursements
are accounted for on the accrual basis.
F-15
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
Note 2 - Summary of Significant Accounting Policies (Continued)
Interest Rate Protection Contracts
Prime Retail Properties uses interest rate protection contracts, including
interest rate caps and corridors, to manage interest rate risk associated with
floating rate debt. These contracts generally involve limiting Prime Retail
Properties' interest costs with an upper limit or specified range on the
underlying interest rate index. The cost of such contracts are included in
deferred charges and are being amortized on a straight-line basis over the life
of the contracts. Amounts earned from interest rate protection contracts are
recorded as a reduction of interest expense. Prime Retail Properties is exposed
to credit losses in the event of counterparty nonperformance, but does not
anticipate any such losses based on the creditworthiness of the counterparties.
Income Taxes
Prime Retail Properties pays no federal income taxes and the income or loss
from Prime Retail Properties is included on the respective income tax returns
of the partners.
Impact of Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", which
requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. SFAS No. 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. Prime Retail Properties will adopt
SFAS No. 121 in the first quarter of 1996 and, based on current circumstances,
management does not believe the effect of adoption will be material to the
combined financial statements.
Note 3 - Restricted Cash
At December 31, 1995 and 1994, Prime Retail Properties had placed in escrow
$1,975 and $2,036, respectively, to complete certain development projects, to
fund real estate taxes and debt service and certain operating costs under a
mortgage loan agreement.
Note 4 - Deferred Charges
Deferred charges at December 31 were as follows:
1995 1994
---- ----
Leasing commissions............. $ 8,685 $ 8,509
Financing costs................. 13,707 10,064
---------- ---------
22,392 18,573
Accumulated amortization........ (7,968) (3,547)
---------- ---------
$14,424 $15,026
========== =========
F-16
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
Note 5 - Notes Payable
Notes payable at December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Revolving line of credit, LIBOR plus 2.25%, 8.19% at December 31, 1995, due
December 31, 1996, monthly interest-only payments, collateralized by seven
properties located throughout the United States............................................ $145,478 $ --
Mortgage, LIBOR plus 2.235%, 8.21% at December 31, 1995 and 8.235% at December
31, 1994, monthly installments of $694 including interest, due July 1, 2000,
collateralized by six properties located throughout the United
States..................................................................................... 97,732 99,355
Notes payable to affiliate, LIBOR plus 1.0%, interest ranged from 6.625% to
7.1875% at December 31, 1995, principal and interest-only payments due at
various times, due August 10, 2000, collateralized by property in Grove City,
PA......................................................................................... 43,410 31,056
Second mortgage, LIBOR plus 2.25%, 8.19% at December 31, 1995, due July 31,
1996, monthly interest-only payments, collateralized by properties in Castle
Rock, CO and Huntley, IL................................................................... 10,000 --
Construction line of credit, LIBOR plus 2.50%, 8.63% at December 31, 1994,
interest-only payments, due September 30, 1995, collateralized by property in
Huntley, IL................................................................................. -- 20,000
Mortgage, LIBOR plus 2.25%, 8.38% at December 31, 1994, monthly interest-only payments,
due April 1, 1995, collateralized by property in Gainesville, TX............................ -- 15,000
-------- --------
$296,620 $165,411
======== ========
</TABLE>
Prime Retail Properties realized an extraordinary loss of $1,098 due to a
write-off of deferred financing costs as a result of extinguishing certain
mortgage obligations during the year ended December 31, 1994.
F-17
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
Note 5 - Notes Payable (Continued)
Interest costs for the year ended December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Interest incurred............................................ $19,114 $ 8,783 $ 8,031
Interest capitalized......................................... (1,586) (976) (1,034)
Interest earned on interest rate protection contracts........ (579) (189) --
Amortization of deferred financing costs
and interest rate protection contracts..................... 3,134 2,006 391
--------- --------- ------ ---
Interest expense............................................. $20,083 $ 9,624 $ 7,388
======= ======== ========
Interest paid................................................ $18,080 $ 9,637 $ 5,061
======= ======== ========
</TABLE>
The scheduled maturities of notes payable at December 31, 1995 was as follows:
1996................... $158,234
1997................... 3,047
1998................... 27,567
1999................... 11,499
2000................... 96,273
-----------
$296,620
===========
The aggregate carrying value of the notes payable at December 31, 1995
approximated their fair value.
In order to mitigate Prime Retail Properties' exposure to increases in interest
rates, Prime Retail Properties entered into various interest rate protection
contracts during 1994. At December 31, 1995, Prime Retail Properties held
interest rate protection contracts on $97,732 of other floating rate
indebtedness. This contract expires on July 1, 2000. In addition, Prime Retail
Properties purchased additional interest rate protection contracts on $43,900
of the $97,732 floating rate indebtedness to further reduce Prime Retail
Properties' exposure to increases in interest rates. These contracts have a
weighted average maturity of approximately 3.3 years.
F-18
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
Note 5 - Notes Payable (Continued)
The following table summarizes the material terms of the interest rate
protection contracts held for purposes other than trading and related
borrowings at December 31, 1995:
Interest Rate Protection Contracts
<TABLE>
<CAPTION>
Borrowings
Outstanding at
December 31, Notional
1995 Amount Date
(in millions) (in millions) Purchased Term Index Maximum Index Rate
- ------------------- -------------- --------------- --------- ---------- ------------------ ----------
<S> <C> <C> <C> <C> <C> <C>
$97.7 $97.7 6/30/94 6 years LIBOR Years 1-5 7.0%
===== =====
Year 6 8.0%
</TABLE>
Additional Interest Rate Protection on $97.7 Million Floating Rate Indebtedness
<TABLE>
<CAPTION>
Maximum Spread
Notional Between
Amount Date Maximum Index
(in millions) Purchased Term Index Maximum Index Rate Rate and Index
-------------- --------------- --------- ---------- ------------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C>
$22.0 7/1/94 4 years LIBOR Year 1 5.0% 2.0%
Year 2 5.5% 1.5%
Year 3 6.0% 1.0%
Year 4 6.5% 0.5%
21.9 3/31/94, 5 years LIBOR Year 1 3.75% 3.25%
Amended Year 2 4.25% 2.75%
7/1/94 Year 3 4.75% 2.25%
Year 4 5.25% 1.75%
Year 5 5.75% 1.25%
-----
$43.9
=====
</TABLE>
The net carrying value and the estimated fair value of interest rate protection
contracts at December 31, 1995 was $4,315 and $1,342, respectively. The
estimated fair value was based on quoted market rates at December 31, 1995.
At December 31, 1995 Prime Retail Properties' share of the Revolving Loan's
outstanding balance was $145,478. The Revolving Loan is guaranteed by the
Operating Partnership and Prime Retail Properties, and is collateralized by a
first mortgage on certain Prime Retail Properties' factory outlet centers and
certain related assets. The Revolving Loan prohibits additional third party
collateralized indebtedness on certain Prime Retail Properties' factory outlet
centers and requires compliance with certain loan covenants, as defined. The
amount available to be drawn by Prime Retail Properties under the Revolving
Loan at any time during the term of the facility is calculated based upon the
net cash flow of the collateral, as defined.
F-19
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS (Continued)
(Amounts in thousands)
Note 5 - Notes Payable (Continued)
On December 18, 1995, the Operating Partnership obtained from a financial
institution a commitment for a ten-year first mortgage loan (the "First
Mortgage Loan"). The First Mortgage Loan will bear a fixed rate of interest at
a spread over 10-year Treasury notes, depending on the level of proceeds drawn
on the facility, and will require monthly principal and interest payments
pursuant to a 25-year amortization schedule. Management can elect to fix the
interest rate on the loan facility at any time prior to the expected loan
closing in July 1996. The First Mortgage Loan will be collateralized by certain
properties of Prime Retail Properties.
On December 18, 1995, the Operating Partnership also obtained from a financial
institution a commitment for a five-year term loan (the "Term Loan") which is
expected to close simultaneously with the First Mortgage Loan. The Term Loan
will bear interest at LIBOR plus 5.00% and requires interest-only payments
during the first twelve months and then will be fully amortizing over the
balance of the term. The Term Loan will be collateralized by a pledge of the
excess cash flow of Prime Retail Properties.
Prime Retail Properties intends to prepay the Mortgage utilizing the proceeds
obtained from these loans. Upon closing of the First Mortgage Loan and the Term
Loan, Prime Retail Properties will incur an extraordinary loss of approximately
$6,550, including $5,728 relating to unamortized financing costs.
On November 1, 1996, Prime Retail Properties closed on the refinancing of
certain credit facilities with a financial institution. The proceeds of
$323,200 were used to repay certain indebtedness and purchase the remaining
partnership interest in a joint venture. As a result of receiving a binding
loan commitment in connection with the refinancing, Prime Retail Properties
incurred a nonrecurring charge and extraordinary loss of $1,806 and $4,280,
respectively.
Note 6 - Related Party Transactions
Prime Retail Properties reimburses the Operating Partnership for (i) certain
administrative costs, such as accounting and marketing costs and (ii) operating
costs paid on its behalf. During the years ended December 31, 1995 and 1994,
Prime Retail Properties incurred $1,423 and $420, respectively, for
administrative costs. At December 31, 1995, the net amount due to affiliates
primarily included $1,004 and $13,644 reimbursable to the Operating Partnership
for administrative costs and operating and financing costs, respectively.
F-20
<PAGE>
NOTES TO COMBINED FINANCIAL STATEMENTS
(Amounts in thousands)
Note 6 - Related Party Transactions (Continued)
Prior to March 22, 1994, Prime Retail Properties paid affiliates fees for
certain development, construction management, administrative, leasing and
management services. Summary information regarding fees paid by Prime Retail
Properties during 1994 and 1993 is as follows:
1994 1993
---- ----
Development fees...................... $ 76 $1,488
Construction management fees.......... 178 836
Leasing commissions................... 424 2,445
Other leasing costs................... 64 243
Property management fees.............. 341 781
Administrative costs.................. 42 68
------ ------
$1,125 $5,861
====== ======
Prior to March 22, 1994, Prime Retail Properties reimbursed an affiliate for
legal, accounting and other costs. For the year ended December 31, 1994, such
amounts were $169.
Note 7 - Lease Agreements
Prime Retail Properties is the lessor of retail space under operating leases
with lease terms that expire from 1996 to 2004. Most leases are renewable for
five years at the lessee's option. Future minimum base rent to be received
under noncancelable operating leases in effect at December 31, 1995 was as
follows:
1996............................................ $ 48,678
1997............................................ 46,075
1998............................................ 42,181
1999............................................ 34,389
2000............................................ 23,841
Thereafter...................................... 35,528
-----------
$230,692
===========
Prime Retail Properties leases land and equipment under various noncancelable
operating lease agreements. Rental expense for operating leases was $212, $164
and $62 for the years ended December 31, 1995, 1994 and 1993, respectively.
Future minimum rental payments, by year and in the aggregate, payable under
these noncancelable operating leases with initial or remaining terms of one
year or more consisted of the following at December 31, 1995:
1995................................................... $ 12
1996................................................... 200
1997................................................... 171
1998................................................... 140
1999................................................... 105
2000................................................... 89
Thereafter............................................. 7,089
------
$7,806
======
F-21
<PAGE>
Report of Independent Auditors
To the Board of Directors
Prime Retail, Inc.
We have audited the statement of revenue and certain expenses of the
JMJ Acquired Properties (the Properties) as described in Note 2 for
the year ended December 31, 1995. This statement of revenue and
certain expenses is the responsibility of the Properties' management.
Our responsibility is to express an opinion on this statement of
revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the statement of revenue
and certain expenses is free of material misstatement. An audit
includes examining on a test basis, evidence supporting the amounts
and disclosures in the statement of revenue and certain expenses. An
audit also includes assessing the basis of accounting used and the
significant estimates made by management, as well as evaluating the
overall presentation of the statement of revenue and certain expenses.
We believe that our audit of the statement of revenue and certain
expenses provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange as described in Note 2 and are not
intended to be a complete presentation of the Properties' revenue and
expenses.
In our opinion, the statement of revenue and certain expenses referred
to above presents fairly, in all material respects, the revenue and
certain expenses described in Note 2 of the JMJ Acquired Properties
for the year ended December 31, 1995, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Baltimore, Maryland
November 14, 1996
F-22
<PAGE>
JMJ Acquired Properties
Statements of Revenue and Certain Expenses
Year Nine months ended
ended December 31, September 30, 1996
1995
------------------ ------------------
Revenue: (Unaudited)
Base rents $5,032,653 $5,580,466
Percentage rents 84,151 111,068
Tenant reimbursements 2,251,545 2,009,620
Other revenue 101,904 122,255
---------- -----------
Total revenue 7,470,253 7,823,409
Expenses:
Property operating 2,027,491 1,597,394
Real estate taxes 318,494 404,900
---------- -----------
Total expenses 2,345,985 2,002,294
---------- -----------
Revenue in excess of certain expenses $5,124,268 $5,821,115
========== ===========
See accompanying notes.
F-23
<PAGE>
JMJ Acquired Properties
Notes to the Statements of Revenue and Certain Expenses
1. Business
The accompanying statements of revenue and certain expenses include
the combined operations of the following factory outlet center
properties (the "Properties") owned by an unaffiliated party.
Property Name Location Square Footage
- ------------- -------- --------------
Rocky Mountain Factory Stores Loveland, Colorado 302,940 sq. ft.
Kansas City Factory Outlets Odessa, Missouri 190,589 sq. ft
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying statements of revenue and certain expenses were
prepared for the purpose of complying with the rules and regulations
of the Securities and Exchange Commission. The statements are not
representative of the actual operations of the Properties for the
period presented nor indicative of future operations as certain
expenses, consisting of interest expense, depreciation, management
fees and certain other operating expenses have been excluded.
A summary of unaudited expenses are as follows:
Year Nine Months ended
ended December 31, September 30, 1996
1995
---------------------- -----------------------
Interest expense $1,994,321 $2,258,130
Depreciation and amortization 906,635 1,001,050
Management fees 246,825 273,742
Other 19,540 43,111
====================== =======================
Total unaudited expenses $3,167,321 $3,576,033
====================== =======================
Revenue Recognition
Rental Revenue is recognized as income in the period earned.
F-24
<PAGE>
JMJ Acquired Properties
Notes to Statements of Revenue and Certain Expenses (continued)
2. Summary of Significant Accounting Policies (continued)
Interim Unaudited Financial Information
The accompanying unaudited statement of revenue and certain expenses
has been prepared pursuant to the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, all
adjustments, consisting solely of normal recurring adjustments
necessary for the fair presentation of the accompanying financial
statement for the interim period, have been made. The statement of
revenue and certain expenses for the interim period ended September
30, 1996 are not necessarily indicative of the results to be obtained
for a full fiscal year.
3. Rentals
The Company has entered into tenant leases with terms from three to
ten years. The leases provide for tenants to share in increases in
operating expenses and real estate taxes in excess of base amounts, as
defined.
F-25
<PAGE>
JMJ Acquired Properties
Statements of Revenue and Certain Expenses
Year Nine months
ended ended
December 31, September 30,
1995 1996
------------ -------------
Revenue: (Unaudited)
Base rents $5,032,653 $5,580,466
Percentage rents 84,151 111,068
Tenant reimbursements 2,251,545 2,009,620
Other revenue 101,904 122,255
---------- ----------
Total revenue 7,470,253 7,823,409
Expenses:
Property operating 2,027,491 1,597,394
Real estate taxes 318,494 404,900
---------- ----------
Total expenses 2,345,985 2,002,294
---------- ----------
Revenue in excess of
certain expenses $5,124,268 $5,821,115
========== ==========
See accompanying notes.
F-26
<PAGE>
JMJ Acquired Properties
Notes to the Statements of Revenue and Certain Expenses
1. Business
The accompanying statements of revenue and certain expenses include the
combined operations of the following factory outlet center properties (the
"Properties") owned by an unaffiliated party.
Property Name Location Square Footage
- -------------- --------- --------------
Rocky Mountain Factory Stores Loveland, Colorado 302,940 sq. ft.
Kansas City Factory Outlets Odessa, Missouri 190,589 sq. ft.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying statements of revenue and certain expenses were prepared
for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission. The statements are not representative of
the actual operations of the Properties for the period presented nor
indicative of future operations as certain expenses, consisting of interest
expense, depreciation, management fees and certain other operating expenses
have been excluded.
A summary of unaudited expenses are as follows:
Year Nine Months
ended ended
December 31, September 30,
1995 1996
------------- --------------
Interest expense $1,994,321 $2,258,130
Depreciation and amortization 906,635 1,001,050
Management fees 246,825 273,742
Other 19,540 43,111
---------- ----------
Total unaudited expenses $3,167,321 $3,576,033
========== ==========
Revenue Recognition
Rental Revenue is recognized as income in the period earned.
F-27
<PAGE>
JMJ Acquired Properties
Notes to Statements of Revenue and Certain Expenses (continued)
2. Summary of Significant Accounting Policies (continued)
Interim Unaudited Financial Information
The accompanying unaudited statement of revenue and certain expenses has
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments,
consisting solely of normal recurring adjustments necessary for the fair
presentation of the accompanying financial statement for the interim period,
have been made. The statement of revenue and certain expenses for the
interim period ended September 30, 1996 are not necessarily indicative of
the results to be obtained for a full fiscal year.
3. Rentals
The Company has entered into tenant leases with terms from three to ten
years. The leases provide for tenants to share in increases in operating
expenses and real estate taxes in excess of base amounts, as defined.
F-28
<PAGE>
EXHIBIT B
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Asset
Securitization Corporation, Commercial Mortgage Pass-Through Certificates,
Series 1996-MD VI (the 'Global Securities') will be available only in book-entry
form. Investors in the Global Securities may hold such Global Securities through
any of The Depository Trust Company ('DTC'), CEDEL or Euroclear. The Global
Securities will be tradable as home market instruments in both the European and
U.S. domestic markets. Initial settlement and all secondary trades will settle
in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar days settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Offered Certificates will be effected on a delivery against
payment basis through the respective Depositaries of CEDEL and Euroclear (in
such capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
of their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
CEDE & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investor securities custody accounts will be credited with their holdings
against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading Between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or Euroclear
Participant at least one business day prior to settlement. CEDEL or Euroclear
will instruct the
B-1
<PAGE>
respective Depositary, as the case may be, to receive the Global Securities
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment date to and excluding the settlement
date, calculated on the basis of a year of 360 days, in each case for the actual
number of days occurring in the period for which such interest is payable.
Payment will then be made by the respective Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the CEDEL Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debit will be
back-valued to, and the interest on the Global Securities will accrue from, the
value date (which would be the preceding day when settlement occurred in New
York). If settlement is not completed on the intended value date (i.e., the
trade fails), the CEDEL or Euroclear cash debit will be valued instead as of the
actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to pre-position funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants can elect not to pre-position funds and allow that
credit line to be drawn upon to finance settlement. Under this procedure, CEDEL
Participants or Euroclear Participants purchasing Global Securities would incur
overdraft charges for one day, assuming they cleared the overdraft when the
Global Securities were credited to their accounts. However, interest on the
Global Securities would accrue from the value date. Therefore, in many cases the
investment income on the Global Securities earned during that one day period may
substantially reduce or offset the amount of such overdraft charges, although
this result will depend on each CEDEL Participant's or Euroclear Participant's
particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective Depositary for the benefit of CEDEL Participants or Euroclear
Participants. The sale proceeds will be available to the DTC seller on the
settlement date. Thus, to the DTC Participant a cross-market transaction will
settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear seller and DTC purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases, CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the bonds to
the DTC Participant's account against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, calculated on the basis of a year of 360
days, in each case for the actual number of days occurring in the period for
which such interest is payable. The payment will then be reflected in the
account of the CEDEL Participant or Euroclear Participant the following day, and
receipt of the cash proceeds in the CEDEL Participant's or Euroclear
Participant's account would be back-valued to the value date (which would be the
preceding day, when settlement occurred in New York). Should the CEDEL
Participant or Euroclear Participant have a line of credit with its respective
clearing system and elect to be in debit in anticipation of receipt of the sale
proceeds in its account, the back-valuation will extinguish any overdraft
charges incurred over the one-day period. If settlement is not completed on the
intended value date (i.e., the trade fails) receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would instead be valued
as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would
B-2
<PAGE>
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined herein), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain or intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate.
Exceptions for non-U.S. Persons (Form W-8): Beneficial owners of
Certificates that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exception for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are beneficial owners of a Certificate and
reside in a country that has a tax treaty with the United States can obtain an
exemption or reduced tax rate (depending on the treaty terms) by filing Form
1001 (Ownership, Exemption or Reduced Rate Certificate). If the treaty provides
only for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form 1001 may be filed by the Holder of a
Certificate or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The holder of a Global
Security or, in the case of a Form 1001 or a Form 4224 filer, his agent, files
by submitting the appropriate form to the person through whom it holds (the
clearing agency, in the case of persons holding directly on the books of the
clearing agency). Form W-8 and Form 1001 are effective for three calendar years
and Form 4224 is effective for one calendar year.
The term 'U.S. Person' means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, an estate that
is subject to U.S. federal income tax regardless of the source of its income or
a trust if (A) for taxable years beginning after December 31, 1996 (or for
taxable years ending after August 20, 1996, if the trustee has made an
applicable election), a court within the United States is able to exercise
primary supervision over the administration of such trust, and one or more
United States fiduciaries have the authority to control all substantial
decisions of such trust, or (B) for all other taxable years, such trust is
subject to United States federal income tax regardless of the source of its
income. Investors are advised to consult their own tax advisors for specific tax
advice concerning their holding and disposing of the Global Securities.
B-3
<PAGE>
ANNEX A
MORTGAGED PROPERTY CHARACTERISTICS
<TABLE>
<CAPTION>
PROPERTY TYPE ADDRESS CITY
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLUMBIA SUSSEX II
1 Melville Marriott Hotel - Full Service 1350 Old Walt Whitman Road Melville
2 Sheraton Hotel Newark Airport Hotel - Full Service 128 Frontage Road Newark
3 Radisson Hotel Orlando Airport Hotel - Full Service 5555 Hazeltine National Drive Orlando
4 Radisson Hotel Cincinnati Airport Hotel - Full Service Cincinnati Airport Boone County
5 Holiday Inn Louisville South Airport Hotel - Full Service 3317 Fern Valley Road Louisville
6 Holiday Inn Southfield (Detroit) Hotel - Full Service 26555 Telegraph Road Southfield
7 Best Western Eastgate Hotel - Full Service 5565 West Irlo Bronson Parkway Kissimmee
8 Radisson Lake Buena Vista Hotel - Full Service 8686 Palm Parkway Vista Centre
9 Radisson Hotel Central Birmingham Hotel - Full Service 808 South 20th Street Birmingham
10 Holiday Inn Itasca Hotel - Full Service 860 Irving Park Road W. Itasca
11 Holiday Inn Springfield Hotel - Full Service 383 East Leffel Lane Springfield
12 Holiday Inn Glen Ellyn Hotel - Full Service 1250 Roosevelt Road Glen Ellyn
TOTAL:
HORIZON II
1 Lake Elsinore Outlet Center Factory Outlet 17600 Collier Avenue Lake Elsinore
2 Southwest Outlet Center Factory Outlet 104 Interstate Highway 35 Hillsboro
3 Chesapeake Village Factory Outlet 441 Outlet Center Road Queenstown
4 Tracy Outlet Center Factory Outlet 1005 Pescadero Avenue Tracy
5 Pismo Beach Outlet Center Factory Outlet 333 Five Cities Drive Pismo Beach
TOTAL:
MHP II
1 Marriott A Hotel - Convention see text
2 Marriott B Hotel - Convention see text
3 Marriott C Hotel - Full Service see text
4 Marriott D Hotel - Full Service see text
TOTAL:
PALMER SQUARE
1 Palmer Square Mixed Nassau/Hulfish Street Princeton
2 Nassau Inn Mixed Nassau Street Princeton
3 Palmer Square Mixed John Street Princeton
4 Palmer Square Mixed Chambers/Hulfish Street Princeton
TOTAL:
PRIME RETAIL II
1 Grove City Factory Outlet Center Factory Outlet Exit 31 and I-79 Grove City
2 San Marcos Factory Shops Factory Outlet 3939 Interstate Highway 35 San Marcos
3 Castle Rock Factory Shops Factory Outlet 5050 Factory Shops Boulevard Castle Rock
4 Gulf Coast Factory Shops Factory Outlet NE I-75 and US H-way 301 Ellenton
5 Ohio Factory Shops Factory Outlet NEQ I-71 and US H-way 35 Jeffersonville
6 Loveland Factory Outlet Center Factory Outlet 5661 McWhinney Boulevard Loveland
7 Magnolia Bluff Factory Shops Factory Outlet Interstate 95 & GA 251 Darien
8 Gainesville Factory Shops Factory Outlet 4321 Interstate 35 North Gainesville
9 Gulfport Factory Shops Factory Outlet Interstate 10 & Route 49 Gulfport
10 Huntley Factory Shops Factory Outlet Interstate 90 & Route 47 Huntley
11 Florida Keys Factory Shops Factory Outlet 250 East Palm Drive Florida City
12 KC Factory Outlet Center Factory Outlet 1306 West Old Highway 40 Odessa
13 Indiana Factory Shops Factory Outlet Rt. 67 and I-State 69 Daleville
14 Nebraska Crossing Factory Shops Factory Outlet 14333 So. Highway 31 & US 80 Gretna
15 Coral Isle Factory Shops Factory Outlet 7222 Isle of Capri Road (Rt. Naples
951)
16 Triangle Factory Shops Factory Outlet 1001 Airport Boulevard Morrisville
TOTAL:
<CAPTION>
YEAR
PROPERTY STATE ZIP BUILT/RENOVATED
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COLUMBIA SUSSEX II
1 Melville Marriott New York 11747 1990
2 Sheraton Hotel Newark Airport New Jersey 07114 1989
3 Radisson Hotel Orlando Airport Florida 32812 1990
4 Radisson Hotel Cincinnati Airport Kentucky 45275 1960/86
5 Holiday Inn Louisville South Airport Kentucky 40213 1960/85
6 Holiday Inn Southfield (Detroit) Michigan 48034 1965/83
7 Best Western Eastgate Florida 34746 1982
8 Radisson Lake Buena Vista Florida 32836 1989
9 Radisson Hotel Central Birmingham Alabama 35205 1972
10 Holiday Inn Itasca Illinois 60143 1968/86
11 Holiday Inn Springfield Ohio 45505 1973/85
12 Holiday Inn Glen Ellyn Illinois 60137 1967/86
TOTAL:
HORIZON II
1 Lake Elsinore Outlet Center California 92530 1991/92/92/96
2 Southwest Outlet Center Texas 76645 1989/93/95
3 Chesapeake Village Maryland 21658 1989/90/91/92
4 Tracy Outlet Center California 95376 1994
5 Pismo Beach Outlet Center California 93449 1994
TOTAL:
MHP II
1 Marriott A 1972/1978
2 Marriott B 1988
3 Marriott C 1976/78/91
4 Marriott D 1989
TOTAL:
PALMER SQUARE
1 Palmer Square New Jersey 08542 Various
2 Nassau Inn New Jersey 08542 1937
3 Palmer Square New Jersey 08542 Various
4 Palmer Square New Jersey 08542 Various
TOTAL:
PRIME RETAIL II
1 Grove City Factory Outlet Center Pennsylvania 16127 1993/95/96
2 San Marcos Factory Shops Texas 78666 1990-1995
3 Castle Rock Factory Shops Colorado 80104 1992/93
4 Gulf Coast Factory Shops Florida 34222 1991/93
5 Ohio Factory Shops Ohio 43128 1993
6 Loveland Factory Outlet Center Colorado 80538 1994-1996
7 Magnolia Bluff Factory Shops Georgia 31305 1995
8 Gainesville Factory Shops Texas 76240 1993/94
9 Gulfport Factory Shops Mississippi 39503 1995
10 Huntley Factory Shops Illinois 60142 1994/95
11 Florida Keys Factory Shops Florida 33034 1994
12 KC Factory Outlet Center Missouri 64076 1995/1996
13 Indiana Factory Shops Indiana 47334 1994
14 Nebraska Crossing Factory Shops Nebraska 68028 1993
15 Coral Isle Factory Shops Florida 33961 1991/92
16 Triangle Factory Shops North Carolina 27560 1985
<PAGE>
<CAPTION>
1996 1996 AS
PROPERTY SF/UNITS OCC. OF DATE AMOUNT
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COLUMBIA SUSSEX II
1 Melville Marriott 371 72% TTM 8/31/1996 $ 27,205,223
2 Sheraton Hotel Newark Airport 501 83% TTM 8/31/1996 25,693,822
3 Radisson Hotel Orlando Airport 347 80% TTM 8/31/1996 15,432,202
4 Radisson Hotel Cincinnati Airport 214 73% TTM 8/31/1996 11,852,568
5 Holiday Inn Louisville South Airport 405 58% TTM 8/31/1996 11,454,831
6 Holiday Inn Southfield (Detroit) 417 44% TTM 8/31/1996 11,295,736
7 Best Western Eastgate 403 71% TTM 8/31/1996 9,068,408
8 Radisson Lake Buena Vista 200 75% TTM 8/31/1996 7,238,817
9 Radisson Hotel Central Birmingham 298 61% TTM 8/31/1996 6,125,153
10 Holiday Inn Itasca 161 58% TTM 8/31/1996 5,091,036
11 Holiday Inn Springfield 150 57% TTM 8/31/1996 3,181,897
12 Holiday Inn Glen Ellyn 121 56% TTM 8/31/1996 1,590,949
--------- ----------------------
TOTAL: 3,588 $ 135,230,640
HORIZON II
1 Lake Elsinore Outlet Center 368,785 91% 09/13/96 $ 29,475,533
2 Southwest Outlet Center 359,455 95% 09/13/96 28,476,363
3 Chesapeake Village 219,307 100% 09/13/96 17,385,569
4 Tracy Outlet Center 153,000 98% 09/13/96 12,089,965
5 Pismo Beach Outlet Center 147,560 96% 09/13/96 11,790,213
--------- -----------------------
TOTAL: 1,248,107 $ 99,217,643
MHP II
1 Marriott A 1,290 Text $ 106,000,000
2 Marriott B 999 Text 102,000,000
3 Marriott C 754 Text 43,500,000
4 Marriott D 368 Text 14,500,000
--------- -----------------------
TOTAL: 3,411 $ 266,000,000
PALMER SQUARE
1 Palmer Square 102,485 93% 05/31/96 $ 13,709,850
2 Nassau Inn 216 67% TTM 8/30/96 11,156,980
3 Palmer Square 130,502 97% 05/31/96 6,890,262
4 Palmer Square 994 N/A N/A 4,242,909
--------- -----------------------
TOTAL: N/A $ 36,000,000
PRIME RETAIL II
1 Grove City Factory Outlet Center 415,670 100% 11/01/96 $ 36,171,432
2 San Marcos Factory Shops 419,126 98% 11/01/96 34,622,655
3 Castle Rock Factory Shops 369,220 99% 11/01/96 31,475,141
4 Gulf Coast Factory Shops 340,656 98% 11/01/96 25,779,639
5 Ohio Factory Shops 308,941 96% 11/01/96 23,231,652
6 Loveland Factory Outlet Center 328,358 100% 11/01/96 22,981,849
7 Magnolia Bluff Factory Shops 299,249 82% 11/01/96 22,182,480
8 Gainesville Factory Shops 315,627 93% 11/01/96 20,983,427
9 Gulfport Factory Shops 251,239 90% 11/01/96 17,486,189
10 Huntley Factory Shops 280,112 81% 11/01/96 15,587,689
11 Florida Keys Factory Shops 207,131 90% 11/01/96 13,689,188
12 KC Factory Outlet Center 190,589 100% 11/01/96 12,789,899
13 Indiana Factory Shops 209,090 87% 11/01/96 12,490,135
14 Nebraska Crossing Factory Shops 191,544 96% 11/01/96 10,291,871
15 Coral Isle Factory Shops 126,595 99% 11/01/96 9,492,503
16 Triangle Factory Shops 193,837 89% 11/01/96 9,492,503
--------- -----------------------
TOTAL: 4,446,984 $ 318,748,252
<CAPTION>
1993 TOTAL 1994 TOTAL 1995 TOTAL 1996 TOTAL
PROPERTY REVENUE REVENUE REVENUE REVENUE
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COLUMBIA SUSSEX II
1 Melville Marriott $ 10,763,288 $ 12,965,391 $ 15,704,887 $ 16,719,510
2 Sheraton Hotel Newark Airport 14,802,098 16,076,317 15,952,686 17,462,582
3 Radisson Hotel Orlando Airport 5,438,635 6,166,288 7,325,502 8,294,477
4 Radisson Hotel Cincinnati Airport 4,373,598 5,039,480 5,161,420 5,702,956
5 Holiday Inn Louisville South Airport 6,716,735 7,021,871 6,781,811 7,171,463
6 Holiday Inn Southfield (Detroit) 4,655,295 5,373,934 6,126,886 6,147,948
7 Best Western Eastgate 4,710,799 3,834,998 4,740,812 5,311,944
8 Radisson Lake Buena Vista 4,154,674 3,556,470 3,928,852 4,483,668
9 Radisson Hotel Central Birmingham 3,817,277 4,054,514 4,799,319 5,248,354
10 Holiday Inn Itasca 2,740,065 3,227,008 3,497,804 3,633,890
11 Holiday Inn Springfield 3,183,859 2,967,372 2,837,710 2,687,073
12 Holiday Inn Glen Ellyn 1,565,164 1,888,718 2,144,178 2,178,114
--------------- --------------- --------------- ---------------
TOTAL: $ 66,921,487 $ 72,172,361 $ 79,001,867 $ 85,041,979
HORIZON II
1 Lake Elsinore Outlet Center $ 4,996,237 $ 7,207,402 $ 7,632,180 $ 7,981,552
2 Southwest Outlet Center 3,579,569 3,642,432 4,973,758 6,082,347
3 Chesapeake Village 2,778,467 3,889,179 4,084,152 4,085,378
4 Tracy Outlet Center -- 684,294 3,301,787 3,336,298
5 Pismo Beach Outlet Center -- 109,557 2,473,569 2,866,392
--------------- --------------- --------------- ---------------
TOTAL: $ 11,354,273 $ 15,532,864 $ 22,465,446 $ 24,351,967
MHP II
1 Marriott A $ 56,843,199 $ 61,650,167 $ 63,426,289 Text
2 Marriott B 59,256,970 56,197,578 62,831,795 Text
3 Marriott C 30,192,692 32,225,360 35,981,178 Text
4 Marriott D 14,748,890 15,108,181 16,446,677 Text
--------------- --------------- --------------- ---------------
TOTAL: $ 161,041,751 $ 165,181,286 $ 178,685,939 TEXT
PALMER SQUARE
1 Palmer Square $ 3,389,214 $ 3,570,246 $ 3,583,961 $ 3,796,302
2 Nassau Inn 10,013,559 10,289,069 10,525,169 10,902,484
3 Palmer Square 2,705,190 2,921,615 3,120,973 3,242,697
4 Palmer Square 1,349,290 1,466,368 1,543,871 1,667,085
--------------- --------------- --------------- ---------------
TOTAL: $ 17,457,253 $ 18,247,298 $ 18,773,974 $ 19,608,568
PRIME RETAIL II
1 Grove City Factory Outlet Center -- $ 1,719,806 $ 7,132,620 $ 9,029,960
2 San Marcos Factory Shops -- 7,227,978 7,885,889 8,437,543
3 Castle Rock Factory Shops -- 8,650,721 8,712,111 8,936,516
4 Gulf Coast Factory Shops -- 6,028,410 6,112,881 6,225,366
5 Ohio Factory Shops -- 5,006,846 5,381,209 5,511,264
6 Loveland Factory Outlet Center -- 1,638,910 4,731,779 5,765,067
7 Magnolia Bluff Factory Shops -- -- 2,319,298 4,635,935
8 Gainesville Factory Shops -- 4,839,527 6,338,332 6,485,095
9 Gulfport Factory Shops -- -- 641,605 3,610,712
10 Huntley Factory Shops -- 1,278,817 4,168,782 4,636,345
11 Florida Keys Factory Shops -- 972,299 4,081,359 3,677,032
12 KC Factory Outlet Center -- -- 1,520,957 3,542,843
13 Indiana Factory Shops -- 249,322 3,250,044 3,339,500
14 Nebraska Crossing Factory Shops -- 2,363,944 3,073,866 3,092,336
15 Coral Isle Factory Shops -- 1,739,757 2,372,257 2,360,783
16 Triangle Factory Shops -- 2,387,130 2,673,328 2,898,224
--------------- --------------- --------------- ---------------
TOTAL: $ 44,103,467 $ 70,396,317 $ 82,184,521
<PAGE>
<CAPTION>
AS OF
PROPERTY 1996 PERIOD 1993 TOTAL NOI 1994 TOTAL NOI 1995 TOTAL NOI
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COLUMBIA SUSSEX II
1 Melville Marriott TTM 8/31/1996 $ 3,607,400 $ 4,649,783 $ 6,187,173
2 Sheraton Hotel Newark Airport TTM 8/31/1996 5,310,900 5,673,882 5,752,281
3 Radisson Hotel Orlando Airport TTM 8/31/1996 1,732,857 2,273,808 3,011,928
4 Radisson Hotel Cincinnati Airport TTM 8/31/1996 1,832,998 2,133,954 2,234,811
5 Holiday Inn Louisville South Airport TTM 8/31/1996 2,808,423 2,908,147 2,718,739
6 Holiday Inn Southfield (Detroit) TTM 8/31/1996 1,112,683 1,669,576 2,210,815
7 Best Western Eastgate TTM 8/31/1996 1,995,349 1,269,130 1,825,369
8 Radisson Lake Buena Vista TTM 8/31/1996 1,700,056 1,164,584 1,420,576
9 Radisson Hotel Central Birmingham TTM 8/31/1996 967,221 1,101,662 1,458,414
10 Holiday Inn Itasca TTM 8/31/1996 671,587 908,756 1,091,127
11 Holiday Inn Springfield TTM 8/31/1996 1,233,029 1,021,383 1,003,059
12 Holiday Inn Glen Ellyn TTM 8/31/1996 218,600 453,883 536,543
--------------- --------------- ---------------
TOTAL: $ 23,191,103 $ 25,228,548 $ 29,450,835
HORIZON II
1 Lake Elsinore Outlet Center TTM 7/31/1996 $ 2,815,922 $ 5,047,250 $ 5,401,648
2 Southwest Outlet Center TTM 7/31/1996 2,650,859 2,868,991 3,806,803
3 Chesapeake Village TTM 7/31/1996 2,048,075 3,070,607 3,214,676
4 Tracy Outlet Center TTM 7/31/1996 -- 421,369 2,370,544
5 Pismo Beach Outlet Center TTM 7/31/1996 -- 73,518 1,763,734
--------------- --------------- ---------------
TOTAL: $ 7,514,856 $ 11,481,735 $ 16,557,405
MHP II
1 Marriott A Text $ 20,394,926 $ 23,715,895 $ 24,491,433
2 Marriott B Text 21,595,959 19,628,755 23,181,310
3 Marriott C Text 9,331,409 10,306,315 12,605,721
4 Marriott D Text 2,924,728 3,484,711 3,832,632
--------------- --------------- ---------------
TOTAL: Text $ 54,247,023 $ 57,135,676 $ 64,111,096
PALMER SQUARE
1 Palmer Square TTM 5/31/96 $ 2,175,032 $ 2,326,259 $ 2,318,317
2 Nassau Inn TTM 8/30/96 2,132,227 2,337,652 2,552,344
3 Palmer Square TTIM 5/31/96 1,418,492 1,611,120 1,786,108
4 Palmer Square TTM 9/30/96 648,682 673,467 736,157
--------------- --------------- ---------------
TOTAL: $ 6,374,432 $ 6,948,498 $ 7,392,927
PRIME RETAIL II
1 Grove City Factory Outlet Center TTM 9/30/96 -- $ 1,139,186 $ 5,138,799
2 San Marcos Factory Shops TTM 9/30/96 -- 5,716,835 6,457,605
3 Castle Rock Factory Shops TTM 9/30/96 -- 6,854,623 6,745,118
4 Gulf Coast Factory Shops TTM 9/30/96 -- 4,281,720 4,590,387
5 Ohio Factory Shops TTM 9/30/96 -- 3,950,860 4,402,280
6 Loveland Factory Outlet Center TTM 9/30/96 -- 1,227,219 3,661,941
7 Magnolia Bluff Factory Shops TTM 9/30/96 -- N/A 1,816,721
8 Gainesville Factory Shops TTM 9/30/96 -- 3,548,131 4,677,293
9 Gulfport Factory Shops TTM 9/30/96 -- N/A 484,312
10 Huntley Factory Shops TTM 9/30/96 -- 930,778 2,676,251
11 Florida Keys Factory Shops TTM 9/30/96 -- 700,402 2,731,432
12 KC Factory Outlet Center TTM 9/30/96 -- N/A 1,154,062
13 Indiana Factory Shops TTM 9/30/96 -- 117,676 2,189,745
14 Nebraska Crossing Factory Shops TTM 9/30/96 -- 1,765,872 2,245,991
15 Coral Isle Factory Shops TTM 9/30/96 -- 1,308,826 1,851,199
16 Triangle Factory Shops TTM 9/30/96 -- 1,268,136 1,594,547
--------------- ---------------
TOTAL: $ 32,810,264 $ 52,417,683
<CAPTION>
PROPERTY 1996 TOTAL NOI NET CASH FLOW VALUE FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
COLUMBIA SUSSEX II
1 Melville Marriott $ 6,652,104 $ 5,020,244 $ 52,300,000 Simple
2 Sheraton Hotel Newark Airport 6,355,777 4,404,544 42,600,000 Simple
3 Radisson Hotel Orlando Airport 3,677,240 3,013,682 30,300,000 Simple
4 Radisson Hotel Cincinnati Airport 2,628,730 2,172,494 19,300,000 Ground Lease
5 Holiday Inn Louisville South Airport 2,714,086 2,140,369 16,600,000 Simple
6 Holiday Inn Southfield (Detroit) 2,295,303 1,796,110 22,000,000 Simple
7 Best Western Eastgate 2,226,389 1,753,706 12,400,000 Simple
8 Radisson Lake Buena Vista 1,826,273 1,467,580 14,600,000 Simple
9 Radisson Hotel Central Birmingham 1,702,904 1,283,036 11,000,000 Ground Lease
10 Holiday Inn Itasca 1,179,821 889,110 8,800,000 Simple
11 Holiday Inn Springfield 891,994 600,371 5,400,000 Simple
12 Holiday Inn Glen Ellyn 441,891 267,642 3,700,000 Simple
--------------- --------------- ---------------
TOTAL: $ 32,592,512 $ 24,808,887 $ 239,000,000
HORIZON II
1 Lake Elsinore Outlet Center $ 5,766,338 $ 5,527,553 $ 58,300,000 Simple
2 Southwest Outlet Center 4,794,879 4,564,527 46,500,000 Simple
3 Chesapeake Village 3,149,524 2,797,614 30,000,000 Simple
4 Tracy Outlet Center 2,257,289 1,879,427 21,400,000 Simple
5 Pismo Beach Outlet Center 2,231,629 2,176,987 22,800,000 Simple
--------------- --------------- ---------------
TOTAL: $ 18,199,659 $ 16,946,108 $ 179,000,000
MHP II
1 Marriott A Text $ 22,222,690 $ 218,300,000 Simple
2 Marriott B Text 18,892,229 185,300,000 Ground Lease
3 Marriott C Text 11,415,114 108,100,000 Ground Lease
4 Marriott D Text 3,346,924 28,700,000 Ground Lease
--------------- --------------- ---------------
TOTAL: TEXT $ 55,876,956 $ 540,400,000
PALMER SQUARE
1 Palmer Square $ 2,507,807 $ 2,613,278 $ 32,100,000 Simple
2 Nassau Inn 2,862,898 2,126,667 18,900,000 Simple
3 Palmer Square 1,897,549 1,313,375 19,800,000 Simple
4 Palmer Square 853,302 808,754 Inc. Above Simple/Ground Lease
--------------- --------------- ---------------
TOTAL: $ 8,121,556 $ 6,862,075 $ 70,800,000
PRIME RETAIL II
1 Grove City Factory Outlet Center $ 7,012,071 $ 6,315,022 $ 78,300,000 Simple
2 San Marcos Factory Shops 6,700,253 5,937,324 64,000,000 Simple
3 Castle Rock Factory Shops 6,951,159 5,488,196 61,000,000 Simple
4 Gulf Coast Factory Shops 4,705,420 4,600,710 44,500,000 Simple
5 Ohio Factory Shops 4,488,735 4,034,904 42,000,000 Simple
6 Loveland Factory Outlet Center 4,387,100 4,072,208 46,000,000 Simple
7 Magnolia Bluff Factory Shops 3,610,613 3,583,869 45,500,000 Ground Lease
8 Gainesville Factory Shops 4,753,672 3,734,676 41,000,000 Simple
9 Gulfport Factory Shops 2,764,821 3,143,492 30,000,000 Ground Lease
10 Huntley Factory Shops 3,011,931 2,706,209 36,900,000 Simple
11 Florida Keys Factory Shops 2,579,221 2,369,767 28,200,000 Simple
12 KC Factory Outlet Center 2,831,484 2,335,213 39,500,000 Simple
13 Indiana Factory Shops 2,436,238 2,159,869 29,000,000 Simple
14 Nebraska Crossing Factory Shops 2,219,757 1,842,044 18,630,000 Simple
15 Coral Isle Factory Shops 1,831,318 1,674,634 18,000,000 Simple
16 Triangle Factory Shops 1,794,860 1,813,056 20,000,000 Simple
--------------- --------------- ---------------
TOTAL: $ 62,078,653 $ 55,811,194 $ 642,530,000
</TABLE>
<PAGE>
PROSPECTUS DATED NOVEMBER 27, 1996
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
ASSET SECURITIZATION CORPORATION
DEPOSITOR
The Certificates offered hereby and by Supplements to this Prospectus (the
'Offered Certificates') will be offered from time to time in series. Each series
of Certificates will represent in the aggregate the entire beneficial ownership
interest in a trust fund (with respect to any series, the 'Trust Fund')
consisting of a segregated pool of various types of multifamily or commercial
mortgage loans and/or installment contracts for the sale of multifamily or
commercial properties (the 'Mortgage Loans'), mortgage-backed securities
evidencing interests therein or secured thereby (the 'MBS'), or a combination of
Mortgage Loans and MBS (with respect to any series, collectively, 'Mortgage
Assets'). The Trust Fund for a series of Certificates may also include letters
of credit, insurance policies, guarantees, reserve funds or other types of
credit support, or any combination thereof (with respect to any series,
collectively, 'Credit Support'), and currency or interest rate exchange
agreements and other financial assets, or any combination thereof (with respect
to any series, collectively, 'Cash Flow Agreements'). See 'Description of the
Trust Funds', 'Description of the Certificates' and 'Description of Credit
Support'.
Each series of Certificates will consist of one or more classes of
Certificates that may (i) provide for the accrual of interest thereon based on
fixed, variable or adjustable rates; (ii) be senior or subordinate to one or
more other classes of Certificates in respect of certain distributions on the
Certificates; (iii) be entitled to principal distributions, with
disproportionately low, nominal or no interest distributions; (iv) be entitled
to interest distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon only
following the occurrence of certain events, such as the retirement of one or
more other classes of Certificates of such series; or (vi) provide for
distributions of principal sequentially, or based on specified payment
schedules, to the extent of available funds, in each case as described in the
related Prospectus Supplement. Any such classes may include classes of Offered
Certificates. See 'Description of the Certificates'.
Principal and interest with respect to Certificates will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the
Certificates of any series will be made only from the assets of the related
Trust Fund.
The Certificates of each series will not represent an obligation of or
interest in the Depositor, any Master Servicer, any Special Servicer or any of
their respective affiliates, except to the limited extent described herein and
in the related Prospectus Supplement. Only those Certificates and assets in the
related Trust Fund as are disclosed in the related Prospectus Supplement will be
guaranteed or insured by any governmental agency or instrumentality or by any
other person. The assets in each Trust Fund will be held in trust for the
benefit of the holders of the related series of Certificates pursuant to a
Pooling and Servicing Agreement or a Trust Agreement, as more fully described
herein.
The yield on each class of Certificates of a series will be affected by,
among other things, the rate of payment of principal (including voluntary and
involuntary prepayments) on the Mortgage Assets in the related Trust Fund and
the timing of receipt of such payments as described under the caption 'Yield
Considerations' herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
Prospective investors should review the information appearing under the
caption 'Special Considerations' herein and such information as may be set forth
under the caption 'Special Considerations' in the related Prospectus Supplement
before purchasing any Offered Certificate.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as
one or more 'real estate mortgage investment conduits' for federal income tax
purposes. See also 'Federal Income Tax Consequences' herein.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Prior to issuance there will have been no market for the Certificates of any
series and there can be no assurance that a secondary market for any Offered
Certificates will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of a series of Offered
Certificates unless accompanied by a Prospectus Supplement.
Offers of the Offered Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described under
'Method of Distribution' herein and in the related Prospectus Supplement. All
Offered Certificates will be distributed by, or sold by underwriters managed by:
NOMURA SECURITIES INTERNATIONAL, INC.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 27, 1996
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Certificates covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating to
the Offered Certificates of each series will, among other things, set forth with
respect to such Certificates, as appropriate: (i) a description of the class or
classes of Certificates, the payment provisions with respect to each such class
and the Pass-Through Rate or method of determining the Pass-Through Rate with
respect to each such class; (ii) the aggregate principal amount and distribution
dates relating to such series and, if applicable, the initial and final
scheduled distribution dates for each class; (iii) information as to the assets
comprising the Trust Fund, including the general characteristics of the assets
included therein, including the Mortgage Assets and any Credit Support and Cash
Flow Agreements (with respect to the Certificates of any series, the 'Trust
Assets'); (iv) the circumstances, if any, under which the Trust Fund may be
subject to early termination; (v) additional information with respect to the
method of distribution of such Certificates; (vi) whether one or more REMIC
elections will be made and designation of the regular interests and residual
interests; (vii) the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each class of Certificates; (viii) information as
to any Master Servicer, any Special Servicer (or provision for the appointment
thereof) and the Trustee, as applicable; (ix) information as to the nature and
extent of subordination with respect to any class of Certificates that is
subordinate in right of payment to any other class; and (x) whether such
Certificates will be initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Certificates. This Prospectus and the Prospectus Supplement relating to each
series of Certificates contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission 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, Northwestern Atrium Center, 500 West Madison, Suite
1400, Chicago, Illinois 60661; and New York Regional Office, 75 Park Place, 14th
Floor, New York, New York 10007. The Commission also maintains a site on the
World Wide Web (the 'Web') at 'http://www.sec.gov' at which users can view and
download copies of reports, proxy and information statements and other
information filed electronically through the Electronic Data Gathering, Analysis
and Retrieval ('EDGAR') system.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered
Certificates or an offer of the Offered Certificates to any person in any state
or other jurisdiction in which such offer would be unlawful. The delivery of
this Prospectus at any time does not imply that information herein is correct as
of any time subsequent to its date; however, if any material change occurs while
this Prospectus is required by law to be delivered, this Prospectus will be
amended or supplemented accordingly.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Certificates of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Certificates are issued, such
reports may be sent on behalf of the related Trust Fund to Cede & Co. ('Cede'),
as nominee of The Depository Trust Company ('DTC') and registered holder of the
Offered Certificates, pursuant to the applicable Agreement. If so specified in
the related Prospectus Supplement, such reports may be sent to beneficial owners
identified to the Master Servicer or Trustee. Such reports may also be available
to holders of interests in the Certificates (the 'Certificateholders') upon
request to their respective DTC participants. See 'Description of the
Certificates--Reports to Certificateholders' and 'Description of the
Agreements-- Evidence as to Compliance'. The Depositor will file or cause to be
filed with the Commission such periodic reports with respect to each Trust Fund
as are required under the Securities Exchange Act of 1934, as amended (the
'Exchange Act'), and the rules and regulations of the Commission thereunder.
Reports filed by the Depositor with the Commission pursuant to the Exchange Act
will be filed by means of EDGAR system and therefore should be available at the
Commission's site on the Web.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
There are incorporated herein by reference all documents and reports filed
or caused to be filed by the Depositor with respect to a Trust Fund pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, prior to the termination
of the offering of the Offered Certificates evidencing an interest therein. The
Depositor will provide or cause to be provided without charge to each person to
whom this Prospectus is delivered in connection with the offering of one or more
classes of Offered Certificates, a copy of any or all documents or reports
incorporated herein by reference, in each case to the extent such documents or
reports relate to one or more of such classes of such Offered Certificates,
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to its principal executive office at 2 World Financial
Center--Building B, New York, New York 10281-1198, Attention: Secretary, or by
telephone at (212) 667-9300. The Depositor has determined that its financial
statements are not material to the offering of any Offered Certificates. See
'Financial Information' herein.
2
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Supplement....................................... 2
Available Information....................................... 2
Incorporation of Certain Information by Reference........... 2
Summary of Prospectus....................................... 7
Special Considerations...................................... 11
Limited Liquidity........................................... 11
Limited Assets.............................................. 11
Average Life of Certificates; Prepayments; Yields........... 11
Limited Nature of Ratings................................... 12
Risks Associated with Certain Mortgage Loans and Mortgaged
Properties................................................ 12
Balloon Payments............................................ 13
Obligor Default............................................. 13
Mortgagor Type.............................................. 13
Credit Support Limitations.................................. 13
Enforceability.............................................. 14
Environmental Risks......................................... 14
ERISA Considerations........................................ 14
Certain Federal Tax Considerations Regarding Residual
Certificates.............................................. 15
Certain Federal Tax Considerations Regarding Original Issue
Discount.................................................. 15
Consent..................................................... 15
Book-Entry Registration..................................... 15
Description of the Trust Funds.............................. 16
Mortgage Assets............................................. 16
Mortgage Loans.............................................. 16
Default and Loss Considerations with Respect to the Mortgage
Loans..................................................... 16
Mortgage Loan Information in Prospectus Supplements......... 17
Mortgage Underwriting Standards and Procedures.............. 18
Payment Provisions of the Mortgage Loans.................... 19
MBS......................................................... 19
Collection Accounts......................................... 20
Credit Support.............................................. 20
Cash Flow Agreements........................................ 20
Use of Proceeds............................................. 20
Yield Considerations........................................ 20
General..................................................... 20
Pass-Through Rate........................................... 20
Timing of Payment of Interest and Principal................. 21
Principal Prepayments....................................... 21
Prepayments--Maturity and Weighted Average Life............. 21
Other Factors Affecting Weighted Average Life............... 22
Type of Mortgage Loan....................................... 22
Foreclosures and Payment Plans.............................. 22
Due-on-Sale and Due-on-Encumbrance Clauses.................. 23
The Depositor............................................... 23
Description of the Certificates............................. 23
General..................................................... 23
Distributions............................................... 25
Available Funds............................................. 25
Distributions of Interest on the Certificates............... 26
Distributions of Principal of the Certificates.............. 26
Distributions on the Certificates of Prepayment Premiums or
in Respect of Equity Participations....................... 27
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Allocation of Losses and Shortfalls......................... 27
Advances in Respect of Delinquencies........................ 27
Reports to Certificateholders............................... 27
Termination................................................. 29
Book-Entry Registration and Definitive Certificates......... 29
Description of the Agreements............................... 30
Assignment of Mortgage Assets; Repurchases.................. 30
Representations and Warranties; Repurchases................. 31
Payments on Mortgage Assets; Deposits to Collection
Account................................................... 32
Collection and Other Servicing Procedures................... 34
Special Servicers........................................... 34
Sub-Servicers............................................... 34
Realization Upon Defaulted Whole Loans...................... 35
Hazard Insurance Policies................................... 36
Due-on-Sale and Due-on-Encumbrance Provisions............... 37
Retained Interest; Servicing Compensation and Payment of
Expenses.................................................. 37
Evidence as to Compliance................................... 38
Certain Matters Regarding a Master Servicer, a Special
Servicer and the Depositor................................ 38
Event of Default............................................ 39
Rights Upon Event of Default................................ 39
Amendment................................................... 40
Duties of the Trustee....................................... 40
The Trustee................................................. 40
Description of Credit Support............................... 40
General..................................................... 40
Subordinate Certificates.................................... 41
Cross-Support Provisions.................................... 41
Insurance or Guarantees with Respect to the Mortgage
Assets.................................................... 41
Letter of Credit............................................ 41
Insurance Policies and Surety Bonds......................... 42
Certificate Guarantee Insurance............................. 42
Reserve Funds............................................... 42
Certain Legal Aspects of Mortgage Loans..................... 43
General..................................................... 43
Types of Mortgage Instruments............................... 43
Leases and Rents............................................ 43
Personalty.................................................. 44
Installment Contracts....................................... 44
Junior Mortgages; Rights of Senior Mortgages or
Beneficiaries............................................. 44
Subordinate Financing....................................... 45
Foreclosure................................................. 46
Judicial Foreclosure........................................ 46
Non-Judicial Foreclosure/Power of Sale...................... 46
Limitations on Lender's Rights.............................. 46
Rights of Redemption........................................ 48
Anti-Deficiency Legislation................................. 48
Leasehold Risks............................................. 49
Bankruptcy Laws............................................. 49
Environmental Legislation................................... 51
Due-on-Sale and Due-on-Encumbrance.......................... 51
Acceleration on Default..................................... 52
Default Interest, Prepayment Charges and Prepayments........ 52
Applicability of Usury Laws................................. 52
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Alternative Mortgage Instruments............................ 52
Soldiers' and Sailors' Civil Relief Act of 1940............. 53
Forfeitures in Drug and RICO Proceedings.................... 53
Certain Laws and Regulations................................ 53
Type of Mortgaged Property.................................. 53
Americans with Disabilities Act............................. 54
Federal Income Tax Consequences............................. 54
Federal Income Tax Consequences for REMIC Certificates...... 54
General..................................................... 54
Status of REMIC Certificates................................ 55
Qualification as a REMIC.................................... 55
Taxation of Regular Certificates............................ 57
General..................................................... 57
Original Issue Discount..................................... 57
Acquisition Premium......................................... 59
Variable Rate Regular Certificates.......................... 59
Deferred Interest........................................... 60
Market Discount............................................. 60
Premium..................................................... 61
Election to Treat All Interest Under the Constant Yield
Method.................................................... 61
Sale or Exchange of Regular Certificates.................... 61
Treatment of Losses......................................... 62
Taxation of Residual Certificates........................... 62
Taxation of REMIC Income.................................... 62
Basis and Losses............................................ 63
Treatment of Certain Items of REMIC Income and Expense...... 64
Limitations on Offset or Exemption of REMIC Income.......... 64
Tax-Related Restrictions on Transfer of Residual
Certificates.............................................. 65
Sale or Exchange of a Residual Certificate.................. 67
Mark to Market Regulations.................................. 67
Taxes That May Be Imposed on the REMIC Pool................. 68
Prohibited Transactions..................................... 68
Contributions to the REMIC Pool After the Startup Day....... 68
Net Income from Foreclosure Property........................ 68
Liquidation of the REMIC Pool............................... 68
Administrative Matters...................................... 68
Limitations on Deduction of Certain Expenses................ 69
Taxation of Certain Foreign Investors....................... 69
Regular Certificates........................................ 69
Residual Certificates....................................... 70
Backup Withholding.......................................... 70
Reporting Requirements...................................... 70
Federal Income Tax Consequences for Certificates as to Which
No REMIC Election Is Made................................. 71
Standard Certificates....................................... 71
General..................................................... 71
Tax Status.................................................. 71
Premium and Discount........................................ 72
Recharacterization of Servicing Fees........................ 72
Sale or Exchange of Standard Certificates................... 73
Stripped Certificates....................................... 73
General..................................................... 73
Status of Stripped Certificates............................. 74
Taxation of Stripped Certificates........................... 74
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Reporting Requirements and Backup Withholding............... 75
Taxation of Certain Foreign Investors....................... 76
ERISA Considerations........................................ 76
General..................................................... 76
Certain Requirements Under ERISA............................ 76
General..................................................... 76
Parties in Interest/Disqualified Persons.................... 76
Delegation of Fiduciary Duty................................ 77
Administrative Exemptions................................... 77
Governmental Plans.......................................... 77
Unrelated Business Taxable Income; Residual Certificates.... 77
Legal Investment............................................ 78
Method of Distribution...................................... 79
Legal Matters............................................... 80
Financial Information....................................... 80
Rating...................................................... 80
Index of Principal Definitions.............................. 81
</TABLE>
6
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Certificates contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
TITLE OF CERTIFICATES
Mortgage Pass-Through Certificates, issuable in series (the
'Certificates').
DEPOSITOR
Asset Securitization Corporation, a wholly-owned subsidiary of Nomura Asset
Capital Corporation. See 'The Depositor'.
MASTER SERVICER
The master servicer (the 'Master Servicer'), if any, for each series of
Certificates will be named in the related Prospectus Supplement. See
'Description of the Agreements--Collection and Other Servicing Procedures'.
SPECIAL SERVICER
The special servicer (the 'Special Servicer'), if any, for each series of
Certificates will be named, or the circumstances in accordance with which a
Special Servicer will be appointed will be described, in the related Prospectus
Supplement. See 'Description of the Agreements--Special Servicer'.
TRUSTEE
The trustee (the 'Trustee') for each series of Certificates will be named
in the related Prospectus Supplement. See 'Description of the Agreements--The
Trustee'.
THE TRUST ASSETS
Each series of Certificates will represent in the aggregate the entire
beneficial ownership interest in a Trust Fund consisting primarily of:
(A) MORTGAGE ASSETS
The Mortgage Assets with respect to each series of Certificates will
consist of a pool of multifamily and/or commercial mortgage loans and/or
installment contracts ('Installment Contracts') for the sale of commercial
or multifamily properties (collectively, the 'Mortgage Loans'), mortgage
participations, mortgage pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by Mortgage Loans
(collectively, the 'MBS') or a combination of Mortgage Loans and MBS.
Except to the extent described in the related Prospectus Supplement, the
Mortgage Loans will not be guaranteed or insured by the Depositor or any of
its affiliates or by any governmental agency or instrumentality or other
person. As more specifically described herein, the Mortgage Loans will be
secured by liens on, or security interest in, properties consisting of (i)
residential properties consisting of five or more rental or
cooperatively-owned dwelling units (the 'Multifamily Properties') or (ii)
office buildings, shopping centers, hotels, motels, nursing homes,
hospitals or other health-care related facilities, mobile home parts,
warehouse facilities, mini-warehouse facilities or self-storage facilities,
industrial plants, mixed use or other types of commercial properties (the
'Commercial Properties' and together with Multifamily Properties, the
'Mortgaged Properties'). The Mortgaged Properties may be located in any one
of the fifty states or the District of Columbia or such other locations as
are disclosed in the related Prospectus Supplement. All Mortgage Loans will
have individual principal balances at origination of not less than $25,000
and original terms to maturity of not more than 40 years. All Mortgage
Loans will have been originated by persons other than the Depositor, and
all Mortgage Assets will have been purchased, either directly or
indirectly, by the Depositor on or before the date of initial issuance of
the related series of Certificates. As described herein and in the
Prospectus Supplement, each Mortgage Loan may (i) provide for no accrual of
interest or for accrual of interest thereon at an interest rate (a
'Mortgage Rate') that is fixed over its term or that adjusts from time to
time, or that may be converted from an adjustable to a fixed Mortgage Rate,
or from a fixed to an adjustable Mortgage Rate, from time to time at the
mortgagor's election; (ii) provide for scheduled payments to maturity,
payments that adjust from
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time to time in accommodate changes in the Mortgage Rate or to reflect the
occurrence of certain events, and may provide negative amortization or
accelerated amortization; (iii) be fully amortizing or require a balloon
payment due on its stated maturity date; (iv) contain prohibitions on
prepayment or require payment of a premium or a yield maintenance penalty
in connection with a prepayment; and (v) provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly, semi-annually
or other interval. See 'Description of the Trust Funds--Mortgage Assets'.
(B) COLLECTION ACCOUNT
Each Trust Fund will include one or more accounts (collectively, the
'Collection Account') established and maintained on behalf of the
Certificateholders into which the person or persons designated in the
related Prospectus Supplement will deposit all payments and collections
received or advanced with respect to the Mortgage Assets and other assets
in the Trust Fund other than certain fees and expenses. A Collection
Account may be maintained as an interest bearing or a non-interest bearing
account, and funds held therein may be invested in certain short-term,
investment grade obligations, as described in the related Prospectus
Supplement. See 'Description of the Agreements--Payments on Mortgage
Assets; Deposits to Collection Account'.
(C) CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Assets in
the related Trust Fund may be provided to one or more classes of
Certificates of the related series in the form of subordination of one or
more other classes of Certificates of such series or by one or more other
types of credit support, such as a letter of credit, an insurance policy on
the Mortgage Loans, guarantee, certificate guarantee insurance policy,
reserve fund or another type of credit support, or a combination thereof
(any such coverage with respect to the Certificates of any series, 'Credit
Support'). The amount and types of coverage, the identification of the
entity providing the coverage (if applicable) and related information with
respect to each type of Credit Support, if any, will be described in the
Prospectus Supplement for a series of Certificates. The Prospectus
Supplement for any series of Certificates evidencing an interest in a Trust
Fund that includes MBS will describe any credit support that is included as
part of the trust fund evidenced or secured by such MBS. See 'Special
Considerations--Credit Support Limitations' and 'Description of Credit
Support'.
(D) CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys held
in the funds and accounts established for the related series will be
invested at a specified rate. The Trust Fund may also include certain other
agreements, such as interest rate exchange agreements, interest rate cap or
floor agreements, currency exchange agreements or similar agreements
provided to reduce the effects of interest rate or currency exchange rate
fluctuations on the Mortgage Assets on one or more classes of Certificates.
The principal terms of any such guaranteed investment contract or other
agreement (any such agreement, a 'Cash Flow Agreement'), including
provisions relating to the timing, manner and amount of payments thereunder
and provisions relating to the termination thereof, will be described in
the Prospectus Supplement for the related series. In addition, the related
Prospectus Supplement will provide certain information with respect to the
obligor under any such Cash Flow Agreement. The Prospectus Supplement for
any series of Certificates evidencing an interest in a Trust Fund that
includes MBS will describe any cash flow agreements that are included as
part of the trust fund evidenced or secured by such MBS. See 'Description
of the Trust Funds--Cash Flow Agreements'.
DESCRIPTION OF CERTIFICATES
Each series of Certificates evidencing an interest in a Trust Fund
consisting of Mortgage Loans will be issued pursuant to a Pooling and Servicing
Agreement and each series of Certificates evidencing an interest in a Trust Fund
the Mortgage Assets of which consisting of MBS will be issued pursuant to a
Trust Agreement. Pooling and Servicing Agreements and Trust Agreements are
sometimes referred to herein as 'Agreements'. Each series of Certificates
(including any class or classes of Certificates of such series not offered
hereby) will represent in the aggregate the entire beneficial ownership interest
in the Trust Fund. Each class of Certificates (other than certain Stripped
Interest Certificates, as defined below) will have a stated principal amount (a
'Certificate Balance') and (other than certain Stripped Principal Certificates,
as defined below), will accrue interest thereon based on a fixed, variable or
adjustable interest rate (a 'Pass-Through Rate'). The related Prospectus
Supplement will specify the Certificate Balance and the Pass-Through Rate for
each class of Certificates, as applicable, or in the case of a variable or
adjustable Pass-Through Rate, the method for determining the Pass-Through Rate.
Each series of Certificates will consist of one or more classes or subclasses of
Certificates that may (i) be senior (collectively, 'Senior Certificates') or
subordinate (collectively,
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'Subordinate Certificates') to one or more other classes of Certificates in
respect of certain distributions on the Certificates; (ii) be entitled to
principal distributions, with disproportionately low, nominal or no interest
distributions (collectively, 'Stripped Principal Certificates'); (iii) be
entitled to interest distributions, with disproportionately low, nominal or no
principal distributions (collectively, 'Stripped Interest Certificates'); (iv)
provide for distributions of accrued interest thereon only following the
occurrence of certain events, such as the retirement of one or more other
classes of Certificates of such series (collectively, 'Accrual Certificates');
and/or (v) provide for payments of principal sequentially, based on specified
payment schedules or other methodologies, to the extent of available funds. Any
such classes or subclasses may include classes or subclasses of Offered
Certificates. The Certificates will not be guaranteed or insured by the
Depositor or any of its affiliates, by any governmental agency or
instrumentality or by any other person, unless otherwise provided in the related
Prospectus Supplement. See 'Special Considerations-- Limited Assets' and
'Description of the Certificates'.
DISTRIBUTIONS OF INTEREST ON CERTIFICATES
Interest on each class of Offered Certificates (other than certain classes
of Stripped Interest Certificates and Stripped Principal Certificates) of each
series will accrue at the applicable Pass-Through Rate on the outstanding
Certificate Balance thereof and will be distributed to Certificateholders as
provided in the related Prospectus Supplement (each of the specified dates on
which distributions are to be made, a 'Distribution Date'). Distributions with
respect to interest on Stripped Interest Certificates may be made on each
Distribution Date on the basis of a notional amount as described in the related
Prospectus Supplement. Distributions of interest with respect to one or more
classes of Certificates may be reduced to the extent of certain delinquencies
and other contingencies described herein and in the related Prospectus
Supplement. See 'Special Considerations--Average Life of Certificates;
Prepayments; Yields', 'Yield Considerations', and 'Description of the
Certificates--Distributions of Interest on the Certificates'.
DISTRIBUTIONS OF PRINCIPAL OF CERTIFICATES
The initial aggregate Certificate Balance of the Certificates of each
series (other than certain classes of Stripped Interest Certificates) will
generally not exceed the outstanding principal balance of the Mortgage Assets as
of the close of business on the day of the month specified in the related Trust
Fund (the 'Cut-off Date'), after application of scheduled payments due on or
before such date, whether or not received. The Certificate Balance of a
Certificate outstanding from time to time represents the maximum amount that the
holder thereof is then entitled to receive in respect of principal from future
cash flow on the assets in the related Trust Fund. Distributions of principal
will be made on each Distribution Date to the class or classes of Certificates
entitled thereto until the Certificate Balance of such Certificates have been
reduced to zero. Distributions of principal of any class of Certificates will be
made on a pro rata basis among all of the Certificates of such class. Stripped
Interest Certificates with no Certificate Balance will not receive distributions
in respect of principal. See 'Description of the Certificates--Distributions of
Principal of the Certificates'.
ADVANCES
In connection with a series of Certificates evidencing an interest in a
Trust Fund consisting of Mortgage Assets other than MBS, the Master Servicer may
be obligated as part of its servicing responsibilities to make certain advances
with respect to delinquent scheduled payments or the Mortgage Loans in such
Trust Fund. Advances made by a Master Servicer are reimbursable generally from
subsequent recoveries in respect of such Mortgage Loans, and in certain
circumstances, from other assets available in the Trust Fund. The Master
Servicer will be entitled to receive interest on its outstanding advances,
payable from amounts in the related Trust Fund. The Prospectus Supplement for
any series of Certificates evidencing an interest in a Trust Fund that includes
MBS will describe any corresponding advancing obligation of any person in
connection with such MBS. See 'Description of the Certificates--Advances in
Respect of Delinquencies'.
TERMINATION
A series of Certificates may be subject to optional early termination
through the repurchase of the Mortgage Assets in the related Trust Fund. If so
provided in the related Prospectus Supplement, upon the reduction of the
Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount, the party specified therein will solicit bids
for the purchase of all of the Mortgage Assets of the Trust Fund under the
circumstances and in the manner set forth therein. See 'Description of the
Certificates--Termination'.
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REGISTRATION OF CERTIFICATES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Certificates will initially be represented by one or more
Certificates registered in the name of Cede & Co., as the nominee of DTC. No
person acquiring an interest in Offered Certificates so registered will be
entitled to receive a definitive certificate representing such person's interest
except in the event that definitive certificates are issued under the limited
circumstances described herein. See 'Special Considerations--Book-Entry
Registration' and 'Description of the Certificates--Book-Entry Registration and
Definitive Certificates'.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax consequences to Certificateholders will vary
depending on whether one or more elections are made to treat the Trust Fund or
specified portions thereof as one or more 'real estate mortgage investment
conduits' (each, a 'REMIC') under the provisions of the Internal Revenue Code of
1986, as amended (the 'Code'). The Prospectus Supplement for each series of
Certificates will specify whether one or more such elections will be made. See
'Federal Income Tax Consequences'.
ERISA CONSIDERATIONS
A fiduciary of an employee benefit plan or other retirement arrangement,
including an individual retirement account, or a Keogh plan which is subject to
the Employee Retirement Income Security Act of 1974, as amended ('ERISA'), or
Section 4975 of the Code (each a 'Plan'), or a collective investment fund in
which such Plans are invested, or an insurance company using assets of a
separate account or general account which includes assets of Plans (or which is
deemed pursuant to ERISA to include assets of Plans), or other pensions acting
on behalf of any such Plan or using the assets of any such Plan, which proposes
to cause a Plan to acquire any of the Offered Certificates should carefully
review with its legal advisors whether the purchase or holding of Offered
Certificates could give rise to a transaction that is prohibited or is not
otherwise permissible either under ERISA or Section 4975 of the Code. See 'ERISA
Considerations' herein and in the related Prospectus Supplement.
LEGAL INVESTMENT
The related Prospectus Supplement will specify whether the Offered
Certificates will constitute 'mortgage related securities' for purposes of the
Secondary Mortgage Market Enhancement Act of 1984. It is not currently
anticipated that such Certificates will constitute 'mortgage related securities'
for purposes of such Act. Accordingly, investors whose investment authority is
subject to legal restrictions should consult their own legal advisors to
determine whether and to what extent the Offered Certificates constitute legal
investments for them. See 'Legal Investment' herein and in the related
Prospectus Supplement.
RATING
At the date of issuance, as to each series, each class of Offered
Certificates will be rated not lower than investment grade by one or more
nationally recognized statistical rating agencies (each, a 'Rating Agency'). See
'Rating' herein and in the related Prospectus Supplement.
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SPECIAL CONSIDERATIONS
Investors should consider, in connection with the purchase of Offered
Certificates, among other things, the following factors and certain other
factors as may be set forth in 'Special Considerations' in the related
Prospectus Supplement.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any series will develop or, if it does develop, that it will provide holders
with liquidity of investment or will continue while Certificates of such series
remain outstanding. Any such secondary market may provide less liquidity to
investors than any comparable market for securities evidencing interests in
single-family mortgage loans. The market value of Certificates will fluctuate
with changes in prevailing rates of interest. Consequently, sale of Certificates
by a holder in any secondary market that may develop may be at a discount from
100% of their original principal balance or from their purchase price.
Furthermore, secondary market purchasers may look only hereto, to the related
Prospectus Supplement and to the reports to Certificateholders delivered
pursuant to the Agreement as described herein under the heading 'Description of
the Certificates--Reports to Certificateholders,' '--Book-Entry Registration and
Definitive Certificates' and 'Description of the Agreements--Evidence as to
Compliance' for information concerning the Certificates. Certificateholders will
have no redemption rights. Each class of Offered Certificates of a series will
be issued in minimum denominations corresponding to Certificate Balances or, in
the case of Stripped Interest Certificates, notional amounts specified in the
related Prospectus Supplement. Nomura Securities International, Inc., through
one or more of its affiliates, currently expects to make a secondary market in
the Offered Certificates, but has no obligation to do so.
LIMITED ASSETS
A series of Certificates will not have any claim against or security
interest in the Trust Funds for any other series. If the related Trust Fund is
insufficient to make payments on such Certificates, no other assets will be
available for payment of the deficiency. Additionally, certain amounts remaining
in certain funds or accounts, including the Certificate Account and any accounts
maintained as Credit Support, may be withdrawn under certain conditions, as
described in the related Prospectus Supplement. In the event of such withdrawal,
such amounts will not be available for future payment of principal of or
interest on the Certificates. With respect to a series of Certificates
consisting of one or more classes of Subordinate Certificates, on any
Distribution Date in respect of which losses or shortfalls in collections on the
Mortgage Assets have been incurred, the amount of such losses or shortfalls will
be borne first by one or more classes of the Subordinate Certificates, and,
thereafter, by the remaining classes of Certificates in the priority and manner
and subject to the limitations specified in the related Prospectus Supplement.
AVERAGE LIFE OF CERTIFICATES; PREPAYMENTS; YIELDS
Prepayments on the Mortgage Assets in any Trust Fund (including principal
prepayments on the Mortgage Loans resulting from both voluntary and involuntary
liquidations) generally will result in a faster rate of principal payments on
one or more classes of the related Certificates than if payments on such
Mortgage Assets were made as scheduled. Thus, the prepayment experience on the
Mortgage Assets may affect the average life of each class of related
Certificates. The rate of principal payments on pools of mortgage loans varies
between pools and from time to time is influenced by a variety of economic,
demographic, geographic, social, tax, legal and other factors. There can be no
assurance as to the rate of prepayment on the Mortgage Assets in any Trust Fund
or that the rate of payments will conform to any model described herein or in
any Prospectus Supplement. If prevailing interest rates fall significantly below
the applicable mortgage rates, principal prepayments are likely to be higher
than if prevailing rates remain at or above the rates borne by the Mortgage
Loans underlying or comprising the Mortgage Assets in any Trust Fund. As a
result, the actual maturity of any class of Certificates could occur
significantly earlier than expected. A series of Certificates may include one or
more classes of Certificates with priorities of payment and, as a result, yields
on other classes of Certificates, including classes of Offered Certificates, of
such series may be more sensitive to prepayments on Mortgage Assets. A series of
Certificates may include one or more classes offered at a significant premium or
discount. Yields on such classes of Certificates will be sensitive, and in some
cases extremely sensitive, to voluntary and involuntary prepayments on Mortgage
Assets and, where the amount of interest payable with respect to a class is
disproportionately high, as compared to the amount of principal, as with certain
classes of Stripped Interest Certificates, a holder might, in some prepayment
scenarios, fail to recoup its original investment. A series of Certificates may
include one or more classes of Certificates, including classes of Offered
Certificates, that provide for distribution of principal thereof from amounts
attributable to interest accrued but not currently distributable on one or more
classes of Accrual Certificates and, as a result, yields on such Certificates
will be sensitive to (a) the provisions of such Accrual Certificates relating to
the timing of distributions of interest thereon and (b) if such Accrual
Certificates accrue interest at a variable
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or adjustable Pass-Through Rate, changes in such rate. See 'Yield
Considerations' herein and, if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Certificates will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Certificates of such class will receive payments to which such
Certificateholders are entitled under the related Agreement. Such rating will
not constitute an assessment of the likelihood that principal prepayments on the
related Mortgage Assets will be made, the degree to which the rate of such
prepayments might differ from that originally anticipated or the likelihood of
early optional termination of the series of Certificates. Such rating will not
address the possibility that prepayment at higher or lower rates than
anticipated by an investor may cause such investor to experience a lower than
anticipated yield or that an investor purchasing a Certificate at a significant
premium might fail to recoup its initial investment under certain prepayment
scenarios. Each Prospectus Supplement will identify any payment to which holders
of Offered Certificates of the related series are entitled that is not covered
by the applicable rating.
The amount, type and nature of credit support, if any, established with
respect to a series of Certificates will be determined on the basis of criteria
established by each Rating Agency rating classes of such series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit support required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Mortgage Assets. No assurance can be given that values of any Mortgaged
Properties have remained or will remain at their levels on the respective dates
of origination of the related Mortgage Loans. Moreover, there is no assurance
that appreciation of real estate values generally will limit loss experiences on
the Mortgaged Properties. If the commercial or multifamily residential real
estate markets should experience an overall decline in property values such that
the outstanding principal balances of the Mortgage Loans underlying or
comprising the Mortgage Assets in a particular Trust Fund and any secondary
financing on the related Mortgaged Properties become equal to or greater than
the value of the Mortgaged Properties, the rates of delinquencies, foreclosures
and losses could be higher than those now generally experienced by institutional
lenders. In addition, adverse economic conditions (which may or may not affect
real property values) may affect the timely payment by mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and, accordingly, the
rates of delinquencies, foreclosures and losses with respect to any Trust Fund.
To the extent that such losses are not covered by Credit Support, such losses
will be borne, at least in part, by the holders of one or more classes of the
Certificates of the related series. See 'Description of Credit Support' and
'Rating'.
RISKS ASSOCIATED WITH CERTAIN MORTGAGE LOANS AND MORTGAGED PROPERTIES
Mortgage loans made with respect to multifamily or commercial property may
entail risks of delinquency and foreclosure, and risks of loss in the event
thereof, that are greater than similar risks associated with single-family
property. See 'Description of the Trust Funds--Mortgage Assets'. The ability of
a mortgagor to repay a loan secured by an income-producing property typically is
dependent primarily upon the successful operation of such property rather than
any independent income or assets of the mortgagor; thus, the value of an
income-producing property is directly related to the net operating income
derived from such property. In contrast, the ability of a mortgagor to repay a
single-family loan typically is dependent primarily upon the mortgagor's
household income, rather than the capacity of the property to produce income;
thus, other than in geographical areas where employment is dependent upon a
particular employer or an industry, the mortgagor's income tends not to reflect
directly the value of such property. A decline in the net operating income of an
income-producing property will likely affect both the performance of the related
loan as well as the liquidation value of such property, whereas a decline in the
income of a mortgagor on a single-family property will likely affect the
performance of the related loan but may not affect the liquidation value of such
property.
The performance of a mortgage loan secured by an income-producing property
leased by the mortgagor to tenants as well as the liquidation value of such
property may be dependent upon the business operated by such tenants in
connection with such property, the creditworthiness of such tenants or both; the
risks associated with such loans may be offset by the number of tenants or, of
applicable, a diversity of types of business operated by such tenants.
It is anticipated that all or a substantial portion of the Mortgage Loans
included in any Trust Fund will be nonrecourse loans or loans for which recourse
may be restricted or unenforceable, as to which, in the event of mortgagor
default, recourse may be had only against the specific multifamily or commercial
property and such other assets, if any, as have been pledged to secure the
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Mortgage Loan. With respect to those Mortgage Loans that provide for recourse
against the mortgagor and its assets generally, there can be no assurance that
such recourse will ensure a recovery in respect of a defaulted Mortgage Loan
greater than the liquidation value of the related Mortgaged Property.
Further, the concentration of default, foreclosure and loss risks in
individual mortgagors or Mortgage Loans in a particular Trust Fund or the
related Mortgaged Properties will generally be greater than for pools of
single-family loans both because the Mortgage Assets in a Trust Fund will
generally consist of a smaller number of loans than would a single-family pool
of comparable aggregate unpaid principal balance and because of the higher
principal balance of individual Mortgage Loans.
BALLOON PAYMENTS
Certain of the Mortgage Loans as of the Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require substantial
principal payments (i.e., balloon payments) at their stated maturity. Mortgage
Loans with balloon payments involve a greater degree of risk because the ability
of a mortgagor to make a balloon payment typically will depend upon its ability
either to timely refinance the loan or to timely sell the related Mortgaged
Property. The ability of a mortgagor to accomplish either of these goals will be
affected by a number of factors, including the level of available mortgage rates
at the time of sale or refinancing, the mortgagor's equity in the related
Mortgaged Property, the financial condition and operating history of the
mortgagor and the related Mortgaged Property, tax laws, rent control laws (with
respect to certain Multifamily Properties and mobile home parks), reimbursement
rates (with respect to certain hospitals, nursing homes and convalescent homes),
renewability of operating licenses, prevailing general economic conditions and
the availability of credit for commercial or multifamily, as the case may be,
real properties generally.
OBLIGOR DEFAULT
In order to maximize recoveries on defaulted Mortgage Loans, a Master
Servicer typically will have considerable flexibility to extend and modify
Mortgage Loans that are in default or as to which a payment default is
reasonably foreseeable, including in particular with respect to balloon
payments. In addition, a Master Servicer or a Special Servicer may receive a
workout fee based on receipts from or proceeds of such Mortgage Loans. While a
Master Servicer generally will be required to determine that any such extension
or modification is likely to produce a greater recovery on a present value basis
than liquidation, there can be no assurance that such flexibility with respect
to extensions or modifications or payment of a workout fee will increase the
present value of receipts from or proceeds of Mortgage Loans that are in default
or as to which a default is reasonably foreseeable. The recent foreclosure and
delinquency experience with respect to loans serviced by a Master Servicer or,
if applicable, any Special Servicer or significant Sub-Servicer will be provided
in the related Prospectus Supplement.
MORTGAGOR TYPE
Mortgage Loans made to partnerships, corporations or other entities may
entail risks of loss from delinquency and foreclosure that are greater than
those of Mortgage Loans made to individuals. The mortgagor's sophistication and
form of organization may increase the likelihood of protracted litigation or
bankruptcy in default situations.
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan originator or other parties.
A series of Certificates may include one or more classes of Subordinate
Certificates (which may include Offered Certificates). Although subordination is
intended to reduce the risk to holders of Senior Certificates of delinquent
distributions or ultimate losses, the amount of subordination will be limited
and may decline under certain circumstances. Any limits with respect to the
aggregate amount of claims under any related Credit Support may be exhausted
before the principal of the lower priority classes of Certificates of a series
has been repaid. As a result, the impact of significant losses and shortfalls on
the Mortgage Assets may fall primarily upon those classes of Certificates having
a lower priority of payment. Moreover, if a form of Credit Support covers more
than one series of Certificates (each, a 'Covered Trust'), holders of
Certificates evidencing an interest in a Covered Trust will be subject to the
risk that such Credit Support will be exhausted by the claims of other Covered
Trusts.
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The amount of any applicable Credit Support supporting one or more classes
of Offered Certificates, including the subordination of one or more classes of
Certificates, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Certificates based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Mortgage Assets will not
exceed such assumed levels. See '--Limited Nature of Ratings', 'Description of
the Certificates' and 'Description of Credit Support'.
ENFORCEABILITY
Mortgages may contain a due-on-sale clause, which permits the lender to
accelerate the maturity of the Mortgage Loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property or its interest in the Mortgaged
Property. Mortgages may also include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary or non-monetary default of the
mortgagor. The courts of all states will enforce clauses providing for
acceleration in the event of a material payment default. The equity courts of
any state, however, may refuse the foreclosure of a mortgage or deed of trust
when an acceleration of the indebtedness would be inequitable or unjust or the
circumstances would render the acceleration unconscionable.
If so specified in the related Prospectus Supplement, the Mortgage Loans
will be secured by an assignment of leases and rents pursuant to which the
mortgagor typically assigns its right, title and interest as landlord under the
leases on the related Mortgaged Property and the income derived therefrom to the
lender as further security for the related Mortgage Loan, while retaining a
license to collect rents for so long as there is no default. In the event the
mortgagor defaults, the license terminates and the lender is entitled to collect
rents. Such assignments may not be perfected as security interests prior to
actual possession of the cash flows. Some state laws may require that the lender
take possession of the Mortgaged Property and obtain a judicial appointment of a
receiver before becoming entitled to collect the rents. In addition, if
bankruptcy or similar proceedings are commenced by or in respect of the
mortgagor, the lender's ability to collect the rents may be adversely affected.
See 'Certain Legal Aspects of Mortgage Loans-- Leases and Rents'.
ENVIRONMENTAL RISKS
Real property pledged as security for a mortgage loan may be subject to
certain environmental risks. Under the laws of certain states, contamination of
a property may give rise to a lien on the property to assure the costs of
cleanup. In several states, such a lien has priority over the lien of an
existing mortgage against such property. In addition, under the laws of some
states and under the federal Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ('CERCLA'), a lender may be liable, as an 'owner' or
'operator,' for the costs of addressing releases or threatened releases of
hazardous substances that require remedial action at a property, if agents or
employees of the lender have become sufficiently involved in the operations of
the mortgagor, regardless of whether the environmental damage or threat was
caused by a prior owner. A lender also risks such liability on foreclosure of
the mortgage. Each Pooling and Servicing Agreement will provide that the Master
Servicer, acting on behalf of the Trust Fund, may not acquire title to a
Mortgaged Property securing a Mortgage Loan or take over its operation unless
the Master Servicer has previously determined, based upon a report prepared by a
person who regularly conducts environmental audits, that (i) the Mortgaged
Property is in compliance with applicable environmental laws and regulations or,
if not, that taking such actions as are necessary to bring the Mortgaged
Property in compliance therewith is reasonably likely to produce a greater
recovery on a present value basis than not taking such actions and (ii) there
are no circumstances or conditions that have resulted in any contamination or,
if circumstances or conditions have resulted in any contamination or if such
circumstances or conditions require remedial action, taking such actions with
respect to the affected Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis that not taking such actions. See
'Certain Legal Aspects of Mortgage Loans-- Environmental Legislation'.
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Offered Certificates of any
series. See 'ERISA Considerations'.
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CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING RESIDUAL CERTIFICATES
Holders of Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in 'Federal Income Tax Consequences --Federal
Income Tax Consequences for REMIC Certificates'. Accordingly, under certain
circumstances, holders of Offered Certificates that constitute Residual
Certificates may have taxable income and tax liabilities arising from such
investment during a taxable year in excess of the cash received during such
period. The requirement that holders of Residual Certificates report their pro
rata share of the taxable income and net loss of the REMIC will continue until
the Certificate Balances of all classes of Certificates of the related series
have been reduced to zero, even though holders of Residual Certificates have
received full payment of their stated interest and principal. A portion (or, in
certain circumstances, all) of such Certificateholder's share of the REMIC
taxable income may be treated as 'excess inclusion' income to such holder which
(i) generally, will not be subject to offset by losses from other activities,
(ii) for a tax-exempt holder, will be treated as unrelated business taxable
income and (iii) for a foreign holder, will not qualify for exemption from
withholding tax. Individual holders of Residual Certificates may be limited in
their ability to deduct servicing fees and other expenses of the REMIC. In
addition, Residual Certificates are subject to certain restrictions on transfer.
Because of the special tax treatment of Residual Certificates, the taxable
income arising in a given year on a Residual Certificate will not be equal to
the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Certificate may be significantly
less than that of a corporate bond or stripped instrument having similar cash
flow characteristics.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING ORIGINAL ISSUE DISCOUNT
Accrual Certificates will be, and certain of the other Classes of
Certificates of a series may be, issued with 'original issue discount' for
federal income tax purposes, which generally will result in recognition of some
taxable income in advance of the receipt of cash attributable to such income.
See 'Federal Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates'.
CONSENT
Under certain circumstances, the consent or approval of the holders of a
specified percentage of the aggregate Certificate Balance of all outstanding
Certificates of all series or a similar means of allocating decision-making
under the Agreement ('Voting Rights') will be required to direct, and will be
sufficient to bind all Certificateholders to, certain actions, including
amending the related Agreement in certain circumstances. See 'Description of the
Agreements--Events of Default', '--Rights Upon Event of Default' and '--
Amendment'.
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Certificates will be initially represented by one or more certificates
registered in the name of Cede, the nominee for DTC, and will not be registered
in the names of the Certificateholders or their nominees. Because of this,
unless and until Definitive Certificates are issued, Certificateholders will not
be recognized by the Trustee as 'Certificateholders' (as that term is to be used
in the related Agreement). Hence, until such time, Certificateholders will be
able to exercise the rights of Certificateholders only indirectly through DTC
and its participating organizations. See 'Description of the
Certificates--Book-Entry Registration and Definitive Certificates'.
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DESCRIPTION OF THE TRUST FUNDS
MORTGAGE ASSETS
The primary assets of each Trust Fund (the 'Mortgage Assets') will include
(i) Multifamily and/or Commercial Loans and/or Installment Contracts
(collectively, the 'Mortgage Loans') or (ii) mortgage participations,
pass-through certificates or other mortgage-backed securities evidencing
interests in or secured by one or more Mortgage Loans ('MBS'). As used herein,
'Mortgage Loans' refers to both whole Mortgage Loans and Mortgage Loans
underlying MBS. Mortgage Loans that secure, or interests in which are evidenced
by, MBS are herein sometimes referred to as Underlying Mortgage Loans. Mortgage
Loans that are not Underlying Mortgage Loans are sometimes referred to as 'Whole
Loans'. The Mortgage Assets will not be guaranteed or insured by the Depositor
or any of its affiliates. The Prospectus Supplement will describe any guarantee
or insurance relating to the Mortgage Assets by any governmental agency or
instrumentality or by any other person. Each Mortgage Asset will be selected by
the Depositor for inclusion in a Trust Fund from among those purchased, either
directly or indirectly, from a prior holder thereof (a 'Mortgage Asset Seller'),
which prior holder may or may not be the originator of such Mortgage Loan or the
issuer of such MBS and may be an affiliate of the Depositor.
MORTGAGE LOANS
The Mortgage Loans will be secured by liens on, or security interests in,
Mortgaged Properties consisting of (i) residential properties consisting of five
or more rental or cooperatively-owned dwelling units in high-rise, mid-rise or
garden apartment buildings ('Multifamily Properties' and the related loans,
'Multifamily Loans') or (ii) office buildings, retail stores, hotels or motels,
nursing homes, hospitals or other health care-related facilities, mobile home
parks, warehouse facilities, mini-warehouse facilities or self-storage
facilities, industrial plants, mixed use or other types of commercial properties
('Commercial Properties' and the related loans, 'Commercial Loans') located in
any one of the fifty states or the District of Columbia or such other locations
as are disclosed in the related Prospectus Supplement. The Mortgage Loans will
be secured by mortgages or deeds of trust or other similar security instruments
creating a first or more junior lien on Mortgaged Properties. Multifamily
Property may include mixed commercial and residential structures and may include
apartment buildings owned by private cooperative housing corporations
('Cooperatives'). The Mortgaged Properties may include leasehold interest in
properties, the title to which is held by third party lessors. The term of any
such leasehold will exceed the term of the mortgage note by at least ten years.
Each Mortgage Loan will have been originated by a person (the 'Originator')
other than the Depositor. The Mortgage Loans will be evidenced by promissory
notes (the 'Mortgage Notes') secured by mortgages or deeds of trust (the
'Mortgages') creating a lien on the Mortgaged Properties. Mortgage Loans will
generally also be secured by an assignment of leases and rents and/or operating
or other cash flow guarantees relating to the Mortgage Loan.
DEFAULT AND LOSS CONSIDERATIONS WITH RESPECT TO THE MORTGAGE LOANS
Mortgage Loans secured by commercial and multifamily properties are
markedly different from owner-occupied single-family home mortgage loans. The
repayment of loans secured by commercial or multifamily properties is typically
dependent upon the successful operation of such property rather than upon the
liquidation value of the real estate. The Mortgage Loans will be non-recourse
loans, which means that, absent special facts, the mortgagee may look only to
the Net Operating Income from the property for repayment of the mortgage debt,
and not to any other of the mortgagor's assets, in the event of the mortgagor's
default. Lenders typically look to the Debt Service Coverage Ratio of a loan
secured by income-producing property as an important measure of the risk of
default on such a loan. The 'Debt Service Coverage Ratio' of a Mortgage Loan at
any given time is the ratio of the Net Operating Income for a twelve-month
period to the annualized scheduled payments on the Mortgage Loan. 'Net Operating
Income' is typically defined as total operating revenues (including primarily
rental income and any expense reimbursement, ancillary income, late charges and
deposit forfeitures) minus total operating expenses (including primarily
expenses for advertising, general administration, management fees and
disbursements, utilities, repairs and maintenance, insurance, real estate taxes
and replacement reserves based solely on the mortgagor's estimates of the useful
lives of various assets). Net Operating Income does not reflect capital
expenditures or partnership expenses. The Net Operating Income of a Mortgaged
Property will fluctuate over time and may be sufficient or insufficient to cover
debt service on the related Mortgage Loan at any given time.
As the primary component of Net Operating Income, rental income (and
maintenance payments from tenant-stockholders of a Cooperative) is subject to
the vagaries of the applicable real estate market and/or business climate.
Properties typically leased, occupied or used on a short-term basis, such as
health care-related facilities, hotels and motels, and mini-warehouse and self-
storage facilities, tend to be affected more rapidly by changes in market or
business conditions than do properties leased, occupied or used for longer
periods, such as (typically) warehouses, retail stores, office buildings and
industrial plants. Commercial Loans
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may be secured by owner-occupied Mortgaged Properties or Mortgaged Properties
leased to a single tenant. Accordingly, a decline in the financial condition of
the mortgagor or single tenant, as applicable, may have a disproportionately
greater effect on the Net Operating Income from such Mortgaged Properties than
would be the case with respect to Mortgaged Properties with multiple tenants.
Changes in the expense components of Net Operating Income due to the
general economic climate or economic conditions in a locality or industry
segment, such as increases in interest rates, real estate and personal property
tax rates and other operating expenses including energy costs; changes in
governmental rules, regulations and fiscal policies, including environmental
legislation; and acts of God may also affect the risk of default on the related
Mortgage Loan. As may be further described in the related Prospectus Supplement,
in some cases leases of Mortgaged Properties may provide that the lessee, rather
than the mortgagor, is responsible for payment of certain of these expenses
('Net Leases'); however, because leases are subject to default risks as well
when a tenant's income is insufficient to cover its rent and operating expenses,
the existence of such 'net of expense' provisions will only temper, not
eliminate, the impact of expense increases on the performance of the related
Mortgage Loan.
While the duration of leases and the existence of any 'net of expense'
provisions are often viewed as the primary considerations in evaluating the
credit risk of mortgage loans secured by certain income-producing properties,
such risk may be affected equally or to a greater extent by changes in
government regulation of the operator of the property. Examples of the latter
include mortgage loans secured by health care-related facilities and hospitals,
the income from which and the operating expenses of which are subject to state
and/or federal regulations, such as Medicare and Medicaid, and multifamily
properties and mobile home parks, which may be subject to state or local rent
control regulation and, in certain cases, restrictions on changes in use of the
property. Low-and moderate-income housing may be particularly subject to legal
limitations and regulations but, because of such regulations, may also be less
sensitive to fluctuations in market rents generally.
The liquidation value of any Mortgaged Property may be adversely affected
by risks generally incident to interests in real property, including declines in
rental or occupancy rates. Lenders generally use the Loan-to-Value Ratio of a
mortgage loan as a measure of risk of loss if a property must be liquidated upon
a default by the mortgagor. The 'Loan-to-Value Ratio' of a Mortgage Loan at any
given time is the ratio (expressed as a percentage) of the then outstanding
principal balance of the Mortgage Loan to the Value of the related Mortgaged
Property. The 'Value' of a Mortgaged Property, other than with respect to
Refinance Loans, is generally the lesser of (a) the appraised value determined
in an appraisal obtained by the originator at origination of such loan and (b)
the sales price for such property. Refinance Loans are loans made to refinance
existing loans. The Value of the Mortgaged Property securing a Refinance Loan is
the appraised value thereof determined in an appraisal obtained at the time of
origination of the Refinance Loan. The Value of a Mortgaged Property as of the
date of initial issuance of the related series of Certificates may be less than
the value at origination and will fluctuate from time to time based upon changes
in economic conditions and the real estate market.
Appraised values of income-producing properties may be based on the market
comparison method (recent resale value of comparable properties at the date of
the appraisal), the cost replacement method (the cost of replacing the property
at such date), the income capitalization method (a projection of value based
upon the property's projected net cash flow), or upon a selection from or
interpolation of the values derived from such methods. Each of these appraisal
methods presents analytical challenges. It is often difficult to find truly
comparable properties that have recently been sold; the replacement cost of a
property may have little to do with its current market value; and income
capitalization is inherently based on inexact projections of income and expense
and the selection of an appropriate capitalization rate. Where more than one of
these appraisal methods are used and create significantly different results, or
where a high Loan-to-Value Ratio accompanies a high Debt Service Coverage Ratio
(or vice versa), the analysis of default and loss risks is even more difficult.
While the Depositor believes that the foregoing considerations are
important factors that generally distinguish the Mortgage Loans from
single-family mortgage loans and provide insight to the risks associated with
income-producing real estate, there is no assurance that such factors will in
fact have been considered by the Originators of the Mortgage Loans, or that, for
a particular Mortgage Loan, they are complete or relevant. See 'Special
Considerations--Risks Associated with Certain Mortgage Loans and Mortgaged
Properties', '--Balloon Payments', '--Mortgagor Default' and '--Mortgagor Type'.
MORTGAGE LOAN INFORMATION IN PROSPECTUS SUPPLEMENTS
Each Prospectus Supplement will contain information, as of the date of such
Prospectus Supplement and to the extent then applicable and specifically known
to the Depositor, with respect to the Mortgage Loans constituting related Trust
Assets, including (i) the aggregate outstanding principal balance and the
largest, smallest and average outstanding principal balance of the Mortgage
Loans as of the applicable Cut-off Date, (ii) the type of property securing the
Mortgage Loans (e.g., Multifamily Property or
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Commercial Property and the type of property in each such category), (iii) the
original and remaining terms to maturity of the Mortgage Loans, and the
seasoning of the Mortgage Loans, (iv) the earliest and latest origination date
and maturity date and weighted average original and remaining terms to maturity
of the Mortgage Loans, (v) the Loan-to-Value Ratios at origination of the
Mortgage Loans, (vi) the Mortgage Rates or range of Mortgage Rates and the
weighted average Mortgage Rate borne by the Mortgage Loans, (vii) the
geographical distribution of the Mortgaged Properties on a state-by-state basis,
(viii) information with respect to prepayment provisions, if any, of the
Mortgage Loans, (ix) the weighted average Retained Interest, if any, (x) with
respect to Mortgage Loans with adjustable Mortgage Rates ('ARM Loans'), the
adjustment dates, the highest, lowest and weighted average margin, and the
maximum Mortgage Rate variation at the time of any adjustment and over the life
of the ARM Loan, (xi) the Debt Service Coverage Ratio either at origination or
as of a more recent date (or both) and (xii) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions. The related Prospectus Supplement
will also contain certain information available to the Depositor with respect to
the provisions of leases and the nature of tenants of the Mortgaged Properties
and other information referred to in a general manner under 'Description of the
Trust Funds--Mortgage Assets--Default and Loss Considerations with Respect to
the Mortgage Loans' above. If specific information respecting the Mortgage Loans
is not known to the Depositor at the time Certificates are initially offered,
more general information of the nature described above will be provided in the
Prospectus Supplement, and specific information will be set forth in a report
which will be available to purchasers of the related Certificates at or before
the initial issuance thereof and will be filed as part of a Current Report on
Form 8-K with the Commission within fifteen days after such initial issuance.
MORTGAGE UNDERWRITING STANDARDS AND PROCEDURES
The underwriting procedures and standards for Mortgage Loans included in a
Mortgage Pool will be specified in the related Prospectus Supplement to the
extent such procedures and standards are known or available. Such Mortgage Loans
may be originated by an affiliate of the Depositor in contemplation of the
transactions contemplated by this Prospectus and the related Prospectus
Supplement or may be have been originated by third-parties and acquired by the
Depositor directly or through its affiliates in negotiated transactions.
Underwriting procedures are intended to evaluate, among other things, the
income derived from the Mortgaged Property, the capabilities of the management
of the project, including a review of management's past performance record, its
management reporting and control procedures (to determine its ability to
recognize and respond to problems) and its accounting procedures to determine
cash management ability, the obligor's credit standing and repayment ability and
the value and adequacy of the Mortgaged Property as collateral. Mortgage Loans
insured by the Federal Housing Administration ('FHA'), a division of the United
States Department of Housing and Urban Development ('HUD'), will have been
originated by mortgage lenders which are approved by HUD as an FHA mortgagee in
the orginated course of their real estate lending activities and will comply
with the underwriting policies of FHA.
The adequacy of a Mortgaged Property as security for repayment will
generally have been determined by appraisal by appraisers selected in accordance
with preestablished guidelines established by or acceptable to the loan
originator for appraisers or other appropriate market studies. If so specified
in the related Prospectus Supplement, the appraiser must have personally
inspected the property and verified that it was in good condition and that
construction, if new, has been completed. An appraisal can be based upon, among
other things, a cash flow analysis and/or a market data analysis of recent sales
of comparable properties or a replacement cost analysis based on the current
cost of constructing or purchasing a similar property.
No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. Further, there is no assurance that appreciation of real
estate values generally will limit loss experiences on commercial properties or
multifamily properties. If the commercial real estate market should experience
an overall decline in property values such that the outstanding balances of the
Mortgage Loans and any additional financing on the Mortgaged Properties in a
particular Mortgage Pool become equal to or greater than the value of the
Mortgaged Properties, the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. Even where Credit Support covers all losses resulting from defaults
and foreclosure, the effect of defaults and foreclosures may be to increase
prepayment experience on the Mortgage Loans, thus shortening weighted average
life and affecting yield to maturity.
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PAYMENT PROVISIONS OF THE MORTGAGE LOANS
The Mortgage Loans generally will (i) have individual principal balances at
origination of not less than $25,000, (ii) have original terms to maturity of
not more than 40 years and (iii) provide for payments of principal, interest or
both, on due dates that occur monthly, quarterly or semi-annually or at such
other interval as is specified in the related Prospectus Supplement. Mortgage
Loan may: (i) provide for no accrual of interest or for accrual of interest
thereon at an interest rate (a 'Mortgage Rate') that is fixed over its term or
that adjusts from time to time, or that may be converted from an adjustable to a
fixed Mortgage Rate, or from a fixed to an adjustable Mortgage Rate, from time
to time at the mortgagor's election; (ii) provide for scheduled payments to
maturity or payments that adjust from time to time to accommodate changes in the
Mortgage Rate or to reflect the occurrence of certain events, and may provide
for negative amortization or accelerated amortization, (iii) be fully amortizing
or require a balloon payment due on its stated maturity date; and (iv) contain
prohibitions on prepayment (a 'Lock-out Period' and the date of expiration
thereof, a 'Lock-out Date') or require payment of a premium or a yield
maintenance penalty (a 'Prepayment Premium') in connection with a prepayment, in
each case as described in the related Prospectus Supplement. In the event that
holders of any class or classes of Offered Certificates will be entitled to all
or a portion of any Prepayment Premiums collected in respect of Mortgage Loans,
the related Prospectus Supplement will specify the method or methods by which
any such amounts will be allocated. A Mortgage Loan may also contain provisions
entitling the mortgagee to a share of profits realized from the operation or
disposition of the Mortgaged Property ('Equity Participations'), as described in
the related Prospectus Supplement. In the event that holders of any class or
classes of Offered Certificates will be entitled to all or a portion of an
Equity Participation, the related Prospectus Supplement will specify the terms
and provisions of the Equity Participation and the method or methods by which
distributions in respect thereof will be allocated among such Certificates.
MBS
Any MBS will have been issued pursuant to a participation and servicing
agreement, a pooling and servicing agreement, an indenture or similar agreement
(an 'MBS Agreement'). A seller (the 'MBS Issuer') and/or servicer (the 'MBS
Servicer') of the underlying Mortgage Loans will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the 'MBS
Trustee'), if any, or with the original purchaser of the interest in the
underlying Mortgage Loans evidenced by the MBS.
Distributions of principal and interest will be made on MBS on the dates
specified in the related Prospectus Supplement. The MBS may be issued in one or
more classes with characteristics similar to the classes of Certificates
described in this Prospectus. Principal and interest distributions will be made
on the MBS by the MBS Trustee or the MBS Servicer. The MBS Issuer or the MBS
Servicer or another person specified in the related Prospectus Supplement may
have the right or obligation to repurchase or substitute assets underlying the
MBS after a certain date or under other circumstances specified in the related
Prospectus Supplement.
Enhancement in the form of reserve funds, subordination of other credit
support similar to that described for the Certificates under 'Description of
Credit Support' may be provided with respect to the MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Mortgage Loans evidenced or secured by such MBS
and other factors and generally will have been established for the MBS on the
basis of requirements of either any Rating Agency that may have assigned a
rating to the MBS or the initial purchasers of the MBS. In addition, MBS may
consist of classes of MBS which are subordinate to other classes of MBS of the
same series.
The Prospectus Supplement for a series of Certificates evidencing interests
in Mortgage Assets that included MBS will specify, to the extent available, (i)
the aggregate approximate initial and outstanding principal amount and type of
the MBS to be included in the Trust Fund, (ii) the original and remaining term
to stated maturity of the MBS, if applicable, (iii) the pass-through or bond
rate of the MBS or formula for determining such rates, (iv) the applicable
payment provisions for the MBS, (v) the MBS Issuer, MBS Servicer and MBS
Trustee, as applicable, (vi) certain characteristics of the credit support, if
any, such as subordination, reserve funds, insurance policies, letters of credit
or guarantees relating to the related Underlying Mortgage Loans or directly to
such MBS, (vii) the characteristics of any subordination to which such MBS may
be subject; (viii) the terms on which the related Underlying Mortgage Loans for
such MBS or the MBS may, or are required to, be purchased prior to their
maturity, (ix) the terms on which Mortgage Loans may be substituted for those
originally underlying the MBS, (x) the servicing fees payable under the MBS
Agreement, (xi) to the extent available to the Depositor, the type of
information in respect of the Underlying Mortgage Loans described under
'Description of the Trust Funds-- Mortgage Assets--Mortgage Loan Information in
Prospectus Supplements' and (xii) the characteristics of any cash flow
agreements that are included as part of the trust fund evidenced or secured by
the MBS.
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COLLECTION ACCOUNTS
Each Trust Fund will include one or more accounts (collectively, the
'Collection Account') established and maintained on behalf of the
Certificateholders into which the person or persons designated in the related
Prospectus Supplement will deposit all payments and collections received or
advanced with respect to the Mortgage Assets and other assets in the Trust Fund.
A Collection Account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be invested in certain short-term,
investment grade obligations.
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Mortgage Assets in the
related Trust Fund may be provided to one or more classes of Certificates in the
related series in the form of subordination of one or more other classes of
Certificates in such series or by one or more other types of credit support,
such as a letter of credit, insurance policy for the Mortgage Loans, certificate
guarantee insurance, guarantee, reserve fund or another type of credit support,
or a combination thereof (any such coverage with respect to the Certificates of
any series, 'Credit Support'). The amount and types of coverage, the
identification of the entity providing the coverage (if applicable) and related
information with respect to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a series of Certificates. See
'Special Considerations--Credit Support Limitations' and 'Description of Credit
Support'.
CASH FLOW AGREEMENTS
The Trust Fund may include guaranteed investment contracts pursuant to
which moneys held in the funds and accounts established for the related series
will be invested at a specified rate. The Trust Fund may also include certain
other agreements, such as interest rate exchange agreements, interest rate cap
or floor agreements, currency exchange agreements or similar agreements provided
to reduce the effects of interest rate or currency exchange rate fluctuations on
the Mortgage Assets on one or more classes of Certificates. The principal terms
of any such guaranteed investment contract or other agreement (any such
agreement, a 'Cash Flow Agreement'), including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related Prospectus
Supplement will provide certain information with respect to the obligor under
any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor to the purchase of Trust Assets or will be used by the
Depositor for general corporate purposes. The Depositor expects 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 the Depositor, prevailing interest rates,
availability of funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Certificate will depend on the price paid by the
Certificateholder, the Pass-Through Rate of the Certificate, the receipt and
timing of receipt of distributions on the Certificate and the weighted average
life of the Mortgage Assets in the related Trust Fund. See 'Special
Considerations--Average Life of Certificates; Prepayments; Yields'.
PASS-THROUGH RATE
Certificates of any class within a series may have fixed, variable or
adjustable Pass-Through Rates, which may or may not be based upon the interest
rates borne by the Mortgage Assets in the related Trust Fund. The Prospectus
Supplement with respect to any series of Certificates will specify the
Pass-Through Rate for each class of such Certificates or in the case of a
variable or adjustable Pass-Through Rate, the method of determining the
Pass-Through Rate; the effect, if any, of the prepayment of any Mortgage Asset
on the Pass-Through Rate of one or more classes of Certificates; and whether the
distributions of interest on the Certificates of any class will be dependent, in
whole or in part, on the performance of any obligor under a Cash Flow Agreement.
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TIMING OF PAYMENT OF INTEREST AND PRINCIPAL
Each payment of interest on the Certificates (or addition to the
Certificate Balance of a class of Accrual Certificates) on a Distribution Date
will include interest accrued during the Interest Accrual Period for such
Distribution Date. If the Interest Accrual Period ends on a date other than a
Distribution Date for the related series, the yield realized by the holders of
such Certificates may be lower than the yield that would result in the Interest
Accrual Period ended on such Distribution Date. In addition, interest accrued
for an Interest Accrual period for one or more classes of Certificates may be
calculated on the assumption that distributions of principal (and additions to
the Certificate Balance of Accrual Certificates) and allocations of losses on
the Mortgage Assets may be made on the first day of the Interest Accrual Period
for a Distribution Date and not on such Distribution Date. Such method would
produce a lower effective yield than if interest were calculated on the basis of
the actual principal amount outstanding during an Interest Accrual Period. The
Interest Accrual Period for any class of Offered Certificates will be described
in the related Prospectus Supplement.
PRINCIPAL PREPAYMENTS
The yield to maturity on the Certificates will be affected by the rate of
principal payments on the Mortgage Assets (including principal prepayments on
Mortgage Loans resulting from both voluntary prepayments by the mortgagors and
involuntary liquidations). The rate at which principal prepayments occur on the
Mortgage Loans will be affected by a variety of factors, including, without
limitation, the terms of the Mortgage Loans, the level of prevailing interest
rates, the availability of mortgage credit and economic, demographic,
geographic, tax, legal and other factors. In general, however, if prevailing
interest rates fall significantly below the Mortgage Rates on the Mortgage Loans
comprising or underlying the Mortgage Assets in a particular Trust Fund, such
Mortgage Loans are likely to be the subject of higher principal prepayments than
if prevailing rates remain at or above the rates borne by such Mortgage Loans.
In this regard, it should be noted that certain Mortgage Assets may consist of
Mortgage Loans with different Mortgage Rates and the stated pass-through or
pay-through interest rate of certain MBS may be a number of percentage points
higher or lower than certain of the Underlying Mortgage Loans. The rate of
principal payments on some or all of the classes of Certificates of a series
will correspond to the rate of principal payments on the Mortgage Assets in the
related Trust Fund and is likely to be affected by the existence of Lock-out
Periods and Prepayment Premium provisions of the Mortgage Loans underlying or
comprising such Mortgage Assets, and by the extent to which the servicer of any
such Mortgage Loan is able to enforce such provisions. Mortgage Loans with a
Lock-out Period or a Prepayment Premium provision, to the extent enforceable,
generally would be expected to experience a lower rate of principal prepayments
than otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or with lower Prepayment Premiums.
If the purchaser of a Certificate offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Mortgage Assets,
the actual yield to maturity will be lower than that so calculated. Conversely,
if the purchaser of a Certificate offered at a premium calculates its
anticipated yield to maturity based on an assumed rate of distributions or
principal that is slower than that actually experienced on the Mortgage Assets,
the actual yield to maturity will be lower than that so calculated. In either
case, the effect of voluntary and involuntary prepayments of the Mortgage Assets
on the yield on one or more classes of the Certificates of such series in the
related Trust Fund may be mitigated or exacerbated by any provisions for
sequential or selective distribution of principal to such classes.
The timing of changes in the rate of principal payments on the Mortgage
Assets may significantly affect an investor's actual yield to maturity, even if
the average rate of distributions of principal is consistent with an investor's
expectation. In general, the earlier a principal payment is received on the
Mortgage Assets and distributed on a Certificate, the greater the effect on such
investor's yield to maturity. The effect of an investor's yield of principal
payments occurring at a rate higher (or lower) than the rate anticipated by the
investor during a given period may not be offset by a subsequent like decrease
(or increase) in the rate of principal payments.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Mortgage Assets
included in or comprising a Trust Fund and the rate at which payments are made
from any Credit Support or Cash Flow Agreement for the related series of
certificates may affect the ultimate maturity and the weighted average life of
each class of such series. Prepayments on the Mortgage Loans comprising or
underlying the Mortgage Assets in a particular Trust Fund will generally
accelerate the rate at which principal is paid on some or all of the classes of
the Certificates of the related series.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Certificates of a series will be
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influenced by the rate at which principal on the Mortgage Loans comprising or
underlying the Mortgage Assets is paid to such class, which may be in the form
of scheduled amortization or prepayments (for this purpose, the term
'prepayment' includes prepayments, in whole or in part, and liquidations due to
default).
In addition, the weighted average life of the Certificates may be affected
by the varying maturities of the Mortgage Loans comprising or underlying the
Mortgage Assets. If any Mortgage Loans comprising or underlying the Mortgage
Assets in a particular Trust Fund have actual terms to maturity of less than
those assumed in calculating final scheduled Distribution Dates for the classes
of Certificates of the related series, one or more classes of such Certificates
may be fully paid prior to their respective final scheduled Distribution Dates,
even in the absence of prepayments. Accordingly, the prepayment experience of
the Mortgage Assets will, to some extent, be a function of the mix of Mortgage
Rates and maturities of the Mortgage Loans comprising or underlying such
Mortgage Assets. See 'Description of the Trust Funds'.
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ('CPR') prepayment model
or the Standard Prepayment Assumption ('SPA') prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% SPA assumes prepayment rates of 0.2% per annum of
the then outstanding principal balance of such 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 assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans underlying or comprising the Mortgage Assets. Moreover, CPR and SPA were
developed based upon historical prepayment experience for single-family loans.
Thus, it is likely that prepayment of any Mortgage Loans comprising or
underlying the Mortgage Assets for any series will not conform to any particular
level of CPR or SPA.
The Prospectus Supplement with respect to each series of Certificates will
contain tables, if applicable, setting forth the projected weighted average life
of each life of Offered Certificates of such series and the percentage of the
Initial Certificate Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Mortgage Assets are made at rates
corresponding to various prepayment rates. Such tables and assumptions are
intended to illustrate the sensitivity of weighted average life of the
Certificates to various prepayment rates and will not be intended to predict or
to provide information that will enable investors to predict the actual weighted
average life of the Certificates. It is unlikely that prepayment of any Mortgage
Loans comprising or underlying the Mortgage Assets for any series will conform
to any particular prepayment rate.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF MORTGAGE LOAN
A number of Mortgage Loans may have balloon payments due at maturity, and
because the ability of a mortgagor to make a balloon payment typically will
depend upon its ability either to refinance the loan or to sell the related
Mortgaged Property, there is a risk that a number of Mortgage Loans having
balloon payments may default at maturity, or that the servicer may extend the
maturity of such a Mortgage Loan in connection with a workout. In the case of
defaults, recovery of proceeds may be delayed by, among other things, bankruptcy
of the mortgagor or adverse conditions in the market where the property is
located. In order to minimize losses on defaulted Mortgage Loans, the servicer
may be given considerable flexibility to modify Mortgage Loans that are in
default or as to which a default is reasonably foreseeable. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan
will tend to extend the weighted average life of the Certificates, thereby
lengthening the period of time elapsed from the date of issuance of a
Certificate until it is retired.
FORECLOSURES AND PAYMENT PLANS
The number of foreclosures and the principal amount of the Mortgage Loans
comprising or underlying the Mortgage Assets that are foreclosed in relation to
the number of Mortgage Loans that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans comprising or underlying
the Mortgage Assets and that of the related series of
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Certificates. Servicing decisions made with respect to the Mortgage Loans,
including the use of payment plans prior to a demand for acceleration and the
restructuring of Mortgage Loans in bankruptcy proceeds, may also have an effect
upon the payment patterns of particular Mortgage Loans and thus the weighted
average life of the Certificates.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE CLAUSES
Acceleration of mortgage payments as a result of certain transfers of or
the creation of encumbrances upon underlying Mortgaged Property is another
factor affecting prepayment rates. A number of the Mortgage Loans comprising or
underlying the Mortgage Assets may include 'due-on-sale' clauses or
'due-on-encumbrance' clauses that allow the holder of the Mortgage Loans to
demand payment in full of the remaining principal balance of the Mortgage Loans
upon sale or certain other transfers of or the creation of encumbrances upon the
related Mortgaged Property. With respect to any Whole Loans, the Master Servicer
will, if required by the related Agreement, on behalf of the Trust Fund, employ
its usual practices in determining whether to exercise any such right that the
Trustee may have as mortgagee to accelerate payment of the Whole Loan. See
'Certain Legal Aspects of Mortgage Loans--Due-on-Sale and Due-on-Encumbrance'
and 'Description of the Agreements--Due-on-Sale and Due-on-Encumbrance
Provisions'.
THE DEPOSITOR
Asset Securitization Corporation, the Depositor, is a Delaware corporation
organized on June 23, 1992 for the purpose of acquiring Mortgage Assets and
selling interests therein or bonds secured thereby. It is a wholly owned
subsidiary of Nomura Asset Capital Corporation, which is in turn a wholly-owned
subsidiary of Nomura Holding America Inc., a United States-based holding
company, incorporated in Delaware, which is wholly owned by The Nomura
Securities Co., Ltd., a Japanese corporation. The Nomura Securities Co., Ltd. is
engaged in the domestic and international securities business. The Depositor
maintains its principal office at Two World Financial Center--Building B, 21st
Floor, New York, New York 10281-1198. Its telephone number is (212) 667-9300.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. Each series of
Certificates will consist of one or more classes or subclasses of Certificates
that may be senior (collectively, 'Senior Certificates') or subordinate
(collectively, 'Subordinate Certificates') Certificates. Each series may consist
of one or more of the types of Certificates described below.
Types of Certificates classified by interest payments can include:
<TABLE>
<CAPTION>
CATEGORY OF CLASS DEFINITION
- ------------------------- ---------------------------------------------------------------------------------------
<S> <C>
Ascending Rate........... Certificates that have predetermined Pass-Through Rates that change one or more times
on dates determined before issuance.
Fixed Rate............... Certificates with Pass-Through Rates that are fixed throughout the life of such
Certificates.
Floating Rate............ Certificates with Pass-Through Rates that are reset periodically based on an index and
that vary directly with changes in the index.
Inverse Floating Rate.... Certificates with Pass-Through Rates that are reset periodically based on an index and
that vary inversely with changes in the index.
Stripped Interest........ Certificates that receive some or all of the interest payments made on the underlying
Mortgage Loans or other Trust Fund assets and little or no principal. Stripped Interest
Certificates have either a nominal or a notional principal amount. A nominal principal
amount represents actual principal that will be paid on the class. It is referred to as
nominal since it is extremely small compared to other classes of Certificates. A
</TABLE>
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<TABLE>
<S> <C>
notional principal amount is the amount used as a reference to calculate the amount of
interest due on a Stripped Interest Certificate that is not entitled to any principal.
Stripped Principal....... Certificates that do not receive any interest.
WAC (or Weighted Average
Coupon)................ Certificates whose Pass-Through Rate represents a blended interest rate that may change
from period to period.
Accrual.................. Certificates that accrete all or a portion of their interest, which is added to the
outstanding principal balance. This accretion may continue until the class of
Certificates begins receiving principal payments, until some other event has occurred
or until the class is retired.
Types of Certificates classified by allocation of principal distributions can include:
PAC (or Planned
Amortization
Class)................. Certificates that are designed to receive principal payments using a predetermined
schedule derived by assuming two constant prepayment rates for the underlying Mortgage
Loans. A PAC schedule will reflect a 'structuring range' both above and below the
Prepayment Assumption for the related series. The PAC Certificates in any series may
include two or more 'types'. The PAC Certificates within any typehave a single
structuring range. The different types have different structuring ranges and/or
different principal payment priorities.
Scheduled................ Certificates that are designed to receive principal payments using a predetermined
schedule, but that are not designated as PAC or TAC Certificates. Classes consisting of
both PAC and TAC components are also designated as Scheduled Classes.
Sequential Pay........... Certificates that receive principal payments in a prescribed sequence, that do not have
predetermined schedules and that under all circumstances receive payments of principal
continuously from the first Distribution Date on which they receive principal until
they are retired. Sequential Pay Certificates may receive principal payments
concurrently with one or more other classes of Sequential Pay Certificates. A single
class of Certificates that receives principal payments before or after all other
classes in the same series may be identified as a Sequential Pay Certificate.
Sticky Jump/Non-Sticky
Jump................... Certificates whose principal payment priorities change temporarily or permanently upon
the occurrence of one or more 'trigger' events. A Sticky Jump Certificate 'jumps' to
its new priority on the first Distribution Date when the trigger condition is met and
retains ('sticks' to) that priority until retired. If the principal payment change is
not permanent, the Certificate is referred to as a Non-Sticky Jump.
Strip.................... Certificates that receive a constant proportion, or 'strip', of the principal payments
on the underlying Mortgage Loans or other Trust Fund assets.
Support (or Companion)... Certificates that receive principal payments on any Payment Date only if scheduled
payments have been made on specified PAC, TAC and/or Scheduled Classes.
TAC (or Targeted
Amortization
Class)................. Certificates that are designed to receive principal payments using a predetermined
schedule derived by assuming a single constant prepayment rate for the underlying
Mortgage Loans. The TAC Certificates in any series may include two or more 'types'. The
different types have different principal payment priorities and/or have schedules that
are derived from different assumed prepayment rates.
Index Allocation Class... Certificates whose principal payment allocations are based on the value of an index.
</TABLE>
The Prospectus Supplement for any series including classes similar to any
of those described above will contain a complete description of their
characteristics and risk factors, including, as applicable, (i) mortgage
principal prepayment effects on the
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weighted average lives of classes; (ii) the risk that Stripped Interest
Certificates purchased at a premium may not return their purchase prices under
rapid prepayment scenarios and (iii) the degree to which an investor's yield is
sensitive to principal prepayment. Any class of Certificates may be divided into
two or more subclasses of Certificates.
Each class of Offered Certificates of a series will be issued in minimum
denominations corresponding to Certificate Balances or, in case of Stripped
Interest Certificates, notional amounts specified in the related Prospectus
Supplement. The transfer of any Offered Certificates may be registered and such
Certificates may be exchanged without the payment of any service charge payable
in connection with such registration of transfer or exchange, but the Depositor
or the Trustee or any agent thereof may require payment of a sum sufficient to
cover any tax or other governmental charge. One or more classes of Certificates
of a series may be issued in definitive form ('Definitive Certificates') or in
book-entry form ('Book-Entry Certificates'), as provided in the related
Prospectus Supplement. See 'Special Considerations--Book-Entry Registration' and
'Description of the Certificates--Book-Entry Registration and Definitive
Certificates'. Definitive Certificates will be exchangeable for other
Certificates of the same class and series of a like aggregate Certificate
Balance or notional amount but of different authorized denominations. See
'Special Considerations--Limited Liquidity' and '--Limited Assets'.
DISTRIBUTIONS
Distributions allocable to principal and interest on the Certificates of
each series will be made by or on behalf of the Trustee on each Distribution
Date as specified in the related Prospectus Supplement from the Available Funds
for such series on such Distribution Date. Distributions (other than the final
distribution) will be made to the persons in whose names the Certificates are
registered (the 'Record Date'), and the amount of each distribution will be
determined (the 'Determination Date') as of the close of business on the date
specified in the related Prospectus Supplement. All distributions with respect
to each class of Certificates on each Distribution Date will be allocated pro
rata among the outstanding Certificates in such class. Payments will be made
either by wire transfer in immediately available funds to the account of a
Certificateholder at a bank or other entity having appropriate facilities
therefor, if such Certificateholder has so notified the Trustee or its designee
no later than the date specified in the related Prospectus Supplement (and, if
so provided in the related Prospectus Supplement, holds Certificates in the
requisite amount specified therein), or by check mailed to the address of the
person entitled thereto as it appears on the Certificate Register; provided,
however, that the final distribution in retirement of the Certificates (whether
Definitive Certificates or Book-Entry Certificates) will be made only upon
presentation and surrender of the Certificates at the office or agency of the
Trustee or its agent specified in the notice to Certificateholders of such final
distribution.
AVAILABLE FUNDS
All distributions on the Certificates of each series on each Distribution
Date will be made from the Available Funds described below, in accordance with
the terms described in the related Prospectus Supplement. 'Available Funds' for
each Distribution Date will generally equal the sum of the following amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but due on a
date subsequent to the related Collection Period (a 'Collection Period' with
respect to any Distribution Date will usually commence on the second day of the
month in which the immediately preceding Distribution Date occurs, or the day
after Cut-off Date in the case of the first Collection Period, and will end on
the first day of the month of the related Distribution Date).
(b) all prepayments, together with related payments of the interest
thereon, Liquidation Proceeds, Insurance Proceeds, and other unscheduled
recoveries received subsequent to the related Prepayment Period, as defined in
the related Prospectus Supplement, and
(c) all amounts in the Collection Account that are due or reimbursable to
the Depositor, the Trustee, a Mortgage Asset Seller, a Sub-Servicer or the
Master Servicer or that are payable in respect of certain expenses of the
related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account, including any
net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so provides,
amounts paid by a Master Servicer with respect to interest shortfalls resulting
from voluntary and involuntary prepayments during the related Prepayment Period;
and
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(v) to the extent not on deposit in the related Collection Account as of
the corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Certificates (including any Certificates not
offered hereby) on each Distribution Date, and accordingly will be released from
the Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE CERTIFICATES
Each class of Certificates (other than classes of Stripped Principal
Certificates that have no Pass-Through Rate) may have a different Pass-Through
Rate, which may be a fixed, variable or adjustable Pass-Through Rate. The
related Prospectus Supplement will specify the Pass-Through Rate for each class
or, in the case of a variable or adjustable Pass-Through Rate, the method for
determining the Pass-Through Rate. Interest on the Certificates will typically
be calculated on the basis of a 360-day year consisting of twelve 30-day months.
Distributions of interest in respect of the Certificates of any class will
be made on each Distribution Date (other than any class of Accrual Certificates,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Certificates that are
not entitled to any distributions of interest) based on the Accrued Certificate
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Certificates, Accrued Certificate Interest on such class will be
added to the Certificate Balance thereof on each Distribution Date. With respect
to each class of Certificates and each Distribution Date (other than certain
classes of Stripped Interest Certificates), 'Accrued Certificate Interest' will
be equal to interest accrued during the related Interest Accrual Period on the
outstanding Certificate Balance thereof immediately prior to the Distribution
Date, at the applicable Pass-Through Rate, reduced to reflect prepayment
interest shortfalls as described below (for this purpose, the term 'prepayment'
includes prepayments, in whole or in part, and liquidations due to default).
Accrued Certificate Interest on Stripped Interest Certificates will be equal to
interest accrued on the outstanding notional amount thereof immediately prior to
each Distribution Date, at the applicable Pass-Through Rate, reduced as
described below. The method of determining the notional amount for any class of
Stripped Interest Certificates will be described in the related Prospectus
Supplement. Reference to notional amount is solely for convenience in certain
calculations and does not represent the right to receive any distributions of
principal. The Accrued Certificate Interest on each class of Certificates will
be reduced in the event of prepayment interest shortfalls, which are shortfalls
in collections of interest for a full accrual period resulting from prepayments
prior to the due date in such accrual period on the Mortgage Loans comprising or
underlying the Mortgage Assets in the Trust Fund for the related series, with
such shortfall allocated among all of the classes of Certificates of that series
in the manner specified in the related Prospectus Supplement. See 'Special
Considerations--Average Life of Certificates; Prepayments; Yields' and 'Yield
Considerations'.
DISTRIBUTIONS OF PRINCIPAL OF THE CERTIFICATES
The Certificates of each series, other than certain classes of Stripped
Interest Certificates, will have a 'Certificate Balance' which, at any time,
will equal the then maximum amount that the holder will be entitled to receive
in respect of principal out of the future cash flow on the Mortgage Assets and
other assets included in the related Trust Fund. The outstanding Certificate
Balance of a Certificate will be reduced to the extent of distributions of
principal thereon from time to time, and by the amount of losses allocated to
such Certificate incurred in respect of the related Mortgage Assets, may be
increased in respect of deferred interest on the related Mortgage Loans to the
extent provided in the related Prospectus Supplement and, in the case of Accrual
Certificates prior to the Distribution Date on which distributions of interest
are required to commence, will be increased by any Accrued Certificate Interest.
The initial aggregate Certificate Balance of all classes of Certificates of a
series will not be greater than the outstanding aggregate principal balance of
the related Mortgage Assets as of the applicable Cut-off Date. The initial
aggregate Certificate Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Distributions of principal will
be made on each Distribution Date to the class or classes of Certificates
entitled thereto in accordance with the provisions described in such Prospectus
Supplement until the Certificate Balance of such class has been reduced to zero.
Stripped Interest Certificates with no Certificate Balance are not entitled to
any distributions of principal.
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DISTRIBUTIONS ON THE CERTIFICATES OF PREPAYMENT PREMIUMS OR IN RESPECT OF EQUITY
PARTICIPATIONS
Prepayment Premiums or payments in respect of Equity Participations that
are collected on the Mortgage Assets in the related Trust Fund will be
distributed on each Distribution Date to the class or classes of Certificates
entitled thereto in accordance with the provisions described in the related
Prospectus Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
With respect to a series of Certificates consisting of one or more classes
of Subordinate Certificates, on any Distribution Date in respect of which losses
or shortfalls in collections on the Mortgage Assets have been incurred, the
amount of such losses or shortfalls will be borne first by a class of
Subordinate Certificates in the priority and manner and subject to the
limitations specified in the related Prospectus Supplement. See 'Description of
Credit Support' for a description of the types of protection that may be
included in a Trust Fund against losses and shortfalls on Mortgage Assets
comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Certificates evidencing an interest in a
Trust Fund consisting of Mortgage Assets other than MBS, the Master Servicer, if
required by the related Agreement, will be required as part of its servicing
responsibilities to advance on or before each Distribution Date its own funds or
funds held in the Collection Account that are not included in the Available
Funds for such Distribution Date, in an amount equal to the aggregate of
payments of principal (other than any balloon payments) and interest (net of
related servicing fees and Retained Interest) that were due on the Whole Loans
in such Trust Fund during the related Collection Period and were delinquent on
the related Determination Date, subject to the Master Servicer's good faith
determination that such advances will be reimbursable from (a) Related Proceeds
(as defined below) or (b) in the case of a series of Certificates that includes
one or more classes of Subordinate Certificates and if so provided in the
related Prospectus Supplement, the greater of (x) the outstanding Certificate
Balance of such Subordinate Certificates and (y) Related Proceeds. See
'Description of Credit Support'.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Advances of the
Master Servicer's funds will typically be reimbursable only out of related
recoveries on the Mortgage Loans (including amounts received under any form of
Credit Support) respecting which such advances were made (as to any Mortgage
Loan, 'Related Proceeds'); provided, however, that any such advance will be
reimbursable from any amounts in the Collection Account to the extent that the
Master Servicer shall determine that such advance (a 'Nonrecoverable Advance')
is not ultimately recoverable from Related Proceeds. If advances have been made
by the Master Servicer from excess funds in the Collection Account, the Master
Servicer is required to replace such funds in the Collection Account on any
future Distribution Date to the extent that funds in the Collection Account on
such Distribution Date are less than payments required to be made to
Certificateholders on such date. The obligations of the Master Servicer to make
advances may be secured by a cash advance reserve fund or a surety bond.
Information regarding the characteristics of, and the identity of any obligor
on, any such surety bond, will be set forth in the related Prospectus
Supplement.
The Master Servicer will be entitled to receive interest at the rate
specified in the related Prospectus Supplement on its outstanding advances and
will be entitled to pay itself such interest periodically from general
collections on the Mortgage Loans prior to any payment to Certificateholders or
as otherwise provided in the related Agreement and described in such Prospectus
Supplement.
The Prospectus Supplement for any series of Certificates evidencing an
interest in a Trust fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO CERTIFICATEHOLDERS
With each distribution to holders of any class of Certificates of a series,
a Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, will forward or cause to be forwarded to each such holder, to the
Depositor and to such other parties as may be specified in the related
Agreement, a statement setting forth, in each case to the extent applicable and
available:
(i) the amount of such distribution to holders of Certificates of such
class applied to reduce the Certificate Balance thereof;
(ii) the amount of such distribution to holders of Certificates of such
class allocable to Accrued Certificate Interest;
(iii) the amount of such distribution allocable to (a) Prepayment Premiums
and (b) payments on account of Equity Participations;
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(iv) the amount of related servicing compensation received by a Master
Servicer, any Special Servicer and any Sub-Servicer and such other customary
information as any such Master Servicer or the Trustee deems necessary or
desirable, or that a Certificateholder reasonably requests, to enable
Certificateholders to prepare their tax returns;
(v) the aggregate amount of advances included in such distribution, and the
aggregate amount of unreimbursed advances at the close of business on such
Distribution Date;
(vi) the aggregate principal balance of the Mortgage Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Mortgage Loans in
respect of which (a) one scheduled payment is delinquent, (b) two scheduled
payments are delinquent, (c) three or more scheduled payments are delinquent and
(d) foreclosure proceedings have been commenced;
(viii) with respect to each Mortgage Loan that is delinquent two or more
months, (a) the loan number thereof, (b) the unpaid balance thereof, (c) whether
the delinquency is in respect of any balloon payment, (d) the aggregate amount
of unreimbursed servicing expenses and unreimbursed advances in respect thereof,
(e) the aggregate amount of any interest accrued and payable on related
servicing expenses and related advances assuming such Mortgage Loan is
subsequently liquidated through foreclosure, (f) whether a notice of
acceleration has been sent to the mortgagor and, if so, the date of such notice,
(g) whether foreclosure proceedings have been commenced and, if so, the date so
commenced and (h) if such Mortgage Loan is more than three months delinquent and
foreclosure has not been commenced, the reason therefor;
(ix) with respect to any Whole Loan liquidated during the related
Collection Period or Prepayment Period, as applicable (other than by payment in
full), (a) the loan number thereof, (b) the manner in which it was liquidated,
(c) the aggregate amount of liquidation proceeds received, (d) the portion of
such liquidation proceeds payable or reimbursable to the Master Servicer in
respect of such Mortgage Loan and (e) the amount of any loss to
Certificateholders;
(x) with respect to each REO Property relating to a Whole Loan and included
in the Trust Fund as of the end of the related Collection Period or Prepayment
Period, as applicable, (a) the loan number of the related Mortgage Loan, (b) the
date of acquisition, (c) the book value, (d) the principal balance of the
related Mortgage Loan immediately following such Distribution Date (calculated
as if such Mortgage Loan were still outstanding taking into account certain
limited modifications to the terms thereof specified in the Agreement), (e) the
aggregate amount of unreimbursed servicing expenses and unreimbursed advances in
respect thereof and (f) if applicable, the aggregate amount of interest accrued
and payable on related servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period or Prepayment Period, as applicable, (a) the loan number of the related
Mortgage Loan, (b) the aggregate amount of sale proceeds, (c) the portion of
such sales proceeds payable or reimbursable to the Master Servicer or a Special
Servicer in respect of such REO Property or the related Mortgage Loan and (d)
the amount of any loss to Certificateholders in respect of the related Mortgage
Loan;
(xii) the aggregate Certificate Balance or notional amount, as the case may
be, of each class of Certificates (including any class of Certificates not
offered hereby) at the close of business on such Distribution Date, separately
identifying any reduction in such Certificate Balance due to the allocation of
any loss and increase in the Certificate Balance of a class of Accrual
Certificates in the event that Accrued Certificate Interest has been added to
such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Prepayment Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close of
business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Certificate Interest, if any, on each
class of Certificates at the close of business on such Distribution Date;
(xvii) in the case of Certificates with a variable Pass-Through Rate, the
Pass-Through Rate applicable to such Distribution Date, as calculated in
accordance with the method specified in the related Prospectus Supplement;
(xviii) in the case of Certificates with an adjustable Pass-Through Rate,
for statements to be distributed in any month in which an adjustment date
occurs, the adjustable Pass-Through Rate applicable to the next succeeding
Distribution Date as calculated in accordance with the method specified in the
related Prospectus Supplement;
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(xix) as to any series which incudes Credit Support, the amount of coverage
of each instrument of Credit Support included therein as of the close of
business on such Distribution Date; and
(xx) the aggregate amount of payments by the mortgagors of (a) default
interest, (b) late charges and (c) assumption and modification fees collected
during the related Collection Period or Prepayment Period, as applicable. In the
case of information furnished pursuant to subclauses (i)-(iv) above, the amounts
shall be expressed as a dollar amount per minimum denomination of Certificates
or for such other specified portion thereof. The Prospectus Supplement for each
series of Offered Certificates will describe any additional information to be
included in reports to the holders of such Certificates.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer, if any, or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Certificate a statement containing the information set
forth in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Certificateholder.
Such obligation of the Master Servicer or the Trustee shall be deemed to have
been satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See 'Description of the
Certificates-- Book-Entry Registration and Definitive Certificates'.
TERMINATION
The obligations created by the Agreement for each series of Certificates
will terminate upon the payment to Certificateholders of that series of all
amounts held in the Collection Account or by the Master Servicer, if any, or the
Trustee and required to be paid to them pursuant to such Agreement following the
earlier of (i) the final payment or other liquidation of the last Mortgage Asset
subject thereto or the disposition of all property acquired upon foreclosure of
any Mortgage Loan subject thereto and (ii) the purchase of all of the assets of
the Trust Fund by the party entitled to effect such termination. In no event,
however, will the trust created by the Agreement continue beyond the date
specified in the related Prospectus Supplement. Written notice of termination of
the Agreement will be given to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency appointed by the Trustee, which will be
specified in the notice of termination.
If so specified in the related Prospectus Supplement, a series of
Certificates may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein. If so
provided in the related Prospectus Supplement, upon the reduction of the
Certificate Balance of a specified class or classes of Certificates by a
specified percentage or amount, the party specified therein will solicit bids
for the purchase of all assets of the Trust Fund under the circumstances and in
the manner set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE CERTIFICATES
If so provided in the Prospectus Supplement for a series of Certificates,
the Offered Certificates of one or more classes of such series will be issued as
Book-Entry Certificates, and each such class will be represented by one or more
single Certificates registered in the name of the depository, The Depository
Trust Company ('DTC').
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the UCC and a 'clearing agency' registered
pursuant to the provisions of Section 17A of the Exchange Act. DTC was created
to hold securities for its participating organizations ('Participants') and
facilitate the clearance and settlement of securities transactions between
Participants through electronic book-entry changes in their accounts, thereby
eliminating the need for physical movement of certificates. Participants include
Nomura Securities International, Inc., securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect access to the DTC system also is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly ('Indirect Participants').
Holders of Certificates that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of, or other
interests in, Offered Certificates may do so only through Participants and
Indirect Participants. In addition, such Certificateholders will receive all
distributions of principal of and interest on the Offered Certificates from the
Trustee or the applicable paying agent through DTC and its Participants. Under a
book-entry format, Certificateholders will receive payments after the related
Distribution Date because, while payments are required to be forwarded to Cede &
Co. ('Cede'), as nominee for DTC, on each such date, DTC will forward such
payments to its Participants which thereafter will be required to forward them
to Indirect Participants or Certificateholders. The only 'Certificateholder' (as
such term is used in the Agreement) will be Cede, as nominee of DTC, and the
Certificateholders will not be recognized by the Trustee as Certificateholders
under the Agreement.
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Certificateholders will be permitted to exercise the rights of
Certificateholders under the related Agreement only indirectly through DTC and
its Participants who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Certificates and is required to
receive and transmit distributions of principal and interest on the
Certificates. Participants and Indirect Participants with which
Certificateholders have accounts with respect to the Certificates similarly are
required to make book-entry transfers and receive and transmit such payments on
behalf of their respective Certificateholders.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a
Certificateholder to pledge Certificates to persons or entities that do not
participate in the DTC system, or otherwise take actions in respect of such
Certificates, may be limited due to the lack of a physical certificate for such
Certificates.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Certificateholder under an Agreement only at the direction of one or
more Participants to whose account with DTC the Certificates are credited.
Certificates initially issued in book-entry form will be issued in fully
registered, certificated form to Certificateholders or their nominees
('Definitive Certificates'), rather than to DTC or its nominee only if (i) the
Depositor advises the Trustee in writing that DTC is no longer willing or able
to properly discharge its responsibilities as depository with respect to the
Certificates and the Depositor is unable to locate a qualified successor or (ii)
the Depositor, at its option, elects to terminate the book-entry system through
DTC.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Certificates for the Certificates. Under
surrender by DTC of the certificate or certificates representing such
Certificates and instructions for reregistration, the Trustee will issue such
Certificates in the form of Definitive Certificates, and thereafter the Trustee
will recognize the holders of such Definitive Certificates as Certificateholders
under the Agreement. In the event that Definitive Certificates are issued or DTC
ceases to be the clearing agency for the Certificates, the Agreement will
provide that the applicable Certificateholders will be notified of such event.
DESCRIPTION OF THE AGREEMENTS
The Certificates of each series evidencing interests in a Trust Fund
consisting of Mortgage Loans will be issued pursuant to a Pooling and Servicing
Agreement among the Depositor, a Master Servicer, any Special Servicer appointed
as of the date of the Pooling and Servicing Agreement and the Trustee. The
Certificates of each series evidencing interests in a Trust Fund consisting
exclusively of MBS will be issued pursuant to a Trust Agreement between the
Depositor and a Trustee. Any Master Servicer, any such Special Servicer and the
Trustee with respect to any series of Certificates will be named in the related
Prospectus Supplement. The provisions of each Agreement will vary depending upon
the nature of the Certificates to be issued thereunder and the nature of the
related Trust Fund. 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.
The following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a series of Certificates will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Trust Fund and
the related Prospectus Supplement. As used herein with respect to any series,
the term 'Certificate' refers to all of the Certificates of that series, whether
or not offered hereby and by the related Prospectus Supplement, unless the
context otherwise requires. The Depositor will provide a copy of the Agreement
(without exhibits) relating to any series of Certificates without charge upon
written request of a holder of a Certificate of such series addressed to Asset
Securitization Corporation, Two World Financial Center-- Building B, 21st Floor,
New York, New York 10281-1198. Attention: Secretary.
ASSIGNMENT OF MORTGAGE ASSETS; REPURCHASES
At the time of issuance of any series of Certificates, the Depositor will
cause the Mortgage Assets included in the related Trust Fund to be assigned to
the Trustee, together with all principal and interest received by or on behalf
of the Depositor on or with respect to such Mortgage Assets after the Cut-off
Date, other than principal and interest due on or before the Cut-off Date and
other than any Retained Interest. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Depositor in exchange for the
Mortgage Assets and the other assets comprising the Trust Fund for such series.
Each Mortgage Asset will be identified in a schedule appearing as an exhibit to
the related Agreement. Such schedule will include detailed information in
respect of each Mortgage Loan included in the related Trust Fund such as the
address of the related Mortgaged Property and type of such
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property, the Mortgage Rate and, if applicable, the applicable index, margin,
adjustment date and any rate cap information, the original and remaining term to
maturity, the original and outstanding principal balance and balloon payment, if
any, the Value, Loan-to-Value Ratio and Debt Service Coverage Ratio as of the
date indicated and payment and prepayment provisions, if applicable and in
respect of each MBS included in the related Trust Fund, including without
limitation, the MBS Issuer, MBS Servicer and MBS Trustee, the pass-through or
bond rate or formula for determining such rates, the issue date and original and
remaining term to maturity, if applicable, the original and outstanding
principal amount and payment provisions, if applicable.
With respect to each Whole Loan, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, including the Mortgage Note endorsed, without recourse, to the
order of the Trustee, the Mortgage with evidence of recording indicated thereon
(except for any Mortgage not returned from the public recording office, in which
case the Depositor will deliver or cause to be delivered a copy of such Mortgage
together with its certificate that the original of such Mortgage was delivered
to such recording office) and an assignment of the Mortgage to the Trustee in
recordable form. The Depositor will promptly cause the assignment of each
related Whole Loan to be recorded in the appropriate public office for real
property records, except in the State of California or in other states where, in
the opinion of counsel acceptable to the Trustee, such recording is not required
to protect the Trustee's interest in the Whole Loan against the claim of any
subsequent transferee or any successor to or creditor of the Depositor, the
Master Servicer, the relevant Mortgage Asset Seller or any other prior holder of
the Whole Loan.
The Trustee (or the custodian) will review such Whole Loan documents within
a specified period of days after receipt thereof, and the Trustee (or the
custodian) will hold such documents in trust for the benefit of the
Certificateholders. If any such document is found to be missing or defective in
any material respect, the Trustee (or such custodian) shall take such action as
required in the Agreement, which may include immediately notifying the Master
Servicer and the Depositor. If the Mortgage Asset Seller, upon notification,
cannot cure the omission or defect within a specified number of days after
receipt of such notice, the Mortgage Asset Seller will be obligated, within a
specified number of days of receipt of such notice, to repurchase the related
Whole Loan from the Trustee at the Purchase Price or substitute for such
Mortgage Loan. There can be no assurance that a Mortgage Asset Seller will
fulfill this repurchase or substitution obligation. Although the Master Servicer
is obligated to use its best efforts to enforce such obligation to the extent of
its obligations with respect to a Warranting Party as described under
'--Representations and Warranties; Repurchases', neither the Master Servicer nor
the Depositor will be obligated to repurchase or substitute for such Mortgage
Loan if the Mortgage Asset Seller defaults on its obligation. This repurchase or
substitution obligation may constitute the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document.
With respect to each MBS, the Depositor will deliver or cause to be
delivered to the Trustee (or the custodian) the original certificate or other
definitive evidence of the MBS, together with bond power or other instruments,
certifications or documents required to transfer fully the MBS to the Trustee
for the benefit of the Certificateholders in accordance with the related MBS
Agreement. The Depositor will promptly cause the Trustee to be registered, with
the applicable persons, as the holder of the MBS.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
The Depositor may make or assign certain representations and warranties
pursuant to the related Agreement with respect to each Whole Loan constituting a
Mortgage Asset in the related Trust Fund, as of a specified date (the person
making such representations and warranties, the 'Warranting Party') covering, by
way of example, the following types of matters: (i) the accuracy of the
information set forth for such Whole Loan on the schedule of Mortgage Assets
appearing as an exhibit to the Agreement; (ii) the existence of title insurance
insuring the lien priority of the Whole Loan; (iii) the authority of the
Mortgage Asset Seller to sell the Whole Loan; (iv) the payment status of the
Whole Loan and the status of payments of taxes, assessments and other charges
affecting the related Mortgaged Property; (v) the existence of customary
provisions in the related Mortgage Note and Mortgage to permit realization
against the Mortgaged Property of the benefit of the security of the Mortgage;
and (vi) the existence of hazard and extended perils insurance coverage on the
Mortgaged Property.
Any Warranting Party shall be a Mortgage Asset Seller or an affiliate
thereof or such other person acceptable to the Depositor and shall be identified
in the related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan may have
been made as of a date prior to the applicable Cut-off Date. A substantial
period of time may have elapsed between such date and the date of initial
issuance of the related series of Certificates evidencing an interest in such
Whole Loan. In the event of a breach of any such representation or warranty, the
Warranting Party may be obligated pursuant to the related Agreement to cure such
breach or repurchase or replace the affected Whole Loan as described below.
Since the representations and warranties may not address events that may occur
following the date as of which they were made, the Warranting Party will have a
cure, repurchase or substitution obligation in connection with a
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breach of such a representation and warranty only if the relevant event that
causes such breach occurs prior to such date. Such party would have no such
obligations if the relevant event that causes such breach occurs after such
date. However, the Depositor will not include any Whole Loan in the Trust Fund
for any series of Certificates if anything has come to the Depositor's attention
that would cause it to believe that the representations and warranties made in
respect of such Whole Loan will not be accurate and complete in all material
respects as of the date of initial issuance of the related series of
Certificates.
Each Agreement will provide that the Master Servicer and/or Trustee will be
required to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by or on behalf of it in respect of a Whole Loan
that materially and adversely affects the value of such Mortgage Loan or the
interests therein of the Certificateholders. If such Warranting Party cannot
cure such breach within a specified period following the date on which such
party was notified of such breach, then such Warranting Party will be obligated
to repurchase such Mortgage Loan from the Trustee within a specified period from
the date on which the Warranting Party was notified of such breach, at the
Purchase Price therefor. As to any Whole Loan, the 'Purchase Price' will
typically equal to the sum of the unpaid principal balance thereof plus unpaid
accrued interest thereon at the Mortgage Rate from the date as to which interest
was last paid to the end of the accrual period in which the relevant purchase is
to occur. If so provided in the Prospectus Supplement for a series, a Warranting
Party, rather than repurchase a Mortgage Loan as to which a breach has occurred,
will have the option, within a specified period after initial issuance of such
series of Certificates, to cause the removal of such Mortgage Loan from the
Trust Fund and substitute in its place one or more other Whole Loans, in
accordance with the standards described in the related Prospectus Supplement.
The Master Servicer will be required under the applicable Agreement to use its
best efforts to enforce such obligations of the Warranting Party for the benefit
of the Trustee and the holders of the Certificates, following the practices it
would employ in its good faith business judgment were it the owner of such Whole
Loan. This repurchase or substitution obligation will constitute the sole remedy
available to holders of Certificates or the Trustee for a breach of
representation by a Warranting Party.
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan if a Warranting Party defaults on its obligation to do so, and no
assurance can be given that Warranting Parties will carry out such obligations
with respect to Whole Loans.
With respect to a Trust Fund that includes MBS, the related Prospectus
Supplement will describe any representations or warranties made or assigned by
the Depositor with respect to such MBS, the person making them and the remedies
for breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. Upon a breach of any such
representation of the Master Servicer which materially and adversely affects the
interests of the Certificateholders, the Master Servicer will be obligated to
cure the breach in all material respects.
PAYMENTS ON MORTGAGE ASSETS; DEPOSITS TO COLLECTION ACCOUNT
The Master Servicer, if any, and/or the Trustee will, as to each Trust
Fund, establish and maintain or cause to be established and maintained one or
more Collection Accounts for the collection of payments on the related Mortgage
Assets, which must be either (i) maintained with a bank or trust company, and in
a manner, satisfactory to the Rating Agency or Agencies rating any class of
Certificates of such series or (ii) an account or accounts the deposits in which
are insured by the Bank Insurance Fund ('BIF') or the Savings Association
Insurance Fund ('SAIF') of the Federal Deposit Insurance Corporation ('FDIC')
(to the limits established by the FDIC) and the uninsured deposits in which are
otherwise secured such that the Certificateholders have a claim with respect to
the funds in the Collection Account or a certified first priority security
interest against any collateral securing such funds that is superior to the
claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained. The collateral eligible to secure
amounts in the Collection Account is limited to United States government
securities and other investment grade investments specified in the Agreement
('Permitted Investments'). A Collection Account may be maintained as an interest
bearing or a non-interest bearing account and the funds held therein may be
invested pending each succeeding Distribution Date in Permitted Investments. Any
interest or other income earned on funds in the Collection Account will
generally be paid to a Master Servicer or its designee as additional servicing
compensation. The Collection Account may be maintained with an institution that
is an affiliate of the Master Servicer, if applicable, provided that such
institution meets the standards set forth above. If permitted by the Rating
Agency or Agencies and so specified in the related Prospectus Supplement, a
Collection Account may contain funds relating to more than one series of
mortgage pass-through certificates and may contain other funds respecting
payments on mortgage loans belonging to the Master Servicer or serviced or
master serviced by it on behalf of others.
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A Master Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for each Trust Fund on a daily basis, unless otherwise
provided in the Agreement and described in the related Prospectus Supplement,
the following payments and collections received, or advances made, by the Master
Servicer or the Trustee or on its behalf subsequent to the Cut-off Date (other
than payments due on or before the Cut-off Date, and exclusive of any amounts
representing a Retained Interest):
(i) all payments on account of principal, including principal prepayments,
and on account of modification or assumption fees, on the Mortgage Assets;
(ii) all payments on account of interest on the Mortgage Assets, including
any late charges or default interest collected, and to the extent that any class
or classes of Certificates is entitled thereto, all payments on account of
Prepayment Premiums or Equity Participations, in each case net of any portion
thereof retained by a Master Servicer or a Sub-Servicer as its servicing
compensation and net of any Retained Interest;
(iii) all proceeds of the hazard insurance policies (to the extent such
proceeds are not applied to the restoration of the property or released to the
mortgagor in accordance with the normal servicing procedures of a Master
Servicer or the related Sub-Servicer, subject to the terms and conditions of the
related Mortgage and Mortgage Note) (collectively, 'Insurance Proceeds') and all
other amounts received and retained in connection with a taking of a Mortgaged
Property by exercise of a power of eminent domain or condemnation or the
liquidation of defaulted Mortgage Loans, by foreclosure or otherwise
('Liquidation Proceeds'), together with the net proceeds on a monthly basis with
respect to any Mortgaged Properties acquired for the benefit of
Certificateholders by foreclosure or by deed in lieu of foreclosure or
otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Certificates as described
under 'Description of Credit Support';
(v) any advances made as described under 'Description of the
Certificates--Advances in Respect of Delinquencies';
(vi) any amounts paid under any Cash Flow Agreement, as described under
'Description of the Trust Funds--Cash Flow Agreements';
(vii) all proceeds of any Mortgage Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Mortgage Asset Seller as described under 'Description of the
Agreements--Assignment of Mortgage Assets; Repurchases'--and '--Representations
and Warranties; Repurchases', exclusive of the Retained Interest, if any, in
respect of such Mortgage Loan, and all proceeds of any Mortgage Asset purchased
as described under 'Description of the Certificates-- Termination';
(viii) all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy described under
'--Hazard Insurance Policies'; and
(ix) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit of the
Master Servicer or the Trustee, as the case may be, of funds held in the
Collection Account.
The Agreement for a series of Certificates may provide that a special trust
account (the 'REO Account') will be established and maintained in order to be
used in connection with REO Properties and, if specified in the related
Prospectus Supplement, certain other Mortgaged Properties. To the extent set
forth in the Agreement, certain withdrawals from the REO Account will be made
to, among other things, (i) make remittances to the Collection Account as
required by the Agreement, (ii) pay taxes, assessments, insurance premiums,
other amounts necessary for the proper operation, management and maintenance of
the REO Properties and such Mortgaged Properties and certain third-party
expenses in accordance with the Agreement and (iii) provide for the
reimbursement of certain expenses in respect of the REO Properties and such
Mortgaged Properties.
The amount at any time credited to the REO Account will be fully insured to
the maximum coverage possible or will be invested in Permitted Investments that
mature, or are subject to withdrawal or redemption, on or before the business
day on which such amounts are required to be remitted to the Master Servicer for
deposit in the Collection Account. The income from the investment of funds in
the REO Account in Permitted Investments shall be deposited in the REO Account
for remittance to the Collection Account, and the risk of loss of funds in the
REO Account resulting from such investments will be borne by the Trust Fund.
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COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans and
held for its own account, provided such procedures are consistent with the
Agreement and any related hazard insurance policy or instrument of Credit
Support included in the related Trust Fund described herein or under
'Description of Credit Support'. Each Master Servicer will be required to
perform the customary functions of a servicer of comparable loans, including
collecting payments from mortgagors; maintaining hazard insurance policies as
described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder; maintaining escrow or impoundment accounts of
mortgagors for payment of taxes, insurance and other items required to be paid
by any mortgagor pursuant to the Whole Loan; processing assumptions or
substitutions, although the Master Servicer is generally required to exercise
due-on-sale clauses to the extent such exercise is permitted by law and would
not adversely affect insurance coverage; attempting to cure delinquencies;
supervising foreclosures; inspecting and managing Mortgaged Properties under
certain circumstances; and maintaining accounting records relating to the Whole
Loans. The Master Servicer will be responsible for filing and settling claims in
respect of particular Whole Loans under any applicable instrument of Credit
Support. See 'Description of Credit Support'.
Consistent with the general servicing standard set forth above, the Master
Servicer may, in its discretion, waive any late payment charge in respect of a
late Whole Loan payment and, only upon determining that the coverage under any
related hazard insurance policy or instrument of Credit Support will not be
affected, extend or cause to be extended the due dates for payments due on a
Whole Loan for a period not greater than that specified in the applicable
Agreement.
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan in a manner consistent with the general servicing standards set forth
above so long as the modification, waiver or amendment will not (i) affect the
amount or timing of any payments of principal or interest on the Whole Loan or
(ii) in its judgment, materially impair the security for the Whole Loan or
reduce the likelihood of timely payment of amounts due thereon. The Master
Servicer also may agree to any modification, waiver or amendment that would so
affect or impair the payments on, or the security for, a Whole Loan if (i) in
its judgment, a material default on the Whole Loan has occurred or a payment
default is imminent and (ii) in its judgment, such modification, waiver or
amendment will minimize the loss that might otherwise be experienced with
respect to the Whole Loan. The Master Servicer is required to notify the Trustee
in the event of any modification, waiver or amendment of any Whole Loan.
SPECIAL SERVICERS
To the extent so specified in the related Prospectus Supplement, a special
servicer (the 'Special Servicer') may be appointed to service Mortgage Loans
that are in default or otherwise require special servicing. The related
Prospectus Supplement will set forth certain information with respect to the
Special Servicer and will describe the rights, obligations and compensation of a
Special Servicer. A Master Servicer will only be responsible for the duties and
obligations of a Special Servicer to the extent set forth in the Prospectus
Supplement. A Special Servicer may be an affiliate of the Depositor and may have
other business relationships with the Depositor and its affiliates.
SUB-SERVICERS
A Master Servicer and/or any Special Servicer may each delegate their
respective servicing obligations in respect of the Whole Loans to third-party
servicers (each, a 'Sub-Servicer'), but such Master Servicer and/or Special
Servicer will remain obligated under the related Agreement. The sub-servicing
agreement between a Master Servicer and/or Special Servicer and a Sub-Servicer
(a 'Sub-Servicing Agreement') will be consistent with the terms of the related
Agreement and will not result in a withdrawal or downgrading of the rating of
any class of Certificates issued pursuant to such Agreement. Although each Sub-
Servicing Agreement will be a contract solely between the Master Servicer or
Special Servicer, as applicable, and the Sub-Servicer, the related Agreement
will provide that, if for any reason the Master Servicer or Special Servicer for
such series of Certificates is no longer acting in such capacity, the Trustee or
any successor Master Servicer or Special Servicer must recognize the Sub-
Servicer's rights and obligations under such Sub-Servicing Agreement.
The Master Servicer or Special Servicer, as applicable, will be solely
liable for all fees owed by it to any Sub-Servicer, irrespective of whether the
Master Servicer's or Special Servicer's compensation pursuant to the related
Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans. Each Sub-Servicer will
be reimbursed by the Master Servicer or Special Servicer, as applicable, for
certain expenditures which it makes, generally to the same
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extent the Master Servicer or Special Servicer, as applicable, would be
reimbursed under an Agreement. See '--Retained Interest, Servicing Compensation
and Payment of Expenses'.
The Master Servicer or Special Servicer, as applicable, may require any
Sub-Servicer to agree to indemnify the Master Servicer or Special Servicer for
any liability or obligation sustained by the Master Servicer or Special Servicer
in connection with any act or failure to act by the Sub-Servicer in its
servicing capacity. An Agreement may require a Sub-Servicer to maintain a
fidelity bond and an errors and omissions policy with respect to its officers,
employees and other persons acting on its behalf or on behalf of the Master
Servicer or Special Servicer.
REALIZATION UPON DEFAULTED WHOLE LOANS
A mortgagor's failure to make required payments may reflect inadequate
operating income or the diversion of that income from the service of payments
due under the Mortgage Loan, and may call into question such mortgagor's ability
to make timely payment of taxes and to pay for necessary maintenance of the
related Mortgaged Property. The Master Servicer is required to monitor any Whole
Loan which is in default, contact the mortgagor concerning the default, evaluate
whether the causes of the default can be cured over a reasonable period without
significant impairment of the value of the Mortgaged Property, initiate
corrective action in cooperation with the mortgagor if cure is likely, inspect
the Mortgaged Property and take such other actions as it would normally take
with respect to similar loans serviced for its own portfolio. A significant
period of time may elapse before the Master Servicer is able to assess the
success of such corrective action or the need for additional initiatives.
The time within which the Master Servicer makes the initial determination
of appropriate action, evaluates the success of corrective action, develops
additional initiatives, institutes foreclosure proceedings and actually
forecloses (or takes a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders, may vary considerably depending on the
particular Whole Loan, the Mortgaged Property, the mortgagor, the presence of an
acceptable party to assume the Mortgage Loan and the laws of the jurisdiction in
which the Mortgaged Property is located. Under federal bankruptcy law, in
certain cases the Master Servicer may not be permitted to accelerate a Whole
Loan or to foreclose on a Mortgaged Property for a considerable period of time.
See 'Certain Legal Aspects of Mortgage Loans'.
If so specified in the Prospectus Supplement for a series of Certificates
that includes one or more subordinate classes, any holder or holders of a class
of Subordinate Certificates having the lowest priority of payment may purchase
from the Trust Fund at the purchase price described in such Supplement any Whole
Loan as to which the number of scheduled payments thereunder specified in such
Supplement are delinquent.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise, if such action
is consistent with the servicing standard described herein and a default on the
related Mortgage Loan has occurred or, in the Master Servicer's judgment, is
imminent. The Master Servicer may not, however, acquire title to any Mortgaged
Property or take any action that would cause the Trust Fund to be an 'owner' or
an 'operator' within the meaning of certain federal or state environmental laws,
unless the Master Servicer has also previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that:
(i) The Mortgaged Property is in compliance with applicable environmental
laws or, if not, that it would be in the best economic interest of the Trust
Fund to take such actions as are necessary to cause the Mortgaged Property to
comply therewith (the cost of which actions will be an expense of the Trust
Fund); and
(ii) There are no circumstances or conditions present at the Mortgaged
Property relating to the use, management or disposal of any hazardous
substances, hazardous materials, wastes, or petroleum-based materials for which
investigation, testing, monitoring, containment, clean-up or remediation could
be required under any federal, state or local law or regulation, or, if such
substances, materials or wastes are present for which such action could be
required, that it would be in the best economic interest of the Trust Fund to
take such actions with respect to the Mortgaged Property (the cost of which
actions will be an expense of the Trust Fund).
If title to any Mortgaged Property is acquired by the Trust Fund, the
Master Servicer, pursuant to the related Agreement and on behalf of the Trust
Fund, will be required to sell the Mortgaged Property within two years of
acquisition, unless the Trustee receives (i) an opinion of independent counsel
to the effect that the holding of the property by the Trust Fund subsequent to
two years after its acquisition will not result in the imposition of a tax on
the Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the
Code at any time that any Certificate is outstanding or (ii) an extension from
the Internal Revenue Service.
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If the Trust Fund acquires title to any Mortgaged Property, the Master
Servicer, on behalf of the Trust Fund, may retain an independent contractor to
manage and operate such property. The retention of an independent contractor,
however, will not relieve the Master Servicer of any of its obligations with
respect to the management and operation of such Mortgaged Property. Any such
property acquired by the Trust Fund will be managed in a manner consistent with
the management and operation by the Master Servicer of similar property owned by
it.
The limitations imposed by the Agreement and the REMIC provisions of the
Code (if a REMIC election has been made with respect to the related Trust Fund)
on the operations and ownership of any Mortgaged Property acquired on behalf of
the Trust Fund may result in the recovery of an amount less than the amount that
would otherwise be recovered. See 'Certain Legal Aspects of Mortgage
Loans--Foreclosure'.
If recovery on a defaulted Whole Loan under any related instrument of
Credit Support is not available, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary or advisable to realize upon the defaulted Whole Loan. If
the proceeds of any liquidation of the property securing the defaulted Whole
Loan are less than the outstanding principal balance of the defaulted Whole Loan
plus interest accrued thereon at the Mortgage Rate plus the aggregate amount of
expenses incurred by the Master Servicer in connection with such proceedings and
which are reimbursable under the Agreement, the Trust Fund will realize a loss
in the amount of such difference. The Master Servicer will be entitled to
withdraw or cause to be withdrawn from the Collection Account out of the
Liquidation Proceeds recovered on any defaulted Whole Loan, prior to the
distribution of such Liquidation Proceeds to Certificateholders, amounts
representing its normal servicing compensation on the Whole Loan, unreimbursed
servicing expenses incurred with respect to the Whole Loan and any unreimbursed
advances of delinquent payments made with respect to the Whole Loan.
If any property securing a defaulted Whole Loan is damaged and proceeds, if
any, from the related hazard insurance policy are insufficient to restore the
damaged property to a condition sufficient to permit recovery under the related
instrument of Credit Support, if any, the Master Servicer is not required to
expend its own funds to restore the damaged property unless it determines (i)
that such restoration will increase the proceeds to Certificateholders on
liquidation of the Whole Loan after reimbursement of the Master Servicer for its
expenses and (ii) that such expenses will be recoverable by it from related
Insurance Proceeds or Liquidation Proceeds.
As servicer of the Whole Loans, a Master Servicer, on behalf of itself, the
Trustee and the Certificateholders, will present claims to the obligor under
each instrument of Credit Support, and will take such reasonable steps as are
necessary to receive payment or to permit recovery thereunder with respect to
defaulted Whole Loans.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan, the Master Servicer
will be entitled to withdraw or cause to be withdrawn from the Collection
Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan, unreimbursed servicing expenses incurred with respect to the
Whole Loan and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan. See '--Hazard Insurance Policies' and 'Description of
Credit Support'.
HAZARD INSURANCE POLICIES
Any Agreement for a Trust Fund that includes Whole Loans will require the
Master Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for coverage of the standard form of fire insurance
policy with extended coverage customary in the state in which the Mortgaged
Property is located. Such coverage generally will be in general in an amount
equal to the lesser of the principal balance owing on such Whole Loan and the
amount necessary to fully compensate for any damage or loss to the improvements
on the Mortgaged Property on a replacement cost basis, but in either case not
less than the amount necessary to avoid the application of any co-insurance
clause contained in the hazard insurance policy. The ability of the Master
Servicer to assure that hazard insurance proceeds are appropriately applied may
be dependent upon its being named as an additional insured under an hazard
insurance policy and under any flood insurance policy referred to below, or upon
the extent to which information in this regard is furnished by mortgagors. All
amounts collected by the Master Servicer under any such policy (except for
amounts to be applied to the restoration or repair of the Mortgaged Property or
released to the mortgagor in accordance with the Master Servicer's normal
servicing procedures, subject to the terms and conditions of the related
Mortgage and Mortgage Note) will be deposited in the Collection Account. The
Agreement will provide that the Master Servicer may satisfy its obligation to
cause each mortgagor to maintain such a hazard insurance policy by the Master
Servicer's maintaining a blanket policy insuring against hazard losses on the
Whole Loans. If such blanket policy contains a deductible clause, the Master
Servicer will be required to deposit in the Collection Account all sums that
would have been deposited therein but for such clause. The Master Servicer will
also be required to maintain a fidelity bond and errors and omission policy with
respect to its officers and employees that provides
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coverage against losses that may be sustained as a result of an officer's or
employee's misappropriation of funds or errors and omissions in failing to
maintain insurance, subject to certain limitations as to amount of coverage,
deductible amounts, conditions, exclusions and exceptions.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks. When a
Mortgaged Property securing a Whole Loan is located at origination in a
federally designated flood area, each Agreement requires the Master Servicer to
cause the mortgagor to acquire and maintain flood insurance in an amount equal
in general to the lesser of (i) the amount necessary to fully compensate for any
damage or loss to the improvements which are part of the Mortgaged Property or a
replacement cost basis and (ii) the maximum amount of insurance available under
the federal flood insurance program, whether or not the area is participating in
the program.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Under the terms of the Whole Loans, mortgagors will be required to present
claims to insurers under hazard insurance policies maintained on the related
Mortgaged Properties. The Master Servicer, on behalf of the Trustee and
Certificateholders, is obligated to present or cause to be presented claims
under any blanket insurance policy insuring against hazard losses on Mortgaged
Properties securing the Whole Loans. However, the ability of the Master Servicer
to present or cause to be presented such claims is dependent upon the extent to
which information in this regard is furnished to the Master Servicer by
mortgagors.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE PROVISIONS
Certain of the Whole Loans may contain clauses requiring the consent of the
mortgagee to any sale or other transfer of the related Mortgaged Property, or
due-on-sale clauses entitling the mortgagee to accelerate payment of the Whole
Loan upon any sale or other transfer of the related Mortgaged Property. Certain
of the Whole Loans may contain clauses requiring the consent of the mortgagee to
the creation of any other lien or encumbrance on the Mortgaged Property or
due-on-encumbrance clauses entitling the mortgagee to accelerate payment of the
Whole Loan upon the creation of any other lien or encumbrance upon the Mortgaged
Property. The Master Servicer, on behalf of the Trust Fund, will determine
whether to exercise any right the Trustee may have as mortgagee to accelerate
payment of any such Whole Loan or to withhold its consent to any transfer or
further encumbrance in accordance with the general servicing standard described
herein under 'Description of the Agreements--Collection and Other Servicing
Procedures'.
Any fee collected by or on behalf of the Master Servicer for entering into
an assumption agreement will be retained by or on behalf of the Master Servicer
as additional servicing compensation. See 'Certain Legal Aspects of Mortgage
Loans--Due-on-Sale and Due-on-Encumbrance'.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Mortgage Assets, and, if so, the
owner thereof. If so, the Retained Interest will be established on a
loan-by-loan basis and will be specified on an exhibit to the related Agreement.
A 'Retained Interest' in a Mortgage Asset represents a specified portion of the
interest payable thereon. The Retained Interest will be deducted from mortgagor
payments as received and will not be part of the related Trust Fund.
A Master Servicer's primary servicing compensation with respect to a series
of Certificates will come from the periodic payment to it of a portion of the
interest payment on each Whole Loan. Since any Retained Interest and a Master
Servicer's primary
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compensation are percentages of the principal balance of each Mortgage Asset,
such amounts will decrease in accordance with the amortization schedule of the
Mortgage Loans underlying or comprising such Mortgage Asset. The Prospectus
Supplement with respect to a series of Certificates evidencing interests in a
Trust Fund that includes Whole Loans may provide that, as additional
compensation, the Master Servicer or the Sub-Servicers may retain all or a
portion of assumption fees, modification fees, late payment charges or
Prepayment Premiums collected from mortgagors and any interest or other income
which may be earned on funds held in the Collection Account or any Sub-Servicing
Account. Any Sub-Servicer will receive a portion of the Master Servicer's
compensation as its sub-servicing compensation.
In addition to amounts payable to any Sub-Servicer, a Master Servicer may,
to the extent provided in the related Prospectus Supplement, pay from its
servicing compensation certain expenses incurred in connection with its
servicing of the Mortgage Loans, including, without limitation, payment of the
fees and disbursements of the Trustee and independent accountants, payment of
expenses incurred in connection with distributions and reports to
Certificateholders, and payment of any other expenses described in the related
Prospectus Supplement. Certain other expenses, including certain expenses
relating to defaults and liquidations on the Mortgage Loans and, to the extent
so provided in the related Prospectus Supplement, interest thereon at the rate
specified therein, and the fees of any Special Servicer, may be borne by the
Trust Fund.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Mortgage Assets which include Whole Loans will
provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Audit Program for
Mortgage Bankers or the Audit Program for Mortgages serviced for FHLMC, the
servicing by or on behalf of the Master Servicer of mortgage loans under pooling
and servicing agreements substantially similar to each other (including the
related Agreement) was conducted in compliance with the terms of such agreements
except for any significant exceptions or errors in records that, in the opinion
of the firm, either the Audit Program for Mortgages serviced for FHLMC, or
paragraph 4 of the Uniform Single Audit Program for Mortgage Bankers, requires
it to report. In rendering its statement such firm may rely, as to matters
relating to the direct servicing of mortgage loans by Sub-Servicers, upon
comparable statements for examinations conducted substantially in compliance
with the Uniform Single Audit Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC (rendered within one year of such statement) of
firms of independent public accountants with respect to the related
Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Agreement throughout the preceding year.
Copies of the annual accountants' statement and the statement of officers
of a Master Servicer will be obtainable by Certificateholders without charge
upon written request to the Master Servicer at the address set forth in the
related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER, A SPECIAL SERVICER AND THE
DEPOSITOR
The Master Servicer, if any, under each Agreement will be named in the
related Prospectus Supplement. The entity serving as Master Servicer may be an
affiliate of the Depositor and may have other normal business relationships with
the Depositor or Depositor's affiliates.
The Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only if such resignation, and the appointment
of a successor, will not result in a downgrading of the rating of any class of
Certificates or upon a determination that its duties under the Agreement are no
longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor servicer has assumed the Master
Servicer's obligations and duties under the Agreement.
Each Agreement will further provide that neither any Master Servicer, the
Depositor nor any director, officer, employee, or agent of a Master Servicer or
the Depositor will be under any liability to the related Trust Fund or
Certificateholders for any action taken, or for refraining from the taking of
any action, in good faith pursuant to the Agreement; provided, however, that
neither a Master Servicer, the Depositor nor any such person will be protected
against any liability which would otherwise be imposed by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. Each Agreement will further provide that any Master Servicer, the
Depositor and any director, officer, employee or agent of a Master Servicer or
the Depositor will be entitled to indemnification by the related
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Trust Fund and will be held harmless against any loss, liability or expense
incurred in connection with any legal action relating to the Agreement or the
Certificates, other than any loss, liability or expense related to any specific
Mortgage Loan or Mortgage Loans (unless any such loss, liability or expense is
otherwise reimbursable pursuant to the Agreement) and any loss, liability or
expense incurred by reason of willful misfeasance, bad faith or gross negligence
in the performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
neither any Master Servicer nor the Depositor will be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
respective responsibilities under the Agreement and which in its opinion may
involve it in any expense or liability. Any such Master Servicer or the
Depositor may, however, in its discretion undertake any such action which it may
deem necessary or desirable with respect to the Agreement and the rights and
duties of the parties thereto and the interests of the Certificateholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Certificateholders, and the Master Servicer or the Depositor, as the case may
be, will be entitled to be reimbursed therefor and to charge the Collection
Accounts.
Any person into which the Master Servicer may be merged or consolidated, or
any person resulting from any merger or consolidation to which the Master
Servicer is a party, or any person succeeding to the business of the Master
Servicer, will be the successor of the Master Servicer under the related
Agreement, provided that such person satisfies the criteria specified in the
Agreement.
If the Master Servicer retains a Special Servicer, the standard of care
for, and any indemnification to be provided to, the Special Servicer will be set
forth in the related Agreement.
EVENT OF DEFAULT
Events of Default under the related Agreement for a Trust Fund that
includes Whole Loans will, in general, consist of (i) any failure by the Master
Servicer to distribute or cause to be distributed to Certificateholders, or to
remit to the Trustee for distribution to Certificateholders, any required
payment that continues unremedied for five days after the giving of written
notice of such failure to the Master Servicer by the Trustee or the Depositor,
or to the Master Servicer, the Depositor and the Trustee by the holders of
Certificates evidencing not less than 25% of the Voting Rights, (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for thirty days (fifteen days in the case of a failure to pay the
premium for any insurance policy or instrument of Credit Support required to be
maintained pursuant to the Agreement) after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer, the Depositor and the Trustee by the holders of Certificates
evidencing not less than 25% of the Voting Rights; and (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings and certain actions by or on behalf of the Master Servicer
indicating its insolvency or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, at the direction of holders of Certificates
evidencing not less than 51% of the Voting Rights, the Trustee shall, terminate
all of the rights and obligations of the Master Servicer under the Agreement
relating to such Trust Fund and in and to the Mortgage Loans (other than any
Retained Interest of the Master Servicer), whereupon the Trustee will succeed to
all of the responsibilities, duties and liabilities of the Master Servicer under
the Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent mortgage loans, then the Trustee
will not be so obligated) and will be entitled to similar compensation
arrangements. In the event that the Trustee is unwilling or unable so to act, it
may or, at the written request of the holders of Certificates entitled to at
least 51% of the Voting Rights, it shall appoint, or petition a court of
competent jurisdiction for the appointment of, a loan servicing institution
acceptable to the Rating Agency with a net worth at the time of such appointment
of at least $15,000,000 to act as successor to the Master Servicer under the
Agreement. Pending such appointment, the Trustee is obligated to act in such
capacity. The Trustee and any such successor may agree upon the servicing
compensation to be paid, which in no event may be greater than the compensation
payable to the Master Servicer under the Agreement.
No Certificateholder will have the right under any Agreement to institute
any proceeding with respect thereto unless such holder previously has given to
the Trustee written notice of default and unless the holders of Certificates
evidencing not less than 25% of the Voting Rights have made written request upon
the Trustee to institute such proceeding in its own name as Trustee thereunder
and have offered to the Trustee reasonable indemnity, and the Trustee for
fifteen days has neglected or refused to institute any such proceeding. The
Trustee, however, is under no obligation to exercise any of the trusts or powers
vested in it by any Agreement or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation
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thereunder or in relation thereto at the request, order or direction of any of
the holders of Certificates covered by such Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
Each Agreement may be amended by the Depositor, the Master Servicer, if
any, and the Trustee, without the consent of any of the holders of Certificates
covered by the Agreement, to cure any ambiguity, to correct, modify or
supplement any provision therein, or to make any other provisions with respect
to matters or questions arising under the Agreement which are not inconsistent
with the provisions thereof, provided that such action will not adversely affect
in any material respect the interests of any holder of Certificates covered by
the Agreement. An Agreement may also be amended by the Depositor, the Master
Servicer, if any, and the Trustee with the consent of the holders of
Certificates evidencing not less than 66% of the Voting Rights, for any purpose;
provided, however, that no such amendment may (i) reduce in any manner the
amount of or delay the timing of, payments received on Mortgage Loans which are
required to be distributed on any Certificate without the consent of the holder
of such Certificate, (ii) adversely affect in any material respect the interests
of the holders of any class of Certificates in a manner other than as described
in (i), without the consent of the holders of Certificates of such class
evidencing not less than 66% of the aggregate Voting Rights of such class or
(iii) reduce the aforesaid percentage of Voting Rights required for the consent
to any such amendment without the consent of the holders of all Certificates
covered by such Agreement then outstanding. However, with respect to any series
of Certificates as to which one or more REMIC elections is to be made, the
Trustee will not consent to any amendment of the Agreement unless it shall first
have received an opinion of counsel to the effect that such amendment will not
cause the Trust Fund (or designated portion thereof) to fail to qualify as a
REMIC at any time that the related Certificates are outstanding.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Certificates or any Mortgage Loan or related document and
is not accountable for the use or application by or on behalf of any Master
Servicer of any funds paid to the Master Servicer or its designee or any Special
Servicer in respect of the Certificates or the Mortgage Loans, or deposited into
or withdrawn from the Certificate Account or any other account by or on behalf
of the Master Servicer or any Special Servicer. If no Event of Default has
occurred and is continuing, the Trustee is required to perform only those duties
specifically required under the related Agreement. However, upon receipt of the
various certificates, reports or other instruments required to be furnished to
it, the Trustee is required to examine such documents and to determine whether
they conform to the requirements of the Agreement.
THE TRUSTEE
The Trustee under each Agreement will be named in the related Prospectus
Supplement. The commercial bank, national banking association or trust company
serving as Trustee may have typical banking relationships with the Depositor and
its affiliates and with any Master Servicer and its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Certificates, Credit Support may be provided with respect
to one or more classes thereof or the related Mortgage Assets. Credit Support
may be in the form of the subordination of one or more classes of Certificates,
letters of credit, insurance policies on the Mortgage Loans, certificate
guarantee insurance, guarantees, the establishment of one or more reserve funds
or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Credit Support will generally not provide protection against all risks of
loss and will not guarantee repayment of the entire Certificate Balance of the
Certificates and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Certificateholders will bear their allocable share of deficiencies. Moreover,
holders of Certificates of a Covered Trust will be subject to the risk that such
Credit Support will be exhausted by the claims of other Covered Trusts prior to
such Covered Trust receiving any of its intended share of such coverage.
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If Credit Support is provided with respect to one or more classes of
Certificates of a series, or the related Mortgage Assets, the related Prospectus
Supplement will include a description of (a) the nature and amount of coverage
under such Credit Support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions (if any) under which the amount
of coverage under such Credit Support may be reduced and under which such Credit
Support may be terminated or replaced and (d) the material provisions relating
to such Credit Support. Additionally, the related Prospectus Supplement will set
forth certain information with respect to the obligor under any instrument of
Credit Support, including (i) a brief description of its principal business
activities, (ii) its principal place of business, place or incorporation and the
jurisdiction under which it is chartered or licensed to do business, (iii) if
applicable, the identity of regulatory agencies that exercise primary
jurisdiction over the conduct of its business and (iv) its total assets, and its
stockholders' or policyholders' surplus, if applicable, as of the date specified
in the Prospectus Supplement. See 'Special Considerations--Credit Support
Limitations'.
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Certificates of a series may be Subordinate Certificates. The rights of the
holders of Subordinate Certificates to receive distributions of principal and
interest from the Certificate Account on any Distribution Date will be
subordinated to such rights of the holders of Senior Certificates to the extent
specified in the related Prospectus Supplement. The subordination of a class may
apply only in the event of (or may be limited to) certain types of losses or
shortfalls. The relative interests of the Senior Certificates and the
Subordinate Certificates of a Series may be subject to adjustment from time to
time on the basis of distributions received in respect thereof. The related
Prospectus Supplement will set forth information concerning the amount of
subordination of a class or classes of Subordinate Certificates in a series, the
circumstances in which such subordination will be applicable and the manner, if
any, in which the amount of subordination will be effected. If one or more
classes of Subordinate Certificates of a series are Offered Certificates, the
related Prospectus Supplement will provide information as to the sensitivity of
distributions on such Certificates based on certain default assumptions.
CROSS-SUPPORT PROVISIONS
If the Mortgage Assets for a series are divided into separate groups, each
supporting a separate class or classes of Certificates of a 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 within the Trust Fund. The Prospectus
Supplement for a series that includes a cross-support provision will describe
the manner and conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE MORTGAGE ASSETS
If so provided in the Prospectus Supplement for a series of Certificates,
the Mortgage Loans underlying or comprising the Mortgage Assets in the related
Trust Fund will be covered for various default risks by insurance policies or
guarantees, or the MBS comprising the Mortgage Assets in the related Trust Fund
will be covered by the types of Credit Support described herein. A copy of any
such material instrument for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related series.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Certificates,
the Mortgage Loans underlying or comprising the Mortgage Assets in the related
Trust Fund will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the 'L/C Bank').
Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, equal to the percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Mortgage Assets on the
related Cut-off Date or one or more classes of Certificates. If so specified in
the related Prospectus Supplement, the letter of credit may permit draws in the
event of only certain types of losses. The amount available under the letter of
credit will, in all cases, be reduced to the extent of the unreimbursed payments
thereunder. The obligations of the L/C Bank under the letter of credit for each
series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund. A copy of
any such letter of credit for a series will be filed with the Commission as an
exhibit to a Current Report on Form 8-K to be filed within 15 days of issuance
of the Certificates of the related series.
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INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Certificates,
the Mortgage Loans underlying or comprising the Mortgage Assets in the related
Trust Fund will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Certificates of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement. A copy of any such instrument
for a series will be filed with the Commission as an exhibit to a Current Report
on Form 8-K to be filed with the Commission within 15 days of issuance of the
Certificates of the related series.
CERTIFICATE GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, certificate guarantee
insurance, if any, with respect to a series of Certificates will be provided by
one or more insurance companies. Such certificate guarantee insurance will
guarantee, with respect to one or more classes of Certificates of the applicable
series, timely distributions of interest and full distributions of principal on
the basis of a schedule of principal distributions set forth in or determined in
the manner specified in the related Prospectus Supplement. If so specified in
the related Prospectus Supplement, the certificate guarantee insurance will also
guarantee against any payment made to a Certificateholder which is subsequently
covered as a 'voidable preference' payment under the Bankruptcy Code. A copy of
the certificate guarantee insurance for a series, if any, will be filed with the
Commission as an exhibit to a Current Report on Form 8-K to be filed with the
Commission within 15 days of issuance of the Certificates of the applicable
series.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Certificates,
the Mortgage Loans underlying or comprising the Mortgage Assets in the related
Trust Fund will be covered by one or more reserve funds in which cash, a letter
of credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Mortgage Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. Reserve funds may be
established to provide limited protection against only certain types of losses
and shortfalls. Following each Distribution Date amounts in a reserve fund in
excess of any amount required to be maintained therein may be released from the
reserve fund under the conditions and to the extent specified in the related
Prospectus Supplement and will not be available for further application to the
Certificates.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investment. Any reinvestment income or other gain from such investments will be
credited to the related Reserve Fund for such series, and any loss resulting
from such investments will be charged to such Reserve Fund. However, such income
may be payable to any related Master Servicer or another service provider as
additional compensation. Whether a Reserve Fund, if any, for a series will be a
part of the Trust Fund will be disclosed in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Certificateholders and use of investment earnings from the
Reserve Fund, if any.
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CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains general summaries of certain legal
aspects of loans secured by commercial and multifamily residential properties
that are general in nature. Because such legal aspects are governed by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See 'Description
of the Trust Funds--Mortgage Assets'.
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, or deeds to secure debt, depending upon the
prevailing practice and law in the state in which the Mortgaged Property is
located. Mortgages, deeds of trust and deeds to secure debt are herein
collectively referred to as 'mortgages'. Any of the foregoing types of mortgages
will create a lien upon, or grant a title interest in, the subject property, the
priority of which will depend on the terms of the particular security
instrument, as well as separate, recorded, contractual arrangements with others
holding interests in the mortgaged property, the knowledge of the parties to
such instrument as well as the order of recordation of the instrument in the
appropriate public recording office. However, recording does not generally
establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, 'mortgagor' includes the
trustor under a deed of trust and a grantor under a deed to secure debt. Under a
deed of trust, the mortgagor grants the property, irrevocably until the debt is
paid, in trust, generally with a power of sale as security for the indebtedness
evidenced by the related note. A deed to secure debt typically has two parties.
By executing a deed to secure debt, the grantor conveys title to, as opposed to
merely creating a lien upon, the subject property to the grantee until such time
as the underlying debt is repaid, generally with a power of sale as security for
the indebtedness evidenced by the related mortgage note. As used in this
Prospectus, unless the context otherwise requires, the term 'mortgagee' means
the lender and, in the case of the deed of trust, the trustee thereunder in
certain cases. In case the mortgagor under a mortgage 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 mortgagor. At
origination of a mortgage loan involving a land trust, the mortgagor executes a
separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailor's Civil Relief Act of 1940) and, in some cases, in 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, pursuant to which the mortgagor assigns its
right, title and interest as landlord under each lease and the income derived
therefrom to the lender, while the mortgagor retains a revocable license to
collect the rents for so long as there is no unremedied default. If the
mortgagor defaults and such default is not remedied by the mortgagor within the
cure period, if any, the license terminates and the lender is entitled to
collect the rents. Local law may require that the lender take possession of the
property and/or obtain a court-appointed receiver before becoming entitled to
collect the rents. In most States, hotel and motel room rates are considered
accounts receivable under the Uniform Commercial Code ('UCC'); generally these
rates are either assigned by the mortgagor, which remains entitled to collect
such rates absent a default, or pledged by the mortgagor, as security for the
loans. In general, the lender must file financing statements in order to perfect
its security interest in the rates and must file continuation statements,
generally every five years, to maintain perfection of such security interest.
Even if the lender's security interest in room rates is perfected under the UCC,
the lender will generally be required to commence a foreclosure or otherwise
take possession of the property in order to collect the room rates after a
default. Even after a foreclosure, the potential rent payments from the property
may be less than the periodic payments that had been due under the mortgage. For
instance, the net income that would otherwise be generated from the property
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may be less than the amount that would have been needed to service the mortgage
debt if the leases on the property are at below-market rents, or as the result
of excessive maintenance, repair or other obligations which a lender succeeds to
as landlord.
PERSONALTY
Certain types of Mortgaged Properties, such as hotels, motels and
industrial plants, are likely to derive a significant part of their value from
personal property which does not constitute 'fixtures' under applicable state
real property law, and hence, would not be subject to the lien of a mortgage.
Such property is generally pledged or assigned as security to the lender under
the UCC. In order to perfect its security interest therein, the lender generally
must file UCC financing statements and, to maintain perfection of such security
interest, file continuation statements generally every five years.
INSTALLMENT CONTRACTS
The Mortgage Loans included in a Trust Fund may also consist of Installment
Contracts. Under an Installment Contract the seller (hereinafter referred to in
this Section as the 'lender') retains legal title to the property and enters
into an agreement with the purchaser (hereinafter referred to in this Section as
the 'borrower') for the payment of the purchase price, plus interest, over the
term of such contract. Only after full performance by the borrower of the
contract is the lender obligated to convey title to the real estate to the
borrower. As with mortgage or deed of trust financing, during the effective
period of the Installment Contract, the borrower is generally responsible for
maintaining the property in good condition and for paying real estate taxes,
assessments and hazard insurance premiums associated with the property.
The method of enforcing the rights of the lender under an Installment
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to its terms. The terms of Installment Contracts
generally provide that upon a default by the borrower, the borrower loses his or
her right to occupy the property, the entire indebtedness is accelerated, and
the buyer's equitable interest in the property is forfeited. The lender in such
a situation does not have to foreclose in order to obtain title to the property,
although in some cases a quiet title action is in order if the borrower has
filed the Installment Contract in local land records and an ejectment action may
be necessary to recover possession. In a few states, particularly in cases of
borrower default during the early years of an Installment Contract, the courts
will permit ejectment of the buyer and a forfeiture of his or her interest in
the property. However, most state legislatures have enacted provisions by
analogy to mortgage law protecting borrowers under Installment Contracts from
the harsh consequences of forfeiture. Under such statutes, a judicial or
nonjudicial foreclosure may be required, the lender may be required to give
notice of default and the borrower may be granted some grace period during which
the contract may be reinstated upon full payment of the default amount and the
borrower may have a post-foreclosure statutory redemption right. In other
states, courts in equity may permit a borrower with significant investment in
the property under an Installment Contract for the sale of real estate to share
in the proceeds of sale of the property after the indebtedness is repaid or may
otherwise refuse to enforce the forfeiture clause. Nevertheless, generally
speaking, the lender's procedures for obtaining possession and clear title under
an Installment Contract for the sale of real estate in a given state are simpler
and less time-consuming and costly than are the procedures for foreclosing and
obtaining clear title to a mortgaged property.
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES OR BENEFICIARIES
Some of the Mortgage Loans included in the Mortgage Pool for a series will
be secured by junior mortgages or deeds of trust which are subordinate to senior
mortgages or deeds of trust held by other lenders or institutional investors.
The rights of the Trust Fund (and therefore the Certificateholders), as
beneficiary under a junior deed of trust or as mortgagee under a junior
mortgage, are subordinate to those of the mortgagee or beneficiary under the
senior mortgage or deed of trust, including the prior rights of the senior
mortgagee or beneficiary to receive rents, hazard insurance and condemnation
proceeds and to cause the property securing the Mortgage Loan to be sold upon
default of the mortgagor or trustor, thereby extinguishing the junior
mortgagee's or junior beneficiary's lien unless the Master Servicer asserts its
subordinate interest in a property in foreclosure litigation or satisfies the
defaulted senior loan. As discussed more fully below, in many states a junior
mortgagee or beneficiary may satisfy a defaulted senior loan in full, adding the
amounts expended to the balance due on the junior loan. Absent a provision in
the senior mortgage, no notice of default is required to be given to the junior
mortgagee.
The form of the mortgage or deed of trust used by many institutional
lenders confers on the mortgagee or beneficiary the right both to receive all
proceeds collected under any hazard insurance policy and all awards made in
connection with any condemnation proceedings, and to apply such proceeds and
awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgage or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or
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other casualty, or in the event the property is taken by condemnation, the
mortgagee or beneficiary under the senior mortgage or deed of trust will have
the prior right to collect any insurance proceeds payable under a hazard
insurance policy and any award of damages in connection with the condemnation
and to apply the same to the indebtedness secured by the senior mortgage or deed
of trust. Proceeds in excess of the amount of senior mortgage indebtedness will,
in most cases, be applied to the indebtedness of a junior mortgage or trust deed
to the extent the junior mortgage or deed of trust so provides. The laws of
certain states may limit the ability of mortgagees or beneficiaries to apply the
proceeds of hazard insurance and partial condemnation awards to the secured
indebtedness. In such states, the mortgagor or trustor must be allowed to use
the proceeds of hazard insurance to repair the damage unless the security of the
mortgagee or beneficiary has been impaired. Similarly, in certain states, the
mortgagee or beneficiary is entitled to the award for a partial condemnation of
the real property security only to the extent that its security is impaired.
The form of mortgage or deed of trust used by many institutional lenders
typically contains a 'future advance' clause, which provides, in essence, that
additional amounts advanced to or on behalf of the mortgagor or trustor by the
mortgagee or beneficiary are to be secured by the mortgage or deed of trust.
While such a clause is valid under the laws of most states, the priority of any
advance made under the clause depends, in some states, on whether the advance
was an 'obligatory' or 'optional' advance. If the mortgagee or beneficiary is
obligated to advance the additional amounts, the advance may be entitled to
receive the same priority as amounts initially made under the mortgage or deed
of trust, notwithstanding that there may be intervening junior mortgages or
deeds of trust and other liens between the date of recording of the mortgage or
deed of trust and the date of the future advance, and notwithstanding that the
mortgagee or beneficiary had actual knowledge of such intervening junior
mortgages or deeds of trust and other liens at the time of the advance. Where
the mortgagee or beneficiary is not obligated to advance the additional amounts
and has actual knowledge of the intervening junior mortgages or deeds of trust
and other liens, the advance may be subordinate to such intervening junior
mortgages or deeds of trust and other liens. Priority of advances under a
'future advance' clause rests, in many other states, on state law giving
priority to all advances made under the loan agreement up to a 'credit limit'
amount stated in the recorded mortgage.
Another provision typically found in the form of the mortgage or deed of
trust used by many institutional lenders obligates the mortgagor or trustor to
pay before delinquency all taxes and assessments on the property and, when due,
all encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to perform
any of these obligations, the mortgagee or beneficiary is given the right under
the mortgage or deed of trust to perform the obligation itself, at its election,
with the mortgagor or trustor agreeing to reimburse the mortgagee or beneficiary
for any sums expended by the mortgagee or beneificary on behalf of the trustor.
All sums so expended by the mortgagee or beneficiary become part of the
indebtedness secured by the mortgage or deed of trust.
The form of mortgage or deed of trust used by many institutional lenders
typically requires the mortgagor or trustor to obtain the consent of the
mortgagee or beneficiary in respect of actions affecting the mortgaged property,
including, without limitation, leasing activities (including new leases and
termination or modification of existing leases), alterations and improvements to
buildings forming a part of the mortgaged property and management and leasing
agreements for the mortgaged property. Tenants will often refuse to execute
lease unless the mortgagee or beneficiary executes a written agreement with the
tenant not to disturb the tenant's possession of its premises in the event of a
foreclosure. A senior mortgagee or beneficiary may refuse to consent to matters
approved by a junior mortgagee or beneficiary with the result that the value of
the security for the junior mortgage or deed of trust is diminished. For
example, a senior mortgagee or beneficiary may decide not to approve a lease or
to refuse to grant to a tenant a non-disturbance agreement. If, as a result, the
lease is not executed, the value of the mortgaged property may be diminished.
SUBORDINATE FINANCING
Where the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
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FORECLOSURE
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage and, by reason thereof, the indebtedness has been
accelerated, the mortgagee has the right to institute foreclosure proceedings to
sell the mortgaged property at public auction to satisfy the indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are other foreclosure procedures available in
some states that are either infrequently used or available only in certain
limited circumstances, such as strict foreclosure.
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 subordinate interest of
record in the real property and all parties in possession of the property, under
leases or otherwise, whose interests are subordinate to the mortgage. Delays in
completion of the foreclosure may occasionally result from difficulties in
locating defendants. When the lender's right to foreclosure is contested, the
legal proceedings can be costly and time-consuming. Upon successful completion
of a 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 which are used to satisfy the judgment.
Such sales are made in accordance with procedures that vary from state to state.
NON-JUDICIAL FORECLOSURE/POWER OF SALE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor 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 mortgagor or junior
lienholder may then have the right, during a reinstatment period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
LIMITATIONS ON LENDER'S RIGHTS
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent an injustice, undue oppression or overreaching, or may require the
lender to undertake affirmative and expensive actions to determine the cause of
the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state
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constitutional provisions reflecting due process concerns for adequate notice
require that a mortgagor receive notice in addition to statutorily-prescribed
minimum notice. For the most part, these cases have upheld the reasonableness of
the 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 afford
constitutional protections to the mortgagor.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses are raised or counterclaims are interposed, and sometimes
require several years to complete.
Also, a third party may be unwilling to purchase a mortgaged property at a
public sale because of the difficulty in determining the value of such property
at the time of sale, due to, among other things, redemption rights which may
exist and the possibility of physical deterioration of the property during the
foreclosure proceedings. Potential buyers may be reluctant to purchase property
at a foreclosure sale as a result of the 1980 decision of the United States
Court of Appeals for the Fifth Circuit in Durrett v. Washington National
Insurance Company and other decisions that have followed its reasoning. The
court in Durrett held that even a non-collusive, regularly conducted foreclosure
sale was a fraudulent transfer under the federal Bankruptcy Code, as amended
from time to time (11 U.S.C.) and, therefore, could be rescinded in favor of the
bankrupt's estate, if (i) the foreclosure sale was held while the debtor was
insolvent and not more than one year prior to the filing of the bankruptcy
petition and (ii) the price paid for the foreclosed property did not represent
'fair consideration' ('reasonably equivalent value' under the Bankruptcy Code).
Although the reasoning and result of Durrett in respect of the Bankruptcy Code
was rejected by the United States Supreme Court in May 1994, the case could
nonetheless be persuasive to a court applying a state fraudulent conveyance law
which has provisions similar to those construed in Durrett. For these reasons,
it is common for the lender to purchase the mortgaged property for an amount
equal to the lesser of fair market value and the underlying debt and accrued and
unpaid interest plus the expenses of foreclosure. Generally, state law controls
the amount of foreclosure costs and expenses which may be recovered by a lender.
Thereafter, subject to the mortgagor's right in some states to remain in
possession during a redemption period, if applicable, the lender will become the
owner of the property and have both the benefits and burdens of ownership of the
mortgaged property. For example, the lender will have the obligation to pay debt
service on any senior mortgages, to pay taxes, obtain casualty insurance and to
make such repairs at its own expense as are necessary to render the property
suitable for sale. Frequently, the lender employs a third party management
company to manage and operate the property. 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 costs of
management and operation of those mortgaged properties which are hotels, motels
or restaurants or nursing or convalescent homes or hospitals may be particularly
significant because of the expertise, knowledge and, with respect to nursing or
convalescent homes or hospitals, regulatory compliance, required to run such
operations and the effect which foreclosure and a change in ownership may have
on the public's and the industry's (including franchisors') perception of the
quality of such operations. The lender will commonly obtain the services of a
real estate broker and pay the broker's commission in connection with the sale
of the property. Depending upon market conditions, the ultimate proceeds of the
sale of the property may not equal the lender's investment in the property.
Moreover, a lender commonly incurs substantial legal fees and court costs in
acquiring a mortgaged property through contested foreclosure and/or bankruptcy
proceedings. Furthermore, a few states require that any environmental
contamination at certain types of properties be cleaned up before a property may
be resold. In addition, a lender may be responsible under federal or state law
for the cost of cleaning up a mortgaged property that is environmentally
contaminated. See '--Environmental Legislation'. Generally state law controls
the amount of foreclosure expenses and costs, including attorneys' fees, that
may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a 'due-on-sale' clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans which are junior mortgage loans, if the lender purchases
the property the lender's title will be subject to all senior mortgages, prior
liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are generally
applied first to the costs, fees and expenses of sale, to unpaid real estate
taxes and assessments and then in satisfaction of the indebtedness secured by
the mortgage under which the sale was conducted. Any proceeds remaining after
satisfaction of senior mortgage debt are generally payable to the holders of
junior mortgages and other liens and claims in order of their priority, whether
or not the mortgagor is in default. Any additional proceeds are generally
payable to the mortgagor. The payment of the proceeds to the holders of junior
mortgages may occur in the foreclosure action of the senior mortgage or a
subsequent ancillary proceeding or may require the institution of separate legal
proceedings by such holders.
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In connection with a series of Certificates for which an election is made
to qualify the Trust Fund, or a portion thereof, as a REMIC, the REMIC
Regulations and the Agreement may require the Master Servicer to hire an
independent contractor to operate any foreclosed property relating to Whole
Loans.
RIGHTS OF REDEMPTION
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their 'equity of redemption'. The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
The equity of redemption is generally a common-law (non-statutory) right
which exists prior to completion of the foreclosure, is not waivable by the
mortgagor, must be exercised prior to foreclosure sale and should be
distinguished from the post-sale statutory rights of redemption. In some states,
after sale pursuant to a deed of trust or foreclosure of a mortgage, the
mortgagor and foreclosed junior lienors are given a statutory period in which to
redeem the property from the foreclosure sale. In some states, statutory
redemption may occur only upon payment of the foreclosure sale price. In other
states, redemption may be authorized if the former mortgagor pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser from a foreclosure
sale or sale under a deed of trust. Consequently, the practical effect of the
redemption right is to force the lender to maintain the property and pay the
expenses of ownership 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.
Under the REMIC Regulations currently in effect, property acquired by
foreclosure generally must not be held for more than two years. With respect to
a series of Certificates for which an election is made to qualify the Trust Fund
or a part thereof as a REMIC, the Agreement will permit foreclosed property to
be held for more than two years if the Trustee receives (i) an extension from
the Internal Revenue Service or (ii) an opinion of counsel to the effect that
holding such property for such period is permissible under the REMIC
Regulations.
ANTI-DEFICIENCY LEGISLATION
Some or all of the Mortgage Loans may be nonrecourse loans, as to which
recourse may be had only against the specific property securing the related
Mortgage Loan and a personal money judgment may not be obtained against the
mortgagor. Even if a mortgage loan by its terms provides for recourse to the
mortgagor, some states impose prohibitions or limitations on such recourse. For
example, statutes in some states limit the right of the lender to obtain a
deficiency judgment against the mortgagor following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former mortgagor equal to the difference between the net amount realized upon
the public sale of the real property and the amount due to the lender. Some
states require the lender to exhaust the security afforded under a mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the mortgagor. In certain other states, the lender has the option
of bringing a personal action against the mortgagor on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. In some cases, a lender will be precluded from exercising any
additional rights under the note or mortgage if it has taken any prior
enforcement action. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the mortgagor. Finally, other statutory provisions limit any
deficiency judgment against the former mortgagor following a judicial sale to
the excess of the outstanding debt over the fair market value of the property at
the time of the public sale. The purpose of these statutes is generally to
prevent a lender from obtaining a large deficiency judgment against the former
mortgagor as a result of low or no bids at the judicial sale.
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LEASEHOLD RISKS
Mortgage Loans may be secured by a mortgage on a ground lease. Leasehold
mortgages are subject to certain risks not associated with mortgage loans
secured by the fee estate of the mortgagor. The most significant of these risks
is that the ground lease creating the leasehold estate could terminate, leaving
the leasehold mortgagee without its security. The ground lease may terminate if,
among other reasons, the ground lessee breaches or defaults in its obligations
under the ground lease or there is a bankruptcy of the ground lessee or the
ground lessor. This risk may be minimized if the ground lease contains certain
provisions protective of the mortgagee, but the ground leases that secure
Mortgage Loans may not contain some of these protective provisions, and
mortgages may not contain the other protections discussed in the next paragraph.
Protective ground lease provisions include the right of the leasehold mortgagee
to receive notices from the ground lessor of any defaults by the the mortgagor;
the right to cure such defaults, with adequate cure periods; if a default is not
susceptible of cure by the leasehold mortgagee, the right to acquire the
leasehold estate through foreclosure or otherwise; the ability of the ground
lease to be assigned to and by the leasehold mortgagee or purchaser at a
foreclosure sale and for the concomitant release of the ground lessee's
liabilities thereunder; and the right of the leasehold mortgagee to enter into a
new ground lease with the ground lessor on the same terms and conditions as the
old ground lease in the event of a termination thereof.
In addition to the foregoing protections, a leasehold mortgagee may require
that the ground lease or leasehold mortgage prohibit the ground lessee from
treating the ground lease as terminated in the event of the ground lessor's
bankruptcy and rejection of the ground lease by the trustee for the
debtor-ground lessor. As further protection, a leasehold mortgage may provide
for the assignment of the debtor-ground lessee's right to reject a lease
pursuant to Section 365 of the Bankruptcy Reform Act of 1978, as amended (11
U.S.C.) (the 'Bankruptcy Code'), although the enforceability of such clause has
not been established. Without the protections described in the foregoing
paragraph, a leasehold mortgagee may lose the collateral securing its leasehold
mortgage. In addition, terms and conditions of a leasehold mortgage are subject
to the terms and conditions of the ground lease. Although certain rights given
to a ground lessee can be limited by the terms of a leasehold mortgage, the
rights of a ground lessee or a leasehold mortgagee with respect to, among other
things, insurance, casualty and condemnation will be governed by the provisions
of the ground lease.
BANKRUPTCY LAWS
The Bankruptcy Code and related state laws may interfere with or affect the
ability of a lender to realize upon collateral and/or to enforce a deficiency
judgment. For example, under the Bankruptcy Code, virtually all actions
(including foreclosure actions and deficiency judgment proceedings) are
automatically stayed upon the filing of the bankruptcy petition, and, usually,
no interest or principal payments are made during the course of the bankruptcy
case. The delay and the consequences thereof caused by such automatic stay can
be significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor may stay the senior lender from
taking action to foreclose out such junior lien.
Under the Bankruptcy Code, provided certain substantive and procedural
safeguards for the lender are met, the amount and terms of a mortgage secured by
property of the debtor may be modified under certain circumstances. The
outstanding amount of the loan secured by the real property may be reduced to
the then-current value of the property (with a corresponding partial reduction
of the amount of lender's security interest) pursuant to a confirmed plan or
lien avoidance proceeding, thus leaving the lender a general unsecured creditor
for the difference between such value and the outstanding balance of the loan.
Other modifications may include the reduction in the amount of each scheduled
payment, which reduction may result from a reduction in the rate of interest
and/or the alteration of the repayment schedule (with or without affecting the
unpaid principal balance of the loan), and/or an extension (or reduction) of the
final maturity date. Some courts with federal bankruptcy jurisdiction have
approved plans, based on the particular facts of the reorganization case, that
effected the curing of a mortgage loan default by paying arrearages over a
number of years. Also, under federal bankruptcy law, a bankruptcy court may
permit a debtor through its rehabilitative plan to de-accelerate a secured loan
and to reinstate the loan even though the lender accelerated the mortgage loan
and final judgment of foreclosure had been entered in state court (provided no
sale of the property had yet occurred) prior to the filing of the debtor's
petition. This may be done even if the full amount due under the original loan
is never repaid.
The Bankruptcy Code has been amended to provide that a lender's perfected
pre-petition security interest in leases, rents and hotel revenues continues in
the post-petition leases, rents and hotel revenues, unless a bankruptcy court
orders to the contrary 'based on the equities of the case.' Thus, unless a court
orders otherwise, revenues from a Mortgaged Property generated after the date
the bankruptcy petition is filed will constitute 'cash collateral' under the
Bankruptcy Code. Debtors may only use cash collateral upon obtaining the
lender's consent or a prior court order finding that the lender's interest in
the Mortgaged Properties and the cash collateral is 'adequately protected' as
such term is defined and interpreted under the Bankruptcy Code. It should be
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noted, however, that the court may find that the lender has no security interest
in either pre-petition or post-petition revenues if the court finds that the
loan documents do not contain language covering accounts, room rents, or other
forms of personalty necessary for a security interest to attach to hotel
revenues.
To the extent that a mortgagor's ability to make payment on a mortgage loan
is dependent on its receipt of payments of rent under a lease of the related
property, such ability may be impaired by the commencement of a bankruptcy
proceeding relating to a lessee under such lease. Under the Bankruptcy Code, the
filing of a petition in bankruptcy by or on behalf of a lessee 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 lessee's petition.
In addition, the Bankruptcy Code generally provides that a trustee or
debtor-in-possession may, subject to approval of the court, (a) assume the lease
and retain it or assign it to a third party or (b) reject the lease. If the
lease is assumed, the trustee or debtor in possession (or assignee, if
applicable) must cure any defaults under the lease, compensate the lessor for
its losses and provide the lessor with 'adequate assurance' of future
performance. Such remedies may be insufficient, however, as the lessor may be
forced to continue under the lease with a lessee that is a poor credit risk or
an unfamiliar tenant if the lease was assigned, and any assurances provided to
the lessor may, in fact, be inadequate. If the lease is rejected, the lessor
will be treated as an unsecured credit or with respect to its claim for damages
for termination of the lease. In addition, pursuant to Section 502(b)(6) of the
Bankruptcy Code, a lessor's damages for lease rejection in respect of future
rent installments are limited to the rent reserved by the lease, without
acceleration, for the greater of one year, or 15%, not to exceed three years, of
the remaining term of the lease.
In a bankruptcy or similar proceeding, action may be taken seeking the
recovery as a preferential transfer of any payments made by the mortgagor under
the related Mortgage Loan to the Trust Fund. Payments on long-term debt may be
protected from recovery as preferences if they are payments in the ordinary
course of business made on debts incurred in the ordinary course of business.
Whether any particular payment would be protected depends upon the facts
specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, a debtor in bankruptcy may have
the power to grant liens senior to the lien of a mortgage, and analogous state
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Moreover, the laws
of certain states also give priority to certain tax liens over the lien of a
mortgage or deed of trust. Under the Bankruptcy Code, if the court finds that
actions of the mortgagee have been unreasonable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
Pursuant to the federal doctrine of 'substantive consolidation' or to the
(predominantly state law) doctrine of 'piercing the corporate veil', a
bankruptcy court, in the exercise of its equitable powers, also has the
authority to order that the assets and liabilities of a related entity be
consolidated with those of an entity before it. Thus, property ostensibly the
property of one entity may be determined to be the property of a different
entity in bankruptcy, the automatic stay applicable to the second entity
extended to the first and the rights of creditors of the first entity impaired
in the fashion set forth above in the discussion of ordinary bankruptcy
principles. Depending on facts and circumstances not wholly in existence at the
time a loan is originated or transferred to the Trust Fund, the application of
any of these doctrines to one or more of the mortgagors in the context of the
bankruptcy of one or more of their affiliates could result in material
impairment of the rights of the Certificateholders. For each mortgagor that is
described as a 'special purpose entity', 'single purpose entity' or
'bankruptcy-remote entity' in the Prospectus Supplement, the activities that may
be conducted by such mortgagor and its ability to incur debt are restricted by
the applicable Mortgage or the organizational documents of such mortgagor in
such manner as is intended to make the likelihood of a bankruptcy proceeding
being commenced by or against such mortgagor remote, and such mortgagor has been
organized and is designed to operate in a manner such that its separate
existence should be respected notwithstanding a bankruptcy proceeding in respect
of one or more affiliated entities of such mortgagor. However, the Depositor
makes no representation as to the likelihood of the institution of a bankruptcy
proceeding by or in respect of any mortgagor or the likelihood that the separate
existence of any mortgagor would be respected if there were to be a bankruptcy
proceeding in respect of any affiliated entity of a mortgagor.
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ENVIRONMENTAL LEGISLATION
A lender may be subject to unforeseen environmental risks when taking a
security interest in real or personal property.
Under the laws of many states, contamination on a property may give rise to
a lien on the property for cleanup costs. In several states, such a lien has
priority over all existing liens (a 'superlien') including those of existing
mortgages; in those states, the lien of a mortgage contemplated by this
transaction may lose its priority to such a superlien.
CERCLA imposes strict, as well as joint and several, liability on several
classes of potentially responsible parties, including current owners and
operators of the property, regardless of whether they caused or contributed to
the contamination. Many states have laws similar to CERCLA. CERCLA excludes from
the definition of 'owner or operator' any person 'who, without participating in
the mangement of . . . [the] facility, holds indicia of ownership primarily to
protect his security interest' ('secured-creditor exemption').
A lender may lose its secured-creditor exemption and be held liable under
CERCLA as an owner or operator, if such lender or its employees or agents
participate in management of the property. Also, if the lender takes title to or
possession of the property, the secured-creditor exemption may be deemed to be
unavailable, and the lender may be liable to the government or private parties
for clean-up or other remedial costs pursuant to CERCLA.
A decision in May 1990 of the United States Court of Appeals for the
Eleventh Circuit in United States v. Fleet Factors Corp. very narrowly construed
the CERCLA secured-creditor exemption. The Court held that a mortgagee need not
have involved itself in the day-to-day operations of the mortgaged property or
in decisions relating to hazardous waste in order to be liable under CERCLA;
rather, liability could attach to a mortgagee if its involvement in the
management of the property is sufficiently broad to support the inference that
it had the capacity to influence the mortgagor's treatment of hazardous waste.
Such capacity to influence could be inferred from the extent of the mortgagee's
involvement in the mortgagor's financial management. A subsequent decision by
the United States Court of Appeals for the Ninth Circuit in In re Bergsoe Metal
Corp. disagreed with the Fleet Factors opinion, ruling that a secured lender had
no liability absent 'some actual management of the facility' on the part of the
lender. The scope of the secured-creditor exemption is thus unclear.
If a lender is or becomes liable, it may bring an action for contribution
against the owner or operator who created the environmental contamination, but
that person or entity may be bankrupt or otherwise judgment proof. It is
possible that cleanup costs could become a liability of the Trust Fund and
occasion a loss to Certificateholders in certain circumstances described above
if such remedial costs were incurred.
Unless otherwise provided in the related Prospectus Supplement, the
Warranting Party with respect to any Whole Loan included in a Trust Fund for a
particular series of Certificates will represent that a 'Phase I assessment' as
described in and meeting the requirements of the then current version of Chapter
5 of the Federal National Mortgage Association Multifamily Guide has been
received and reviewed. In addition, the Agreement may provide that the Master
Servicer, acting on behalf of the Trustee, will not acquire title to a Mortgaged
Property or take over its operation unless the Master Servicer has previously
determined, based on a report prepared by a person who regularly conducts
environmental audits, that (a) there are no circumstances or conditions present
at the Mortgaged Property relating to substances for which some investigation or
clean-up action could be required or that it would be in the best economic
interest of the Trust Fund to take such actions with respect to the affected
Mortgaged Property and (b) that the Mortgaged Property is in compliance with
applicable environmental laws or that it would be in the best economic interest
of the Trust Fund to take the actions necessary to comply with such laws. See
'Description of the Agreements-- Realization Upon Defaulted Whole Loans'.
DUE-ON-SALE AND DUE-ON-ENCUMBRANCE
Certain of the Mortgage Loans may contain due-on-sale and
due-on-encumbrance clauses. These clauses generally provide that the lender may
accelerate the maturity of the loan if the mortgagor sells or otherwise
transfers or encumbers the mortgaged property. Certain of these clauses may
provide that, upon an attempted breach thereof by the mortgagor of an otherwise
non-recourse loan, the mortgager becomes personally liable for the mortgage
debt. The enforceability of due-on-sale clauses has been the subject of
legislation or litigation in many states and, in some cases, the enforceability
of these clauses was limited or denied. However, with respect to certain loans
the Garn-St Germain Depository Institutions Act of 1982 preempts state
constitutional, statutory and case law that prohibits the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms subject to certain limited exceptions. Unless otherwise
provided in the related Prospectus Supplement, a Master Servicer, on behalf of
the Trust Fund, will determine whether to exercise any right the Trustee may
have as mortgagee to accelerate payment of any such Mortgage Loan or to withhold
its consent to any transfer or further encumbrance in accordance
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with the general servicing standard described herein under 'Description of the
Agreements--Collection and Other Servicing Procedures'.
ACCELERATION ON DEFAULT
Some of the Mortgage Loans included in a Trust Fund will include a
'debt-acceleration' clause, which permits the lender to accelerate the full debt
upon a monetary or nonmonetary default of the borrower. The courts of all states
will enforce clauses providing for acceleration in the event of a material
payment default after giving effect to any appropriate notices. The equity
courts of any state, however, may refuse to foreclose a mortgage or deed of
trust when an acceleration of the indebtedness would be inequitable or unjust or
the circumstances would render the acceleration unconscionable. Furthermore, in
some states, the borrower may avoid foreclosure and reinstate an accelerated
loan by paying only the defaulted amounts and the costs and attorneys' fees
incurred by the lender in collecting such defaulted payments.
State courts also are known to apply various legal and equitable principles
to avoid enforcement of the forfeiture provisions of Installment Contracts. For
example, a lender's practice of accepting late payments from the borrower may be
deemed a waiver of the forfeiture clause. State courts also may impose equitable
grace periods for payment of arrearages or otherwise permit reinstatement of the
contract following a default. Not infrequently, if a borrower under an
Installment Contract has significant equity in the property, equitable
principles will be applied to reform or reinstate the contract or to permit the
borrower to share the proceeds upon a foreclosure sale of the property if the
sale price exceeds the debt.
DEFAULT INTEREST, PREPAYMENT CHARGES AND PREPAYMENTS
Forms of notes and mortgages used by lenders may contain provisions
obligating the mortgagor to pay a late charge or additional interest if payments
are not timely made, and in some circumstances may provide for prepayment fees
or yield maintenance penalties if the obligation is paid prior to maturity or
prohibit such prepayment for a specified period. In certain states, there are or
may be specific limitations upon the late charges which a lender may collect
from a mortgagor for delinquent payments. Certain states also limit the amounts
that a lender may collect from a mortgagor as an additional charge if the loan
is prepaid. The enforceability, under the laws of a number of states of
provisions providing for prepayment fees or penalties upon, or prohibition of,
an involuntary prepayment is unclear, and no assurance can be given that, at the
time a Prepayment Premium is required to be made on a Mortgage Loan in
connection with an involuntary prepayment, the obligation to make such payment,
or the provisions of any such prohibition, will be enforceable under applicable
state law. The absence of a restraint on prepayment, particularly with respect
to Mortgage Loans having higher Mortgage Rates, may increase the likelihood of
refinancing or other early retirements of the Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential (including
multifamily but not other commercial) first mortgage loans originated by certain
lenders after March 31, 1980. A similar federal statute was in effect with
respect to mortgage loans made during the first three months of 1980. The
statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor has been advised by counsel that a court interpreting Title V
would hold that first mortgage loans secured by primarily residential properties
that are originated on or after January 1, 1980 are subject to federal
preemption. Therefore, in a state that has not taken the requisite action to
reject application of Title V or to adopt a provision limiting discount points
or other charges prior to origination of such mortgage loans, any such
limitation under such state's usury law would not apply to such mortgage loans.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans,
originated by non-federally chartered lenders have historically been subjected
to a variety of restrictions. Such restrictions differed from state to state,
resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender was in compliance
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act
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('Title VIII'). Title VIII provides that, notwithstanding any state law to the
contrary, state-chartered banks may originate alternative mortgage instruments
in accordance with regulations promulgated by the Comptroller of the Currency
with respect to origination of alternative mortgage instruments by national
banks, state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration (the 'NCUA') with respect to origination of alternative
mortgage instruments by federal credit unions, and all other non-federally
chartered housing creditors, including state-chartered savings and loan
associations, state-chartered savings banks and mortgage banking companies, may
originate alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board (now the Office of Thrift
Supervision) with respect to origination of alternative mortgage instruments by
federal savings and loan associations. Title VIII provides that any state may
reject applicability of the provision of Title VIII by adopting, prior to
October 15, 1985, a law or constitutional provision expressly rejecting the
applicability of such provisions. Certain states have taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the 'Relief Act'), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor 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 such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors 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 Relief Act applies to mortgagors
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 that may be affected by the Relief Act. Application of
the Relief Act would adversely affect, for an indeterminate period of time, the
ability of any servicer to collect full amounts of interest on certain of the
Mortgage Loans. Any shortfalls in interest collections resulting from the
application of the Relief Act would result in a reduction of the amounts
distributable to the holders of the related series of Certificates and would not
be covered by advances or any form of Credit Support (if any) provided in
connection with such Certificates. In addition, the Relief Act imposes
limitations that would impair the ability of the servicer to foreclose on an
affected Mortgage Loan during the mortgagor's period of active duty status, and,
under certain circumstances, during an additional three month period thereafter.
Thus, in the event that such a Mortgage Loan goes into default, there may be
delays and losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ('RICO') statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the 'Crime
Control Act'), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may 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: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) 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.
CERTAIN LAWS AND REGULATIONS
The Mortgaged Properties will be subject to compliance with various
federal, state and local statutes and regulations. Failure to comply (together
with an inability to remedy any such failure) could result in material
diminution in the value of a Mortgaged Property which could, together with the
possibility of limited alternative uses for a particular Mortgaged Property
(i.e., a nursing or convalescent home or hospital), result in a failure to
realize the full principal amount of the related Mortgage Loan.
TYPE OF MORTGAGED PROPERTY
The lender may be subject to additional risk depending upon the type and
use of the Mortgaged Property in question. For instance, Mortgaged Properties
which are hospitals, nursing homes or convalescent homes may present special
risks to lenders in large part due to significant governmental regulation of the
operation, maintenance, control and financing of health care
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institutions. Mortgages on Mortgaged Properties which are owned by the borrower
under a condominium form of ownership are subject to the declaration, by-laws
and other rules and regulations of the condominium association. Mortgaged
Properties which are hotels or motels may present additional risk to the lender
in that: (i) hotels and motels are typically operated pursuant to franchise,
management and operating agreements which may be terminable by the operator; and
(ii) the transferability of the hotel's operating, liquor and other licenses to
the entity acquiring the hotel either through purchase or foreclosure is subject
to the vagaries of local law requirements. In addition, Mortgaged Properties
which are multifamily residential properties or cooperatively owned multifamily
properties may be subject to rent control laws, which could impact the future
cash flows of such properties.
AMERICANS WITH DISABILITIES ACT
Under Title III of the Americans with Disabilities Act of 1990 and rules
promulgated thereunder (collectively, the 'ADA'), in order to protect
individuals with disabilities, public accommodations (such as hotels,
restaurants, shopping centers, hospitals, schools and social service center
establishments) must remove architectural and communication barriers which 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, such altered portions are readily accessible to and
usable by disabled individuals. The 'readily achievable' standard takes into
account, among other factors, the financial resources of the affected site,
owner, landlord or other applicable person. In addition to imposing a possible
financial burden on the borrower in its capacity as owner or landlord, the ADA
may also impose such 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
stringent requirements than those to which the borrower is subject.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This discussion reflects the applicable provisions of the
Internal Revenue Code of 1986, as amended (the 'Code'), as well as regulations
(the 'REMIC Regulations') promulgated by the U.S. Department of Treasury (the
'Treasury') on December 23, 1992. Investors should consult their own tax
advisors in determining the federal, state, local and other tax consequences to
them of the purchase, ownership and disposition of Certificates.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Assets
underlying a series of Certificates, references to the Mortgage will be deemed
to refer to that portion of the Mortgage Assets held by the Trust Fund which
does not include the Retained Interest. References to a 'holder' or
'Certificateholder' in this discussion generally mean the beneficial owner of a
Certificate.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular series of Certificates, an election may be
made to treat the Trust Fund or one or more segregated pools of assets therein
as one or more REMICs within the meaning of Code Section 860D. A Trust Fund or a
portion thereof as to which a REMIC election will be made will be referred to as
a 'REMIC Pool'. For purposes of this discussion, Certificates of a series as to
which one or more REMIC elections are made are referred to as 'REMIC
Certificates' and will consist of one or more Classes of 'Regular Certificates'
and one Class of 'Residual Certificates' in the case of each REMIC Pool.
Qualification as a REMIC requires ongoing compliance with certain conditions.
With respect to each series of REMIC Certificates, Cadwalader, Wickersham &
Taft, counsel to the Depositor, has advised the Depositor that in the firm's
opinion, assuming (i) the making of such an election, (ii) compliance with the
Agreement and (iii) compliance with any changes in the law, including any
amendments to the Code or applicable Treasury regulations thereunder, each REMIC
Pool will qualify as a REMIC. In such case, the Regular Certificates will be
considered to be 'regular interests' in the REMIC Pool and generally will be
treated for federal income tax purposes as if they were newly originated debt
instruments, and the Residual Certificates will be considered to be 'residual
interests' in the REMIC Pool. The Prospectus Supplement for each series of
Certificates will indicate whether one or more REMIC elections with respect to
the related Trust Fund will be made, in which event references to 'REMIC' or
'REMIC Pool'
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herein shall be deemed to refer to each such REMIC Pool. 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 a grantor trust for federal income
tax purposes. See '--Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made'. For purposes of this discussion, unless
otherwise specified, the term 'Mortgage Loans' will be used to refer to Mortgage
Loans, MBS and Installment Contracts.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a domestic building and loan association will
constitute 'a regular or residual interest in a REMIC' within the meaning of
Code Section 7701(a)(19)(C)(xi) but only in the same proportion that the assets
of the REMIC Pool would be treated as 'loans . . . secured by an interest in
real property which is . . . residential real property' (such as single family
or multifamily properties, but not commercial properties) within the meaning of
Code Section 7701(a)(19)(C)(v) or as other assets described in Code Section
7701(a)(19)(C), and otherwise will not qualify for such treatment. REMIC
Certificates held by a real estate investment trust will constitute 'real estate
assets' within the meaning of Code Section 856(c)(5)(A), and interest on the
Regular Certificates and income with respect to Residual Certificates will be
considered 'interest on obligations secured by mortgages on real property or on
interests in real property' within the meaning of Code Section 856(c)(3)(B) in
the same proportion that, for both purposes, the assets of the REMIC Pool would
be so treated. If at all times 95% or more of the assets of the REMIC Pool
qualify for each of the foregoing respective treatments, the REMIC Certificates
will qualify for the corresponding status in their entirety. For purposes of
Code Section 856(c)(5)(A), payments of principal and interest on the Mortgage
Loans that are reinvested pending distribution to holders of REMIC Certificates
qualify for such treatment. Where two REMIC Pools are a part of a tiered
structure they will be treated as one REMIC for purposes of the tests described
above respecting asset ownership of more or less than 95%. In addition, if the
assets of the REMIC include Buy-Down Mortgage Loans, it is possible that the
percentage of such assets constituting 'qualifying real property loans' or
'loans . . . secured by an interest in real property' for purposes of Code
Section 7701(a)(19)(C)(v), respectively, may be required to be reduced by the
amount of the related Buy-Down Funds. REMIC Certificates held by a regulated
investment company will not constitute 'Government securities' within the
meaning of Code Section 851(b)(4)(A)(i). REMIC Certificates held by certain
financial institutions will constitute an 'evidence of indebtedness' within the
meaning of Code Section 582(c)(1). The Small Business Job Protection Act of 1996
(the 'SBJPA of 1996') repealed the reserve method for bad debts of domestic
building and loan associations and mutual savings banks, and thus has eliminated
the asset category of 'qualifying real property loans' in former Code Section
593(d) for taxable years beginning after December 31, 1995. The requirement in
the SBJPA of 1996 that such institutions must 'recapture' a portion of their
existing bad debt reserves is suspended if a certain portion of their assets are
maintained in 'residential loans' under Code Section 7701(a)(19)(C)(v), but only
if such loans were made to acquire, construct or improve the related real
property and not for the purpose of refinancing. However, no effort will be made
to identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
QUALIFICATION AS A REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the 'Startup Day' (which for purposes
of this discussion is the date of issuance of the REMIC 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 aggregate adjusted
basis of the nonqualified assets is less than 1% of the aggregate adjusted basis
of all the REMIC Pool'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 must furnish applicable tax information to transferors or agents that
violate this requirement. See 'Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates--Disqualified 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 Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contract in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
certificates of beneficial interest in a grantor trust that holds mortgage
loans, such as the Mortgage Certificates, regular interests in another REMIC,
such as Mortgage Certificates in a trust as to which a REMIC election has been
made, loans secured by timeshare interests and loans secured by shares held by a
tenant stockholder in a cooperative housing corporation, provided, in general,
(i) the fair market value of the real property security (including buildings and
structural components thereof) is at least 80% of the principal balance of the
related Mortgage Loan or mortgage loan underlying the Mortgage Certificate
either at origination or as of
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the Startup Day (an original loan-to-value ratio of not more than 125% with
respect to the real property security) or (ii) substantially all the proceeds of
the Mortgage Loan or the underlying mortgage loan were used to acquire, improve
or protect an interest in real property that, at the origination date, was the
only security for the Mortgage Loan or underlying mortgage loan. If the Mortgage
Loan has been substantially modified other than in connection with a default or
reasonably foreseeable default, it must meet the loan-to-value test in (i) of
the preceding sentence as of the date of the last such modification). A
qualified mortgage includes a qualified replacement mortgage, which is any
property that would have been treated as a qualified mortgage if it were
transferred to the REMIC Pool on the Startup Day and that is received either (i)
in exchange for any qualified mortgage within a three-month period thereafter or
(ii) in exchange for a 'defective obligation' within a two-year period
thereafter. A 'defective obligation' includes (i) a mortgage in default or as to
which default is reasonably foreseeable, (ii) a mortgage as to which a customary
representation or warranty made at the time of transfer to the REMIC Pool has
been breached, (iii) a mortgage that was fraudulently procured by the mortgagor,
and (iv) a mortgage that was not in fact principally secured by real property
(but only if such mortgage is disposed of within 90 days of discovery). A
Mortgage Loan that is 'defective' as described in clause (iv) that is not sold
or, if within two years of the Startup Day, exchanged, within 90 days of
discovery, ceases to be a qualified mortgage after such 90-day period.
The REMIC Regulations provide that obligations secured by interests in
manufactured housing which qualify as 'single family residences' within the
meaning of Code Section 25(e)(10) may be treated as 'qualified mortgages' of a
REMIC. Under Code Section 25(e)(10), the term 'single family residence' includes
any manufactured home which has a minimum of 400 square feet of living space and
a minimum width in excess of 102 inches and which is of a kind customarily used
at a fixed location. With respect to each series with respect to which Contracts
are included in a REMIC Pool, the Depositor will represent and warrant that each
of the manufactured homes securing the Contracts meets this definition of
'single family residence'.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced 'promptly and appropriately' as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally held for not more than two years, with extensions granted by the
Internal Revenue Service (the 'Service').
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified variable rate, or consist of a specified, nonvarying portion of
the interest payments on qualified mortgages. Such a specified portion may
consist of a fixed number of basis points, a fixed percentage of the total
interest, or a fixed or qualified variable or inverse variable rate on some or
all of the qualified mortgages minus a different fixed or qualified variable
rate. The specified principal amount of a regular interest that provides for
interest payments consisting of a specified, nonvarying portion of interest
payments on qualified mortgages may be zero. A residual interest is an interest
in a REMIC Pool other than a regular interest that is issued on the Startup Day
and that is designated as a residual interest. An interest in a REMIC Pool may
be treated as a regular interest even if payments of principal with respect to
such interest are subordinated to payments on other regular interests or the
residual interest in the REMIC Pool, and are dependent on the absence of
defaults or delinquencies on qualified mortgages or permitted investments, lower
than reasonably expected returns on permitted investments, unanticipated
expenses incurred by the REMIC Pool or prepayment interest shortfalls.
Accordingly, the Regular Certificates of a series will constitute one or more
classes of regular interests, and the Residual Certificates with respect to that
series will constitute a single class of residual interests on which
distributions are made pro rata.
If an entity, such as the REMIC Pool, 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 the entity will not be treated as a REMIC for such year
and thereafter. In this event, an entity with multiple classes of ownership
interests may be treated as a separate association taxable as a corporation
under
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Treasury regulations, and the Regular Certificates may be treated as equity
interests therein. The Code, however, authorizes the Treasury Department to
issue regulations that address situations where failure to meet one or more of
the requirements for REMIC status occurs inadvertently and in good faith, and
disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that the Conference Committee Report to the
Tax Reform Act of 1986 (the '1986 Act') indicates that the relief may be
accompanied by sanctions, such as the imposition of a corporate tax on all or a
portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
TAXATION OF REGULAR CERTIFICATES
GENERAL
In general, interest, original issue discount and market discount on a
Regular Certificate will be treated as ordinary income to a holder of the
Regular Certificate (the 'Regular Certificateholder') as they accrue, and
principal payments on a Regular Certificate will be treated as a return of
capital to the extent of the Regular Certificateholder's basis in the Regular
Certificate allocable thereto. Regular Certificateholders must use the accrual
method of accounting with regard to Regular Certificates, regardless of the
method of accounting otherwise used by such Regular Certificateholders.
ORIGINAL ISSUE DISCOUNT
Accrual Certificates will be, and other Classes of Regular Certificates may
be, issued with 'original issue discount' within the meaning of Code Section
1273(a). Holders of any Class of Regular Certificates having original issue
discount generally must include original issue discount in ordinary income for
federal income tax purposes as it accrues, in accordance with the constant yield
method that takes into account the compounding of interest, in advance of
receipt of the cash attributable to such income. The following discussion is
based in part on temporary and final Treasury regulations issued on February 2,
1994 (the 'OID Regulations'), as amended on June 14, 1996, under Code Sections
1271 through 1273 and 1275 and in part on the provisions of the 1986 Act.
Regular Certificateholders should be aware, however, that the OID Regulations
and the Proposed OID Regulations do not adequately address certain issues
relevant to prepayable securities, such as the Regular Certificates. To the
extent such issues are not addressed in such regulations, the Depositor intends
to apply the methodology described in the Conference Committee Report to the
1986 Act. No assurance can be provided that the Service will not take a
different position as to those matters not currently addressed by the OID
Regulations. Moreover, the OID Regulations include an anti-abuse rule allowing
the Service to apply or depart from the OID Regulations where necessary or
appropriate to ensure a reasonable tax result in light of the applicable
statutory provisions. A tax result will not be considered unreasonable under the
anti-abuse rule in the absence of a substantial effect on the present value of a
taxpayer's tax liability. Investors are advised to consult their own tax
advisors as to the discussion herein and the appropriate method for reporting
interest and original issue discount with respect to the Regular Certificates.
Each Regular Certificate (except to the extent described below with respect
to a Regular Certificate on which principal is distributed by random lot
('Random Lot Certificates')) will be treated as a single installment obligation
for purposes of determining the original issue discount includible in a Regular
Certificateholder's income. The total amount of original issue discount on a
Regular Certificate is the excess of the 'stated redemption price at maturity'
of the Regular Certificate over its 'issue price'. The issue price of a Class of
Regular Certificates offered pursuant to this Prospectus generally is the first
price at which a substantial amount of Regular Certificates of that Class is
sold to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, the Depositor intends to treat the issue
price of a Class as to which there is no substantial sale as of the issue date
or that is retained by the Depositor as the fair market value of that Class as
of the issue date. The issue price of a Regular Certificate also includes the
amount paid by an initial Regular Certificateholder for accrued interest that
relates to a period prior to the issue date of the Regular Certificate, unless
the Regular Certificateholder elects on its federal income tax return to exclude
such amount from the issue price and to recover it on the first Distribution
Date. The stated redemption price at maturity of a Regular Certificate always
includes the original principal amount of the Regular Certificate, but generally
will not include distributions of stated interest if such interest distributions
constitute 'qualified stated interest'. Under the OID Regulations, qualified
stated interest generally means interest payable at a single fixed rate or a
qualified variable rate (as described below) provided that such interest
payments are unconditionally payable at intervals of one year or less during the
entire term of the Regular Certificate. Distributions of interest on an Accrual
Certificate, or on other Regular Certificates with respect to which deferred
interest will accrue, will not constitute qualified stated interest, in which
case the stated redemption price at maturity of such Regular Certificates
includes all distributions of interest as well as principal thereon. Likewise,
the Depositor intends to treat an 'interest only' class, or a class on which
interest is substantially disproportionate to its principal amount (a
so-called 'super-premium' class) as having no qualified stated interest. Where
the interval between the issue date and the first
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Distribution Date on a Regular Certificate is shorter than the interval between
subsequent Distribution Dates, the interest attributable to the additional days
will be included in the stated redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than 0.25%
of the stated redemption price at maturity of the Regular Certificate multiplied
by the weighted average maturity of the Regular Certificate. For this purpose,
the weighted average maturity of the Regular Certificate is computed as the sum
of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution is
scheduled to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the Regular
Certificate and the denominator of which is the stated redemption price at
maturity of the Regular Certificate. The Conference Committee Report to the 1986
Act provides that the schedule of such distributions should be determined in
accordance with the assumed rate of prepayment of the Mortgage Loans (the
'Prepayment Assumption') and the anticipated reinvestment rate, if any, relating
to the Regular Certificates. The Prepayment Assumption with respect to a Series
of Regular Certificates will be set forth in the related Prospectus Supplement.
Holders generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the Regular Certificate is
held as a capital asset. However, under the OID Regulations, Regular
Certificateholders may elect to accrue all de minimis original issue discount as
well as market discount and market premium under the constant yield method. See
'Election to Treat All Interest Under the Constant Yield Method'.
A Regular Certificateholder generally must include in gross income for any
taxable year the sum of the 'daily portions,' as defined below, of the original
issue discount on the Regular Certificate accrued during an accrual period for
each day on which it holds the Regular Certificate, including the date of
purchase but excluding the date of disposition. The Depositor will treat the
monthly period ending on the day before each Distribution Date as the accrual
period. With respect to each Regular Certificate, a calculation will be made of
the original issue discount that accrues during each successive full accrual
period (or shorter period from the date of original issue) that ends on the day
before the related Distribution Date on the Regular Certificate. The Conference
Committee Report to the 1986 Act states that the rate of accrual of original
issue discount is intended to be based on the Prepayment Assumption. Other than
as discussed below with respect to a Random Lot Certificate, the original issue
discount accruing in a full accrual period would be the excess, if any, of (i)
the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Certificate as of the end of that accrual period that are
included in the Regular Certificate's stated redemption price at maturity and
(b) the distributions made on the Regular Certificate during the accrual period
that are included in the Regular Certificate's stated redemption price at
maturity, over (ii) the adjusted issue price of the Regular Certificate at the
beginning of the accrual period. The present value of the remaining
distributions referred to in the preceding sentence is calculated based on (i)
the yield to maturity of the Regular Certificate at the issue date, (ii) events
(including actual prepayments) that have occurred prior to the end of the
accrual period and (iii) the Prepayment Assumption. For these purposes, the
adjusted issue price of a Regular Certificate at the beginning of any accrual
period equals the issue price of the Regular Certificate, increased by the
aggregate amount of original issue discount with respect to the Regular
Certificate that accrued in all prior accrual periods and reduced by the amount
of distributions included in the Regular Certificate's stated redemption price
at maturity that were made on the Regular Certificate in such prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then be divided by the number of days in the period to
determine the daily portion of original issue discount for each day in the
period. With respect to an initial accrual period shorter than a full accrual
period, the daily portions of original issue discount must be determined
according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the Mortgage Loans that exceed the
Prepayment Assumption, and generally will decrease (but not below zero for any
period) if the prepayments are slower than the Prepayment Assumption. An
increase in prepayments on the Mortgage Loans with respect to a Series of
Regular Certificates can result in both a change in the priority of principal
payments with respect to certain Classes of Regular Certificates and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Certificates.
In the case of a Random Lot Certificate, the Depositor intends to determine
the yield to maturity of such Certificate based upon the anticipated payment
characteristics of the Class as a whole under the Prepayment Assumption. In
general, the original issue discount accruing on each Random Lot Certificate in
a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution in retirement of the
entire unpaid principal balance of any Random Lot Certificate (or portion of
such unpaid principal balance), (a) the remaining unaccrued original issue
discount allocable to such Certificate (or to such portion) will accrue at the
time of such distribution, and (b) the accrual of original issue discount
allocable to each remaining Certificate of such Class (or the
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remaining unpaid principal balance of a partially redeemed Random Lot
Certificate after a distribution of principal has been received) will be
adjusted by reducing the present value of the remaining payments on such Class
and the adjusted issue price of such Class to the extent attributable to the
portion of the unpaid principal balance thereof that was distributed. The
Depositor believes that the foregoing treatment is consistent with the 'pro rata
prepayment' rules of the OID Regulations, but with the rate of accrual of
original issue discount determined based on the Prepayment Assumption for the
Class as a whole. Investors are advised to consult their tax advisors as to this
treatment.
ACQUISITION PREMIUM
A purchaser of a Regular Certificate at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Certificate reduced pro rata by a fraction, the
numerator of which is the excess of its purchase price over such adjusted issue
price and the denominator of which is the excess of the remaining stated
redemption price at maturity over the adjusted issue price. Alternatively, such
a subsequent purchaser may elect to treat all such acquisition premium under the
constant yield method, as described below under the heading 'Election to Treat
All Interest Under the Constant Yield Method'.
VARIABLE RATE REGULAR CERTIFICATES
Regular Certificates may provide for interest based on a variable rate.
Under the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more 'qualified floating rates',
(b) a single fixed rate and one or more qualified floating rates, (c) a single
'objective rate', or (d) a single fixed rate and a single objective rate that is
a 'qualified inverse floating rate'. A floating rate is a qualified floating
rate if variations in the rate can reasonably be expected to measure
contemporaneous variations in the cost of newly borrowed funds, where such rate
is subject to a fixed multiple that is greater than 0.65 but not more than 1.35.
Such rate may also be increased or decreased by a fixed spread or subject to a
fixed cap or floor, or a cap or floor that is not reasonably expected as of the
issue date to affect the yield of the instrument significantly. An objective
rate is any rate (other than a qualified floating rate) that is determined using
a single fixed formula and that is based on objective financial or economic
information, provided that such information is not (i) within the control of the
issuer or a related party or (ii) unique to the circumstances of the issuer or a
related party. A qualified inverse floating rate is a rate equal to a fixed rate
minus a qualified floating rate that inversely reflects contemporaneous
variations in the cost of newly borrowed funds; an inverse floating rate that is
not a qualified inverse floating rate may nevertheless be an objective rate. A
Class of Regular Certificates may be issued under this Prospectus that does not
have a variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly 'front-loaded' or 'back-loaded' within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear 'contingent interest' within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest rate by their terms not applicable to Regular Certificates. However, if
final regulations dealing with contingent interest with respect to Regular
Certificates apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Certificates as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Certificate that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Certificate (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable Prospectus Supplement, the Depositor intends to
treat Regular Certificates that qualify as regular interests under this rule in
the same manner as obligations bearing a variable rate for original issue
discount reporting purposes.
The amount of original issue discount with respect to a Regular Certificate
bearing a variable rate of interest will accrue in the manner described above
under 'Original Issue Discount' with the yield to maturity and future payments
on such Regular Certificate generally to be determined by assuming that interest
will be payable for the life of the Regular Certificate based on the initial
rate (or, if different, the value of the applicable variable rate as of the
pricing date) for the relevant Class. Unless otherwise specified in the
applicable Prospectus Supplement, the Depositor intends to treat such variable
interest as qualified stated interest,
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other than variable interest on an interest-only or super-premium Class, which
will be treated as non-qualified stated interest includible in the stated
redemption price at maturity. Ordinary income reportable for any period will be
adjusted based on subsequent changes in the applicable interest rate index.
Although unclear under the OID Regulations, the Depositor intends to treat
Regular Certificates bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans or Mortgage Certificates having fixed or
adjustable rates, as having qualified stated interest. In the case of adjustable
rate Mortgage Loans, the applicable index used to compute interest on the
Mortgage Loans in effect on the pricing date (or possibly the issue date) will
be deemed to be in effect beginning with the period in which the first weighted
average adjustment date occurring after the issue date occurs. Adjustments will
be made in each accrual period either increasing or decreasing the amount or
ordinary income reportable to reflect the actual Pass-Through Rate on the
Regular Certificates.
DEFERRED INTEREST
Under the OID Regulations, all interest on a Regular Certificate as to
which there may be Deferred Interest is includible in the stated redemption
price at maturity thereof. Accordingly, any Deferred Interest that accrues with
respect to a Class of Regular Certificates may constitute income to the holders
of such Regular Certificates prior to the time distributions of cash with
respect to such Deferred Interest are made.
MARKET DISCOUNT
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Section 1276 through 1278. Under these Code sections and
the principles applied by the OID Regulations in the context of original issue
discount, 'market discount' is the amount by which the purchaser's original
basis in the Regular Certificate (i) is exceeded by the then-current principal
amount of the Regular Certificate or (ii) in the case of a Regular Certificate
having original issue discount, is exceeded by the adjusted issue price of such
Regular Certificate at the time of purchase. Such purchaser generally will be
required to recognize ordinary income to the extent of accrued market discount
on such Regular Certificate as distributions includible in the stated redemption
price at maturity thereof are received, in an amount not exceeding any such
distribution. Such market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Certificate
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue discount as of the end
of such period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Regular 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 as partial distributions in reduction of the stated
redemption price at maturity were received. Such purchaser will be required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Certificate over the
interest distributable thereon. The deferred portion of such interest expense in
any taxable year generally will not exceed the accrued market discount on the
Regular Certificate for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Certificateholder may elect to include market discount in
income currently as it accrues on all market discount instruments acquired by
such Regular Certificateholder in that taxable year or thereafter, in which case
the interest deferral rule will not apply. See 'Election to Treat All Interest
Under the Constant Yield Method' below regarding an alternative manner in which
such election may be deemed to be made.
Market discount with respect to a Regular Certificate will be considered to
be zero if such market discount is less than 0.25% of the remaining stated
redemption price at maturity of such Regular Certificate multiplied by the
weighted average maturity of the Regular Certificate (determined as described
above in the third paragraph under 'Original Issue Discount') remaining after
the date of purchase. It appears that de minimis market discount would be
reported in a manner similar to de minimis original issue discount. See
'Original Issue Discount' above. Treasury regulations implementing the market
discount rules have not yet been issued, and therefore investors should consult
their own tax advisors regarding the application of these rules. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
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PREMIUM
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
'capital asset' within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under the constant yield method. The Conference Committee Report to the 1986 Act
indicates a Congressional intent that the same rules that will apply to the
accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Certificates, although it is unclear whether the alternatives to
the constant yield method described above under 'Market Discount' are available.
Amortizable bond premium will be treated as an offset to interest income on a
Regular Certificate rather than as a separate deduction item. See 'Election to
Treat All Interest Under the Constant Yield Method' below regarding an
alternative manner in which the Code Section 171 election may be deemed to be
made.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Certificate may elect to
treat all interest that accrues on the instrument using the constant yield
method, with none of the interest being treated as qualified stated interest.
For purposes of applying the constant yield method to a debt instrument subject
to such an election, (i) 'interest' includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all debt instruments acquired by the
holder in the same taxable year or thereafter. The election is made on the
holder's federal income tax return for the year in which the debt instrument is
acquired and is irrevocable except with the approval of the Service. Investors
should consult their own tax advisors regarding the advisability of making such
an election.
SALE OR EXCHANGE OF REGULAR CERTIFICATES
If a Regular Certificateholder sells or exchanges a Regular Certificate,
the Regular Certificateholder will recognize gain or loss equal to the
difference, if any, between the amount received and its adjusted basis in the
Regular Certificate. The adjusted basis of a Regular Certificate generally will
equal the cost of the Regular Certificate to the seller, increased by any
original issue discount or market discount previously included in the seller's
gross income with respect to the Regular Certificate and reduced by amounts
included in the stated redemption price at maturity of the Regular Certificate
that were previously received by the seller and by any amortized premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Certificate realized by an investor who holds the Regular Certificate as
a capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Certificate has been held for the long-term
capital gain holding period (currently more than one year). Such gain will be
treated as ordinary income (i) if a Regular Certificate is held as part of a
'conversion transaction' as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Certificateholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate under Code Section 1274(d) in effect at the time the taxpayer
entered into the transaction minus any amount previously treated as ordinary
income with respect to any prior distribution of property that was held as a
part of such transaction, (ii) in the case of a non-corporate taxpayer, to the
extent such taxpayer has made an election under Code Section 163(d)(4) to have
net capital gains taxed as investment income at ordinary rates, or (iii) to the
extent that such gain does not exceed the excess, if any, of (a) the amount that
would have been includible in the gross income of the holder if its yield on
such Regular Certificate were 110% of the applicable Federal rate as of the date
of purchase, over (b) the amount of income actually includible in the gross
income of such holder with respect to the Regular Certificate. In addition, gain
or loss recognized from the sale of a Regular Certificate by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to Code
Section 582(c). Pursuant to the Revenue Reconciliation Act of 1993, capital
gains of certain non-corporate taxpayers are subject to a lower maximum tax rate
than ordinary income of such taxpayers. The maximum tax rate for corporations is
the same with respect to both ordinary income and capital gains.
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TREATMENT OF LOSSES
Holders of Regular Certificates will be required to report income with
respect to Regular Certificates on the accrual method of accounting, without
giving effect to delays or reductions in distributions attributable to defaults
or delinquencies on the Mortgage Loans allocable to a particular class of
Regular Certificates, except to the extent it can be established that such
losses are uncollectible. Accordingly, the holder of a Regular Certificate may
have income, or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the discussion
below) for the corresponding loss until a subsequent taxable year. To the extent
the rules of Code Section 166 regarding bad debts are applicable, it appears
that holders of Regular Certificates that are corporations or that otherwise
hold the Regular Certificates in connection with a trade or business should in
general be allowed to deduct as an ordinary loss any such loss sustained during
the taxable year on account of any such Regular Certificates becoming wholly or
partially worthless, and that, in general, holders of Regular Certificates that
are not corporations and do not hold the Regular Certificates in connection with
a trade or business will be allowed to deduct as a short-term capital loss any
loss with respect to principal sustained during the taxable year on account of a
portion of any class or subclass of such Regular Certificates becoming wholly
worthless. Although the matter is not free from doubt, non-corporate holders of
Regular Certificates should be allowed a bad debt deduction at such time as the
principal balance of any class or subclass of such Regular Certificates is
reduced to reflect losses resulting from any liquidated Mortgage Loans. The
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect such losses only after all Mortgage
Loans remaining in the Trust Fund have been liquidated or such class of Regular
Certificates has been otherwise retired. The Service could also assert that
losses on the Regular Certificates are deductible based on some other method
that may defer such deductions for all holders, such as reducing future cash
flow for purposes of computing original issue discount. This may have the effect
of creating 'negative' original issue discount which would be deductible only
against future positive original issue discount or otherwise upon termination of
the Class. Holders of Regular Certificates are urged to consult their own tax
advisors regarding the appropriate timing, amount and character of any loss
sustained with respect to such Regular Certificates. While losses attributable
to interest previously reported as income should be deductible as ordinary
losses by both corporate and non-corporate holders the Service may take the
position that losses attributable to accrued original issue discount may only be
deducted as capital losses in the case of non-corporate holders who do not hold
Regular Certificates in connection with a trade or business. Special loss rules
are applicable to banks and thrift institutions, including rules regarding
reserves for bad debts. Such taxpayers are advised to consult their tax advisors
regarding the treatment of losses on Regular Certificates.
TAXATION OF RESIDUAL CERTIFICATES
TAXATION OF REMIC INCOME
Generally, the 'daily portions' of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Certificates ('Residual Certificateholders'), and will
not be taxed separately to the REMIC Pool. The daily portions of REMIC taxable
income or net loss of a Residual Certificateholder are determined by allocating
the REMIC Pool's taxable income or net loss for each calendar quarter ratably to
each day in such quarter and by allocating such daily portion among the Residual
Certificateholders in proportion to their respective holdings of Residual
Certificates in the REMIC Pool on such day. REMIC taxable income is generally
determined in the same manner as the taxable income of an individual using the
accrual method of accounting, except that (i) the limitations on deductibility
of investment interest expense and expenses for the production of income do not
apply, (ii) all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. The REMIC Pool's gross income, includes interest, original
issue discount income and market discount income, if any, on the Mortgage Loans,
reduced by amortization of any premium on the Mortgage Loans plus income on
reinvestment of cash flows and reserve assets, plus any cancellation of
indebtedness income upon allocation of realized losses to the Regular
Certificates. The REMIC Pool's deductions include interest and original issue
discount expense on the Regular Certificates, servicing fees on the Mortgage
Loans, other administrative expenses of the REMIC Pool and realized losses on
the Mortgage Loans. The requirement that Residual Certificateholders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Certificates of any class of the related series
outstanding.
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The taxable income recognized by a Residual Certificateholder in any
taxable year will be affected by, among other factors, the relationship between
the timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. In the event
that an interest in the Mortgage Loans is acquired by the REMIC Pool at a
discount, and one or more of such Mortgage Loans is prepaid, the Residual
Certificateholder may recognize taxable income without being entitled to receive
a corresponding amount of cash because (i) the prepayment may be used in whole
or in part to make distributions in reduction of principal on the Regular
Certificates and (ii) the discount on the Mortgage Loans which is includible in
income may exceed the deduction allowed upon such distributions on those Regular
Certificates on account of any unaccrued original issue discount relating to
those Regular Certificates. When there is more than one class of Regular
Certificates that distribute principal sequentially, this mismatching of income
and deductions is particularly likely to occur in the early years following
issuance of the Regular Certificates when distributions in reduction of
principal are being made in respect of earlier classes of Regular Certificates
to the extent that such classes are not issued with substantial discount. If
taxable income attributable to such a mismatching is realized, in general,
losses would be allowed in later years as distributions on the later classes of
Regular Certificates are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a series of Regular Certificates, may increase over time as distributions
in reduction of principal are made on the lower yielding classes of Regular
Certificates, whereas to the extent that the REMIC Pool includes fixed rate
Mortgage Loans, interest income with respect to any given Mortgage Loan will
remain constant over time as a percentage of the outstanding principal amount of
that loan. Consequently, Residual Certificateholders must have sufficient other
sources of cash to pay any federal, state or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of 'excess inclusions' below under 'Limitations on
Offset or Exemption of REMIC Income'. The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a series
of Certificates, may have a significant adverse effect upon the Residual
Certificateholder's after-tax rate of return. In addition, a Residual
Certificateholder's taxable income during certain periods may exceed the income
reflected by such Residual Certificateholder for such periods in accordance with
generally accepted accounting principles. Investors should consult their own
accountants concerning the accounting treatment of their investment in Residual
Certificates.
BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Certificateholder is limited to the adjusted basis of the
Residual Certificate as of the close of the quarter (or time of disposition of
the Residual Certificate if earlier), determined without taking into account the
net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Certificateholder and will be decreased (but not
below zero), first, by a cash distribution from the REMIC Pool and, second, by
the amount of loss of the REMIC Pool reportable by the Residual
Certificateholder. Any loss that is disallowed on account of this limitation may
be carried over indefinitely with respect to the Residual Certificateholder as
to whom such loss was disallowed and may be used by such Residual
Certificateholder only to offset any income generated by the same REMIC Pool.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable income
of the related REMIC Pool. However, that taxable income will not include cash
received by the REMIC Pool that represents a recovery of the REMIC Pool's basis
in its assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Certificates over their life.
However, in view of the possible acceleration of the income of Residual
Certificateholders described above under 'Taxation of REMIC Income', the period
of time over which such issue price is effectively amortized may be longer than
the economic life of the Residual Certificates.
A Residual Certificate may have a negative value if the net present value
of anticipated tax liabilities exceeds the present value of anticipated cash
flows. The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Service may provide future guidance on the proper tax treatment
of payments made by a transferor of such a residual interest to induce the
transferee to acquire the interest, and Residual Certificateholders should
consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate is
greater that the corresponding portion of the REMIC Pool's basis in the Mortgage
Loans, the Residual Certificateholder will not recover a portion of such basis
until termination of the REMIC Pool unless future Treasury regulations
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provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The REMIC Regulations currently in effect do not so provide. See
'Treatment of Certain Items of REMIC Income and Expense--Market Discount' below
regarding the basis of Mortgage Loans to the REMIC Pool and 'Sale or Exchange of
a Residual Certificate' below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although the Depositor intends to compute REMIC income and expense in
accordance with the Code and applicable regulations, the authorities regarding
the determination of specific items of income and expense are subject to
differing interpretations. The Depositor makes no representation as to the
specific method that it will use for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Certificates, and
different methods could result in different timing of reporting of taxable
income or net loss to Residual Certificateholders or differences in capital gain
versus ordinary income.
Original Issue Discount. Generally, the REMIC Pool's deductions for
original issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under 'Taxation of
Regular Certificates-- Original Issue Discount' and '-- Variable Rate Regular
Certificates', without regard to the de minimis rule described therein.
Deferred Interest. Any Deferred Interest that accrues with respect to any
adjustable rate Mortgage Loans held by the REMIC Pool will constitute income to
the REMIC Pool and will be treated in a manner similar to the Deferred Interest
that accrues with respect to Regular Certificates as described above under
'Taxation of Regular Certificates--Deferred Interest'.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Loans if, in general, the basis of the REMIC Pool allocable
to such Mortgage Loans is exceeded by their unpaid principal balances. The REMIC
Pool's basis in such Mortgage Loans is generally the fair market value of the
Mortgage Loans immediately after the transfer thereof to the REMIC Pool. The
REMIC Regulations provide that such basis is equal in the aggregate to the issue
prices of all regular and residual interests in the REMIC Pool (or the fair
market value thereof at the Closing Date, in the case of a retained Class). In
respect of Mortgage Loans that have market discount to which Code Section 1276
applies, the accrued portion of such market discount would be recognized
currently as an item of ordinary income in a manner similar to original issue
discount. Market discount income generally should accrue in the manner described
above under 'Taxation of Regular Certificates--Market Discount'.
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
(or the fair market value of retained Classes) of the regular and residual
interests in the REMIC Pool immediately after the transfer thereof to the REMIC
Pool. In a manner analogous to the discussion above under 'Taxation of Regular
Certificates--Premium', a REMIC Pool that holds a Mortgage Loan as a capital
asset under Code Section 1221 may elect under Code Section 171 to amortize
premium on whole mortgage loans or mortgage loans underlying MBS that were
originated after September 27, 1985 or on Agency Securities, or Private
Mortgage-Backed Securities that are REMIC regular interests under the constant
yield method. Amortizable bond premium will be treated as an offset to interest
income on the Mortgage Loans, rather than as a separate deduction item. To the
extent that the mortgagors with respect to the Mortgage Loans are individuals,
Code Section 171 will not be available for premium on Mortgage Loans (including
underlying mortgage loans) originated on or prior to September 27, 1985. Premium
with respect to such Mortgage Loans may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
such premium pro rata among principal payments should be considered a reasonable
method; however, the Service may argue that such premium should be allocated in
a different manner, such as allocating such premium entirely to the final
payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
A portion or all of the REMIC taxable income includible in determining the
federal income tax liability of a Residual Certificateholder will be subject to
special treatment. That portion, referred to as the 'excess inclusion', is equal
to the excess of REMIC taxable income for the calendar quarter allocable to a
Residual Certificate over the daily accruals for such quarterly period of (i)
120% of the long-term applicable Federal rate that would have applied to the
Residual Certificate (if it were a debt instrument) on the Startup Day under
Code Section 1274(d), multiplied by (ii) the adjusted issue price of such
Residual Certificate at the beginning of such quarterly period. For this
purpose, the adjusted issue price of a Residual Certificate at the beginning of
a quarter is the issue price of the Residual Certificate, plus the amount of
such daily accruals of REMIC income described in this paragraph for all prior
quarters, decreased by any distributions made with respect to such Residual
Certificate prior to the beginning
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of such quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated as excess inclusions will be a larger portion of
such income as the adjusted issue price of the Residual Certificates diminishes.
The portion of a Residual Certificateholder's REMIC taxable income
consisting of the excess inclusions generally may not be offset by other
deductions, including net operating loss carryforwards, on such Residual
Certificateholder's return. However, net operating loss carryovers are
determined without regard to excess inclusion income. Further, if the Residual
Certificateholder is an organization subject to the tax on unrelated business
income imposed by Code Section 511, the Residual Certificateholder's excess
inclusions will be treated as unrelated business taxable income of such Residual
Certificateholder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under 'Tax-Related Restrictions on Transfer
of Residual Certificates--Foreign Investors'), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See 'Taxation of Certain Foreign
Investors--Residual Certificates' below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Certificate, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or a regulated investment company could not be
offset by net operating losses of its shareholders, would constitute unrelated
business taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
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 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 Residual Certificates continuously held by thrift institutions since
November 1, 1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Holder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL CERTIFICATES
Disqualified Organizations. If any legal or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value rate equals the applicable
Federal rate under Code Section 1274(d) as of the date of the transfer for a
term ending with the last calendar quarter in which excess inclusions are
expected to accrue. Such a tax generally would be imposed on the transferor of
the Residual Certificate, except that where such transfer is through an agent
(including a broker, nominee or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. The tax also may be waived by the Treasury Department if the
Disqualified Organization promptly disposes of the residual interest and the
transferor pays income tax at the highest corporate rate on the excess
inclusions for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a 'Pass-Through Entity' (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions on the Residual Certificate that are allocable
to the interest in the Pass-Through Entity during the period such interest is
held by such Disqualified Organization, and (ii) the highest marginal federal
corporate income tax rate. Such tax would be deductible from the ordinary gross
income of the Pass-Through Entity for the taxable year. The Pass-Through Entity
would not be liable for such tax if it has received an affidavit from such
record holder that it is not a Disqualified Organization or stating such
holder's taxpayer identification number and, during the period such person is
the record holder of the Residual Certificate, the Pass-Through Entity does not
have actual knowledge that such affidavit is false.
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For these purposes, (i) 'Disqualified Organization' means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) 'Pass-Through
Entity' means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide that no
legal or beneficial interest in a Residual Certificate may be transferred unless
(i) the proposed transferee provides to the transferor and the Trustee an
affidavit providing its taxpayer identification number and stating that such
transferee is the beneficial owner of the Residual Certificate, is not a
Disqualified Organization and is not purchasing such Residual Certificates on
behalf of a Disqualified Organization (i.e., as a broker, nominee or middleman
thereof), and (ii) the transferor provides a statement in writing to the
Depositor and the Trustee that it has no actual knowledge that such affidavit is
false. Moreover, the Agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Certificate with
respect to a series will bear a legend referring to such restrictions on
transfer, and each Residual Certificateholder will be deemed to have agreed, as
a condition of ownership thereof, to any amendments to the related Agreement
required under the Code or applicable Treasury regulations to effectuate the
foregoing restrictions. Information necessary to compute an applicable excise
tax must be furnished to the Service and to the requesting party within 60 days
of the request, and the Depositor or the Trustee may charge a fee for computing
and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a 'noneconomic residual
interest' (as defined below) to a Residual Certificateholder (other than a
Residual Certificateholder who is not a U.S. Person, as defined below under
'Foreign Investors') is disregarded for all federal income tax purposes if a
significant purpose of the transferor is to impede the assessment or collection
of tax. A residual interest in a REMIC (including a residual interest with a
positive value at issuance) is a 'noneconomic residual interest' unless, at the
time of the transfer, (i) the present value of the expected future distributions
on the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions and the present value rate are determined in the same manner as set
forth above under 'Disqualified Organizations'. The REMIC Regulations explain
that a significant purpose to impede the assessment or collection of tax exists
if the transferor, at the time of the transfer, either knew or should have known
that the transferee would be unwilling or unable to pay taxes due on its share
of the taxable income of the REMIC. A safe harbor is provided if (i) the
transferor conducted, at the time of the transfer, a reasonable investigation of
the financial condition of the transferee and found that the transferee
historically had paid its debts as they came due and found no significant
evidence to indicate that the transferee would not continue to pay its debts as
they came due in the future, and (ii) the transferee represents to the
transferor that it understands that, as the holder of the noneconomic residual
interest, the transferee may incur tax liabilities in excess of cash flows
generated by the interest and that the transferee intends to pay taxes
associated with holding the residual interest as they become due. The Agreement
with respect to each series of Certificates will require the transferee of a
Residual Certificate to certify to the matters in the preceding sentence as part
of the affidavit described above under the heading 'Disqualified Organizations'.
The transferor must have no actual knowledge or reason to know that such
statements are false.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Certificate that has 'tax avoidance potential' to a 'foreign person'
will be disregarded for all federal tax purposes. This rule appears intended to
apply to a transferee who is not a 'U.S. Person' (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Certificate is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding
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tax liability to be paid. If the non-U.S. Person transfers the Residual
Certificate back to a U.S. Person, the transfer will be disregarded and the
foreign transferor will continue to be treated as the owner unless arrangements
are made so that the transfer does not have the effect of allowing the
transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any person
that is not a U.S. Person or may describe the circumstances and restrictions
pursuant to which such a transfer may be made. The term 'U.S. Person' means a
citizen or resident of the United States, a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, an estate that is subject to U.S. federal income
tax regardless of the source of its income or a trust if (A) for taxable years
beginning after December 31, 1996 (or for taxable years ending after August 20,
1996, if the trustee has made an applicable election), a court within the United
States is able to exercise primary supervision over the administration of such
trust, and one or more United States fiduciaries have the authority to control
all substantial decisions of such trust, or (B) for all other taxable years,
such trust is subject to United States federal income tax regardless of the
source of its income.
SALE OR EXCHANGE OF A RESIDUAL CERTIFICATE
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under 'Taxation
of Residual Certificates--Basis and Losses') of such Residual Certificateholder
in such Residual Certificate at the time of the sale or exchange. In addition to
reporting the taxable income of the REMIC Pool, a Residual Certificateholder
will have taxable income to the extent that any cash distribution to it from the
REMIC Pool exceeds such adjusted basis on that Distribution Date. Such income
will be treated as gain from the sale or exchange of the Residual Certificate.
It is possible that the termination of the REMIC Pool may be treated as a sale
or exchange of a Residual Certificateholder's Residual Certificate, in which
case, if the Residual Certificateholder has an adjusted basis in such Residual
Certificateholder's Residual Certificate remaining when its interest in the
REMIC Pool terminates, and if such Residual Certificateholder holds such
Residual Certificate as a capital asset under Code Section 1221, then such
Residual Certificateholder will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Any gain on the sale of a Residual Certificate will be treated as ordinary
income (i) if a Residual Certificate is held as part of a 'conversion
transaction' as defined in Code Section 1258(c), up to the amount of interest
that would have accrued on the Residual Certificateholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate in
effect at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as a part of such transaction or (ii) in the case of a
non-corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates. In addition, gain or loss recognized from the sale of a
Residual Certificate by certain banks or thrift institutions will be treated as
ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Certificates where the
seller of the Residual Certificate, during the period beginning six months
before the sale or disposition of the Residual Certificate and ending six months
after such sale or disposition, acquires (or enters into any other transaction
that results in the application of Section 1091) any residual interest in any
REMIC or any interest in a 'taxable mortgage pool' (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate.
MARK TO MARKET REGULATIONS
Prospective purchasers of the Residual Certificates should also be aware
that on January 3, 1995, the Service released proposed regulations (the
'Proposed Mark to Market Regulations') under Code Section 475 relating to the
requirement that a securities dealer mark to market securities held for sale to
customers. This mark-to-market requirement applies to all securities of a
dealer, except to the extent that the dealer has specifically identified a
security as held for investment. The Proposed Mark to Market Regulations provide
that, for purposes of this mark-to-market requirement, a Residual Certificate is
not treated as a security and thus may not be marked to market. The Proposed
Mark to Market Regulations would apply to all Residual Certificates acquired on
or after January 4, 1995.
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TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Certificateholders, but rather
will be taxed directly to the REMIC Pool at a 100% rate. Prohibited transactions
generally include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell REMIC Pool property to prevent a default on Regular
Certificates as a result of a default on qualified mortgages or to facilitate a
clean-up call (generally, an optional termination to save administrative costs
when no more than a small percentage of the Certificates is outstanding). The
REMIC Regulations indicate that the modification of a Mortgage Loan generally
will not be treated as a disposition if it is occasioned by a default or
reasonably foreseeable default, an assumption of the Mortgage Loan, the waiver
of a due-on-sale or due-on-encumbrance clause or the conversion of an interest
rate by a mortgagor pursuant to the terms of a convertible adjustable rate
Mortgage Loan.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Certificateholder, (iii) in the nature of a guarantee, (iv) made to
facilitate a qualified liquidation or clean-up call and (v) as otherwise
permitted in Treasury regulations yet to be issued.
NET INCOME FROM FORECLOSURE PROPERTY
The REMIC Pool will be subject to federal income tax at the highest
corporate rate on 'net income from foreclosure property', determined by
reference to the rules applicable to real estate investment trusts. Generally,
property acquired by deed in lieu of foreclosure would be treated as
'foreclosure property' for a period of two years, with possible extensions. Net
income from foreclosure property generally means gain from the sale of a
foreclosure property that is inventory property and gross income from
foreclosure property other than qualifying rents and other qualifying income for
a real estate investment trust.
It is not anticipated that the REMIC Pool will receive income or
contributions subject to tax under the preceding three paragraphs, except as
described in the applicable Prospectus Supplement with respect to net income
from foreclosure property on a commercial or multifamily residential property
that secured a Mortgage Loan. In addition, unless otherwise disclosed in the
applicable Prospectus Supplement, it is not anticipated that any material state
income or franchise tax will be imposed on a REMIC Pool.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool 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 Pool'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 the date of the adoption of the plan of liquidation, the REMIC Pool
will not be subject to the prohibited transaction rules on the sale of its
assets, provided that the REMIC Pool credits or distributes in liquidation all
of the sale proceeds plus its cash (other than amounts retained to meet claims)
to holders of Regular Certificates and Residual Certificateholders within the
90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Certificateholder for an
entire taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the
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Service of any adjustments to, among other things, items of REMIC income, gain,
loss, deduction or credit in a unified administrative proceeding. The Residual
Certificateholder owning the largest percentage interest in the Residual
Certificates will be obligated to act as 'tax matters person', as defined in
applicable Treasury regulations, with respect to the REMIC Pool. Each Residual
Certificateholder will be deemed, by acceptance of such Residual Certificates,
to have agreed (i) to the appointment of the tax matters person as provided in
the preceding sentence and (ii) to the irrevocable designation of the Master
Servicer as agent for performing the functions of the tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the aggregate, do not exceed
2% of the investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $100,000 ($50,000 in the case of a married
individual filing a separate return) (subject to adjustments for inflation) or
(ii) 80% of the amount of itemized deductions otherwise allowable for such year.
In the case of a REMIC Pool, such deductions may include deductions under Code
Section 212 for the Servicer Fee and all administrative and other expenses
relating to the REMIC Pool, any similar fees paid to the issuer or guarantor of
the Agency Certificates or the Private Mortgage-Backed Securities or Contracts,
or any similar expenses allocated to the REMIC Pool with respect to a regular
interest it holds in another REMIC. Such investors who hold REMIC Certificates
either directly or indirectly through certain pass-through entities may have
their pro rata share of such expenses allocated to them as additional gross
income, but may be subject to such limitation on deductions. In addition, such
expenses are not deductible at all for purposes of computing the alternative
minimum tax, and may cause such investors to be subject to significant
additional tax liability. Temporary Treasury regulations provide that the
additional gross income and corresponding amount of expenses generally are to be
allocated entirely to the holders of Residual Certificates in the case of a
REMIC Pool that would not qualify as a fixed investment trust in the absence of
a REMIC election. However, such additional gross income and limitation on
deductions will apply to the allocable portion of such expenses to holders of
Regular Certificates, as well as holders of Residual Certificates, where such
Regular Certificates are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. In general, such allocable portion
will be determined based on the ratio that a REMIC Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
temporary Treasury regulations) may have taxable income in excess of the
interest income at the pass-through rate on Regular Certificates that are issued
in a single Class or otherwise consistently with fixed investment trust status
or in excess of cash distributions for the related period on Residual
Certificates. Unless otherwise indicated in the applicable Prospectus
Supplement, all such expenses will be allocable to the Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR CERTIFICATES
Interest, including original issue discount, distributable to Regular
Certificateholders who are non-resident aliens, foreign corporations, or other
Non-U.S Persons (as defined below), will be considered 'portfolio interest' and,
therefore, generally will not be subject to 30% United States withholding tax,
provided that such Non-U.S. Person (i) is not a '10-percent shareholder' within
the meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and (ii) provides the Trustee, or the
person who would otherwise be required to withhold tax from such distributions
under Code Section 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial owner and stating, among other
things, that the beneficial owner of the Regular Certificate is a Non-U.S.
Person. If such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Regular Certificate is effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Person. In the latter case, such Non-U.S. Person will be subject
to United States federal income tax at regular rates. Prepayment Premiums
distributable to Regular Certificateholders who are Non-U.S. Persons may be
subject to 30% United States withholding tax. Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning a Regular Certificate. The term 'Non-U.S. Person' means any
person who is not a U.S. Person.
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RESIDUAL CERTIFICATES
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Certificateholders who are Non-U.S. Persons are treated as interest
for purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual
Certificateholders may qualify as 'portfolio interest', subject to the
conditions described in 'Regular Certificates' above, but only to the extent
that (i) the Mortgage Loans (including mortgage loans underlying MBS) were
issued after July 18, 1984 and (ii) the Trust Fund or segregated pool of assets
therein (as to which a separate REMIC election will be made), to which the
Residual Certificate relates, consists of obligations issued in 'registered
form' within the meaning of Code Section 163(f)(1). Generally, whole mortgage
loans will not be, but MBS and regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, a Residual
Certificateholder will not be entitled to any exemption from the 30% withholding
tax (or lower treaty rate) to the extent of that portion of REMIC taxable income
that constitutes an 'excess inclusion'. See 'Taxation of Residual
Certificates--Limitations on Offset or Exemption of REMIC Income'. If the
amounts paid to Residual Certificateholders who are Non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not
apply. Instead, the amounts paid to such Non-U.S. Persons will be subject to
United States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
'Tax-Related Restrictions on Transfer of Residual Certificates--Foreign
Investors' above concerning the disregard of certain transfers having 'tax
avoidance potential'. Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
'backup' withholding tax under Code Section 3406 of 31% on 'reportable payments'
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Certificateholder
complies with certain reporting and/or certification procedures, including the
provision of its taxpayer identification number to the Trustee, its agent or the
broker who effected the sale of the Regular Certificate, or such
Certificateholder is otherwise an exempt recipient under applicable provisions
of the Code. Any amounts to be withheld from distribution on the Regular
Certificates would be refunded by the Service or allowed as a credit against the
Regular Certificateholder's federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of any market discount on the Regular
Certificates will be made annually to the Service and to individuals, estates,
non-exempt and non-charitable trusts, and partnerships who are either holders of
record of Regular Certificates or beneficial owners who own Regular Certificates
through a broker or middleman as nominee. All brokers, nominees and all other
non-exempt holders of record of Regular Certificates (including corporations,
non-calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift institutions
and charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Service
Publication 938 with respect to a particular series of Regular Certificates.
Holders through nominees must request such information from the nominee.
The Service's Form 1066 has an accompanying Schedule Q, Quarterly Notice to
Residual Interest Holders of REMIC Taxable Income or Net Loss Allocation.
Treasury regulations require that Schedule Q be furnished by the REMIC Pool to
each Residual Certificateholder by the end of the month following the close of
each calendar quarter (41 days after the end of a quarter under proposed
Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Service concerning Code Section 67
expenses (see 'Limitations on Deduction of Certain Expenses' above) allocable to
such holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Certificateholders, furnished annually to holders of
Regular Certificates, and filed annually with the Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under 'Status of REMIC Certificates'.
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FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES
AS TO WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
GENERAL
In the event that no election is made to treat a Trust Fund (or a
segregated pool of assets therein) with respect to a series of Certificates that
are not designated as 'Stripped Certificates', as described below, as a REMIC
(Certificates of such a series hereinafter referred to as 'Standard
Certificates'), the Trust Fund will be classified as a grantor trust under
subpart E, Part 1 of subchapter J of the Code and not as an association taxable
as a corporation or a 'taxable mortgage pool' within the meaning of Code Section
7701(i). Where there is no fixed retained yield with respect to the Mortgage
Loans underlying the Standard Certificates, the holder of each such Standard
Certificate (a 'Standard Certificateholder') in such series will be treated as
the owner of a pro rata undivided interest in the ordinary income and corpus
portions of the Trust Fund represented by its Standard Certificate and will be
considered the beneficial owner of a pro rata undivided interest in each of the
Mortgage Loans, subject to the discussion below under 'Recharacterization of
Servicing Fees'. Accordingly, the holder of a Standard Certificate of a
particular series will be required to report on its federal income tax return
its pro rata share of the entire income from the Mortgage Loans represented by
its Standard Certificate, including interest at the coupon rate on such Mortgage
Loans, original issue discount (if any), prepayment fees, assumption fees, and
late payment charges received by the Master Servicer, in accordance with such
Standard Certificateholder's method of accounting. A Standard Certificateholder
generally will be able to deduct its share of the Servicing Fee and all
administrative and other expenses of the Trust Fund in accordance with its
method of accounting, provided that such amounts are reasonable compensation for
services rendered to that Trust Fund. However, investors who are individuals,
estates or trusts who own Standard Certificates, either directly or indirectly
through certain pass-through entities, will be subject to limitation with
respect to certain itemized deductions described in Code Section 67, including
deductions under Code Section 212 for the Servicing Fee and all such
administrative and other expenses of the Trust Fund, to the extent that such
deductions, in the aggregate, do not exceed two percent of an investor's
adjusted gross income. In addition, Code Section 68 provides that itemized
deductions otherwise allowable for a taxable year of an individual taxpayer will
be reduced by the lesser of (i) 3% of the excess, if any, of adjusted gross
income over $100,000 ($50,000 in the case of a married individual filing a
separate return) (subject to adjustments for inflation), or (ii) 80% of the
amount of itemized deductions otherwise allowable for such year. As a result,
such investors holding Standard Certificates, directly or indirectly through a
pass-through entity, may have aggregate taxable income in excess of the
aggregate amount of cash received on such Standard Certificates with respect to
interest at the pass-through rate on such Standard Certificates. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Standard
Certificates or where the Servicing Fee is in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
'stripped bond' and 'stripped coupon' rules of the Code, as described below
under 'Stripped Certificates' and 'Recharacterization of Servicing Fees',
respectively.
TAX STATUS
Standard Certificates will have the following status for federal income tax
purposes:
1. A Standard Certificate owned by a 'domestic building and loan
association' within the meaning of Code Section 7701(a)(19) will be
considered to represent 'loans secured by an interest in real property'
within the meaning of Code Section 7701(a)(19)(C)(v), provided that the
real property securing the Mortgage Loans represented by that Standard
Certificate is of the type described in such section of the Code.
2. A Standard Certificate owned by a real estate investment trust will
be considered to represent 'real estate assets' within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust
Fund consist of qualified assets, and interest income on such assets will
be considered 'interest on obligations secured by mortgages on real
property' to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Certificate owned by a REMIC will be considered to
represent an 'obligation. . . which is principally secured by an interest
in real property' within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related Trust Fund consist of 'qualified
mortgages' within the meaning of Code Section 860G(a)(3).
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PREMIUM AND DISCOUNT
Standard Certificateholders are advised to consult with their tax advisors
as to the federal income tax treatment of premium and discount arising either
upon initial acquisition of Standard Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Certificate will be determined generally as described above under 'Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates-- Premium'.
Original Issue Discount. The original issue discount rules will be
applicable to a Standard Certificateholder's interest in those Mortgage Loans as
to which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount income are applicable to
mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgages in an amount greater than a statutory de
minimis exception, including a payment of points currently deductible by the
borrower under applicable Code provisions or, under certain circumstances, by
the presence of 'teaser rates' on the Mortgage Loans.
Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Standard Certificateholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Loans, no original issue discount attributable
to the difference between the issue price and the original principal amount of
such Mortgage Loans (i.e., points) will be includible by such holder.
Market Discount. Standard Certificateholders also will be subject to the
market discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under 'Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Market Discount', except that the ratable accrual methods
described therein will not apply. Rather, the holder will accrue market discount
pro rata over the life of the Mortgage Loans, unless the constant yield method
is elected. Unless indicated otherwise in the applicable Prospectus Supplement,
no prepayment assumption will be assumed for purposes of such accrual.
RECHARACTERIZATION OF SERVICING FEES
If the Servicing Fee paid to the Master Servicer were deemed to exceed
reasonable servicing compensation, the amount of such excess would represent
neither income nor a deduction to Certificateholders. In this regard, there are
no authoritative guidelines for federal income tax purposes as to either the
maximum amount of servicing compensation that may be considered reasonable in
the context of this or similar transactions or whether, in the case of the
Standard Certificate, the reasonableness of servicing compensation should be
determined on a weighted average or loan-by-loan basis. If a loan-by-loan basis
is appropriate, the likelihood that such amount would exceed reasonable
servicing compensation as to some of the Mortgage Loans would be increased.
Service guidance indicates that a servicing fee in excess of reasonable
compensation ('excess servicing') will cause the Mortgage Loans to be treated
under the 'stripped bond' rules. Such guidance provides safe harbors for
servicing deemed to be reasonable and requires taxpayers to demonstrate that the
value of servicing fees in excess of such amounts is not greater than the value
of the services provided.
Accordingly, if the Service's approach is upheld, a servicer who receives a
servicing fee in excess of such amounts would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Loans.
Under the rules of Code Section 1286, the separation of ownership of the right
to receive some or all of the interest payments on an obligation from the right
to receive some or all of the principal payments on the obligation would result
in treatment of such Mortgage Loans as 'stripped coupons' and 'stripped bonds'.
Subject to the de minimis rule discussed below under '--Stripped Certificates',
each stripped bond or stripped coupon could be considered for this purpose as a
non-interest bearing obligation issued on the date of issue of the Standard
Certificates, and the original issue discount rules of the Code would apply to
the holder thereof. While Standard Certificateholders would still be treated as
owners of beneficial interests in a grantor trust for federal income tax
purposes, the
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corpus of such trust could be viewed as excluding the portion of the Mortgage
Loans the ownership of which is attributed to the Master Servicer, or as
including such portion as a second class of equitable interest. Applicable
Treasury regulations treat such an arrangement as a fixed investment trust,
since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust assets and the existence of
multiple classes of ownership interests is incidental to that purpose. In
general, such a recharacterization should not have any significant effect upon
the timing or amount of income reported by a Standard Certificateholder, except
that the income reported by a cash method holder may be slightly accelerated.
See 'Stripped Certificates' below for a further description of the federal
income tax treatment of stripped bonds and stripped coupons.
SALE OR EXCHANGE OF STANDARD CERTIFICATES
Upon sale or exchange of a Standard Certificate, a Standard
Certificateholder will recognize gain or loss equal to the difference between
the amount realized on the sale and its aggregate adjusted basis in the Mortgage
Loans and the other assets represented by the Standard Certificate. In general,
the aggregate adjusted basis will equal the Standard Certificateholder's cost
for the Standard Certificate, increased by the amount of any income previously
reported with respect to the Standard Certificate and decreased by the amount of
any losses previously reported with respect to the Standard Certificate and the
amount of any distributions received thereon. Except as provided above with
respect to market discount on any Mortgage Loans, and except for certain
financial institutions subject to the provisions of Code Section 582(c), any
such gain or loss would be capital gain or loss if the Standard Certificate was
held as a capital asset. However, gain on the sale of a Standard Certificate
will be treated as ordinary income (i) if a Standard Certificate is held as part
of a 'conversion transaction' as defined in Code Section 1258(c), up to the
amount of interest that would have accrued on the Standard Certificateholder's
net investment in the conversion transaction at 120% of the appropriate
applicable Federal rate in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as a part of such transaction
or (ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. Pursuant to the Revenue
Reconciliation Act of 1993, capital gains of certain non-corporate taxpayers are
subject to a lower maximum tax rate than ordinary income of such taxpayers. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
STRIPPED CERTIFICATES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of 'stripped bonds' with respect to principal payments and 'stripped
coupons' with respect to interest payments. For purposes of this discussion,
Certificates that are subject to those rules will be referred to as 'Stripped
Certificates'.
The Certificates will be subject to those rules if (i) the Depositor or any
of its affiliates retains (for its own account or for purposes of resale), in
the form of fixed retained yield or otherwise, an ownership interest in a
portion of the payments on the Mortgage Loans, (ii) the Master Servicer is
treated as having an ownership interest in the Mortgage Loans to the extent it
is paid (or retains) servicing compensation in an amount greater than reasonable
consideration for servicing the Mortgage Loans (see 'Standard
Certificates--Recharacterization of Servicing Fees' above) and (iii)
Certificates are issued in two or more classes or subclasses representing the
right to non-pro-rata percentages of the interest and principal payments on the
Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
'stripped bonds' with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or 'stripped coupons' with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Certificate's allocable share of the
servicing fees paid to the Master Servicer, to the extent that such fees
represent reasonable compensation for services rendered. See discussion above
under 'Standard Certificates--Recharacterization of Servicing Fees'. Although
not free from doubt, for purposes of reporting to Stripped Certificateholders,
the servicing fees will be allocated to the Stripped Certificates in proportion
to the respective entitlements to distributions of each class (or subclass) of
Stripped Certificates for the related period or periods. The holder of a
Stripped Certificate generally will be entitled to a deduction each year in
respect of the servicing fees, as described above under 'Standard
Certificates--General', subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon as an
obligation issued at an original issue discount on the date that such stripped
interest is purchased. Although the treatment of Stripped Certificates for
federal income tax purposes is not clear in certain respects at this time,
particularly where such Stripped Certificates are issued with respect to a
Mortgage Pool containing
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variable-rate Mortgage Loans, the Depositor has been advised by counsel that (i)
the Trust Fund will be treated as a grantor trust under subpart E, Part 1 of
subchapter J of the Code and not as an association taxable as a corporation or a
'taxable mortgage pool' within the meaning of Code Section 7701(i), and (ii)
each Stripped Certificate should be treated as a single installment obligation
for purposes of calculating original issue discount and gain or loss on
disposition. This treatment is based on the interrelationship of Code Section
1286, Code Sections 1272 through 1275, and the OID Regulations. While under Code
Section 1286 computations with respect to Stripped Certificates arguably should
be made in one of the ways described below under 'Taxation of Stripped
Certificates--Possible Alternative Characterizations,' the OID Regulations
state, in general, that two or more debt instruments issued by a single issuer
to a single investor in a single transaction should be treated as a single debt
instrument for original issue discount purposes. The Agreement requires that the
Trustee make and report all computations described below using this aggregate
approach, unless substantial legal authority requires otherwise.
Furthermore, Treasury regulations issued December 28, 1992 provide for the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is purchased for purposes of calculating any original issue discount. In
addition, under these regulations, a Stripped Certificate that represents a
right to payments of both interest and principal may be viewed either as issued
with original issue discount or market discount (as described below), at a de
minimis original issue discount, or, presumably, at a premium. This treatment
suggests that the interest component of such a Stripped Certificate would be
treated as qualified stated interest under the OID Regulations. Further, these
final regulations provide that the purchaser of such a Stripped Certificate will
be required to account for any discount as market discount rather than original
issue discount if either (i) the initial discount with respect to the Stripped
Certificate was treated as zero under the de minimis rule, or (ii) no more than
100 basis points in excess of reasonable servicing is stripped off the related
Mortgage Loans. Any such market discount would be reportable as described under
'Federal Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Market Discount,' without regard to the de minimis rule therein,
assuming that a prepayment assumption is employed in such computation.
STATUS OF STRIPPED CERTIFICATES
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that Stripped Certificates owned by applicable holders
should be considered to represent 'real estate assets' within the meaning of
Code Section 856(c)(5)(A), 'obligation[s] principally secured by an interest in
real property' within the meaning of Code Section 860G(a)(3)(A), and 'loans
secured by an interest in real property' within the meaning of Code Section
7701(a)(19)(C)(v), and interest (including original issue discount) income
attributable to Stripped Certificates should be considered to represent
'interest on obligations secured by mortgages on real property' within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buy-Down Mortgage Loans is uncertain. See
'Standard Certificates--Tax Status' above.
TAXATION OF STRIPPED CERTIFICATES
Original Issue Discount. Except as described above under 'General', each
Stripped Certificate will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Certificate must be included in ordinary income as it accrues, in
accordance with a constant interest method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the 1986
Act, the amount of original issue discount required to be included in the income
of a holder of a Stripped Certificate (referred to in this discussion as a
'Stripped Certificateholder') in any taxable year likely will be computed
generally as described above under 'Federal Income Tax Consequences for REMIC
Certificates--Taxation of Regular Certificates--Original Issue Discount' and
'--Variable Rate Regular Certificates'. However, with the apparent exception of
a Stripped Certificate issued with de minimis original issue discount as
described above under 'General', the issue price of a Stripped Certificate will
be the purchase price paid by each holder thereof, and the stated redemption
price at maturity will include the aggregate amount of the payments to be made
on the Stripped Certificate to such Stripped Certificateholder, presumably under
the Prepayment Assumption.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the amount
of such original issue discount will be either increased or decreased depending
on the relative interests in principal and interest on each Mortgage Loan
represented by such Stripped Certificateholder's Stripped Certificate. While the
matter is not free from doubt, the holder of a Stripped Certificate should be
entitled in the year that it becomes certain (assuming no further prepayments)
that the holder will not
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recover a portion of its adjusted basis in such Stripped Certificate to
recognize an ordinary loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Certificates will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are 'contingent' within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Certificates. However, if final regulations dealing with contingent
interest with respect to the Stripped Certificates apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Certificates as ordinary income. Investors
should consult their tax advisors regarding the appropriate tax treatment of
Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under 'Federal Income Tax Consequences for REMIC Certificates--Taxation of
Regular Certificates--Sale or Exchange of Regular Certificates'. To the extent
that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Certificates, such subsequent purchaser will be
required for federal income tax purposes to accrue and report such excess as if
it were original issue discount in the manner described above. It is not clear
for this purpose whether the assumed prepayment rate that is to be used in the
case of a Stripped Certificateholder other than an original Stripped
Certificateholder should be the Prepayment Assumption or a new rate based on the
circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an investor
purchases more than one class of Stripped Certificates, it is currently unclear
whether for federal income tax purposes such classes of Stripped Certificates
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterizations. The characterizations of the
Stripped Certificates discussed above are not the only possible interpretations
of the applicable Code provisions. For example, the Stripped Certificateholder
may be treated as the owner of (i) one installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to principal
on each Mortgage Loan and a second installment obligation consisting of such
Stripped Certificate's pro rata share of the payments attributable to interest
on each Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there
are scheduled payments of principal and/or interest on each Mortgage Loan or
(iii) a separate installment obligation for each Mortgage Loan, representing the
Stripped Certificate's pro rata share of payments of principal and/or interest
to be made with respect thereto. Alternatively, the holder of one or more
classes of Stripped Certificates may be treated as the owner of a pro rata
fractional undivided interest in each Mortgage Loan to the extent that such
Stripped Certificate, or classes of Stripped Certificates in the aggregate,
represent the same pro rata portion of principal and interest on each such
Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Final regulations issued on December 28, 1992 regarding original
issue discount on stripped obligations make the foregoing interpretations less
likely to be applicable. The preamble to those regulations states that they are
premised on the assumption that an aggregation approach is appropriate for
determining whether original issue discount on a stripped bond or stripped
coupon is de minimis, and solicits comments on appropriate rules for aggregating
stripped bonds and stripped coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped
Certificates and the resultant differing treatment of income recognition,
Stripped Certificateholders are urged to consult their own tax advisors
regarding the proper treatment of Stripped Certificates for federal income tax
purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Standard Certificateholder or Stripped Certificateholder
at any time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such information
will include the amount of original issue discount accrued on Certificates held
by persons other than Certificateholders exempted from the reporting
requirements. The amounts required to be reported by the Trustee may not be
equal to the proper amount of original issue discount required to be reported as
taxable income by a Certificateholder, other than an original Certificateholder
that purchased at the issue price. In particular, in the case of Stripped
Certificates, unless provided otherwise in the applicable Prospectus Supplement,
such reporting will be based upon a representative initial offering price of
each class of Stripped Certificates. The Trustee will also file such original
issue discount information with the Service. If a Certificateholder fails to
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supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under 'Federal Income Tax Consequences for REMIC
Certificates--Backup Withholding'.
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Standard Certificateholder or Stripped
Certificateholder on original issue discount recognized by the Standard
Certificateholder or Stripped Certificateholders on the sale or exchange of such
a Certificate also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
'portfolio interest' and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under 'Federal
Income Tax Consequences for REMIC Certificates--Taxation of Certain Foreign
Investors--Regular Certificates'.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
and Section 4975 of the Code impose certain requirements on employee benefit
plans and on certain other retirement plans and arrangements, including
individual retirement accounts, Keogh plans, collective investment funds,
insurance company separate accounts, and some insurance company general accounts
in which such plans, accounts or arrangements are invested, which are subject to
ERISA and the Code (all of which are hereinafter referred to for purposes of
this discussion as 'Plans') and on persons who are fiduciaries with respect to
such Plans. The following is a general discussion of such requirements, and
certain applicable exceptions to and administrative exemptions from such
requirements.
Before purchasing any Offered Certificates, a Plan fiduciary should consult
with its counsel and determine whether there exists any prohibition to such
purchase under the requirements of ERISA, whether any prohibited transaction
class-exemption or any individual administrative prohibited transaction
exemption (as described below) applies, including whether the appropriate
conditions set forth therein would be met, or whether any statutory prohibited
transaction exemption is applicable, and further should consult the applicable
Prospectus Supplement relating to such Series of Certificates.
CERTAIN REQUIREMENTS UNDER ERISA
GENERAL
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate a Plan fiduciary should determine whether to do so is permitted
under the governing Plan instruments and is appropriate for the Plan in view of
its overall investment policy and the composition and diversification of its
portfolio. A Plan fiduciary should especially consider the ERISA requirement of
investment prudence and the sensitivity of the return on the Certificates to the
rate of principal repayments (including voluntary prepayments by the mortgagors
and involuntary liquidations) on the Mortgage Loans, as discussed in 'Yield
Considerations' herein.
PARTIES IN INTEREST/DISQUALIFIED PERSONS
Other provisions of ERISA (and corresponding provisions of the Code)
prohibit certain transactions involving the assets of a Plan and persons who
have certain specified relationships to the Plan (so-called 'parties in
interest' within the meaning of ERISA or 'disqualified persons' within the
meaning of the Code, including, in both cases, Plan fiduciaries). The Depositor,
Master Servicer or the Trustee or certain affiliates thereof, might be
considered or might become 'parties in interest' or 'disqualified persons' with
respect to a Plan. If so, the acquisition or holding of Certificates by or on
behalf of such Plan could be considered to give rise to a 'prohibited
transaction' within the meaning of ERISA and the Code unless an administrative
exemption described
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below or some other exemption is available. Special caution should be exercised
before the assets of a Plan are used to purchase a Certificate if, with respect
to such assets, the Depositor, the Master Servicer or the Trustee or an
affiliate thereof, either: (a) has investment discretion with respect to the
investment of such assets of such Plan; or (b) has authority or responsibility
to give, or regularly gives investment advice with respect to such assets for a
fee and pursuant to an agreement or understanding that such advice will serve as
a primary basis for investment decisions with respect to such assets and that
such advice will be based on the particular investment needs of the Plan.
DELEGATION OF FIDUCIARY DUTY
Further, if the assets included in a Trust Fund were deemed to constitute
Plan assets, it is possible that a Plan's investment in the Certificates might
be deemed to constitute a delegation, under ERISA, of the duty to manage Plan
assets by the fiduciary deciding to invest in the Certificates, and certain
transactions involved in the operation of the Trust Fund might be deemed to
constitute prohibited transactions under ERISA and the Code. Neither ERISA nor
the Code define the term 'plan assets.'
The U.S. Department of Labor (the 'Department') has published final
regulations (the 'Regulations') concerning whether or not a Plan's assets would
be deemed to include an interest in the underlying assets of an entity (such as
a Trust Fund) for purposes of the reporting and disclosure and general fiduciary
responsibility provisions of ERISA, as well as for the prohibited transaction
provisions of ERISA and the Code, if the Plan acquires an 'equity interest'
(such as a Certificate) in such an entity.
Certain exceptions are provided in the Regulations whereby an investing
Plan's assets would be deemed merely to include its interest in the Certificates
instead of being deemed to include an interest in the assets of a Trust Fund.
However, the Depositor cannot predict in advance, nor can there be any
continuing assurance, whether such exceptions may be met, because of the factual
nature of certain of the rules set forth in the Regulations. For example, one of
the exceptions in the Regulations states that the underlying assets of an entity
will not be considered 'plan assets' if less than 25% of the value of all
classes of equity interests are held by 'benefit plan investors,' which are
defined as Plans, IRAs, and employee benefit plans not subject to ERISA (for
example, governmental plans). However, this exception is tested immediately
after each acquisition of an equity interest in the entity whether upon initial
issuance or in the secondary market.
ADMINISTRATIVE EXEMPTIONS
Several underwriters of mortgage-backed securities have applied for and
obtained individual administrative ERISA prohibited transaction exemptions which
can only apply to the purchase and holding of mortgage-backed securities which,
among other conditions, are sold in an offering with respect to which such
underwriter serves as the sole or a managing underwriter, or as a selling or
placement agent. If such an exemption might be applicable to a Series of
Certificates, the related Prospectus Supplement will refer to such possibility,
as well as provide a summary of the conditions to the applicability.
GOVERNMENTAL PLANS
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such a governmental plan may be subject to
a federal, state, or local law, which is, to a material extent, similar to the
provisions of ERISA or Code Section 4975 ('Similar Law'). A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under Similar Law.
UNRELATED BUSINESS TAXABLE INCOME; RESIDUAL CERTIFICATES
The purchase of a Residual Certificate by any employee benefit plan
qualified under Code Section 401(a) and exempt from taxation under Code Section
501(a), including most varieties of ERISA Plans, may give rise to 'unrelated
business taxable income' as described in Code Sections 511-515 and 860E.
Further, prior to the purchase of Residual Certificates, a prospective
transferee may be required to provide an affidavit to a transferor that it is
not, nor is it purchasing a Residual Certificate on behalf of, a 'Disqualified
Organization,' which term as defined above includes certain tax-exempt entities
not subject to Code Section 511 including certain governmental plans, as
discussed above under the caption 'Federal Income Tax Consequences-- Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual
Certificates--Disqualified Organizations.'
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
investors who are Plan fiduciaries consult with their counsel regarding the
consequences under ERISA of their acquisition and ownership of Certificates.
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The sale of Certificates to an employee benefit plan is in no respect a
representation by the Depositor or the Underwriter that this investment meets
all relevant legal requirements with respect to investments by plans generally
or by any particular plan, or that this investment is appropriate for plans
generally or for any particular plan.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Certificates will not constitute 'mortgage related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA'). The appropriate
characterization of those Certificates not qualifying as 'mortgage related
securities' ('Non-SMMEA Certificates') under various legal investment
restrictions, and thus the ability of investors subject to these restrictions to
purchase such Certificates, may be subject to significant interpretive
uncertainties. Accordingly, investors whose investment authority is subject to
legal restrictions should consult their own legal advisors to determine whether
and to what extent the Non-SMMEA Certificates constitute legal investments for
them.
Generally, only Classes of Certificates that (i) are rated in one of the
two highest rating categories by one or more Rating Agencies and (ii) are part
of a Series evidencing interests in a Trust Fund consisting of loans secured by,
among other things, a single parcel of real estate upon which is located a
dwelling or mixed residential and commercial structure, such as certain
Multifamily Loans, originated by certain types of Originators as specified in
SMMEA, will be 'mortgage related securities' for purposes of SMMEA. As 'mortgage
related securities,' such Classes will constitute legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including, but not limited to, state-chartered savings banks,
commercial banks, savings and loan associations and insurance companies, as well
as trustees and state government employee retirement systems) created pursuant
to or existing under the laws of the United States or of any state (including
the District of Columbia and Puerto Rico) whose authorized investments are
subject to state regulation to the same extent that, under applicable law,
obligations issued by or guaranteed as to principal and interest by the United
States or any agency or instrumentality thereof constitute legal investments for
such entities. Pursuant to SMMEA, a number of states enacted legislation, on or
before the October 3, 1991 cutoff for such enactments, limiting to varying
extents the ability of certain entities (in particular, insurance companies) to
invest in 'mortgage related securities,' in most cases by requiring the affected
investors to rely solely upon existing state law, and not SMMEA. Accordingly,
the investors affected by such legislation will be authorized to invest in
Certificates qualifying as 'mortgage related securities' only to the extent
provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in mortgage related
securities without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase such securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12 U.S.C.
Section 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, federal credit
unions should review NCUA Letter to Credit Unions No. 96, as modified by Letter
to Credit Unions No. 108, which includes guidelines to assist federal credit
unions in making investment decisions for mortgage related securities. The NCUA
has adopted rules, codified as 12 C.F.R. SectionSection 703.5(f)-(k), which
prohibit federal credit unions from investing in certain mortgage related
securities (including securities such as certain Series, Classes or subclasses
of Certificates), except under limited circumstances.
All depository institutions considering an investment in the Certificates
should review the 'Supervisory Policy Statement on Securities Activities' dated
January 28, 1992, as revised April 15, 1994 (the 'Policy Statement') of the
Federal Financial Institutions Examination Council. The Policy Statement, which
has been adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Comptroller of the Currency and the
Office of Thrift Supervision, and by the NCUA (with certain modifications),
prohibits depository institutions from investing in certain 'high-risk mortgage
securities' (including securities such as certain Series, Classes or subclasses
of the Certificates), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any
Certificates, as certain Series, Classes or subclasses may be deemed unsuitable
investments, or may otherwise be restricted, under such rules, policies or
guidelines (in certain instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, 'prudent investor' provisions,
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percentage-of-assets limits, provisions which may restrict or prohibit
investment in securities which are not 'interest bearing' or 'income paying,'
and, with regard to any Certificates issued in book-entry form, provisions which
may restrict or prohibit investments in securities which are issued in
book-entry form.
Except as to the status of certain Classes of Certificates as 'mortgage
related securities,' no representation is made as to the proper characterization
of the Certificates for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Certificates under applicable legal investment
restrictions. The uncertainties described above (and any unfavorable future
determinations concerning legal investment or financial institution regulatory
characteristics of the Certificates) may adversely affect the liquidity of the
Certificates.
Investors should consult their own legal advisors in determining whether
and to what extent the Certificates constitute legal investments for such
investors.
METHOD OF DISTRIBUTION
The Certificates offered hereby and by the Prospectus Supplement will be
offered in Series through one or more of the various methods described below.
The Prospectus Supplement for each Series of Certificates will describe the
method of offering being utilized for that Series, the public offering or
purchase price of the Certificates and the net proceeds to the Depositor from
such sale. If so specified in the Prospectus Supplement, one or more Classes of
Certificates may be offered for sale only outside of the United States and only
to non-U.S. persons and foreign branches of U.S. banks (or in such other manner
and to such other persons as may be specified therein) and will not be offered
hereby.
The 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 a particular Series of Certificates may be made
through any combination of these methods:
1. Negotiated firm commitment underwriting and public reoffering by
underwriters;
2. Placements by the Depositor to institutional investors through
affiliated or unaffiliated dealers or agents; and
3. Direct placements by the Depositor to institutional investors.
If underwriters are used in a sale of any Certificates, such Certificates
will be acquired by the underwriters for their own account and may be resold.
The distribution of the Certificates may be effected from time to time in one or
more transactions, including negotiated transactions, at a fixed public offering
price or at varying prices to be determined at the time of sale or at the time
of commitment therefor. If so specified in the related Prospectus Supplement,
the Certificates will be distributed in a firm commitment underwriting, subject
to the terms and conditions of the underwriting agreement, by Nomura Securities
International, Inc. ('Nomura') acting as underwriter with other underwriters, if
any, named therein. Asset Securitization Corporation, the Depositor, is a
wholly-owned subsidiary of Nomura Asset Capital Corporation ('Nomura Capital').
Nomura and Nomura Capital are both wholly-owned subsidiaries of Nomura Holding
America Inc. See 'The Depositor' herein.
In connection with the sale of the Certificates, underwriters, dealers or
placement agents may receive compensation from the Depositor or from purchasers
of the Certificates in the form of discounts, concessions or commissions.
Underwriters, agents and dealers participating in the distributions of the
Certificates may be deemed to be underwriters in connection with such
Certificates, and any discounts or commissions received by them from the Issuer
and any profit on the resale of the Certificates by them may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended (the '1933 Act').
Any sales by the Depositor directly to investors, whether using an
affiliated or other placement agent or otherwise, may be made from time to time
in one or more transactions, including negotiated transactions, at a fixed
offering price or at varying prices to be determined at the time of sale or the
time of commitment therefor. The Prospectus Supplement with respect to any
Series of Certificates offered other than through underwriters will contain
information regarding the nature of such offering and any agreements to be
entered into between the Depositor and dealers or purchasers of the Certificates
for such Series.
The underwriting agreement pertaining to a sale of a series of Certificates
will provide that the obligations of Nomura and any underwriters will be subject
to certain conditions precedent, that the underwriters will be obligated to
purchase all such Certificates if any are purchased, and that the Depositor will
indemnify Nomura and any underwriters against certain civil liabilities,
including liabilities under the 1933 Act, or will contribute to payments Nomura
and any underwriters may be required to make in respect thereof.
79
<PAGE>
In the ordinary course of business, Nomura and the Depositor may engage in
various securities and financing transactions, including repurchase agreements
to provide interim financing of the Depositor's mortgage loans pending the sale
of such mortgage loans or interests therein, including the Certificates.
Purchasers of Certificates, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be 'underwriters' within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Certificates. Holders of Certificates should consult with their legal
advisors in this regard prior to any such reoffer or sale.
If and to the extent required by applicable law or regulation, this
Prospectus will be used by Nomura in connection with offers and sales related to
market-making transactions in Certificates previously offered hereunder in
transactions in which Nomura acts as principal. Nomura may also act as agent in
such transactions. Sales may be made at negotiated prices determined at the time
of sale.
LEGAL MATTERS
The legality of the Certificates of each Series, including certain federal
income tax consequences with respect thereto, will be passed upon for the
Depositor by Cadwalader, Wickersham & Taft, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Certificates
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Certificates.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates that
they shall have been rated not lower than investment grade, that is, in one of
the four highest categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage loans
and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood of
principal prepayments by mortgagors or of the degree by which such prepayments
might differ from those originally anticipated. As a result, certificateholders
might suffer a lower than anticipated yield, and, in addition, holders of
stripped interest certificates in extreme cases might fail to recoup their
initial investments.
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.
80
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH TERM IS
TERM DEFINED IN THE PROSPECTUS
- -------------------------------------------------- -------------------------
<S> <C>
1933 Act.......................................... 79
1986 Act.......................................... 57
Accrual Certificates.............................. 9
Accrued Certificate Interest...................... 26
ADA............................................... 54
ARM Loans......................................... 18
Bankruptcy Code................................... 49
BIF............................................... 32
Book-Entry Certificates........................... 25
Cash Flow Agreement............................... 1
Cede.............................................. 2
CERCLA............................................ 14
Certificate Balance............................... 8
Certificateholders................................ 2
Certificates...................................... 7
Code.............................................. 10
Collection Account................................ 8
Collection Period................................. 25
Commercial Loans.................................. 16
Commercial Properties............................. 7
Commission........................................ 2
Cooperatives...................................... 16
Covered Trust..................................... 13
CPR............................................... 22
Credit Support.................................... 1
Crime Control Act................................. 53
Cut-off Date...................................... 9
Debt Service Coverage Ratio....................... 16
Definitive Certificates........................... 25
Department........................................ 77
Determination Date................................ 25
Disqualified Organization......................... 65
Distribution Date................................. 9
DTC............................................... 2
Equity Participations............................. 19
ERISA............................................. 10
Exchange Act...................................... 2
FDIC.............................................. 32
FHA............................................... 18
HUD............................................... 18
Indirect Participants............................. 29
Installment Contracts............................. 7
Insurance Proceeds................................ 33
L/C Bank.......................................... 41
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH TERM IS
TERM DEFINED IN THE PROSPECTUS
- -------------------------------------------------- -------------------------
<S> <C>
Liquidation Proceeds.............................. 33
Loan-to-Value Ratio............................... 17
Lock-out Date..................................... 19
Lock-out Period................................... 19
Master Servicer................................... 7
MBS............................................... 1
MBS Agreement..................................... 19
MBS Issuer........................................ 19
MBS Servicer...................................... 19
MBS Trustee....................................... 19
Mortgage Asset Seller............................. 16
Mortgage Assets................................... 1
Mortgage Loans.................................... 1
Mortgage Rate..................................... 7
Mortgaged Properties.............................. 7
Mortgages......................................... 16
Multifamily Loans................................. 16
Multifamily Properties............................ 7
NCUA.............................................. 53
Net Leases........................................ 17
Net Operating Income.............................. 16
Nomura............................................ 79
Nomura Capital.................................... 79
Nonrecoverable Advance............................ 27
Non-SMMEA Certificates............................ 78
Offered Certificates.............................. 1
OID Regulations................................... 57
Originator........................................ 16
Participants...................................... 29
Pass-Through Entity............................... 65
Pass-Through Rate................................. 8
Permitted Investments............................. 32
Plans............................................. 10
Policy Statement.................................. 78
Prepayment Assumption............................. 58
Prepayment Premium................................ 19
Random Lot Certificates........................... 57
Rating Agency..................................... 10
Record Date....................................... 25
Regular Certificateholder......................... 57
Regular Certificates.............................. 54
Regulations....................................... 77
Related Proceeds.................................. 27
Relief Act........................................ 53
REMIC............................................. 10
REMIC Certificates................................ 54
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH TERM IS
TERM DEFINED IN THE PROSPECTUS
- -------------------------------------------------- -------------------------
<S> <C>
REMIC Pool........................................ 54
REMIC Regulations................................. 54
REO Account....................................... 33
Residual Certificateholders....................... 62
Residual Certificates............................. 54
RICO.............................................. 53
SAIF.............................................. 32
Senior Certificates............................... 8
Service........................................... 56
Similar Law....................................... 77
SMMEA............................................. 78
SPA............................................... 22
Special Servicer.................................. 7
Standard Certificateholder........................ 71
Standard Certificates............................. 71
Stripped Certificateholder........................ 74
Stripped Certificates............................. 71
Stripped Interest Certificates.................... 9
Stripped Principal Certificates................... 9
Subordinate Certificates.......................... 9
Sub-Servicer...................................... 34
Sub-Servicing Agreement........................... 34
Title V........................................... 52
Title VIII........................................ 53
Treasury.......................................... 54
Trust Assets...................................... 2
Trust Fund........................................ 1
Trustee........................................... 7
UCC............................................... 43
U.S. Person....................................... 67
Value............................................. 17
Voting Rights..................................... 15
Warranting Party.................................. 31
</TABLE>
83
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE
AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE SECURITIES OFFERED HEREBY NOR AN OFFER OF SUCH SECURITIES TO ANY PERSON IN
ANY STATE OR OTHER JURISDICTION IN WHICH SUCH AN OFFER WOULD BE UNLAWFUL. THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AT ANY TIME DOES NOT
IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE;
HOWEVER, IF ANY MATERIAL CHANGE OCCURS WHILE THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS ARE REQUIRED BY LAW TO BE DELIVERED, THIS PROSPECTUS SUPPLEMENT AND
THE PROSPECTUS WILL BE AMENDED OR SUPPLEMENTED ACCORDINGLY.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement.................. S-7
Risk Factors and Other Special Considerations..... S-32
Description of the Mortgage Pool.................. S-52
Description of the Mortgage Loans and Mortgaged
Properties...................................... S-74
Description of the Offered Certificates........... S-129
The Interest Rate Floor Agreements................ S-147
The Floor Counterparty............................ S-150
Prepayment and Yield Considerations............... S-152
The Pooling and Servicing Agreement............... S-166
Use of Proceeds................................... S-190
Certain Federal Income Tax Consequences........... S-190
ERISA Considerations.............................. S-193
Legal Investment.................................. S-195
Method of Distribution............................ S-196
Experts........................................... S-196
Legal Matters..................................... S-197
Rating............................................ S-197
Index of Significant Definitions.................. S-198
Financial Information.............................Exhibit A
Global Clearance Settlement and Tax
Documentation Procedures........................Exhibit B
Mortgaged Property Characteristics..................Annex A
PROSPECTUS
Prospectus Supplement............................. 2
Available Information............................. 2
Incorporation of Certain Information by
Reference....................................... 2
Table of Contents................................. 3
Summary of Prospectus............................. 7
Special Considerations............................ 11
Description of the Trust Funds.................... 16
Use of Proceeds................................... 20
Yield Considerations.............................. 20
The Depositor..................................... 23
Description of the Certificates................... 23
Description of the Agreements..................... 30
Description of Credit Support..................... 40
Certain Legal Aspects of the Mortgage Loans....... 43
Federal Income Tax Consequences................... 54
ERISA Considerations.............................. 76
Legal Investment.................................. 78
Method of Distribution............................ 79
Legal Matters..................................... 80
Financial Information............................. 80
Rating............................................ 80
Index of Principal Definition..................... 81
</TABLE>
$859,388,670
(APPROXIMATE)
ASSET SECURITIZATION
CORPORATION, DEPOSITOR
COMMERCIAL MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES 1996-MD VI
----------------------------------
PROSPECTUS SUPPLEMENT
----------------------------------
NOMURA SECURITIES
INTERNATIONAL, INC.
DECEMBER , 1996
================================================================================
