<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration File No.: 33-99502
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 ANY SUCH STATE.
PRELIMINARY PROSPECTUS SUPPLEMENT, DATED MARCH 14, 1997 SUBJECT TO COMPLETION
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH , 1997)
$[ ] (APPROXIMATE)
ASSET SECURITIZATION CORPORATION, DEPOSITOR
NOMURA ASSET CAPITAL CORPORATION, ORIGINATOR
COMMERCIAL MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1997-MD VII
The Commercial Mortgage Pass-Through Certificates, Series 1997-MD VII (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 seven mortgage loans, with original terms to maturity of not more
than 30 years (the "Mortgage Loans"), secured by first liens on 71 commercial
properties (the "Mortgaged Properties"). The Mortgaged Properties consist of
hotels, office buildings, retail properties and a retail design trade center.
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 fifteen classes, designated as the Class
A-1A Certificates, Class A-1B Certificates, Class PS-1 Certificates, Class
CS-1 Certificates, Class A-1C Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates, Class A-5 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 PS-1, Class CS-1, Class A-1C, Class A-2, Class A-3, Class A-4 and
Class A-5 Certificates (collectively, the "Offered Certificates") are offered
hereby; the 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-28 AND "SPECIAL CONSIDERATIONS" IN THE PROSPECTUS COMMENCING ON PAGE
11.
(cover page continued)
-----------------
<TABLE>
<CAPTION>
INITIAL CLASS
CERTIFICATE BALANCE OR PASS-THROUGH
NOTIONAL BALANCE (1) RATE DESCRIPTION (4)
-------------------------- ---------------- -----------------
<S> <C> <C> <C>
Class A-1A ........... $[ ] % Fixed
Class A-1B ........... [ ] Fixed
Class A-1C ........... [ ] Fixed
Class PS-1(2)(3) .... [ ] WAC/IO
Class CS-1(2)(3) .... [ ] WAC/IO
Class A-2(2) ......... [ ] WAC
Class A-3(2) ......... [ ] WAC
Class A-4(2) ......... [ ] WAC
Class A-5(2) ......... [ ] WAC
</TABLE>
- ------------
(1) Approximate, subject to adjustment as described herein.
(2) The Pass-Through Rates shown on the table above for the Class PS-1,
Class CS-1, Class A-2, Class A-3, Class A-4 and Class A-5
Certificates are the rates for the Distribution Date occurring in
April 1997. The Pass-Through Rates for such classes for each
subsequent Distribution Date will be calculated as provided herein.
See "Description of the Offered Certificates -- Distributions --
Payment Priorities" herein.
(3) The Class PS-1 and Class CS-1 Certificates will not have Certificate
Balances and will not be entitled to receive distributions of
principal. Interest will accrue on such classes of Certificates at
the Pass-Through Rates thereof on the Notional Balances thereof
(subject to adjustment in certain limited circumstances described
herein with respect to the Class PS-1 Certificates). The Notional
Balance of the Class PS-1 Certificates is initially $[ ], which is
equal to the aggregate principal balance of the Mortgage Loans as of
the Cut-off Date. The Notional Balance of the Class CS-1 Certificates
is initially $[ ], which is equal to the initial Certificate Balance
of the Class A-1A Certificates. See "Description of the Offered
Certificates -- General" herein.
(4) "WAC" means weighted average coupon and "IO" means interest only.
Both terms are descriptions of the type of pass-through rates borne
by the related classes.
-----------------
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 March
27, 1997 (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 March 27, 1997.
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 April 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
will 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 (subject to adjustment in certain limited
circumstances with respect to the Class PS-1 Certificates) (the "Pass-Through
Rate") and the aggregate principal balance (the "Certificate Balance") or
notional balance (the "Notional Balance"), as applicable, of such class
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 PS-1 AND CLASS CS-1
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 HAVE THE EFFECT OF REDUCING 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 PS-1 AND CLASS CS-1 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 ENTITLED TO PRINCIPAL
DISTRIBUTIONS, 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 UP TO AN
AMOUNT EQUAL TO THE REMAINING PRINCIPAL BALANCE THEREOF. 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.
Pacific Mutual Life Insurance Company, a California corporation, 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.
Elections will be made to treat designated portions of the Trust Fund,
exclusive of the Reserve Accounts, Lock Box Accounts, Cash Collateral
Accounts, the Excess Interest, the Excess Interest Distribution Account, the
Default Interest and the Default Interest Distribution Account (each as
defined herein) (such portions of the Trust Fund, the "Trust REMICs"), and
the Trust REMICs, in the opinion of counsel, 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 PS-1, Class CS-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class B-1 and Class B-1H Certificates will constitute "regular
interests" in the Upper-Tier REMIC. 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 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 Net 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 a 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 MARCH , 1997, 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 March , 1997 and
the Prospectus dated March , 1997, 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.
<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
TOTAL SUPPORT CERTIFICATE SUMMARY
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CLASS PS-1 $[ ] [(AAA/AAA/Aaa/n/a)]
(Notional)
-------------------------------------------------------------------------------
[ ]% [ ]% CLASS A-1A $[ ] [(AAA/AAA/Aaa/AAA)] CLASS CS-1
$[ ]
(Notional)
[(AAA/AAA/Aaa/n/a)]
-------------------------------------------------------------------------------
[ ]% [ ]% CLASS A-1B $[ ] [(AAA/AAA/Aaa/AAA)]
-------------------------------------------------------------------------------
[ ]% [ ]% CLASS A-1C $[ ] [(n/a/n/a/Aaa/AAA)]
-------------------------------------------------------------------------------
[ ]% [ ]% CLASS A-2 $[ ] [(AA/AA/Aa/AA)]
-------------------------------------------------------------------------------
[ ]% [ ]% CLASS A-3 $[ ] [(A/A/A/A)]
-------------------------------------------------------------------------------
[ ]% [ ]% CLASS A-4 $[ ] [(BBB/BBB/Baa/BBB)]
-------------------------------------------------------------------------------
[ ]% [ ]% CLASS A-5 $[ ] [(BBB-/BBB-/Baa3/BBB-)]
-------------------------------------------------------------------------------
[ ]% n/a CLASS B-1 AND $[ ] [(BB/BB/Ba/BB)]
CLASS B-1H (approx.)
-------------------------------------------------------------------------------
</TABLE>
Offered Certificates Rating Agencies: [(DCR/Fitch/Moody's/S&P)]
Private Certificates V-1, V-2, R And LR classes are not listed
S-3
<PAGE>
CERTIFICATE SUMMARY
<TABLE>
<CAPTION>
INITIAL
AGGREGATE
CERTIFICATE PASS-THROUGH
PRINCIPAL OR RATE AS AVG.
NOTIONAL % OF OF CUT-OFF LIFE* PRINCIPAL
CLASS RATINGS AMOUNT TOTAL DESCRIPTION DATE (YRS.) WINDOW*
- ------------ ---------------------- -------------- ------- ----------------------- -------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Grade Certificates
---------------------------------------------------------------------------------------------------------------------------
A-1A [AAA/DCR, Fitch, S&P; $ % Fixed Rate %
Aaa/Moody's]
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
A-1B [AAA/DCR, Fitch, S&P; $ % Fixed Rate %
Aaa/Moody's]
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
A-1C [AAA/S&P; $ % Fixed Rate %
Aaa/Moody's]
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
A-2 [AA/DCR, Fitch, S&P; $ % Weighted Average Coupon %
Aa/Moody's]
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
A-3 [A/DCR, Fitch, S&P; $ % Weighted Average Coupon %
A/Moody's]
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
A-4 [BBB/DCR, Fitch, S&P; $ % Weighted Average Coupon %
Baa/Moody's]
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
A-5 [BBB-/DCR, Fitch, S&P; $ % Weighted Average Coupon %
Baa3/Moody's]
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
A-X [AAA/DCR, Fitch; $ n/a Interest Only: Weighted % ** n/a
Aaa/Moody's] Average Coupon
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
CS-1 [AAA/DCR, Fitch; $ n/a Interest Only: Weighted % ** n/a
Aaa/Moody's] Average Coupon
----------- ---------------------- ------------- ------- ----------------------- -------------- ------- -----------
Non-Investment Grade Certificates***
---------------------------------------------------------------------------------------------------------------------------
B-1 and [BB/DCR, Fitch, S&P; $ %
Class B-1H Ba/Moody's] (approx.)
----------- ---------------------- ------------- -------
</TABLE>
Classes V-1, V-2, R and LR are not represented in this table.
* Based on Scenario 1. See "Prepayment and Yield Considerations" for a
description of Scenario 1.
** Calculated on a cash flow basis. Average life data is for illustrative
purposes only, as the Class PS-1 and CS-1 Certificates are not entitled
to any distributions of principal and do not have average lives.
*** Not offered hereby.
MORTGAGE LOAN SUMMARY
<TABLE>
ANTICIPATED
CUT-OFF REPAYMENT CUT-OFF
DATE DATE AMORTIZATION MORTGAGE ARD DATE
LOAN # PROPERTIES BALANCE ("ARD") (MONTHS) RATE DSCR(2) LTV(2) LTV(2)
- ------------------------ -------------- ------------- ------------- -------------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fairfield Inn Pool 50 164,825,657 1/11/07 240 8.400 1.62 43.56% 60.75%
----------------------- -------------- ------------- ------------- -------------- ---------- ------- -------- ---------
101 Hudson Street 1 134,505,878 1/11/07 240(1) 7.916 1.64 40.20% 56.99%
----------------------- -------------- ------------- ------------- -------------- ---------- ------- -------- -------
M&H Retail Pool 6 58,300,969 1/11/07 360 7.500 1.84 41.86% 47.32%
----------------------- -------------- ------------- ------------- -------------- ---------- ------- -------- --------
Innkeepers USA Hotel
Pool II 8 42,000,000 3/11/09 264 8.150 2.13 34.65% 48.84%
----------------------- -------------- ------------- ------------- -------------- ---------- ------- -------- --------
Design Center of
the Americas 1 39,899,849 1/11/07 300 7.470 2.22 33.45% 41.13%
----------------------- -------------- ------------- ------------- -------------- ---------- ------- -------- --------
G&L Medical Office
II Pool 4 34,801,294 9/11/06 300 8.492 1.50 57.14% 68.01%
----------------------- -------------- ------------- ------------- -------------- ---------- ------- -------- --------
Insurance Company of
the West 1 25,234,505 2/11/07 240 7.506 n/a n/a n/a
----------------------- -------------- ------------- ------------- -------------- ---------- ------- -------- --------
TOTAL/WTD. AVER. 71 499,568,152 265 8.031 1.70 41.76% 55.86%
----------------------- -------------- ------------- ------------- -------------- ---------- ------- -------- --------
</TABLE>
<PAGE>
The terms "Anticipated Repayment Date," "DSCR," "ARD 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."
(1) The 240-month amortization period for the Hudson Loan assumes that the
Hudson Borrower makes all payments in respect of Base Additional
Amortization Amounts. See "Description of the Mortgage Loans and
Mortgaged Properties -- 101 Hudson Street Loan and Property -- Payment
Terms."
(2) The ICW Loan is not included in the determination of the Weighted Average
DSCR, Weighted Average ARD LTV and Weighted Average Cut-off Date LTV.
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-28
The Mortgage Loans........................................................................... S-28
The Certificates............................................................................. S-40
Description of the Mortgage Pool............................................................... S-44
General...................................................................................... S-44
Security for the Mortgage Loans ............................................................. S-45
Certain Characteristics of the Mortgage Loans ............................................... S-45
Underwriting Standards ...................................................................... S-62
Additional Information ...................................................................... S-63
Description of the Mortgage Loans and Mortgaged Properties..................................... S-64
The Fairfield Inn Pool Loan and Properties................................................... S-64
The 101 Hudson Street Loan and Property ..................................................... S-74
The M&H Retail Pool Loan and Properties ..................................................... S-81
The Innkeepers Pool Loan and Properties ..................................................... S-89
The Design Center of the Americas Loan and Property ......................................... S-98
The G&L Medical Office II Pool Loan and Properties .......................................... S-103
The Insurance Company of the West Loan and Properties ....................................... S-111
Description of the Offered Certificates........................................................ S-117
General...................................................................................... S-117
Distributions ............................................................................... S-117
Subordination ............................................................................... S-127
Appraisal Reductions ........................................................................ S-128
Delivery, Form and Denomination ............................................................. S-128
Book-Entry Registration ..................................................................... S-129
Definitive Certificates ..................................................................... S-131
Transfer Restrictions ....................................................................... S-132
Payment and Yield Considerations............................................................... S-133
Yield........................................................................................ S-133
Yield on the Class PS-1 and CS-1 Certificates ............................................... S-134
Rated Final Distribution Date ............................................................... S-136
Weighted Average Life of Offered Certificates ............................................... S-136
The Pooling and Servicing Agreement............................................................ S-145
General...................................................................................... S-145
Assignment of the Mortgage Loans ............................................................ S-145
Representations and Warranties; Repurchase .................................................. S-145
Servicing of the Mortgage Loans; Collection of Payments ..................................... S-150
Advances .................................................................................... S-151
Accounts .................................................................................... S-152
Withdrawals from the Collection Account ..................................................... S-154
Successor Manager ........................................................................... S-154
Enforcement of "Due-on-Sale" and "Due-on-Encumbrance" Clauses ............................... S-155
Inspections ................................................................................. S-155
Evidence as to Compliance ................................................................... S-155
Certain Matters Regarding the Depositor, the Servicer and the Special Servicer .............. S-156
Events of Default ........................................................................... S-157
Rights Upon Event of Default ................................................................ S-157
Amendment ................................................................................... S-158
Realization Upon Mortgage Loans; Modification ............................................... S-159
Optional Termination; Optional Mortgage Loan Purchase ....................................... S-162
The Trustee ................................................................................. S-163
Duties of the Trustee ....................................................................... S-164
S-5
<PAGE>
PAGE
---------------
The Fiscal Agent ............................................................................ S-164
Duties of the Fiscal Agent .................................................................. S-165
The Servicer ................................................................................ S-165
Servicing Compensation and Payment of Expenses .............................................. S-165
Special Servicing ........................................................................... S-166
Servicer and Special Servicer Permitted to Buy Certificates ................................. S-167
Reports to Certificateholders ............................................................... S-167
Use of Proceeds................................................................................ S-168
Certain Federal Income Tax Consequences........................................................ S-169
Taxation of Offered Certificates............................................................. S-169
ERISA Considerations........................................................................... S-171
Legal Investment............................................................................... S-172
Method of Distribution......................................................................... S-173
Experts........................................................................................ S-173
Legal Matters.................................................................................. S-173
Rating......................................................................................... S-174
Index of Significant Definitions...............................................................
Financial Information
Fairfield Inn by Marriott Limited Partnership................................................. Exhibit A-1
Hudson Street Owners Limited Partnership I and Hudson Street Owners Limited Partnership II ... Exhibit A-2
Global Clearance, Settlement and Tax Documentation Procedures.................................. Exhibit B
Schedule of Weighted Average Net Mortgage Pass-Through Rates................................... Exhibit C
Mortgaged Property Characteristics............................................................. Annex A
INDEX OF TABLES
Mortgage Loan Characteristics ................................................................ S-50
Cut-off Date Allocated Loan Balance .......................................................... S-51
Property Type ................................................................................ S-51
Principal Balances as of the Cut-off Date .................................................... S-52
Range of Loan-to-Value Ratios as of the Cut-off Date ......................................... S-52
Range of Loan-to-Value Ratios as of the Anticipated Repayment Date ........................... S-52
Remaining Term to Anticipated Repayment Date as of the Cut-off Date, in Months ............... S-63
Remaining Prepayment Lockout periods as of the Cut-off Date, in Months ....................... S-63
Mortgaged Properties by Property Type ........................................................ S-54
Mortgaged Properties by State ................................................................ S-55
Hotel Properties by State .................................................................... S-56
Hotel Property Occupancy and Average Daily Rate .............................................. S-57
Annual Retail Lease Expiration--M&H Retail Pool Loan ......................................... S-59
Annual Office Lease Expiration--Hudson Property .............................................. S-60
Annual Office Lease Expiration--G&L Loan ..................................................... S-60
Annual Retail Lease Expiration--DCOTA Loan ................................................... S-61
</TABLE>
S-6
<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.
TITLE OF CERTIFICATES ......... Asset Securitization Corporation, Commercial
Mortgage Pass-Through Certificates, Series
1997-MD VII (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 ...................... Pacific Mutual Life Insurance Company, a
California corporation (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 the parent of the Depositor
and an affiliate of the Underwriter.
CUT-OFF DATE .................. March 27, 1997.
CLOSING DATE .................. On or about March 27, 1997.
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 April 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 Date, for all
purposes other than receipt of the
distribution on such Distribution Date, the
Record Date is the Closing Date.
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<PAGE>
INTEREST ACCRUAL PERIOD ....... With respect to any Distribution Date other
than the Distribution Date occurring in
April 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 April 1997 is
the period commencing on and including the
Closing Date to and including April 10, 1997
and is assumed to consist of [ ] days. Each
Interest Accrual Period other than the
Interest Accrual Period with respect to the
Distribution Date occurring in April 1997 is
assumed to consist of 30 days.
SCHEDULED FINAL DISTRIBUTION
DATE ......................... As to each class of Offered Certificates,
the Distribution Date in January 2027, 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,
the Distribution Date in January 2030, the
Distribution Date occurring three years
after the latest maturity date of any
Mortgage Loan.
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, if the 11th day is not a
business day, the next 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 $50,000 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.
THE MORTGAGE POOL ............. The "Mortgage Pool" will consist of seven
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 Mortgaged Properties"
herein. The Mortgage Loans will be acquired
by the Depositor on or before the Closing
Date. In connection with its acquisition of
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<PAGE>
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:
<TABLE>
<CAPTION>
<S> <C>
Aggregate Principal Balance (as of the Cut-off Date) ..... $499,568,152
Lowest Mortgage Loan Principal Balance (as of the Cut-off
Date).................................................... $ 25,234,505
Highest Mortgage Loan Principal Balance (as of the
Cut-off Date)............................................ $164,825,657
Average Mortgage Loan Principal Balance (as of the
Cut-off Date)............................................ $ 71,366,879
Range of Term to Maturity (as of date of origination) .... 240 to 360 months
Weighted Average Term to Maturity (as of date of
origination). ........................................... 279 months
Range of Remaining Term to Anticipated Repayment Date (as
of the Cut-off Date)..................................... 114 to 144 months
Weighted Average Remaining Term to Anticipated Repayment
Date (as of the Cut-off Date)............................ 120 months
Range of Interest Rate ("Mortgage Rate") per annum ...... 7.47% to 8.492%
Weighted Average Mortgage Rate (as of the Cut-off Date) .. 8.031%
Range of Loan-to-Value ("LTV") Ratio (as of the Cut-off
Date).................................................... 41.13% to 68.01%
Weighted Average LTV Ratio (as of the Cut-off Date) ...... 55.86%
Range of Debt Service Coverage Ratio (as of the Cut-off
Date).................................................... 1.50 to 2.22
Weighted Average Debt Service Coverage Ratio (as of the
Cut-off Date)............................................ 1.70
</TABLE>
Each of the Mortgage Loans substantially
fully amortizes over its respective term to
maturity.
DESCRIPTION OF THE MORTGAGE LOANS
AND PROPERTIES
A. THE FAIRFIELD INN POOL LOAN
AND PROPERTIES ............. The "Fairfield Inn Pool Loan" had a
principal balance at origination of
$165,400,000 and has a principal balance as
of the Cut-off Date of $164,825,657 and is
secured by fifty mortgages (the "Fairfield
Inn Mortgages") encumbering 50 hotel
properties (the "Fairfield Inn Properties")
located in 16 states. The Fairfield Inn
Mortgages are cross-collateralized with each
other (e.g. each Fairfield Inn Mortgage
secures the full principal balance of the
Fairfield Inn Pool Loan) and
cross-defaulted. The borrower under the
Fairfield Inn Pool Loan is Fairfield Inn by
Marriott Limited Partnership (the "Fairfield
Inn Borrower"). The Fairfield Inn Pool Loan
is evidenced by a Note that bears interest
at a fixed rate per annum equal to 8.40%
(the "Fairfield Inn Current Interest Rate")
through and including January 10, 2007. On
and after January 11, 2007 (the "Fairfield
Inn Anticipated Repayment Date"), the Note
bears interest at a fixed rate per annum,
adjusted annually (as in effect for any such
annual period, the "Fairfield Inn Revised
Interest Rate") equal to the greater of (i)
the Fairfield Inn
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<PAGE>
Current Interest Rate plus 2.00% or (ii) the
yield as of January 11, 2007 or such annual
adjustment date, as the case may be,
calculated by linear interpolation of the
yields on U.S. Treasury Constant Maturities
with terms (one longer and one shorter) most
nearly approximating those of non-callable
U.S. Treasury obligations having maturities
as close as possible to January 11, 2017
plus 2.00%. All interest accrued at the
excess of the Fairfield Inn Revised Interest
Rate over the Fairfield Inn Current Interest
Rate will be deferred and will not be paid
until after the balance of the loan has been
reduced to zero. Amounts so deferred will
bear interest at the Fairfield Inn Revised
Interest Rate. Interest on the Fairfield Inn
Pool Loan is calculated based on the actual
number of days elapsed and a 360-day year.
The Fairfield Inn Pool Loan is scheduled to
mature on January 11, 2017 (the "Fairfield
Inn Maturity Date"), but may be prepaid
without payment of a yield maintenance
premium on and after the Fairfield Inn
Anticipated Repayment Date. Commencing on
March 11, 1997, the Fairfield Inn Pool Loan
requires 240 constant monthly payments of
principal and interest of $1,424,928.44 (the
"Fairfield Inn Monthly Debt Service
Payment") (based on a 240-month amortization
schedule and the Fairfield Inn Current
Interest Rate). Payment of the balance of
the principal, if any, together with all
accrued and unpaid interest is required on
the Fairfield Inn Maturity Date.
Additionally, commencing on the first
payment date after the Fairfield Inn
Anticipated Repayment Date, the Fairfield
Inn Pool Loan requires that all Fairfield
Inn Excess Cash Flow (as defined below under
"Description of the Mortgage Loans and
Mortgaged Properties -- The Fairfield Inn
Pool Loan and Properties -- The Loan
--Payment Terms") be applied toward the
reduction of the principal balance of the
loan. The scheduled principal balance of the
Fairfield Inn Pool Loan as of the Fairfield
Inn Anticipated Repayment Date is
approximately $118,178,860.
The Fairfield Inn Pool Properties consist of
50 limited service hotels operated as
Fairfield Inn by Marriott hotels under
management by Fairfield FMC Corporation, a
wholly owned subsidiary of Marriott
International, Inc. The properties contain
in the aggregate 6,672 guestrooms, with the
individual Fairfield Inn Properties ranging
from 120 guestrooms to 135 guestrooms, and
averaging 133 guestrooms per Fairfield Inn
Property. All of the Fairfield Inn
Properties were built between 1987 and 1991.
The average occupancy rate of the hotels for
the year ended approximately December 31,
1996 ranged from 59% to 86%, with a weighted
average of 77%. The ADRs for the year ended
approximately December 31, 1996 for the
Fairfield Inn Properties ranged from
approximately $41 to $58, with a weighted
average of approximately $50. The appraisals
performed from October to November, 1996
determined an aggregate value of
$271,300,000 for all of the Fairfield Inn
Properties held as a portfolio.
B. THE 101 HUDSON STREET LOAN
AND AND PROPERTY .......... The 101 Hudson Street Loan (the "Hudson
Loan") had a principal balance at
origination of $135,000,000 and has a
principal balance as of the Cut-off Date of
approximately $134,505,878 and is secured by
a Mortgage (the "Hudson Mortgage")
encumbering a single commercial office
building located at 101 Hudson Street,
Jersey City, New Jersey. The borrowers under
the Hudson Loan are 101 Hudson Street
Associates ("Street"), which is the fee
owner of the land (the "Hudson Land") making
up the Hudson Property (as defined below);
101 Hudson Urban Renewal Associates
("Urban"), which leased the Hudson Land from
Street as the lessee under a ground lease
and constructed and owns the improvements
(the "Hudson Improvements," and,
collectively with the Hudson
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<PAGE>
Land, the "Hudson Property") on the Hudson
Land; and 101 Hudson Leasing Associates
("Leasing"), which leased the Hudson
Improvements from Urban as the lessee under
a building lease, and operates the Hudson
Property (Street, Urban and Leasing are
referred to collectively as the "Hudson
Borrower"). The Hudson Loan is evidenced by
a Note that bears interest at a fixed rate
per annum equal to 7.916% (the "Hudson
Interest Rate"). Interest on the Hudson Loan
is calculated on the basis of the actual
number of days elapsed and a 360-day year.
The Hudson Loan is scheduled to mature on
January 11, 2022 (the "Hudson Maturity
Date"), but may be prepaid without payment
of a yield maintenance premium on or after
the Hudson Anticipated Repayment Date.
Commencing on February 11, 1997, the Hudson
Loan requires 300 constant monthly payments
(the "Hudson Monthly Debt Service Payment
Amount") of principal and interest of
$1,034,451 (based on a 300-month
amortization schedule and the Hudson
Interest Rate). Payment of the balance of
the principal, if any, together with all
accrued and unpaid interest, is required on
the Hudson Maturity Date. Commencing on
February 11, 1997, in addition to the Hudson
Monthly Debt Service Payment Amount, the
Hudson Borrower is required to apply Hudson
Excess Cash Flow (as defined below under
"Description of the Mortgage Loans and
Mortgaged Properties -- The Hudson Loan and
Property -- The Loan --Payment Terms") for
the month preceding the month in which the
payment date occurs, to reduce the
outstanding principal balance of the Hudson
Loan in an aggregate monthly amount not to
exceed the sum of (a) $87,696 and (b) any
portion of clause (a) not paid on any prior
payment date. Such application of Hudson
Excess Cash Flow would result in the
amortization of the Hudson Loan generally on
a 240-month rather than a 300-month
amortization schedule. Additionally,
commencing on the first payment date after
the Hudson Anticipated Repayment Date, the
Hudson Borrower is required to apply 100% of
the Hudson Excess Cash Flow for the month
preceding the month in which the payment
date occurs towards the reduction of the
principal balance of the Hudson Loan. The
scheduled principal balance of the Hudson
Loan as of the Hudson Anticipated Repayment
Date is approximately $94,876,938 (assuming
a 240-month amortization schedule).
The Hudson Property consists of a forty-two
story office building (the "Hudson
Building") constructed between 1990 and 1992
of steel and concrete and located on a lot
of approximately 1.79 acres on the Hudson
waterfront in Jersey City. The Hudson
Building has a gross leasable area ("GLA")
of approximately 1,230,087 square feet,
including approximately 1,200,834 square
feet of GLA comprised of office space,
approximately 19,457 square feet of GLA
comprised of retail space, and approximately
9,796 square feet of GLA comprised of space
leased to Lehman Brothers Holding, Inc. for
certain emergency generators. The occupancy
rates, as of December 31, 1996, were
approximately 100% and 22% for the office
and retail portions of the Hudson Building,
respectively, with an overall occupancy rate
of 99%. Major tenants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated and
Lehman Brothers Holdings, Inc. The appraisal
performed for the Hudson Property as of
August 13, 1996, determined a value of
$236,000,000.
C. THE M&H RETAIL POOL AND
LOAN AND PROPERTIES ....... The "M&H Retail Pool Loan" had a principal
balance at origination of $58,400,000 and
has a principal balance as of the Cut-off
Date of approximately $58,300,969 and is
secured by six separate Mortgages (the "M&H
Retail Mortgages") on six retail properties
(the "M&H Retail Pool Properties")
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<PAGE>
located in California. The M&H Retail
Mortgages are cross-collateralized and
cross-defaulted. The borrower under the M&H
Retail Pool Loan is M&H Realty Partners II
L.P. (the "M&H Retail Pool Borrower"). The
M&H Retail Pool Loan is evidenced by a Note
that bears interest at a fixed rate per
annum equal to 7.50% (the "M&H Retail
Current Interest Rate") through and
including January 10, 2007. From and
including January 11, 2007 (the "M&H Retail
Anticipated Repayment Date"), the Note
accrues interest at a fixed rate per annum
equal to the lesser of (i) the maximum rate
permitted by applicable law, and (ii) the
greater of (a) the M&H Retail Current
Interest Rate plus 2.00% and (b) the yield,
as of the M&H Retail 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 January
11, 2027 plus 2.00% (the "M&H Retail Revised
Interest Rate"). All interest accrued at the
excess of the M&H Retail Revised Interest
Rate over the M&H Retail 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 M&H
Retail Revised Interest Rate. Interest on
the M&H Retail Pool Loan is computed on the
basis of the actual number of days elapsed
and a 360-day year.
The M&H Retail Pool Loan is scheduled to
mature on January 11, 2027 (the "M&H Retail
Maturity Date"), but may be prepaid without
payment of a yield maintenance premium on
and after 90 days prior to the M&H Retail
Anticipated Repayment Date. Commencing on
February 11, 1997, the M&H Retail Pool Loan
requires 360 constant monthly payments of
principal and interest (the "M&H Retail
Monthly Debt Service Amount") of $408,341.27
(based on a 360-month amortization schedule
and the M&H Retail Current Interest Rate).
Payment of the then outstanding balance of
the principal, if any, together with all
accrued and unpaid interest (including the
M&H Retail Excess Interest (as defined below
under "Description of the Mortgage Loans and
Mortgaged Properties -- The M&H Retail Pool
Loan and Properties -- Payment Terms")) is
required on the M&H Retail Maturity Date.
Additionally, commencing on the first
payment date after the M&H Retail
Anticipated Repayment Date, the M&H Retail
Pool Loan requires that all M&H Retail
Excess Cash Flow (as defined below under
"Description of the Mortgage Loans and
Mortgaged Properties -- The M&H Retail Pool
Loan and Properties -- Payment Terms") be
applied towards the reduction of the
principal balance of the loan. The scheduled
principal balance of the loan as of the M&H
Retail Anticipated Repayment Date is
approximately $51,572,473.
The M&H Retail Pool Properties contain
approximately 1,398,516 square feet of GLA.
As of December 31, 1996, the occupancy rate
for the M&H Retail Pool Properties ranged
from approximately 73% to 94% and the
annualized base rent for such properties was
approximately $9.07 per square foot of GLA
which represents an increase in the
occupancy rate of 6% and base rents of 9%,
in each case, from December 31, 1995.
Tenants include Safeway, Barnes & Noble,
Vons, Thrifty Drug Store and Copelands
Sporting Goods. Recent appraisals determined
an aggregate value of $123,200,000 for the
M&H Retail Pool Properties.
D. THE INNKEEPERS POOL LOAN
AND PROPERTIES ............ The Innkeepers Pool Loan had a principal
balance at origination of $43,545,085, has a
principal balance as of the Cut-off Date of
$42,000,000 and is secured by eight separate
mortgages and deeds of trust (the
"Innkeepers Mortgages")
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<PAGE>
encumbering eight hotels (the "Innkeepers
Properties") located in California,
Colorado, Florida, Kansas, New Jersey and
New York. The Innkeepers Mortgages are
cross-collateralized and cross-defaulted
with each other, with certain exceptions to
accommodate recording tax requirements. Each
of Innkeepers Residence Denver-Downtown,
L.P., Innkeepers Residence Wichita East,
L.P., Innkeepers Residence Sili I, L.P. and
Innkeepers Financing Partnership III, L.P.
("the Innkeepers Borrowers") is a borrower
under the Innkeepers Pool Loan, and each is
jointly and severally liable for the entire
Innkeepers Pool Loan. The Innkeepers Pool
Loan is evidenced by a Note that bears
interest at a fixed rate per annum equal to
8.15% (the "Innkeepers Current Interest
Rate") through and including March 10, 2009.
From and after March 11, 2009 (the
"Innkeepers Anticipated Repayment Date")
such Note accrues interest at a fixed rate
per annum equal to the greater of (i) the
Innkeepers Current Interest Rate plus 2.00%
and (ii) the yield, as of the week prior to
the Innkeepers Anticipated Repayment Date,
on U.S. Treasury Obligations having maturity
dates (one longer and one shorter) most
nearly approximating the remaining term of
the Innkeepers Pool Loan as of the
Innkeepers Anticipated Repayment Date, plus
2.00% (the "Innkeepers Revised Interest
Rate"). Any interest accrued at the excess
of the Innkeepers Revised Interest Rate over
the Innkeepers 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 Innkeepers Revised
Interest Rate. Interest on the Innkeepers
Pool Loan is calculated on the basis of the
actual number of days elapsed and a 360-day
year. On the closing date of the Innkeepers
Pool Loan, the Innkeepers Borrowers made a
prepayment in the amount of $1,545,085. The
Innkeepers Pool Loan is scheduled to mature
on March 11, 2019, but may be prepaid
without payment of a yield maintenance
premium on and after the Innkeepers
Anticipated Repayment Date. The Innkeepers
Pool Loan requires payments of interest only
through March 11, 1999. Commencing on April
11, 1999 and ending on the Innkeepers
Anticipated Repayment Date, the Innkeepers
Pool Loan requires 240 constant monthly
payments (the "Innkeepers Monthly Debt
Service Payments") of principal and interest
of $355,235.77 (based on a 264-month
amortization schedule and the Innkeepers
Current Interest Rate and the initial
balance without taking into effect the
prepayment on the funding date).
Additionally, commencing on the first
payment date after the Innkeepers
Anticipated Repayment Date, the Innkeepers
Borrowers are required to apply 100% of
Innkeepers Excess Cash Flow (as defined
below under "Description of the Mortgaged
Loans and Mortgaged Properties -- The
Innkeepers Pool Loan and Properties -- The
Loan -- Payment Terms") on each payment date
to the prepayment of the principal balance
of the Innkeepers Pool Loan and payment of
accrued interest (and the interest thereon)
and any other amounts due under the
Innkeepers Pool Loan. The scheduled
principal balance of the Innkeepers Pool
Loan as of the Innkeepers Anticipated
Repayment Date is approximately $29,797,520.
The Innkeepers Properties consist of eight
hotels operated as either Hampton Inns or
Residence Inns. Each Innkeepers Property
contains from 64 to 231 rentable guestrooms,
and was constructed between 1981 and 1993.
The average occupancy rates for the twelve
months ended December 31, 1996 for the
Innkeepers Properties ranged from
approximately 72% to approximately 91%, with
a weighted average occupancy rate of
approximately 85%. The ADRs for the twelve
month period ending December 31, 1996 for
the Innkeepers Properties ranged from $60 to
$99, with a weighted average of $85. The
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<PAGE>
appraisals performed in February, 1997
determined an aggregate value of
approximately $86,500,000 for the Innkeepers
Properties.
E. THE DESIGN CENTER OF THE
AMERICAS LOAN AND
PROPERTY .................. The "DCOTA Loan" had a principal balance at
origination of $40,000,000 and has a
principal balance as of the Cut-off Date of
$39,899,849 and is secured by a mortgage
(the "DCOTA Mortgage") encumbering two
parcels of land and buildings with tenants
primarily in the business of selling goods
to consumers represented by members of the
design trade. Such land and building
comprise a retail design center known as The
Design Center of the Americas (the "DCOTA
Property") located in Dania, Florida. The
borrower under the DCOTA Loan is Design
Center of the Americas, Limited Partnership
(the "DCOTA Borrower"). The DCOTA Loan is
evidenced by a Note that bears interest at a
fixed rate per annum equal to 7.47% (the
"DCOTA Current Interest Rate") through
January 10, 2007. On and after January 11,
2007 (the "DCOTA Anticipated Repayment
Date"), the Note bears interest at a fixed
rated per annum (as in effect for any such
annual period, the "DCOTA Revised Interest
Rate") equal to the greater of (i) the DCOTA
Current Interest Rate plus 2.00% or (ii) the
yield as of the DCOTA Anticipated Repayment
Date, calculated by linear interpolation of
the yields on U.S. Treasury Constant
Maturities with terms (one longer and one
shorter) most nearly approximating those of
non-callable U.S. Treasury obligations
having maturities as close as possible to
January 11, 2022, plus 2%. All interest
accrued at the excess of the DCOTA Revised
Interest Rate over the DCOTA Current
Interest Rate will be deferred and will not
be paid until after the balance of the loan
has been reduced to zero. Amounts so
deferred will bear interest at the DCOTA
Revised Interest Rate (such accrued and
deferred interest and interest thereon at
the DCOTA Revised Interest Rate, the "DCOTA
Excess Interest"); provided, that if the
DCOTA Borrower repays the entire DCOTA Loan
on or prior to the third payment date after
the DCOTA Anticipated Repayment Date, the
DCOTA Borrower shall have no obligation to
pay any DCOTA Excess Interest and any DCOTA
Excess Interest accrued prior to the date of
such repayment shall be forgiven by the
lender. Interest on the DCOTA Loan is
calculated based on the actual number of
days elapsed and a 360-day year.
The DCOTA Loan is scheduled to mature on
January 11, 2022 (the "DCOTA Maturity
Date"), but may be prepaid without payment
of a yield maintenance premium on and after
the DCOTA Anticipated Repayment Date.
Commencing on February 11, 1997, the DCOTA
Loan requires 300 constant monthly payments
of principal and interest of $294,816.36
(the "DCOTA Monthly Debt Service Payment")
(based on a 300-month amortization schedule
and the DCOTA Current Interest Rate).
Payment of the balance of the principal, if
any, together with all accrued and unpaid
interest, is required on the DCOTA Maturity
Date. Additionally, commencing on the DCOTA
Anticipated Repayment Date, the DCOTA Loan
requires that all DCOTA Excess Cash Flow (as
defined below under "Description of the
Mortgage Loans and Mortgaged Property -- The
DCOTA Loan and Property -- The Loan --
Payment Terms") be applied toward the
reduction of the principal balance of the
loan. The scheduled principal balance of the
DCOTA Loan as of the DCOTA Anticipated
Repayment Date is approximately $32,445,946.
The DCOTA Property consists of a four-story
building in Dania, Florida, adjacent to the
Ft. Lauderdale Airport on I-95 and
containing approximately 554,273 square feet
of GLA. Space in the DCOTA Property is
leased to tenants
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who primarily provide goods and related
services to professionals in the design
trade, including architects, builders, and
designers who represent home and office
owners. The land adjacent to the DCOTA
Property is owned by an affiliate of the
DCOTA Borrower and is subject to certain
restrictive use covenants in favor of the
lender, among other things, prohibiting the
owner of such parcel from operating such
parcel as a design center. The DCOTA
Property contains parking spaces for 716
vehicles on site. The DCOTA Property also
utilizes a parking area contained on such
adjacent parcel for parking spaces.
As of December 31, 1996, the DCOTA Property
had an occupancy rate of approximately 96%
and an average base rent per square foot of
$23. As of May 7, 1996, the appraised value
of the DCOTA Property was $97,000,000.
F. THE G&L MEDICAL OFFICE II
POOL LOAN AND PROPERTIES ... The "G&L Medical Office II Pool Loan" had a
principal balance at origination of
$35,000,000 and has a principal balance as
of the Cut-off Date of approximately
$34,801,294 and is secured by Mortgages (the
"G&L Medical Office II Pool Mortgages")
encumbering four medical office buildings
(the "G&L Medical Office II Pool
Properties") located in California. The
Mortgages encumbering the G&L Medical Office
II Pool Properties are cross-defaulted and
cross-collateralized. The borrower under the
G&L Medical Office II Pool Loan is G&L
Medical Partnership, L.P. (the "G&L Medical
Office II Pool Borrower"). The G&L Medical
Office II Pool Loan is evidenced by a Note
that bears interest at a fixed rate per
annum equal to 8.492% (the "G&L II Current
Interest Rate") through September 10, 2006.
From and including September 11, 2006 (the
"G&L II Anticipated Repayment Date"), the
Note bears interest at a fixed rate per
annum equal to the greater of (i) the G&L II
Current Interest Rate plus 2.00% and (ii)
the yield, calculated by linear
interpolation of the yields of the 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 G&L II Maturity
Date plus 2.00% (the "G&L II Revised
Interest Rate"). All interest accrued at the
excess of the G&L Revised Interest Rate over
the G&L II Current Interest Rate will be
deferred and will not be paid until the
principal balance of the G&L Medical Office
II Pool Loan has been reduced to zero.
Interest on the G&L Medical Office II Pool
Loan is calculated on the basis of the
actual number of days elapsed and a 360-day
year.
The G&L Medical Office II Pool Loan is
scheduled to mature on September 11, 2021
(the "G&L II Maturity Date"), but may be
prepaid without payment of a yield
maintenance premium on or after the G&L II
Anticipated Repayment Date. Commencing on
October 11, 1996, the G&L Medical Office II
Pool Loan requires 300 constant monthly
payments (the "G&L II Monthly Debt Service
Amount") of principal and interest of
$281,640.81 (based on a 300-month
amortization schedule and the G&L II Current
Interest Rate). Payment of the balance of
the principal, if any, together with all
accrued and unpaid interest (including the
G&L II Excess Interest), is required on the
G&L II Maturity Date. Additionally,
commencing on the first payment date after
the G&L Anticipated Prepayment Date, the G&L
Medical Office II Pool Borrower is required
to apply 100% of the G&L II Available Cash
for the month preceding the month in which
the payment date occurs towards the
reduction of the principal balance of the
G&L Medical Office II Pool Loan. The
scheduled
S-15
<PAGE>
principal balance of the G&L Medical Office
II Pool Loan as of the G&L II Anticipated
Repayment Date is approximately $29,240,098.
The G&L Medical Office II Pool Properties
consist of four medical office buildings,
which range in size from 47,604 square feet
to 78,779 square feet. The average occupancy
rates as of January 1, 1997 (or with respect
to the property known as Regents Medical
Center, December 1, 1996) for the G&L
Medical Office II Pool Properties ranged
from 89% to 100%, with a weighted average
occupancy rate of 96%. The annualized base
rent for such properties was approximately
$28.54 per square foot of GLA. Recent
appraisals determined an aggregate value of
$51,170,000 for the G&L Medical Office II
Pool Properties.
G. THE INSURANCE COMPANY OF
THE WEST POOL LOAN AND
PROPERTIES ................ The "ICW Loan" had a principal balance at
origination of $25,277,612 and has a
principal balance as of the Cut-off Date of
approximately $25,234,505 and is secured by
a Mortgage (the "ICW Mortgage") encumbering
an office building ("ICW Plaza") and an
interest in an adjacent parcel of land,
which is a common area and parking lot
(collectively, the "ICW Property") located
in San Diego. The borrower under the ICW
Loan is ICW Plaza, L.P. (the "ICW
Borrower"). The ICW Loan is evidenced by a
Note that bears interest at a fixed rate per
annum equal to 7.506% (the "ICW Current
Interest Rate") through February 11, 2007.
From and including February 11, 2007 (the
"ICW Anticipated Repayment Date"), the Note
bears interest at a fixed rate per annum
equal to the greater of (i) the ICW Current
Interest Rate plus 2.00% and (ii) the yield,
calculated by linear interpolation of the
yields of the 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 ICW
Maturity Date, plus 2.00% (the "ICW Revised
Interest Rate"). All interest accrued at the
excess of the ICW Revised Interest Rate over
the ICW Current Interest Rate will be
deferred and will not be paid until the
principal balance of the ICW Loan has been
reduced to zero. Interest on the ICW Loan is
calculated on the basis of the actual number
of days elapsed and a 360-day year.
The ICW Loan is scheduled to mature on
February 11, 2017 (the "ICW Maturity Date"),
but may be prepaid in whole without payment
of a yield maintenance premium on or after
the payment date which is three months
before the ICW Anticipated Repayment Date,
and may be prepaid in part without payment
of a yield maintenance premium on or after
the ICW Anticipated Repayment Date.
Commencing on March 11, 1997, the ICW Loan
requires 240 graduated monthly payments (the
"ICW Monthly Debt Service Amount") of
principal and interest as follows:
<TABLE>
<CAPTION>
<S> <C>
March 11, 1997.............................. $111,622.24
April 11, 1997, through July 11, 1999 ..... $190,677.97
August 11, 1999, through July 11, 2002 .... $196,398.31
August 11, 2002, through July 11, 2005 .... $202,290.26
August 11, 2005, through July 11, 2008 .... $208,358.96
August 11, 2008, through July 11, 2011 .... $212,577.83
August 11, 2011, through July 11, 2014 .... $221,048.03
August 11, 2014, through February 11, 2017 $227,679.46
</TABLE>
Payment of the balance of the principal, if
any, together with all accrued and unpaid
interest (including the ICW Excess
Interest), is required on the ICW Maturity
Date. The scheduled principal balance of the
ICW Loan as of the ICW Anticipated Repayment
Date is approximately $18,634,587.
S-16
<PAGE>
The ICW Property consists of ICW Plaza,
which contains approximately 164,764 square
feet, and an interest in and reciprocal
easement over an adjacent parcel, on part of
which is built a surface-level parking lot.
ICW Plaza has an occupancy rate of 100%, all
of its rentable area being leased pursuant
to a bonded triple net lease (the "ICW
Lease") to Insurance Company of the West
(the "ICW Tenant"). The ICW Tenant subleases
a portion of the space to third parties. The
ICW Monthly Debt Service Payment represents
a debt service coverage ratio of 1.003
relative to the net rent payable by the ICW
Tenant under the ICW Lease. Recent
appraisals determined an aggregate value of
$25,000,000 for the ICW Property.
H. GENERAL ................... For a further description of the Mortgage
Loans and Mortgaged 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 password
for access to such Web site is "CMBS". The
electronic version of this Prospectus
Supplement may contain 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 Mortgaged Properties
(except in connection with a release)
without the Servicer's consent. However, the
following exceptions apply.
The Fairfield Inn Borrower has the right to
sell all, but not less than all, of the
Fairfield Inn Properties provided, among
other things, that (a) the transferee is
approved by the lender and the Rating
Agencies confirm in writing that such action
will not result in the withdrawal,
qualification or downgrade of the then
existing ratings of the Certificates, (b) no
event of default has occurred and is
continuing and (c) the transferee executes a
new note in a principal amount equal to the
then outstanding principal amount of the
Fairfield Inn Pool Loan. See "Description of
the Mortgage Loans and Mortgaged Properties
-- The Fairfield Inn Pool Loan and
Properties -- Transfer of Properties and
Interest in Borrower; Encumbrance."
The Hudson Borrower is permitted, if no
event of default has occurred and is
continuing, to sell the Hudson Property so
long as, among other things, (i) the lender
receives an opinion of counsel satisfactory
to the Rating Agencies that such sale will
not adversely affect the validity of certain
property tax abatements in favor of the
owner of the Hudson Property and (ii) the
Rating Agencies confirm in writing that such
transfer will not result in the downgrade,
withdrawal or qualification of the rating of
any of the Certificates. See "Description of
the Mortgage Loans and Mortgaged Properties
-- The 101 Hudson Loan and Property --
Transfer of Properties and Interest in
Hudson Borrower; Encumbrance."
S-17
<PAGE>
The Innkeepers Borrower is permitted to sell
all the Innkeepers Properties to a single
purchaser, provided that the lender receives
written confirmation from the Rating
Agencies that such a sale would not result
in a qualification, withdrawal or downgrade
of the ratings of the Certificate in effect
immediately prior to such sale. See
"Description of the Mortgage Loans and
Mortgaged Properties -the Innkeepers Pool
Loan and Properties -- Transfer of
Properties and Interest in Borrower;
Encumbrance."
The DCOTA Borrower has the one-time right to
sell the DCOTA Property subject to the DCOTA
Loan, provided that, among other things, (a)
the purchaser assumes in writing all
obligations of the DCOTA Borrower under the
DCOTA Loan and (b) the Rating Agencies
confirm in writing that such sale will not
result in a qualification, downgrade or
withdrawal of the ratings then applicable to
the Certificates. See "The Design Center of
the Americas Loan and Property -- Transfer
of Property and Interest in Borrower;
Encumbrance."
All of the Mortgage Loans provide that after
a specified period (a "Defeasance Lockout
Period") and prior to the related
Anticipated Repayment Date, the applicable
borrower may obtain the release of one or
more of the Mortgaged Properties from the
lien of the related Mortgage upon the pledge
to the Trustee of noncallable U.S. Treasury
or, in some cases, certain other noncallable
U.S. government obligations ("U.S.
Obligations") which generally provide
payments on or prior to all successive
scheduled payment dates upon which interest
and principal payments are due under the
related Note through and including the
respective Anticipated Repayment Date, in
amounts equal to the portion of the
scheduled payments due on such dates (or,
for such purposes, deemed to be due on the
Anticipated Repayment Date as if the related
loans were to mature on the applicable
Anticipated Repayment Date) that are
attributable to a portion of the loan equal
to the release amount required to be paid
with respect to the Mortgaged Property or
Properties to be released. In the event of a
release in connection with a partial
defeasance, the Mortgage Loans secured by
multiple Mortgaged Properties generally
require that the principal amount defeased
is equal to at least 125% of the Allocated
Loan Amount of the Mortgaged Property so
released with certain exceptions such as in
the event of a partial prepayment in
connection with a casualty or condemnation.
Such Mortgage Loans also generally require
that the debt service coverage ratio of the
remaining Mortgaged Property or Properties,
after taking such release into account, is
greater than both the debt service coverage
ratio at origination as such term is defined
in the related loan agreements and the debt
service coverage ratio prior to such
release.
<PAGE>
All of the Mortgage Loans provide that on
and after the related Anticipated Repayment
Date (or, in the case of the M&H Retail Pool
Loan, the Innkeepers Pool Loan and (with
respect to a prepayment in full) the ICW
Loan, on or after the date that is 90 days
prior to its Anticipated Repayment Date), in
connection with a prepayment, the related
borrower may obtain the release of one or
more of the Mortgaged Properties from the
lien of the related Mortgage. Each of the
Fairfield Inn Pool Loan , M&H Retail Pool
Loan, Innkeepers Pool Loan and the G&L
Medical Office II Pool Loan generally
requires that the related borrower prepay an
amount at least equal to 125% of the
Allocated Loan Amount of any Mortgaged
Property released in connection with a
partial prepayment on or after the related
Anticipated Repayment Date with certain
exceptions such as in the event of a partial
prepayment in connection with a casualty or
condemnation. The Fairfield Inn Pool Loan,
M&H Retail Pool Loan, Innkeepers Pool Loan
and
S-18
<PAGE>
the G&L Medical Office II Pool Loan
generally also require that the debt service
coverage ratio of the remaining Mortgaged
Properties, after taking such release into
account, be at least equal to the greater of
each of the debt service coverage ratio at
origination as that term is defined in the
respective loan agreements and the debt
service coverage ratio prior to the release.
In order to release a Mortgaged Property in
connection with a partial prepayment, the
Innkeepers Pool Loan requires that the
related borrower satisfy all the conditions
for release of a related Mortgaged Property
in connection with a defeasance of the
Innkeepers Pool Loan.
All of the Mortgage Loans provide that the
Servicer, at its option, may require a
mandatory prepayment under certain
circumstances such as certain casualties and
condemnations. 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 $[ ].
The Class A-1B Certificates will have an
initial Certificate Balance of $[ ].
The Class A-1C Certificates will have an
initial Certificate Balance of $[ ].
The Class PS-1 Certificates will have an
initial Notional Balance of $[ ], which
is equal to the aggregate Stated Principal
Balance of the Mortgage Loans as of the
Cut-off Date. With respect to any
Distribution Date, the Notional Balance of
the Class PS-1 Certificates will be equal to
the aggregate Stated Principal Balance of
the Mortgage Loans as of the first day of
the related Interest Accrual Period.
The Class CS-1 Certificates will have an
initial Notional Balance of $[ ]. The
Notional Balance of the Class CS-1
Certificates will at all times be equal to
the Certificate Balance of the Class A-1A
Certificates.
The Class A-2 Certificates will have an
initial Certificate Balance of $[ ].
The Class A-3 Certificates will have an
initial Certificate Balance of $[ ].
The Class A-4 Certificates will have an
initial Certificate Balance of $[ ].
The Class A-5 Certificates will have an
initial Certificate Balance of $[ ].
THE PRIVATE CERTIFICATES ...... The Class B-1 and Class B-1H Certificates
will have initial Certificate Balances of
approximately $[ ] 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 B-1, Class B-1H, Class V-1, Class
V-2, Class LR and Class R Certificates are
not offered hereby.
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 PS-1
Certificates is a per annum rate equal to
the Weighted Average Net Mortgage
Pass-Through Rate minus the Weighted Average
Pass-Through Rate.
S-19
<PAGE>
The Pass-Through Rate on the Class CS-1
Certificates is a per annum rate equal to
the 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 A-2
Certificates is a per annum rate equal to
the 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 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 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 Weighted Average Net Mortgage
Pass-Through Rate minus [ ]%.
The Pass-Through Rate on the Class B-1 and
Class B-1H Certificates is a per annum rate
equal to the Weighted Average Net Mortgage
Pass-Through Rate minus [ ]%.
The "Weighted Average Pass-Through Rate" for
purposes of calculating the Pass-Through
Rate on the Class PS-1 Certificates, with
respect to any Interest Accrual Period, is
the amount (expressed as a percentage), the
numerator of which is the sum of (i) the sum
of the products of (A) the Pass-Through Rate
with respect to each class of Certificates
having a Pass-Through Rate (other than the
Coupon Strip Certificates) and (B) the
Certificate Balance of such class as of the
first day of such Interest Accrual Period
and (ii) the product of (A) the Pass-Through
Rate on the Class CS-1 Certificates and (B)
the Notional Balance of such class as of
such date and the denominator of which is
the sum of the Certificate Balances of each
class included in clause (i)(A) above as of
such date.
The "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 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, as of the
first day of the related Interest Accrual
Period and (b) the denominator of which is
the sum of the Stated Principal Balances of
all Mortgage Loans as of such date.
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 for
such Mortgage Loan minus the Servicing Fee
Rate.
The "Mortgage Pass-Through Rate" with
respect to any Mortgage Loan (other than the
[ ] Loans) for any Interest Accrual Period
(other than the Interest Accrual Period
relating to the Distribution Date occurring
in April 1997) is the per annum rate 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 [ ] Loans for any Interest
Accrual Period commencing in any (a)
January, February, April, June, September
and November and any December occurring in a
year immediately preceding any year which is
not a leap year, is the Mortgage Rate
thereof, or (b) March (other than March
1997), May, July, August and October and 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
S-20
<PAGE>
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 any Mortgage Loan and the
Interest Accrual Period relating to the
Distribution Date occurring in April 1997
will be a per annum rate equal to the
related Mortgage Rate.
The "Mortgage Rate" with respect to a
Mortgage Loan is the per annum interest rate
on such Mortgage Loan as stated in the
related Note, which does not include the
Excess Rate.
The Mortgage Rate with respect to any
Mortgage Loan for purposes of calculating
the 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
on such Mortgage Loan required by a
bankruptcy court pursuant to a plan of
reorganization or pursuant to any of its
equitable powers.
The Class V-1, Class V-2, Class R and Class
LR Certificates do not have Pass-Through
Rates.
DISTRIBUTIONS ................. On each Distribution Date, each 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 PS-1
Certificates, the Reduction Interest
Distribution Amount, if applicable) for such
class 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,
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, if any, bearing an earlier
sequential designation than such class, 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 means such
classes in alphabetical and numerical order
(or such classes in reverse alphabetical and
numerical order) (except in respect of the
Class PS-1 and Class CS-1 Certificates,
which (except in respect of Reduction
Interest Distribution Amounts and Reduction
Interest Shortfalls) will have the same
priority as the Class A-1A and Class A-1B
Certificates under the circumstances
described herein).
The "Interest Distribution Amount" with
respect to any Distribution Date and any
class of Offered Certificates is equal to
interest accrued during the related Interest
Accrual Period at the Pass-Through Rate for
such class on the Certificate Balance or
Notional Balance, as applicable, of such
class (except that with respect to the Class
PS-1 Certificates, such amount shall be
reduced by the aggregate Reduction Interest
Distribution Amounts for such Distribution
Date).
<PAGE>
For purposes of calculating the Interest
Distribution Amount for any class of Offered
Certificates (other than the Class PS-1
Certificates) and any Distribution Date, any
reduction of Certificate Balance or Notional
Balance, as applicable, as a result of
distributions to such class or any related
class, respectively, and reductions in
Certificate Balance or Notional Balance, as
applicable, as a result of the occurrence
and allocations of Realized Losses 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.
S-21
<PAGE>
On each Distribution Date prior to the
Cross-over Date, an amount equal to the
Principal Distribution Amount will be
distributed, to the extent of available
funds therefor, 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 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-1C Certificates, for
unreimbursed amounts of Realized Losses
previously allocated to such class; fifth,
to the Class A-2 Certificates, in reduction
of the Certificate Balance thereof, until
the Certificate Balance of such class is
reduced to zero; sixth, to the Class A-2
Certificates, for unreimbursed amounts of
Realized Losses previously allocated to such
class; seventh, to the Class A-3
Certificates, in reduction of the
Certificate Balance thereof, until the
Certificate Balance thereof is reduced to
zero; eighth, to the Class A-3 Certificates
for unreimbursed amounts of Realized Losses
previously allocated to such class; ninth,
to the Class A-4 Certificates, in reduction
of the Certificate Balance thereof, until
the Certificate Balance thereof is reduced
to zero; tenth, to the Class A-4
Certificates for unreimbursed amounts of
Realized Losses previously allocated to such
class; eleventh, to the Class A-5
Certificates, in reduction of the
Certificate Balance thereof, until the
Certificate Balance thereof is reduced to
zero; twelfth, to the Class A-5 Certificates
for unreimbursed amounts of Realized Losses
previously allocated to such class; and
thirteenth, to the Private Certificates in
accordance with the Pooling and Servicing
Agreement, in each case to the extent of
Available Funds remaining after required
distributions to all more senior classes of
Certificates and of interest to such class.
On each Distribution Date occurring on and
after the Cross-over Date, regardless of the
allocation of principal payments described
in priorities first and second in the
preceding sentence, an amount equal to the
Principal Distribution Amount will be
distributed, first, to the Class A-1A
Certificates and Class A-1B 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 and Class A-1B
Certificates, for unreimbursed amounts of
Realized Losses previously allocated to such
classes, pro rata in accordance with the
amount of such unreimbursed Realized Losses
previously allocated. The "Cross-over Date"
is the Distribution Date on which the
Certificate Balance of each class of
Certificates entitled to distributions of
principal other than the Class A-1A and
Class A-1B Certificates has been reduced to
zero through the allocation of Realized
Losses. The Class PS-1 and Class CS-1
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),
(ii) the principal component of all Extended
Monthly Payments due on the related Due Date
(if received or advanced), (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 in the related
Collection Period, (iv) the principal
portion of all unscheduled collections in
respect of a Mortgage Loan that was
liquidated in the related Collection Period,
(v) to the extent not included in any
preceding clause, the principal component of
the purchase price of each Mortgage Loan
purchased, during the related Collection
Period, from the Trust Fund in connection
with breaches of representations or
warranties, the
S-22
<PAGE>
exercise of the rights described under
"Optional Termination; Optional Mortgage
Loan Purchase" below or otherwise as
described herein, (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, net
liquidation proceeds, net condemnation
proceeds and net insurance proceeds received
in the related Collection Period (in the
case of clauses (iii) through (vii), net of
any related outstanding P&I Advances
allocable to principal).
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 Net 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 with respect to
the Regular Certificates on such
Distribution Date have been made. 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
with respect to the regular interests in the
Lower-Tier REMIC on such Distribution Date
have been made. The Class LR
Certificateholders will also be entitled to
receive the proceeds of the remaining assets
in the Lower-Tier REMIC, 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 Lower-Tier REMIC 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 Net Mortgage Pass-Through Rate plus
the Trustee Fee 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 "The Pooling and Servicing
Agreement--Realization Upon Mortgage Loans;
Modification" 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) 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 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 as of the last day of
related Collection Period minus (ii) any
Appraisal Reduction Amount thereof and the
denominator of which is the Stated Principal
Balance thereof as of such date. The
<PAGE>
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
S-23
<PAGE>
Class B-1 and Class B-1H Certificates
together and (ii) the Class A-1A and Class
A-1B Certificates and the Coupon Strip
Certificates together will, in each case, be
treated as one class) and (ii) will not make
any P&I Advance in respect of Reduction
Interest Distribution Amounts and Reduction
Interest Shortfalls. See "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, subject to a
determination of recoverability, 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 PS-1 and Class CS-1 Certificates
against losses associated with delinquent
and defaulted Mortgage Loans, the rights of
the holders of the Class A-1C, Class A-2,
Class A-3, Class A-4 and Class A-5
Certificates and the Private 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 PS-1
and Class CS-1 Certificates, except to the
extent provided herein with respect to
Reduction Interest Distribution Amounts and
Reduction Interest Shortfalls on the Class
PS-1 Certificates. The Class A-1C
Certificates will likewise be protected by
the subordination of the Class A-2, Class
A-3, Class A-4, Class A-5 and Private
Certificates. The Class A-2 Certificates
will be likewise protected by the
subordination of the Class A-3, Class A-4,
Class A-5 Certificates and Private
Certificates. The Class A-3 Certificates
will be likewise protected by the
subordination of the Class A-4, Class A-5
and Private Certificates. The Class A-4
Certificates will be likewise protected by
the subordination of the Class A-5
Certificates and Private Certificates. The
Class A-5 Certificates will be likewise
protected by the subordination of the
Private 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 on such date (except as
described herein in respect of the Class
PS-1 Certificates and Reduction Interest
Distribution Amounts and Reduction Interest
Shortfalls) 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, first, to the Private
Certificates; second, to the Class A-5
Certificates; third, to the Class A-4
Certificates; fourth, to the Class A-3
Certificates; fifth, to the Class A-2
Certificates; sixth, to the Class A-1C
Certificates; and finally, to the Class A-1A
and Class A-1B 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. See "Description of the
Offered Certificates" herein.
<PAGE>
Shortfalls in Available Funds resulting from
Servicing Compensation other than the
Servicing Fee, interest on Advances (to the
extent not covered by Default Interest) and
on accrued, unpaid Servicing Compensation,
extraordinary expenses of the Trust Fund
(other than indemnification expenses), a
reduction of 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
S-24
<PAGE>
Shortfalls or other unanticipated or
default-related expenses of the Trust Fund
for which there is no corresponding
collection from the borrower 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,
pro rata, based upon the amount
distributable to each class 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; OPTIONAL
MORTGAGE LOAN PURCHASE ....... 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% of the aggregate Stated
Principal Balance of the Mortgage Loans as
of the Cut-off Date.
The holders of the Class LR Certificates
representing a 100% Percentage Interest of
the Class LR Certificates will have the
option to purchase at the purchase price
specified herein any Mortgage Loan not
prepaid in full on its Anticipated Repayment
Date.
See "The Pooling and Servicing Agreement --
Optional Termination; Optional Mortgage Loan
Purchase" herein, "Description of the
Certificates --Termination" in the
Prospectus and "Risk Factors and Other
Special Considerations -- The Certificates
-- Special Prepayment, Yield and Loss
Considerations" herein.
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, in the opinion
of counsel, 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 PS-1, Class CS-1, Class A-2,
Class A-3, Class A-4, Class A-5, Class B-1
and Class B-1H Certificates (collectively,
the "Regular Certificates") will be
designated as "regular interests" in the
Upper-Tier REMIC, 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 Class V-1 Certificates
will represent the right to receive Net
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 a grantor
trust for federal income tax purposes.
<PAGE>
The Offered Certificates will be treated as
newly originated debt instruments for
federal income tax purposes. Beneficial
owners will be required to report income
thereon in accordance with the accrual
method of accounting. It is anticipated that
the Class PS-1 and Class CS-1 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 Offered
Certificates may be issued with original
issue discount to the extent the initial
Certificate Balances thereof
S-25
<PAGE>
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
PS-1 and Class CS-1 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 PS-1 and Class CS-1
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.
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-1C, CLASS A-2, CLASS A-3, CLASS
A-4 AND CLASS A-5 CERTIFICATES ARE
SUBORDINATE TO ONE OR MORE OTHER CLASSES OF
CERTIFICATES, AND, ACCORDINGLY, SUCH
CERTIFICATES MAY NOT BE PURCHASED BY OR
TRANSFERRED TO A PLAN OR PERSON ACTING ON
BEHALF OF ANY PLAN OR USING THE ASSETS OF
ANY SUCH PLAN, UNLESS SUCH PERSON USING
S-26
<PAGE>
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 and Class A-1B Certificates be
rated ["AAA," "AAA," "Aaa" and "AAA" by Duff
& Phelps Credit Rating Co. ("DCR"), Fitch
Investors Service, L.P. ("Fitch"), Moody's
Investors Service, Inc. ("Moody|Als") and
Standard & Poor's Ratings Group, a division
of The McGraw-Hill Companies, Inc. ("S&P"
and, together with DCR, Fitch and Moody's,
the "Rating Agencies"), respectively; (ii)
each of the Class PS-1 and Class CS-1
Certificates be rated "AAA," "AAA" and "Aaa"
by DCR, Fitch and Moody's, respectively;
(iii) the Class A-1C Certificates be rated
"Aaa" and "AAA" by Moody's and S&P,
respectively; (iv) the Class A-2
Certificates be rated "AA," "AA," "Aa" and
"AA" by DCR, Fitch, Moody's and S&P,
respectively; (v) the Class A-3 Certificates
be rated "A," "A," "A" and "A" by DCR,
Fitch, Moody's and S&P, respectively; (vi)
the Class A-4 Certificates be rated "BBB,"
"BBB," "Baa" and "BBB" by DCR, Fitch,
Moody's and S&P, respectively and (vii) the
Class A-5 Certificates be rated "BBB-,"
"BBB-," "Baa3" and "BBB-" by DCR, Fitch,
Moody's and S&P, respectively.] 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 PS-1 and Class CS-1 Certificates might
not fully recover their initial investment
in the event of delinquencies or defaults,
rapid prepayments of the Mortgage Loans
(including both voluntary and involuntary
prepayments), or the application of Realized
Losses, Appraisal Reduction Amounts or
Delinquency Reduction Amounts. 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, other than the [Class A-3,
Class A-4 and Class A-5] Certificates, will
constitute "mortgage related securities"
within the meaning of the Secondary Mortgage
Market Enhancement Act of 1984, so long as
they are rated in one of the two highest
rating categories by one or more Rating
Agencies. 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.
S-27
<PAGE>
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 -- Assignment of the Mortgage
Loans" and "--Representations and Warranties; Repurchase," the Originator
will be obligated to repurchase a Mortgage Loan in certain circumstances if
there is missing or defective documentation with respect to such Mortgage
Loan or if certain of its representations or warranties concerning such
Mortgage Loan are breached.
Each Mortgage Loan is generally 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. See "Description of the Mortgage Loans and
Mortgaged Properties." 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
scheduled 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.
All of the Mortgage Loans were originated within the seven months prior to
the Cut-off Date. Consequently, the Mortgage Loans do not have as long
standing a payment history as mortgage loans originated on earlier dates. In
the case of the Innkeepers Pool Loan and the ICW Loan the first regular
scheduled payment did not occur under the loan until March 11, 1997 and April
11, 1997, respectively (except with respect to the Innkeepers Initial
Prepayment made on the respective closing date).
Commercial Lending Generally. The Mortgage Loans are secured by extended
stay and limited-service hotels, office buildings, neighborhood retail
shopping centers, a community retail shopping center and a retail design
trade 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. See "--Concentration of Mortgage
Loans and Mortgage Property Types."
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,
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 retail space, office space or
hotel rooms); changes or continued weakness in specific industry segments;
perceptions by prospective tenants and guests and, in the case of retail
properties, retailers and shoppers, of the safety, convenience, condition,
services and attractiveness of the property; the proximity and availability
of competing alternatives to the Mortgaged 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, competing properties of a similar type are built
in the areas where the Mortgaged Properties are located or similar
S-28
<PAGE>
properties in the vicinity of the Mortgaged Properties 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 the appraised value used in connection with the 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 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 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 factory outlet centers,
discount shopping centers and clubs, video shopping networks, 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, a new power center was recently opened near the M&H Retail Pool
Property known as Westgate Mall. In addition, the Innkeepers Properties in
Tallahasee, Florida and Denver, Colorado each border on a vacant parcel for
which there are no current plans for development.
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. Consequently, 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. In addition, with the
exception of the properties managed by the Fairfield Inn Manager and the
Innkeepers Marriott Manager, (as defined in "Description of the Mortgage
Loans and Mortgaged Properties -- The Innkeepers Pool Loan and Properties --
Property Operation") and the ICW Property, which is managed by the ICW
Borrower itself, all of the properties are managed by affiliates of the
borrowers so that the performance of the related Mortgaged Properties may
affect the property manager's financial condition. 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 Mortgaged
Properties." Since the ICW Property is triple net leased to the ICW Tenant
(which is an affiliate of the ICW Borrower) primarily for use as a corporate
headquarters, property management is the responsibility of the ICW Borrower
or, at the ICW Borrower's option, of the ICW Tenant. The ICW Tenant has
retained American Assets Inc., an affiliate of the ICW Borrower and the ICW
Tenant, to maintain the ICW Parking Parcel which is part of the ICW Property.
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. In addition, Lehman Brothers Holdings, Inc. ("Lehman
Brothers"), which is a large tenant at the Hudson Property, was given a rent
abatement which expired in January, 1996. Consequently, there is no
significant rent payment history for Lehman Brothers, and there can be no
assurance that Lehman Brothers will pay rent in a timely fashion.
S-29
<PAGE>
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.
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 Properties. The
Hudson Borrower has established a lease rollover reserve account for the
payment of certain costs and expenses, such as leasing commissions and tenant
improvements, incurred in connection with the re-leasing of any portion of
the Hudson Property as to which a lease has expired or become vacant due to a
default by a tenant under a lease. OTR, an affiliate of the Hudson Borrower
has also issued a guaranty for the benefit of the lender, pursuant to which
it has agreed to pay the lender certain costs associated with re-leasing any
portion of the Hudson Property as to which a lease has expired or become
vacant. See "Description of the Mortgage Loans and Mortgaged Properties --
The 101 Hudson Street Loan and Property -- Reserves." The M&H Retail Pool
Borrower has established a tenant improvement reserve account to be used (a)
for the cost of tenant improvements only for the space currently leased to
Home Express in the M&H Retail Pool Property known as Westgate Mall in the
event Home Express, a tenant currently in bankruptcy, rejects its lease or
(b) for the cost of tenant improvements at any M&H Retail Pool Property in
the event Home Express affirms its lease. See "Description of the Mortgage
Loans and Mortgaged Properties -- The M&H Retail Pool Loan and Properties --
The Properties." The G&L Medical Office II Borrower has established (i) a
leasing reserve account for the purpose of paying certain leasing costs
associated with all leases other than the lease for the 12701 Schabarum
Avenue Building and (ii) a replacement lease reserve account to be used for
the paying of certain re-letting costs with respect to the lease for the
12701 Schabarum Avenue Building. See "Description of the Mortgage Loans and
Mortgaged Properties -- The G&L Medical Office II Pool Loan and Properties --
Reserves." Additionally, the DCOTA Borrower has established a capital 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 the actual re-letting costs or expenses or reductions of cash flow on
the related properties resulting from tenant rollovers.
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. For example,
two of the major tenants of the Hudson Property, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and Lehman Brothers Holdings,
Inc. ("Lehman Brothers"), both of whom are in the same industry, account for
approximately 75% of the current annualized base rent of the Hudson Property.
The long term debt rating of Merrill Lynch is "AA-" from S&P, "AA" from DCR,
"AA" from Fitch and Aa3 from Moody's and the long term debt rating of Lehman
Brothers is "A" from S&P, "A" from Fitch and Baa1 from Moody's. In addition,
all of the tenants at the DCOTA Property are in the design trade. Insurance
Company of the West ("ICW") leases 100% of the net leasable area of the ICW
Property under a bonded triple net lease from the ICW Borrower. ICW is rated
"A" by S&P. Since the ICW Monthly Debt Service Amount represents a debt
service coverage ratio of 1.003 relative to the net rental payable by the ICW
Tenant under the ICW Lease, the ability of the ICW Borrower to make payments
under the ICW Loan is directly tied to the financial condition of ICW. The
12701 Schabarum Avenue property of the G&L Medical Office II Pool Properties
is currently leased to a single tenant, Friendly Hills Healthcare Network,
which accounts for approximately 15% of the current annualized base rent of
the G&L Medical Office II Pool Properties. Friendly Hills Healthcare Network,
a subsidiary of Caremark International Inc., obtained its lease by assignment
from Cigna Healthcare of California, Inc. Cigna Healthcare of California,
Inc. has remained liable on the lease and has a long term debt rating of "A-"
from S&P, "A-" from DCR and "A3" from Moodys. 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
Fairfield Inn Pool Loan are hotels that are operated as Fairfield Inn by
Marriott hotels under management by Fairfield FMC Corporation, a wholly-owned
subsidiary of Marriott International, Inc. See "Description of the Mortgage
Loans and Mortgaged Properties -- The Fairfield Inn Pool Loan and
Properties." Three of the Mortgaged Properties securing the Innkeepers Pool
Loan are franchises of Hampton Inns and two of such Mortgaged Properties are
franchises of Residence Inn by Marriott. Three of the Mortgaged Properties
securing the Innkeepers Pool Loan are managed by Residence Inn by Marriott
and five are managed by JF Hotel IV, Inc. See "Description of the Mortgage
Loans and Mortgaged Properties -- The Innkeepers Pool Loan and Properties --
The Properties."
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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 federal
bankruptcy law, a tenant has the option of assuming, or rejecting or, subject
to certain conditions, assuming and 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 against the tenant. The
amount of the claim would be limited to the amount owed for the unpaid rent
reserved under the lease for the period prior to the bankruptcy petition (or
earlier surrender of the leased premises) which are unrelated to the
rejection, plus the greater of one year's rent or 15% of the remaining rent
reserved under the lease (but not to exceed three years' rent). 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.
Home Express, a tenant at the M&H Retail Pool Property known as Westgate
Mall, which leases approximately 4% of the aggregate GLA of the M&H Retail
Pool Properties and accounts for approximately 6% of the aggregate current
annualized base rent for the M&H Retail Pool Properties, is a debtor in a
Chapter 11 bankruptcy proceeding. Home Express has not yet assumed or
rejected its lease in the Westgate Mall property, but continues to pay rent
and has moved fixtures and inventory from other store locations to the store
in the Westgate Mall property. See "Description of the Mortgage Loans and
Mortgaged Properties -- The M&H Retail Pool Loan and Properties -- The
Properties." There can be no assurance that Home Express will assume such
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 Hotels. The Fairfield Inn Pool Loan and the
Innkeepers Pool Loan are secured by 50 and 8 hotels, respectively. 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 Fairfield Inn Pool Loan are managed
by Fairfield FMC Corporation, a wholly-owned subsidiary of Marriott
International, Inc. as part of the Fairfield Inn by Marriott system. Three of
the Mortgaged Properties securing the Innkeepers Pool Loan are franchises of
Hampton Inns and two of such Mortgaged Properties securing such loan are
franchises of Residence Inn by Marriott. Three of the Mortgaged Properties
securing the Innkeepers Pool Loan are managed by Residence Inn by Marriott
and five are managed by JF Hotel IV, Inc., an affiliate of the Innkeepers
Borrower. 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. Franchise licensing agreements may impose certain affirmative
obligations on the owners or operators of the Mortgaged Properties with
respect to the operation of such properties. Certain of the franchise
agreements for the Innkeepers Properties (which terminate between 2003 and
2010) terminate prior to the Anticipated Repayment Date of the Innkeepers
Pool Loan. However, subject to certain restrictions described under
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<PAGE>
"Description of the Mortgage Loans and Properties--The Innkeepers Pool Loan
and Mortgaged Properties--The Properties," the Innkeepers Borrowers may, at
their option, renew the Innkeepers Marriott Franchise Agreements for an
additional ten year term. The franchise agreements governing the Innkeepers
Properties operated as Hampton Inns are renewable only at the option of the
franchisor. The management agreements with Marriott governing certain
Innkeepers Properties also expire prior to the Anticipated Repayment Date of
the Innkeepers Pool Loan, however such agreements may be renewed for an
additional period of thirteen years at the option of the Innkeepers Marriott
Manager, provided certain conditions are met, as described under "Description
of the Mortgage Loans and Properties -The Innkeepers Pool Loan and Mortgaged
Properties--The 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, the lender or its agent as operator of the Mortgaged Property would
not have the right to use the franchise license without the franchisor's
consent. 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 because of a
bankruptcy of a franchisor or manager will generally not be enforceable. No
assurance can be given that the Trust Fund 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 on behalf of the Trust Fund 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 $71,366,879, which is equal to 14% of the aggregate principal
balance of the Mortgage Pool as of the Cut-off Date. The Fairfield Inn Pool
Loan, Hudson Loan, M&H Retail Pool Loan, Innkeepers Pool Loan, DCOTA Loan,
G&L Medical Office II Pool Loan and ICW Loan represent approximately 33%,
27%, 12%, 8%, 8%, 7%, and 5%, respectively, of the aggregate principal
balance of the Mortgage Pool as of the Cut-off Date. 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 hotels, office buildings, retail and net leased office
properties representing 41%, 34%, 20% and 5% 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 Offered Certificates. 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 seven 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 entitled to
distributions of principal receives principal until the Certificate Balance
of the preceding class or classes so entitled 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 preceding sentence than
classes with higher sequential priority.
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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
19 states. See the table entitled "Mortgaged Properties by State" for a
description of the 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 Mortgaged
Properties are located.
SIGNIFICANT GEOGRAPHIC CONCENTRATION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
WEIGHTED
CUT-OFF DATE ALLOCATED PERCENT OF CUT-OFF DATE NUMBER AVERAGE
STATE LOAN AMOUNT ALLOCATED LOAN AMOUNT OF PROPERTIES DSCR
- -------------- ---------------------- ----------------------- --------------- ----------
<S> <C> <C> <C> <C>
New Jersey..... $139,238,544 28% 2 1.66
California..... 136,400,993 27% 14 1.60
Florida........ 60,151,324 12% 7 2.00
North
Carolina...... 25,480,701 5% 7 1.62
Georgia........ 23,202,912 5% 7 1.77
</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 generally is not limited under such circumstances 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.
Although recently enacted legislation clarifies the activities in which a
lender may engage without becoming subject to liability under CERCLA and
similar federal laws, such legislation has no applicability to state
environmental law. See "Certain Legal Aspects of Mortgage Loans --
Environmental Legislation" in the Prospectus.
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.
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<PAGE>
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 and
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 radon gas in the buildings on the Mortgaged
Properties and of polychlorinated biphenyls ("PCBs") in the electrical
transformers, a discussion of 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
impacting the Mortgaged Properties, including the presence of ACMs, leaks
from chemical storage tanks, and on-site spills. The Mortgaged Properties
securing the M&H Retail Pool Loan presently have or formerly had gasoline
stations, automobile repair stations, and/or dry cleaning businesses as
tenants. Remedial measures have been or are being implemented as necessary to
address residual soil and/or groundwater contamination at five of these
sites. Similarly, there is known to be residual contamination at one of the
Mortgaged Properties securing the Fairfield Inn Pool Loan from the removal of
on-site leaking underground storage tanks ("LUSTs"). However, no further
remedial activities are anticipated at this site according to the
environmental assessment. In addition, friable and/or non-friable ACMs were
found on three Mortgaged Properties securing the M&H Retail Pool Loan.
Operations and maintenance programs were implemented in each instance. The
environmental assessments 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.
Certain of the Mortgaged Properties are in the vicinity of LUST sites or
other potential sources of groundwater contamination. Groundwater is known to
be contaminated at one of the Mortgaged Properties securing the M&H Retail
Pool Loan and one of the Mortgaged Properties securing the Fairfield Inn Pool
Loan due to contamination that is believed to come from adjacent or nearby
sites. The responsible party for a site adjacent to the Mortgaged Property
securing the M&H Retail Pool Loan is taking responsibility for remedial
activities according to the environmental assessment. The environmental
assessments do not anticipate that the borrower will have to undertake
remedial investigations or actions at these sites. Further, 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 Aquifers," 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 or
to sell the property to a third party.
For several Mortgaged Properties, the environmental assessments also
recommend limited further investigations or minor repairs; 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 adverse effect on the related
Mortgaged Properties. There can be no assurance that all environmental
conditions and risks have been identified in such environmental assessments.
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
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<PAGE>
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 its 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 credit, the prevailing
interest 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 Fairfield Inn Pool Loan
permits the Fairfield Inn Borrower to incur subordinate debt and to secure
such additional indebtedness with a subordinate mortgage on a Fairfield Inn
Property after the second anniversary of the closing of the Fairfield Inn
Pool Loan, provided that, among other things, (i) the Fairfield Inn DSCR will
not be less than 2.25 after the incurrence of such subordinate debt and (ii)
the Rating Agencies confirm in writing that the placement of the subordinate
debt will not result in a withdrawal, qualification or downgrade of the then
existing ratings of the Certificates. The Fairfield Inn Borrower is also
permitted to incur unsecured indebtedness as described herein under
"Description of the Mortgage Loans and Mortgaged Properties -- The Fairfield
Inn Pool Loan and Properties -- Transfer of Properties and Interest in
Borrower; Encumbrance."
The Hudson Property is subject to a second mortgage in favor of the New
Jersey Urban Development Corporation in the principal amount of $3,000,000
which is subject and subordinate to the Hudson Mortgage pursuant to a
subordination agreement between the Originator and the second mortgagee. In
addition, the Hudson Borrower has made provisions for the payment of
scheduled interest and principal sufficient to amortize such second mortgage
loan by its maturity date of December, 2009, by depositing with the lender
U.S. Obligations in amounts sufficient to make such payments when due. See
"Description of the Mortgage Loans and Mortgaged Properties -- The 101 Hudson
Street Loan and Property -- Transfer of Properties and Interest in Hudson
Borrower."
The DCOTA Loan permits, under certain circumstances, the direct and/or
indirect partners in the DCOTA Borrower to receive a mezzanine loan in an
amount not to exceed $5,000,000 provided that, among other things: (a) the
loan is secured by a pledge of stock in the DCOTA GP and limited partnership
interests in the DCOTA Borrower and (b) the Rating Agencies confirm in
writing that neither the making of the mezzanine loan nor the identity of the
lender thereof will result in the withdrawal, downgrade or qualification of
the rating of the Certificates. See "Description of the Mortgage Loans and
Mortgaged Properties -- The DCOTA Loan -- Transfer of Property and Interest
in Borrower; Encumbrance." In addition, the DCOTA Borrower is permitted to
incur equipment leases and unsecured trade debt as described herein under
"Description of the Mortgage Loans and Mortgaged Properties -- The DCOTA Loan
- -- Transfer of Property and Interest in Borrower; Encumbrance."
The ICW Borrower is the borrower on an entirely subordinated unsecured
loan in the principal amount of $1,867,522 made by Western Insurance
Holdings, Inc., an affiliate of the ICW Borrower (the "WIH Loan") the
interest in which loan it has agreed not to transfer. See "Description of the
Mortgage Loans and Mortgaged Properties -- The ICW Loan and Property --
Transfer of Properties and Interest in Borrower; Encumbrance."
Additionally, M&H Retail Pool and G&L Medical Office II Pool Loans
generally permit the related borrower to incur limited indebtedness in
limited circumstances such as trade payables incurred in the ordinary course
of business. The Innkeepers Pool Loan does not permit the Innkeepers Borrower
to incur any additional indebtedness whether trade payables or others. 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.
Limitations on Lock Boxes. Each Mortgage Loan other than the Fairfield Inn
Pool Loan, Hudson Loan and DCOTA Loan provide throughout the term of such
Mortgage Loan for collection of revenues from the related Mortgaged
Properties or, in the case of the Innkeepers Pool Loan, rent received from
the Innkeepers Operators of the Innkeepers Properties, in collection accounts
and the payment of debt service and reserves in each case through a lock box
held in the name of the Servicer. The Fairfield Inn Pool Loan, Hudson Loan
and DCOTA Loan do not require the related borrower to establish a lock box
prior to the occurrence of certain specified events. These events generally
include, among other things, events of default, application of certain
specified reserve funds, a change of the hotel manager or such manager's long
term debt rating (in the case of the Fairfield Inn Pool Loan) and certain
changes of control ("lock box events"). Therefore until such a lock box event
neither the related borrowers nor any tenants of such properties will be
required
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<PAGE>
to make deposits into a lock box and each borrower will deposit amounts
required to be deposited under the related loan directly into a cash
collateral account with the exception of the Fairfield Inn Borrower, who will
make monthly deposits into an account controlled by the Fairfield Inn
Manager. Following the occurrence of a lock box event, generally the borrower
will be required to, or cause the related account debtors to, deposit all
amounts required under the related loan agreement into a lock box account
controlled by the Servicer. To the extent, however, that a borrower files a
bankruptcy petition, such arrangements may not be carried out. See
"Description of the Mortgage Loans and Mortgaged Properties -- The Fairfield
Inn Pool Loan and Properties -- Cash Management Procedures," " -- The 101
Hudson Street Loan and Property -- Lock Box" and "--The Design Center of the
Americas Loan and Property -- 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, with respect to any Mortgage Loan
the Servicer may be required to foreclose first on Mortgaged Properties
securing such Mortgage Loan located in states where such "one action" rules
apply (and where non-judicial foreclosure is permitted) before foreclosing on
properties located in states where judicial foreclosure is the only permitted
method of foreclosure. See "Certain Legal Aspects of Mortgage Loans --
Foreclosure" in the Prospectus.
Limitations of Appraisals. In general, appraisals represent the analysis
and opinion of qualified appraisers and are not guarantees of present or
future value. One appraiser 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. Other than the Fairfield Inn Properties, the
Innkeepers Properties and the ICW Property, which is managed by the ICW
Borrower itself, the Mortgaged 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/or its affiliates currently own debt issued by an
affiliate of the Inkeepers Borrowers. The Originator or an affiliate have
entered into and may, in the future, enter into other financing arrangements
with some or all of the affiliates of the Borrowers. Certain officers and
directors of the Originator and its affiliates own equity interests in
affiliates of the Borrowers.
Leasehold Interests. The Fairfield Inn Pool Loan is secured by, among
other things, first leasehold mortgages on the borrower's leasehold estate in
the land underlying thirty-two of the Fairfield Inn Pool Properties. A
discussion of the Fairfield Inn Pool Loan underlying leases is provided under
"Description of the Mortgage Loans and Mortgaged Properties -- The Fairfield
Inn Pool Loan and Properties."
On the bankruptcy of a lessor or a lessee under a lease, the debtor entity
has the right to assume or reject the lease. Pursuant to Section 365(h) of
the Bankruptcy Code, as it is presently in effect, a lessee whose lease is
rejected by a debtor 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 lease. The leasehold mortgages on the Fairfield Inn Pool
Properties provide that the borrower must remain in possession of the
leasehold if the lessor rejects the lease in a bankruptcy absent the
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 of a lessee/borrower bankruptcy in which
such debtor rejects any or all of its leases, the leasehold mortgagee would
have the right to succeed to the lessee/borrower's position under the lease
only if the lessor had specifically granted the mortgagee such right. The
leases provide for the entry into new leases with the leasehold mortgagee on
the same terms as the old lease upon such a rejection by the lessee, provided
written notice has been sent to the lessor and, among other things, all
defaults under the lease are cured. The leases also permit the granting of
the leasehold mortgages. In the event of concurrent bankruptcy proceedings
involving the lessor and the lessee/borrower, the Trustee may be unable to
enforce the bankrupt lessee/borrower's obligation to refuse to treat a ground
lease rejected by a bankrupt lessor as terminated. In such circumstances, a
lease could be terminated notwithstanding lender protection provisions
contained therein or in the mortgage.
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Inspections. Inspections of the Mortgaged Properties were conducted in
connection with the origination of the Mortgage Loans 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 conditions requiring repair or replacement were
identified in such inspections. See "Description of the Mortgage Pool --
Underwriting Standards -- Property Condition Assessments" for further
information regarding the inspections on the Mortgaged Properties.
Certain of the Mortgaged Properties are in earthquake zones, and one of
the G&L Medical Office II Pool Properties was damaged in an earthquake in
1994. (See "Description of the Mortgage Loans and Mortgaged Properties -- The
G&L Medical Office II Pool Loan -- The Property" below).
Availability of Earthquake, Flood and Other Insurance. The Fairfield Inn
Borrower is required to maintain (a) earthquake insurance to the extent
available at commercially reasonable rates and to the extent such coverage is
customarily obtained for similar properties in the vicinity in an amount
reasonably satisfactory to lender; (b) if the improvements are located within
a federally designated flood hazard area, flood insurance in an amount not
less than the maximum amount available under the National Flood Insurance
Program; and (c) such other insurance as is generally available on
commercially reasonable terms and is generally required by institutional
lenders for properties similar to the Fairfield Inn Properties. Such
insurance generally is required to be maintained by insurance carriers having
a claims paying ability rating of at least "AA-" by S&P. The two Fairfield
Inn Properties located in California are located within earthquake zones;
however, no earthquake insurance is required unless the Fairfield Inn
Borrower fails to comply with the provisions relating to the Earthquake
Restoration Reserve Account as described under "Description of the Mortgage
Loans and Mortgaged Properties -- The Fairfield Inn Pool Loan and Properties"
herein. Ten of the Fairfield Inn Properties located in Florida, Georgia,
North Carolina, South Carolina and Virginia are located within federally
designated flood hazard zones. Earth movement insurance (excluding
California) in the amount of $200,000,000 (with a $25,000 deductible per
occurrence, per location) has been provided by Allendale Insurance Company,
which has a claims paying ability rating of "A" by S&P and "A++/X" by A.M.
Best Company ("Best|Als"). Flood and wind (including hurricane) insurance in
the amount of $2,000,000,000 (with a deductible of up to $100,000 per
occurrence, per location) has been provided under a blanket "all risk" policy
by Allendale Insurance Company.
The Hudson Borrower is required to maintain flood insurance with respect
to any part of the Hudson Property that is located in a federally designated
flood hazard area and in which such insurance is available under the National
Flood Insurance Program. The Hudson Property is not located within a
federally designated flood hazard zone. The Hudson Loan requires the Hudson
Borrower to obtain the insurance described above from insurance carriers
having claims paying abilities rated not less than "AA" by S&P. In addition,
the lender has agreed that the Hudson Borrower may obtain insurance from
Royal Indemnity Company unless such company's claims paying ability rating by
S&P falls below "AA-." Flood insurance in the amount of $125,000,000 (with a
deductible of $25,000) has been provided by Royal Indemnity Company, which
has a claims paying ability rating of "AA" by S&P and "A-/XI" by Best's.
Earthquake insurance in the amount of $125,000,000 (with a deductible of
$25,000) has been provided by Royal Indemnity Company.
The M&H Retail Pool Borrower is required to maintain (a) flood insurance
with respect to any of the M&H Retail Pool Properties 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, (b) earthquake insurance from an insurer satisfactory to the
lender and the Rating Agencies in an amount equal to the probable maximum
loss (based on a 100-year return earthquake); provided that such coverage is
available at commercially reasonable rates and the probable maximum loss
(based on a 475-year return earthquake) is greater than 10% of the actual
replacement cost of improvements, equipment and inventory with a deductible
not in excess of 10% of the full replacement value of the improvements or
such other amount that is acceptable to the lender, and (c) such other
insurance with respect to the improvements, equipment and inventory against
loss or damage of the kind customarily insured against and in such amounts as
are generally required by institutional lenders for comparable properties.
Any such insurance may be effected under a blanket policy. The M&H Retail
Pool Loan requires the M&H Retail Pool 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 one or more of the
other Rating Agencies, except for earthquake insurance which may be obtained
from insurance carriers with lower ratings. None of the M&H Retail Pool
Properties is located within a federally designated flood hazard zone. The
M&H Retail Pool Borrower has obtained separate earthquake insurance for the
M&H Retail Pool Properties in the amount of $20,000,000 (subject to a 10%
deductible of at least $100,000 and $100,000 per occurrence). Such earthquake
insurance is provided as follows: (1) $2,500,000 of the $20,000,000 is
provided by Royal Surplus, which has a claims paying ability rating of "A" by
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S&P and "A-/VII" by Best's, (2) $2,500,000 of the $20,000,000 is provided by
Pacific Insurance, which has a claims paying ability rating of "A-" by S&P
and "A+/XV" by Best's, (3) $5,000,000 of the $20,000,000 is provided by RLI
Ins., which has a claims paying ability rating of "BB" by S&P and "A/VIII" by
Best's and (4) $10,000,000 of the $20,000,000 is provided by Western Re,
which has a claims paying ability rating of "A" by S&P" and "A+/VII" by
Best's.
The Innkeepers Borrower is required to maintain insurance on the
Innkeepers Properties against risk of loss or damage by an "all risk" policy,
in an amount equal to the greater of the full replacement cost of each
Innkeepers Property and the outstanding balance of the Innkeepers Pool Loan.
In addition, the Innkeepers Borrowers are required to maintain (a) flood
insurance with respect to any part of the Innkeepers Property that is located
in a federally designated flood hazard zone, (b) comprehensive public
liability insurance with minimum limits per occurrence of $1,000,000 and
$2,000,000 in the aggregate for any policy year, as well as $10,000,000
excess and/or umbrella reliability insurance for any claims incurred in
connection with the Innkeepers Properties and (c) such other insurance,
including earthquake insurance, as the lender may reasonably request. The
Innkeepers Pool Loan requires the Insurance Borrowers to obtain the insurance
described above from insurance carriers having claims paying abilities rated
not less than "AA" by S&P. [However, the Lender has agreed that the
Innkeepers Borrower may obtain insurance from the Fireman's Fund, which is
not rated by S&P, and Traveler's Insurance Company, which is rated "BBq" by
S&P.]
The DCOTA Borrower is required to maintain (x) flood insurance if any part
of the DCOTA Property is located in an area identified by the Federal
Emergency Management Agency as an area having special flood hazards and in
which flood insurance has been made available under the National Flood
Insurance Program in an amount equal to the lesser of the principal amount of
the DCOTA Loan or the maximum limit of coverage available with respect to the
DCOTA Property and (y) earthquake insurance if reasonably required by the
lender. The DCOTA Property is not located within an area identified as having
special flood hazards. The DCOTA Borrower is required to maintain such
insurance, to the extent available, with insurers with a claims paying
ability of at least "AA-" by S&P and "A-XIV" by Best's. The DCOTA Borrower
has obtained flood and earthquake insurance with a limit of $5,000,000 for
each type of loss, subject to a deductible of $500,000 for flood damage and
$50,000 for earthquake damage. These policies expire on April 1, 1997, and
the DCOTA Borrower is required to replace them with insurance meeting the
requirements of the loan documents.
The G&L Medical Office II Pool Borrower is required to maintain (a) flood
insurance with respect to any part of a G&L Medical Office II Pool Property
or its improvements which is located within a federally designated flood
hazard zone, and which, if lost or flooded, would have a material adverse
effect on the collateral as a whole, (b) earthquake insurance in an amount
not less than the probable maximum loss for the G&L Medical Office II Pool
Properties (as determined by engineering reports prepared for the lender)
with deductibles not greater than 10% of such probable maximum loss and (c)
such other insurance as is reasonably requested by the lender. The G&L
Medical Office II Pool Loan requires the G&L Medical Office II Pool Borrower
to obtain the insurance described above from insurance carriers having claims
paying abilities rated not less than "AA" (or, in the case of earthquake
insurance, "A") or better from at least two of the Rating Agencies or a
national equivalent or otherwise acceptable to the lender in its sole
discretion. Certain of the Mortgaged Properties are in earthquake zones, and
one of the G&L Medical Office II Pool Properties was damaged in an earthquake
in 1994. (See "Description of the Mortgage Loans and Mortgaged Properties --
The G&L Medical Office II Pool Loan -- The Property" below). Flood insurance
in the amount of [ ] (with a deductible of [ ]) has been provided by Royal
Surplus Lines, which has a claims paying ability rating of [ ] by S&P and [ ]
by Best's, and flood insurance in the amount of $4,500,000 (with a deductible
of $100,000 per flood) has been provided by Westchester Fire, which has a
claims paying ability rating of [ ] by S&P and [ ] by Best's. Earthquake
insurance in the amount of [ ] (with a deductible of [ ]) has been provided
by Royal Surplus Lines, and earthquake insurance in the amount of $4,500,000
(with a deductible of 5% per unit of insurance, subject to a minimum of
$25,000 per occurrence with a seven-day waiting period on Loss of Rents) has
been provided by Westchester Fire.
The ICW Borrower is required to maintain (a) flood insurance with respect
to any part of the ICW Property or its improvements which is located within a
federally designated flood hazard zone, in an amount equal to the lesser of
(i) the outstanding principal balance of the ICW Loan or (ii) the maximum
limit of coverage available, (b), earthquake insurance in an amount equal to
the lesser of (i) $3,000,000 and (ii) the maximum amount permitted by law,
and (c) such other insurance as is reasonably required by the lender. The ICW
Loan requires the ICW Borrower to obtain the insurance described above from
insurance carriers having claims paying ability rated not less than "AA" by
S&P and not less than "A X" by Best's or covered by a "cut-through" agreement
acceptable to the lender from a company having such ratings.
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Earthquake insurance coverage is often not obtainable from "AA" or higher
rated insurers. Flood insurance in the amount of $3,000,000 (with a
deductible of $1,250,000) has been provided by Insurance Company of the West,
with a cut-through endorsement to St. Paul Fire & Marine, which has a claims
paying ability rating of "AAA" by S&P and "A+XIV" by Best's. Earthquake
insurance in the amount of $3,000,000 (with a deductible of $1,250,000) has
been provided by Insurance Company of the West, with a cut-through
endorsement to St. Paul Fire & Marine.
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 will be commercially available
in the future.
Most of the Mortgage Loans require that the property insurance carrier for
the applicable properties be rated "AA" or higher by S&P; however, the
current property insurer for the Fairfield Inn Properties is rated "A" by
S&P, and may continue to provide coverage until April 1, 1997. In addition,
with respect to the DCOTA Property and the Hudson Property, the current
property insurer is rated "AA-" by S&P. See "Description of the Mortgage
Loans and Mortgaged Properties."
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, 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 Fairfield Inn Borrower and the Hudson Borrower are
required to be used for costs associated with complying with the ADA. There
can be no assurance that the Hudson Property 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.
Limitations on Enforceability of Cross-Collateralization. The Innkeepers
Pool Loan is comprised of a joint and several obligation of the four entities
which comprise the Innkeepers Borrower, each of which owns one Innkeepers
Property. Each Innkeepers Property will provide security for the entire
indebtedness represented by the Innkeepers Pool Loan, except for the
Innkeepers Properties located in Florida, New York and Kansas, each of which
secures only 110% of the fair market value of such individual Innkeepers
Property as of the closing date of the Innkeepers Loan. The Hudson Loan is
comprised of the joint and several obligation of each of the Hudson
Borrowers, each of which is the holder of a different fee or leasehold
interest in all or a portion of the single Hudson Property. The interest of
each Hudson Borrower in the Hudson Property will provide security for the
entire indebtedness represented by the Hudson Loan. These arrangements are
designed primarily to ensure that all of the collateral pledged to secure the
Innkeepers Pool Loan and the Hudson Loan, and the cash flow and rental income
generated thereby, is available to support debt service on, and ultimate
repayment of, all of the aggregate indebtedness evidenced by the Innkeepers
Pool Loan and the Hudson Loan. In the case of the Innkeepers Pool Loan the
arrangements seek to reduce the risk that the inability of a single
Innkeepers Mortgaged Property securing such loan to generate rental 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 an Individual Innkeepers Borrower or a Hudson Borrower, in an
action brought outside a bankruptcy case, or, if an Individual Innkeepers
Borrower or a Hudson Borrower were to become a debtor in a bankruptcy case,
by such Innkeepers Borrowers. Generally, under federal and most state
fraudulent conveyance statutes, the incurring of an obligation or the
transfer of property or an interest in property (including the granting of a
lien) by a person will be subject to avoidance under certain circumstances if
the person did not receive fair consideration or reasonably equivalent value
in exchange for such obligation or transfer and (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
an Innkeepers Borrower or a Hudson Borrower to secure repayment of the
Innkeepers Pool Loan or the Hudson Loan, as the case may be, 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 Property or Properties, or, in the case of the
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Hudson Borrowers, its interest in the Hudson Property to be encumbered by a
lien securing the entire indebtedness represented by the Innkeepers Pool Loan
or the Hudson Loan (or granted a right to credit support from revenues from
its properties), receive fair consideration or reasonably equivalent value
for pledging its Mortgaged Property or Properties for the benefit of the
other Innkeepers Borrowers, or, in the case of the Hudson Borrowers, its
interest in the Hudson Property (or granting such interest in its cash flow).
Among other things, a legal challenge to the granting of the liens and/or the
incurring of the obligation by the Innkeepers Borrowers or the Hudson
Borrower may focus on the benefits realized by such Innkeepers Borrowers or
the Hudson Borrower from the Innkeepers Pool Loan proceeds or the Hudson Loan
proceeds, as the case may be, as well as the overall cross-collateralization.
If a court were to find or conclude that the granting of the liens or the
incurring of the obligations associated with the Innkeepers Pool Loan or the
Hudson Loan was an avoidable fraudulent conveyance with respect to a
particular Innkeepers Borrower or Hudson Borrower, that court could
subordinate all or part of the Innkeepers Pool Loan or the Hudson Loan to
existing or future indebtedness of that Individual Innkeepers Borrower or
Hudson Borrower, recover payments made under the Innkeepers Pool Loan or the
Hudson Loan or take other actions detrimental to the holders of the
Certificates, including under certain circumstances, invalidating the
Innkeepers Pool Loan or the Hudson Loan or the Mortgages securing such loans.
Risks Associated with Blanket Insurance 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.
Attornment Considerations. Some of the operating leases and 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 Mortgages or contain a
provision that requires the tenant to subordinate the lease if the mortgagee
agrees to enter into a non-disturbance agreement. Not all leases were
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 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., particularly 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. Several of the Mortgaged Properties which
are hotel properties have liquor licenses. The liquor licenses for such
properties may be held by the property manager or operator, as the case may
be (or an affiliate thereof) 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.
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 entitled to
distributions of principal. 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
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respect to any class of Offered Certificates entitled to distributions of
principal, 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 up to an amount equal to
the outstanding Certificate Balance thereof. No representation is made as to
the anticipated rate of prepayments (voluntary or involuntary) 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 Lockout 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
a yield maintenance premium, on the dates, set forth in the following table
(none of which occur earlier than the third payment date preceding the
related Anticipated Repayment Date):
<TABLE>
<CAPTION>
MORTGAGE LOAN
- ------------------------------------
<S> <C>
Fairfield Inn Pool Loan ............. January 11, 2007
Hudson Loan ......................... January 11, 2007
M&H Retail Pool Loan ................ October 11, 2006
Innkeepers Pool Loan ................ December 11, 2008
DCOTA Loan .......................... January 11, 2007
G&L Medical Office II Pool Loan .... September 11, 2006
ICW Loan ............................ November 11, 2006
</TABLE>
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. See "Certain Legal Aspects of the
Mortgage Loans -- Applicability of Usury Laws" in the Prospectus.
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
may 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 may be lower than that assumed at the
time of purchase.
Each Mortgage Loan (other than the ICW Loan) requires that commencing on
the first Due Date after the related 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
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(other than the Hudson Loan) also provides that principal outstanding after
the related 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. The
foregoing features, to the extent applicable, are designed to increase the
likelihood that a Mortgage Loan will be prepaid by the borrower on the
applicable Anticipated Repayment Date. In addition, as described below under
"The Pooling and Servicing Agreement -- Optional Termination; Optional
Mortgage Loan Purchase," the holders of the Class LR Certificates will have
the right to purchase from the Trust Fund any Mortgage Loan not prepaid in
full on its Anticipated Repayment Date; such a purchase would have the same
effect in terms of distributions on the Certificates as a prepayment in full
of the related Mortgage Loan (except that no Prepayment Premium would be
payable).
All of the Mortgage Loans provide that after the applicable Defeasance
Lockout 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. Obligations which provide payments on or prior to all successive payment
dates and the amount of principal that would be due on the related
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
"Release in Exchange for Substitute Collateral" under the description of each
Mortgage Loan in "Description of the Mortgage Loans and Mortgaged
Properties."
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 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 all or 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 (including accrued
unpaid Servicing Compensation). Such interest will accrue from (and
including) the date on which the related Advance is made or the related
expense incurred or the related Servicing Compensation due through the date
of payment or reimbursement, less any amount of interest previously paid in
respect thereof. The Servicer's, the Special 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. The 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. 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.
S-42
<PAGE>
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.
As described under "Description of the Offered Certificates --
Distributions" herein, if the portion of Available Funds distributable in
respect of interest on any class of Offered Certificates on any Distribution
Date is less than the Interest Distribution Amount then payable for such
class, the shortfall will be distributable without interest on such shortfall
to holders of such class of Certificates on subsequent Distribution Dates, to
the extent of Available Funds.
Related Parties May Purchase Certificates. Related parties, including the
Servicer, the Special Servicer or affiliates of the borrowers may purchase
all or part of one or more classes of Certificates. 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, the Special Servicer or any affiliate thereof. Additionally,
the Pooling and Servicing Agreement provides that an affiliate of a borrower
may not vote with respect to matters where there is a potential conflict of
interest.
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" 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. 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 243.
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
PS-1, Class CS-1, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates
are based on the 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 Weighted Average Net Mortgage Pass-Through Rate
for each Distribution Date, assuming that each Mortgage Loan prepays on its
Anticipated Repayment Date (and that all scheduled monthly payments are
timely made and that no other prepayments occur), is set forth in Exhibit C
hereto. See "Prepayment and Yield Considerations -- Yield" herein.
S-43
<PAGE>
DESCRIPTION OF THE MORTGAGE POOL
GENERAL
The Trust Fund will consist primarily of seven Mortgage Loans with an
aggregate principal balance as of the Cut-off Date, after deducting payments
of principal due on or before such date, of $499,568,152. 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 and/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...................... 38
Leasehold Estate....................... 32
Collective Fee and Leasehold
Estate(1)............................. 1
</TABLE>
- ------------
(1) "Collective Fee and Leasehold Estate" means that, in the case of
multiple borrowers, such borrowers' interest in the Mortgaged Property
consists of both a fee interest and one or more leasehold interests as
is the case in the Hudson Loan. See "Description of the Mortgage Loans
and Mortgaged Properties -- The 101 Hudson Street Loan and Property --
The Borrowers."
The Mortgaged Properties consist of extended stay and limited-service
hotels, office buildings, community and neighborhood retail shopping centers
and a retail design trade center. All of the Mortgage Loans are generally
nonrecourse 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, the Originator may be obligated to repurchase a Mortgage
Loan in the event of missing or defective documentation or 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. 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") 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. Pacific Mutual Life Insurance
Company, 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 of
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; Repurchase" herein and
"Description of the Agreements -- Representations and Warranties;
Repurchases" in the Prospectus.
S-44
<PAGE>
SECURITY FOR THE MORTGAGE LOANS
Each Mortgage Loan is generally nonrecourse 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, among
other things, 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 not yet due and payable 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 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 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>
<CAPTION>
<S> <C>
Aggregate Principal Balance (as of the Cut-off Date) ............................... $499,568,152
Lowest Mortgage Loan Principal Balance (as of the Cut-off Date)..................... $25,234,505
Highest Mortgage Loan Principal Balance (as of the Cut-off Date).................... $164,825,657
Average Mortgage Loan Principal Balance (as of the Cut-off Date).................... $71,366,879
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) .................. 279 months
Range of Remaining Term to Anticipated Repayment Date (as of the Cut-off Date) ..... 114 to 144 months
Weighted Average Remaining Term to Anticipated Repayment Date (as of the Cut-off
Date).............................................................................. 120 months
Range of Mortgage Rates per annum .................................................. 7.47% to 8.492%
Weighted Average Mortgage Rate (as of the Cut-off Date)............................. 8.031%
Range of Loan-to-Value ("LTV") Ratios (as of the Cut-off Date)...................... 41.13% to 68.01%
Weighted Average LTV Ratio (as of the Cut-off Date)................................. 55.86%
Range of Debt Service Coverage Ratios (as of the Cut-off Date)...................... 1.50 to 2.22
Weighted Average Debt Service Coverage Ratio (as of the Cut-off Date) .............. 1.70
</TABLE>
- ------------
All of the Mortgage Loans amortize substantially all of their principal
over their respective terms. Each Mortgage Loan (other than the ICW Loan)
requires that after a specified date (each an "Anticipated Repayment Date"),
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 following chart lists the respective Anticipated Repayment
Dates for each of the Mortgage Loans:
<TABLE>
<CAPTION>
MORTGAGE LOAN ANTICIPATED REPAYMENT DATE
- ------------------------------------ ------------------------------
<S> <C>
Fairfield Inn Pool Loan ............. January 11, 2007
Hudson Loan ......................... January 11, 2007
M&H Retail Pool Loan ................ January 11, 2007
Innkeepers Pool Loan ................ March 11, 2009
DCOTA Loan .......................... January 11, 2007
G&L Medical Office II Pool Loan .... September 11, 2006
ICW Loan ............................ February 11, 2007
</TABLE>
S-45
<PAGE>
The Innkeepers Pool Loan requires payment of interest only on the
scheduled payment dates for the first two years of the term of the loan,
followed by constant monthly principal and interest payments over the
remaining term of the Innkeepers Pool Loan.
All of the Mortgage Loans have Prepayment Lockout Periods to, but not
including, their respective Anticipated Repayment Dates (or, in the case of
the M&H Retail Pool Loan, the Innkeepers Pool Loan and, in the case of
prepayments in full, the ICW Loan, to, but not including, three months prior
to its Anticipated Repayment Date). No yield maintenance premium is required
for any 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 and prior to the related Anticipated Repayment Date, the
borrower may obtain the release of one or more of the related Mortgaged
Property or Mortgaged Properties from the lien of the related Mortgage, upon
a payment by the borrower of an amount sufficient to purchase U.S.
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, for such purposes, deemed to be due on the
Anticipated Repayment Dates as if the related loans were repaid on the
applicable Anticipated Repayment Date) that are attributable to a portion of
the loan equal to the release amount required to be paid with respect to the
Mortgaged Property or Mortgaged Properties to be released (the funds
delivered to the Servicer sufficient to purchase such U.S. Obligations, a
"Defeasance Deposit"). The borrower must also satisfy 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, certain debt service coverage tests and the defeasance of
principal generally equal to at least 125% of the Allocated Loan Amount of
such property so released, with certain exceptions in the case of certain of
the Mortgage Loans in the event of a partial prepayment and release in
connection with a casualty or condemnation. In certain cases, the Mortgage
Loans also permit or require the related borrower 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 established,
designated or approved by the lender. 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 made without adjustments which would be required under generally
accepted accounting principles ("GAAP"). For purposes of the tables and when
used elsewhere in this Prospectus Supplement, the following terms have the
meanings described below:
(1) "Total Revenue" 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 approximately December 31, 1996 (or
the period indicated), December 31, 1995 or December 31, 1994. (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. (During periods where less than 12 full months of operating
history is available, partial years may have been annualized) (except
as noted below).
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.
S-46
<PAGE>
(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, 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 (except with
respect to the Hudson Property which used the average of a
ten-year projection).
b. Management Fees: Management fees used in the calculation of Net
Cash Flow, which in all cases equal or exceed the contractual base
rate under the management agreements currently in effect, are as
follows: Fairfield Inn Properties: 5% of Total Revenues; Hudson
Property: 3% of Total Revenues; M&H Retail Pool Properties: 5% of
Total Revenues; G&L Medical Office II Pool Properties: 4% of Total
Revenues (except with respect to the Friendly Hills Healthcare
Building, in which case 3%) of Total Revenues; DCOTA Property: the
actual amount paid to the manager for the relevant period which is
5.4% of Total Revenues; Innkeepers Pool Properties: 4.5% of Total
Revenues.
c. Franchise Fees: Franchise fees and chain services fees used in the
calculation of Net Cash Flow are as follows: (a) for the
Innkeepers Pool Properties, (i) 6.5% of gross revenue was used as
the franchise fee for the Innkeepers Properties which are
Residence Inns and (ii) 8% of gross revenue was used as the
franchise fee for the Innkeepers Properties which are Hampton Inns
and (b) for the Fairfield Inn Properties, chain services fees
equal to the actual amounts paid to the Fairfield Inn Manager
pursuant to the management agreements for the relevant period was
used.
d. Capital Reserves: Annual reserves assumed in calculating Net Cash
Flow are as follows: Fairfield Inn Pool Properties: FF&E reserve
of 7% of total revenues; Hudson Property: capital expenditure
reserve of $0.15/square foot; M&H Retail Pool Properties: reserve
of $0.15/square foot (except with respect to Plaza La Quinta where
reserve is $0.17/square foot); Innkeepers Pool Properties: FF&E
reserve of 5% of total room revenues; DCOTA Property: capital
expenditure reserve of $0.25/square foot (which can also be used
for re-leasing costs); G&L Medical Office II Pool Properties:
capital expenditure reserve of $0.30/square foot; and ICW
Property: not applicable.
e. Rollover Expenses: Annual expenses of tenant rollover (i.e.,
tenant improvements and leasing commissions) assumptions used in
calculating Net Cash Flow are generally as follows:
<TABLE>
<CAPTION>
BASE RENT AVG. LEASE
PER SQUARE TERM RENEWAL
FOOT (YRS) PROBABILITY
------------ ------------ -------------
<S> <C> <C> <C>
Hudson ........ $23-$30 5-10 70%
M&H Retail .... $11-19 5-7.5 60%
DCOTA ......... $24.25 10 70%
G&L Medical .. $28 6-10.5 70%
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
LC LC
NEW RENEWAL NEW RENEWAL
TENANT TENANT TENANT TENANT
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Hudson ........ $30 $5 5% 5%
M&H Retail .... $5 $2 5% 2%
DCOTA ......... $8 $2 4% 2%
G&L Medical .. $5-$25 $2-$7.50 4-5% 1-2%
</TABLE>
f. Occupancy: In calculating Net Cash Flow, adjustments were made to
Total Revenues or Annualized Base Rent to reflect maximum
occupancies of 95% for retail and office properties (other than
the Hudson Property, the ICW Property and the G&L Property known
as the Friendly Hills Healthcare Building). For hotel properties,
occupancies were adjusted downward to levels believed by the
Originator to be sustainable based on the underwritten Average
Daily Room Rate ("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.
S-47
<PAGE>
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 GAAP as a measure of the results of the property's operations
or a substitute for cash flows from operating activities
determined in accordance with GAAP 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 Mortgage 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. There can be no assurance, and it is
very unlikely, that the Allocated Loan Amounts represent the current
values of individual Mortgaged Properties, the price at which an
individual Mortgaged Property could be sold in the future to a
willing buyer or the replacement cost of the Mortgaged Properties.
(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.
(7) "Anticipated Repayment Date" for each Mortgage Loan is the date on
which (i) in the case of all Mortgage Loans except the Hudson Loan,
such Mortgage Loan commences to accrue interest at the "Revised
Interest Rate" for such Mortgage Loan, (ii) all Excess Cash Flow for
such Mortgage Loan (except the ICW Loan) is required to be applied to
payment of principal of such Mortgage Loan and (iii) such Mortgage
Loan generally 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" or "Debt Service Coverage Ratio" means, for each Mortgage
Loan, (i) 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.
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.
(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.
S-48
<PAGE>
(11) "Anticipated Repayment Date LTV" or "ARD 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 reflected in the appraisal used in connection with
the origination of such Mortgage Loan. There can be no assurance that
the value of any particular Mortgaged Property will not have declined
or increased from such original Value.
(12) "SF/Units/Spaces" means, in the case of office or retail 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).
(13) "GLA" means the square footage of the gross leaseable area.
(14) "Occupancy" or "OCC" means the percentage of SF/Units of the property
that are rented. With respect to the hotel properties, "Occupancy" or
"OCC" means the occupancy for each twelve-month period ended
generally December 31, 1994, 1995 or 1996. With respect to other
types of properties, "Occupancy" means the Occupancy as of the date
indicated in the column with the heading "As of Date."
(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 within
three months of the Occupancy date and with respect to credit tenants
and adjusting downward to reflect a minimum vacancy of 95% (except
with respect to the ICW Property, the Hudson Property and the G&L
Property known as the Friendly Hills Healthcare Building).
(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 retail
property, the number of tenant spaces, as of the point in time for
which "Occupancy" was calculated for the related property.
(18) "Average Daily Room Rate" or "ADR" 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) "First P&I Date" means the first Due Date on which the borrower is
required to pay both principal and interest.
(20) "Original Principal Balance" means the principal balance of the
Mortgage Loan at origination.
(21) "Anticipated Term" means the term of the Mortgage Loan as of the
Cut-off Date to the related Anticipated Repayment Date.
(22) "Sales Per SF" means sales, based on the most recent sales data
available to the Originator, for the previous 12 months, or if 12
months of sales data was not available, such sales data as was
available, annualized.
(23) "TTM" means trailing 12 months.
(24) "UW OCC" means the Occupancy rate used in connection with the
origination of a Mortgage Loan by the Originator.
Due to rounding, percentages in the following tables may not add to 100%
and amounts may not add to the indicated total. Throughout the tables and on
Annex A: (a) the ICW Loan is excluded for all calculations of DSCR and LTV;
and (b) the 240-month amortization period for the Hudson Loan assumes that
the Hudson Borrower makes all payments of Base Additional Amortization
Amounts.
S-49
<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>
FIRST
MORTGAGE AMORTIZATION ANTICIPATED P&I
LOAN RATE (1) TERM DATE
- ---------------------------------- ---------- -------------- ------------- ----------
<S> <C> <C> <C> <C>
Fairfield Inns..................... 8.400% 240 120 02/11/97
101 Hudson (1) .................... 7.916 240 120 02/11/97
M & H II........................... 7.500 360 120 2/11/97
Innkeepers (2) .................... 8.150 264 144 04/11/99
Design Center of the Americas ..... 7.470 300 120 02/11/97
G&L................................ 8.492 300 120 10/11/96
Insurance Company of the West (3) 7.506 240 120 03/11/97
---------- -------------- ------------- ----------
Total/Weighted Average............. 8.031% 265 122
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ANTICIPATED ORIGINAL
REPAYMENT STATED PRINCIPAL
LOAN DATE MATURITY BALANCE
- ---------------------------------- ------------- ---------- --------------
<S> <C> <C> <C>
Fairfield Inns..................... 01/11/07 01/11/17 $165,400,000
101 Hudson (1) .................... 01/11/07 01/11/22 135,000,000
M & H II........................... 1/11/07 1/11/27 58,400,000
Innkeepers (2) .................... 03/11/09 03/11/19 43,545,085
Design Center of the Americas ..... 01/11/07 01/11/22 40,000,000
G&L................................ 09/11/06 09/11/21 35,000,000
Insurance Company of the West (3) 02/11/07 02/11/17 25,277,612
------------- ---------- --------------
Total/Weighted Average............. $502,622,697
</TABLE>
<TABLE>
<CAPTION>
CUT-OFF ANTICIPATED
DATE REPAYMENT
PRINCIPAL DATE ANNUAL DEBT
LOAN BALANCE BALANCE VALUE SERVICE
- ----------------------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Fairfield Inns................ $164,825,657 $118,178,860 $271,305,000 $17,099,141
101 Hudson.................... 134,505,878 94,876,938 236,000,000 13,465,764
M & H II ..................... 58,300,969 51,572,473 123,200,000 4,900,095
Innkeepers.................... 42,000,000 29,797,520 86,000,000 4,262,829
Design Center of the
Americas..................... 39,899,849 32,445,946 97,000,000 3,537,796
G&L........................... 34,801,294 29,240,098 51,170,000 3,379,690
Insurance Company of the
West......................... 25,234,505 18,634,587 25,000,000 2,444,730
-------------- -------------- -------------- -------------
Total ........................ $499,568,152 $374,746,422 $889,675,000 $49,090,045
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
ANTICIPATED
CUT-OFF REPAYMENT
NET CASH DATE DATE
LOAN FLOW DSCR LTV LTV
- ----------------------------- ------------- ------ --------- -------------
<S> <C> <C> <C> <C>
Fairfield Inns................ $27,624,104 1.62 61% 44%
101 Hudson.................... 20,495,199 1.52 57 40
M & H II ..................... 9,001,617 1.84 47 42
Innkeepers.................... 9,066,080 2.13 49 35
Design Center of the
Americas..................... 7,841,617 2.22 41 33
G&L........................... 5,056,283 1.50 68 57
Insurance Company of the
West......................... 2,295,000 n/a n/a n/a
------------- ------ --------- -------------
Total ........................ $81,379,900 1.70 56% 42%
</TABLE>
- ------------
(1) The 240 month amortization period for the Hudson Loan assumes that the
Hudson Borrower makes all payments in respect of Base Additional
Amortization Amounts.
(2) On the related origination date, the Innkeepers Borrower prepaid the
principal due for the first two years on the Innkeepers Pool Loan; such
Mortgage Loan now requires payments of only interest on the payment
dates from and including 4/11/97 through and including 3/11/99.
(3) The ICW Loan was excluded for purposes of calculating DSCR and LTV.
S-50
<PAGE>
[Insert Cut-Off Date Allocated Loan Balance Chart]
[Insert Property Type Chart]
S-51
<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 MORTGAGE RATE DSCR LTV
- -------------------- ----------- -------------- -------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Insurance Company of
the West............ 1 $ 25,234,505 5% 7.506% N/A N/A
G&L.................. 1 34,801,294 7 8.492 1.50 68%
Design Center of the
Americas............ 1 39,899,849 8 7.470 2.22 41
Innkeepers........... 1 42,000,000 8 8.150 2.13 49
M & H II............. 1 58,300,969 12 7.500 1.84 47
101 Hudson........... 1 134,505,878 27 7.916 1.52 57
Fairfield Inns....... 1 164,825,657 33 8.400 1.62 61
----------- -------------- -------------- --------------- ---------- ----------
Grand Total.......... 7 $499,568,152 100% 8.031% 1.70 56%
=========== ============== ============== =============== ========== ==========
</TABLE>
The following table sets forth the range of Loan-to-Value Ratios as of the
Cut-off Date.
RANGE OF LOAN-TO-VALUE RATIOS 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-TO-VALUE RATIO LOANS BALANCE BALANCE MORTGAGE RATE DSCR LTV
- ------------------- ----------- -------------- -------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
N/A................. 1 $ 25,234,505 5% 7.506% N/A N/A
40%-44.9%........... 1 39,899,849 8 7.470 2.22 41%
45%-44.9%........... 2 100,300,969 20 7.772 1.96 48
55%-59.9%........... 1 134,505,878 27 7.916 1.52 57
60%-64.9%........... 1 164,825,657 33 8.400 1.62 61
65%-69.9%........... 1 34,801,294 7 8.492 1.50 68
----------- -------------- -------------- --------------- ---------- ----------
Grand Total......... 7 $499,568,152 100% 8.031% 1.70 56%
=========== ============== ============== =============== ========== ==========
</TABLE>
The following tables sets forth the range of Loan-to-Value Ratios as of
the Anticipated Repayment Date.
RANGE OF LOAN-TO-VALUE RATIOS AS OF THE 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 BALANCE NOTE RATE DSCR LTV
- ------------------- ----------- -------------- -------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
N/A................. 1 $ 25,234,505 5% 7.506% N/A N/A
30%-34.9%........... 2 81,899,849 16 7.819 2.17 45%
40%-44.9%........... 3 357,632,503 72 8.071 1.62 57
55%-59.9%........... 1 34,801,294 7 8.492 1.50 68
----------- -------------- -------------- ----------- ---------- ----------
Grand Total......... 7 $499,568,152 100% 8.031% 1.70 56%
=========== ============== ============== =========== ========== ==========
</TABLE>
S-52
<PAGE>
The following table sets forth the range of remaining terms to
Anticipated Repayment Dates as of the Cut-off Date.
REMAINING TERM TO ANTICIPATED REPAYMENT DATE AS OF THE CUT-OFF DATE, IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE WEIGHTED WEIGHTED WEIGHTED
REMAINING TERM AS OF THE MORTGAGE PRINCIPAL PRINCIPAL AVERAGE AVERAGE AVERAGE
CUT-OFF DATE IN MONTHS LOANS BALANCE BALANCE NOTE RATE DSCR LTV
- ------------------------ ----------- -------------- -------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
114...................... 1 $ 34,801,294 7% 8.492% 1.50 68%
118...................... 4 397,532,353 80 8.011 1.68 56
119...................... 1 25,234,505 5 7.506 N/A N/A
144...................... 1 42,000,000 8 8.150 2.13 49
----------- -------------- -------------- ----------- ---------- ----------
Grand Total.............. 7 $499,568,152 100% 8.031% 1.70 56%
=========== ============== ============== =========== ========== ==========
</TABLE>
The following table sets forth the range of remaining Prepayment Lockout
Periods as of the Cut-off Date.
REMAINING PREPAYMENT LOCKOUT PERIODS AS OF THE CUT-OFF DATE, IN MONTHS
<TABLE>
<CAPTION>
PERCENT BY
AGGREGATE AGGREGATE
NUMBER OF CUT-OFF DATE CUT-OFF DATE WEIGHTED WEIGHTED WEIGHTED
REMAINING LOCKOUT AS OF THE MORTGAGE PRINCIPAL PRINCIPAL AVERAGE AVERAGE AVERAGE
CUT-OFF DATE IN MONTHS LOANS BALANCE BALANCE NOTE RATE DSCR LTV
- --------------------------- ----------- -------------- -------------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
113......................... 1 $ 34,801,294 7% 8.492% 1.50 68%
114......................... 1 58,300,969 12 7.500 1.84 47
115......................... 1 25,234,505 5 7.506 N/A N/A
117......................... 3 339,231,384 68 8.099 1.65 57
140......................... 1 42,000,000 8 8.150 2.13 49
----------- -------------- -------------- ----------- ---------- ----------
Grand Total................. 7 $499,568,152 100% 8.031% 1.70 56%
=========== ============== ============== =========== ========== ==========
</TABLE>
S-53
<PAGE>
The following table sets forth certain characteristics of the Mortgaged
Properties by property type.
MORTGAGED PROPERTIES BY PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
PERCENT DATE
OF TOTAL CUT-OFF DATE ALLOCATED
NUMBER OF NUMBER OF ALLOCATED LOAN LOAN
PROPERTY TYPE PROPERTIES PROPERTIES AMOUNT AMOUNT SF/UNITS
- ------------- ---------- ---------- -------------- ---------- ---------
<S> <C> <C> <C> <C> <C>
HOTEL
Hotel--Limited 53 75% $176,793,116 35% 6,993
Hotel--Extended 5 7 30,032,541 6 619
---------- ---------- -------------- ---------- ---------
58 82 206,825,657 41 7,612
OFFICE
Office--Medical Office 4 6 34,801,294 7 261,780
Office 1 1 134,505,878 27 1,230,087
---------- ---------- -------------- ---------- ---------
5 7 169,307,172 34 1,491,867
RETAIL
Retail--Anchor 6 8 58,300,969 12 1,398,516
Retail--Design Center 1 1 39,899,849 8 554,273
---------- ---------- -------------- ---------- ---------
7 10 98,200,818 20 1,952,789
NET LEASE
Net Lease 1 1 25,234,505 5 164,764
---------- ---------- -------------- ---------- ---------
Grand Total 71 100.00% $499,568,152 100% 3,617,032
========== ========== ============== ========== =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
MOST
RECENT MOST PERCENT OF WEIGHTED WEIGHTED
PERIOD RECENT NET CASH TOTAL NET AVERAGE AVERAGE
PROPERTY TYPE VALUE REVENUE PERIOD NOI FLOW CASH FLOW DSCR LTV
- ------------- ------------- ------------ ----------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HOTEL
Hotel--Limited $294,405,000 $102,234,985 $32,310,711 $30,091,433 37% 1.65 60%
Hotel--Extended 62,900,000 19,024,534 8,269,809 6,598,751 8 2.13 49
------------- ----------- ----------- ---------- ---------- -------- --------
357,305,000 121,259,519 40,580,520 36,690,184 45 1.72 58
OFFICE
Office--Medical Office 51,170,000 7,886,718 5,809,558 5,056,283 6 1.50 68
Office 236,000,000 29,223,384 20,078,302 20,495,199 25 1.52 57
------------- ----------- ----------- ---------- ---------- -------- --------
287,170,000 37,110,102 25,887,860 25,551,482 31 1.52 59
RETAIL
Retail--Anchor 123,200,000 13,425,553 8,140,095 9,001,617 11 1.84 47
Retail--Design Center 97,000,000 12,595,107 8,750,376 7,841,617 10 2.22 41
------------- ------------ ----------- ---------- ---------- -------- --------
220,200,000 26,020,660 16,890,471 16,843,234 21 1.99 45
NET LEASE
Net Lease 25,000,000 -- -- 2,295,000 3 N/A N/A
------------- ------------ ----------- ---------- ---------- -------- --------
Grand Total $889,675,000 $184,390,281 $ 83,358,851 $81,379,900 100% 1.70 56%
============= ============ =========== =========== ========== ======== ========
</TABLE>
S-54
<PAGE>
The following table sets forth certain information regarding the Mortgaged
Properties by state.
MORTGAGED PROPERTIES BY STATE
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF DATE CUT-OFF DATE PERCENT OF
NUMBER OF ALLOCATED PRINCIPAL SUM OF NET TOTAL NET PERCENT OF
STATE PROPERTIES LOAN AMOUNT BALANCE CASH FLOW CASH FLOW SUM OF VALUE TOTAL VALUE
- -------------- ------------ -------------- -------------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
New Jersey..... 2 $139,238,544 28% $21,498,287 26% $245,900,000 28%
California..... 14 136,400,993 27 20,093,378 25 239,252,000 27
Florida........ 7 60,151,324 12 11,223,330 14 130,807,000 15
North
Carolina...... 7 25,480,701 5 4,294,648 5 40,937,000 5
Georgia........ 7 23,202,912 5 4,254,793 5 33,221,000 4
Michigan....... 6 15,934,375 3 2,719,321 3 30,366,000 3
Illinois....... 4 13,905,044 3 2,162,454 3 22,261,000 3
Ohio........... 4 13,090,406 3 2,055,454 3 21,857,000 2
Kansas......... 3 11,074,333 2 2,036,603 2 17,767,000 2
South
Carolina...... 3 10,112,582 2 1,779,474 2 16,384,000 2
New York....... 2 8,439,510 2 1,675,660 2 16,000,000 2
Indiana........ 2 7,804,192 2 1,264,885 2 12,150,000 1
Alabama........ 2 7,743,915 2 1,350,295 2 12,630,000 1
Wisconsin...... 2 6,468,970 1 1,151,387 1 12,018,000 1
Colorado....... 1 6,074,078 1 1,354,614 1 11,100,000 1
Virginia....... 2 4,913,172 1 850,196 1 8,639,000 1
Iowa........... 1 3,663,744 1 609,335 1 6,999,000 1
Tennessee...... 1 3,110,458 1 526,811 1 6,585,000 1
Missouri....... 1 2,758,899 1 478,975 1 4,802,000 1
------------ -------------- -------------- ------------- ------------ -------------- -------------
Grand Total.... 71 $499,568,152 100% $81,379,900 100% $889,675,000 100%
============ ============== ============== ============= ============ ============== =============
</TABLE>
S-55
<PAGE>
The following table sets forth certain information regarding the hotel
properties (the Fairfield Inn Properties and Innkeepers Pool Properties) by
state.
HOTEL PROPERTIES BY STATE
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF DATE
CUT-OFF DATE ALLOCATED PERCENT OF
NUMBER OF ALLOCATED LOAN SUM OFNET TOTAL NET PERCENT OF
STATE PROPERTIES LOAN AMOUNT AMOUNT CASH FLOW CASH FLOW SUM OF VALUE TOTAL VALUE
- --------------- ------------ -------------- -------------- ------------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
North Carolina . 7 $ 25,480,701 12% $ 4,294,648 12% $ 40,937,000 11%
Georgia ........ 7 23,202,912 11% 4,254,793 12 33,221,000 9
Florida ........ 6 20,251,475 10% 3,381,713 9 33,807,000 9
California ..... 3 18,064,225 9% 3,740,478 10 39,882,000 11
Michigan ....... 6 15,934,375 8% 2,719,321 7 30,366,000 8
Illinois ....... 4 13,905,044 7% 2,162,454 6 22,261,000 6
Ohio ........... 4 13,090,406 6% 2,055,454 6 21,857,000 6
Kansas ......... 3 11,074,333 5% 2,036,603 6 17,767,000 5
South Carolina 3 10,112,582 5% 1,779,474 5 16,384,000 5
New York ....... 2 8,439,510 4% 1,675,660 5 16,000,000 4
Indiana ........ 2 7,804,192 4% 1,264,885 3 12,150,000 3
Alabama ........ 2 7,743,915 4% 1,350,295 4 12,630,000 4
Wisconsin ...... 2 6,468,970 3% 1,151,387 3 12,018,000 3
Colorado ....... 1 6,074,078 3% 1,354,614 4 11,100,000 3
Virginia ....... 2 4,913,172 2% 850,196 2 8,639,000 2
New Jersey ..... 1 4,732,666 2% 1,003,088 3 9,900,000 3
Iowa ........... 1 3,663,744 2% 609,335 2 6,999,000 2
Tennessee....... 1 3,110,458 2% 526,811 1 6,585,000 2
Missouri........ 1 2,758,899 1% 478,975 1 4,802,000 1
------------ -------------- -------------- ------------- ------------ -------------- -------------
Grand Total..... 58 $206,825,657 100% $36,690,184 100% $357,305,000 100%
============ ============== ============== ============= ============ ============== =============
</TABLE>
S-56
<PAGE>
The following table shows the Occupancy and Average Daily Room Rate ("ADR")
of the hotel properties (the Fairfield Inn Properties and Innkeepers Pool
Properties) for 1993, 1994, 1995, 1996.
HOTEL PROPERTY OCCUPANCY AND AVERAGE DAILY RATE
<TABLE>
<CAPTION>
1993 1994 1995 1996 U/W 1993 1994 1995 1996 U/W
HOTEL UNITS OCC OCC OCC OCC OCC ADR ADR ADR ADR ADR
- ----------------------------- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FAIRFIELD INNS
Fairfield -Atlanta Metro -1 . 130 87% 87% 84% 77% 78% $42 $46 $50 $55 $56
Fairfield -Atlanta Metro -2 . 133 85 86 85 79 78 37 41 46 54 55
Fairfield -Atlanta Metro -3 . 134 84 85 80 72 75 39 40 45 51 50
Fairfield -Atlanta Metro -4 . 135 86 89 89 80 78 38 44 51 58 58
Fairfield -Atlanta Metro -5 . 135 85 85 83 76 78 35 41 48 55 55
Fairfield -Atlanta Metro -6 . 132 82 86 83 77 78 38 40 45 52 51
Fairfield -Florida -1........ 132 85 86 83 86 79 36 35 38 41 41
Fairfield -Florida -2........ 135 78 84 86 82 75 40 42 46 49 48
Fairfield -Florida -3........ 135 94 89 90 86 80 56 55 56 56 56
Fairfield -Florida -4........ 135 87 83 85 84 80 42 42 41 48 47
Fairfield -Great Lakes -1 ... 132 93 94 90 80 80 32 36 40 51 48
Fairfield -Great Lakes -2 ... 133 77 80 81 79 75 36 40 46 52 50
Fairfield -Great Lakes -3 ... 132 73 78 76 73 72 35 37 43 48 47
Fairfield -Great Lakes -4 ... 134 78 80 78 77 75 39 43 48 53 52
Fairfield -MidAtlantic -1 ... 132 86 88 82 82 80 37 41 46 50 50
Fairfield -MidAtlantic -2 ... 135 88 86 87 84 80 40 42 46 47 47
Fairfield -MidAtlantic -3 ... 135 87 86 82 76 77 35 36 41 44 43
Fairfield -MidAtlantic -4 ... 134 89 87 86 82 80 41 44 49 53 52
Fairfield -MidAtlantic -5 ... 135 82 85 84 84 80 35 38 45 50 49
Fairfield -MidAtlantic -6 ... 133 88 90 87 78 80 30 33 37 42 41
Fairfield -MidAtlantic -7 ... 135 85 83 81 77 75 40 42 45 48 48
Fairfield -MidAtlantic -8 ... 134 75 77 74 72 73 34 34 40 42 41
Fairfield -MidAtlantic -9 ... 134 62 68 64 59 63 37 38 43 46 45
Fairfield -Midwest -1........ 135 79 79 74 73 72 44 45 47 47 47
Fairfield -Midwest -10....... 134 75 79 82 80 75 40 42 46 51 50
Fairfield -Midwest -11....... 135 75 78 77 72 72 37 39 42 46 45
Fairfield -Midwest -2........ 128 78 78 80 68 69 39 43 45 48 48
Fairfield -Midwest -3........ 135 78 78 80 75 75 38 40 45 50 48
Fairfield -Midwest -4........ 135 85 88 89 84 80 46 49 51 55 55
Fairfield -Midwest -5........ 131 77 78 79 74 74 43 45 49 51 51
Fairfield -Midwest -6........ 131 76 78 79 74 74 42 44 48 53 51
Fairfield -Midwest -7........ 134 77 82 82 78 75 41 43 47 54 54
Fairfield -Midwest -8........ 135 80 82 85 79 79 41 45 48 54 53
Fairfield -Midwest -9........ 133 75 74 74 72 70 39 42 43 47 46
Fairfield -North Central -1 . 135 75 76 80 77 75 40 45 47 52 51
Fairfield -North Central -2 . 135 79 75 73 74 72 38 40 43 45 44
Fairfield -North Central -3 . 135 79 75 77 74 75 39 40 42 47 45
Fairfield -North Central -4 . 135 80 82 81 81 77 42 42 46 50 49
Fairfield -North Central -5 . 135 81 84 87 86 80 41 44 46 49 48
S-57
<PAGE>
1993 1994 1995 1996 U/W 1993 1994 1995 1996 U/W
HOTEL UNITS OCC OCC OCC OCC OCC ADR ADR ADR ADR ADR
- ----------------------------- ------- ------ ------ ------ ------ ----- ------ ------ ------ ------ -----
Fairfield -North Central -6 . 134 79% 75% 74% 66% 68% $40 $42 $45 $48 $48
Fairfield -North Central -7 . 135 78 74 75 71 73 40 42 45 52 51
Fairfield -SouthEast -3 ..... 135 78 80 77 73 73 39 40 44 50 48
Fairfield -SouthEast -4 ..... 132 79 81 79 77 75 37 39 41 44 43
Fairfield -SouthEast -5 ..... 120 71 71 72 68 69 42 47 52 54 55
Fairfield -SouthEast -6 ..... 132 80 81 82 80 79 36 40 45 50 48
Fairfield -SouthEast -7 ..... 134 83 82 81 77 77 40 42 44 49 48
Fairfield -West -1........... 135 73 75 73 71 69 35 35 39 41 40
Fairfield -West -2........... 135 78 84 82 78 75 35 36 38 43 41
Fairfield SouthEast -1....... 132 83 82 79 74 75 46 47 50 52 51
Fairfield SouthEast -2....... 133 82 85 77 76 75 40 43 47 51 50
------- ------ ------ ------ ------ ----- ------ ------ ------ ------ -----
6,672 81% 81% 81% 77% 75% $39 $41 $45 $50 $49
======= ====== ====== ====== ====== ===== ====== ====== ====== ====== =====
INNKEEPERS
Residence Inn -Sunnyvale .... 231 78% 80% 86% 91% 80% $79 $83 $88 $99 $99
Hampton Inn -Naples.......... 107 78 74 70 72 70 56 60 66 66 66
Residence Inn -Binghampton .. 72 82 81 82 83 80 82 84 85 84 84
Hampton Inn -Islandia........ 121 70 75 75 76 75 66 70 75 76 76
Residence Inn -Cherry Hill .. 96 92 92 91 89 80 81 84 89 94 94
Residence Inn -Denver........ 156 87 90 86 86 80 68 68 75 82 82
Residence Inn -Wichita....... 64 83 83 82 81 80 73 75 76 79 78
Hampton Inn -Tallahassee .... 93 85 86 82 78 50 56 60 60
------- ------ ------ ------ ------ ----- ------ ------ ------ ------ -----
940 81% 82% 83% 84% 78% $72 $73 $77 $83 $83
======= ====== ====== ====== ====== ===== ====== ====== ====== ====== =====
</TABLE>
S-58
<PAGE>
The following table sets forth scheduled lease expirations of the M&H
Retail Pool Properties for the twelve months ending December 31, 1997 and for
each calendar year thereafter through 2016. The table assumes that none of
the tenants exercise early termination or renewal options.
ANNUAL RETAIL LEASE EXPIRATION -- M&H II RETAIL POOL LOAN
<TABLE>
<CAPTION>
SUM OF
OCCUPIED PERCENT OF ANNUALIZED
NUMBER SQUARE PERCENT OF ANNUALIZED ANNUALIZED BASE RENT
YEAR ENDING DEC. 31 OF STORES FEET TOTAL OCCUPIED SF BASE RENT BASE RENT PER SF
- ------------------- ----------- ----------- ----------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1997................ 18 35,579 3% $ 434,955 4% $12.23
1998................ 28 105,278 9 1,205,237 10 11.45
1999................ 30 141,081 12 1,459,691 12 10.35
2000................ 26 93,950 8 1,456,882 12 15.51
2001................ 17 70,230 6 642,874 5 9.15
2002................ 1 0 0 15,210 0
2003................ 3 26,616 2 225,068 2 8.46
2004................ 3 80,665 7 1,111,211 9 13.78
2005................ 2 20,584 2 179,004 2 8.70
2006................ 7 20,790 2 454,052 4 21.84
2007................ 1 167,154 14 121,324 1 0.73
2008................ 3 39,300 3 386,830 3 9.84
2009................ 4 79,938 7 726,628 6 9.09
2010................ 3 49,407 4 708,498 6 14.34
2011................ 9 163,530 14 2,068,921 18 12.65
2012................ 1 36,800 3 223,193 2 6.07
2013................ 1 4,300 0 69,660 1 16.20
2014................ 1 19,560 2 94,080 1 4.81
2016................ 1 2,000 0 60,000 1 30.00
MTM................. 7 27,095 2 163,010 1 6.02
----------- ----------- ----------------- ------------- ------------ ------------
Grand Total......... 166 1,183,857 100.00% $11,806,329 100.00% $ 9.97
=========== =========== ================= ============= ============ ============
</TABLE>
S-59
<PAGE>
The following table sets forth scheduled lease expirations at the Hudson
Property, for the twelve months ending December 31, 1997 and for each
calendar year thereafter through 2011. The table assumes that none of the
tenants exercise early termination or renewal options.
ANNUAL OFFICE LEASE EXPIRATION -- HUDSON PROPERTY
<TABLE>
<CAPTION>
PERCENT OF ANNUALIZED
YEAR ENDING SUM OF PERCENT OF ANNUALIZED ANNUALIZED BASE RENT
DEC. 31 SQUARE FT TOTAL SF BASE RENT BASE RENT PER SF
- ------------- ----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1998.......... 8,293 1% $ 182,446 1% $22.00
2000.......... 8,393 1 213,971 1 25.49
2001.......... 5,578 0 141,661 1 25.40
2002.......... 34,991 3 932,106 5 26.64
2003.......... 4,284 0 98,532 1 23.00
2004.......... 30,885 3 795,289 4 25.75
2006.......... 843 0 25,290 0 30.00
2007.......... 590,174 48 8,860,439 47 15.01
2008.......... 33,600 3 715,164 4 21.28
2010.......... 434,500 35 5,809,776 31 13.37
2011.......... 63,372 5 950,580 5 15.00
Vacant........ 15,174 1 -- 0 --
----------- ------------ ------------- ------------ ------------
Grand Total .. 1,230,087 100% $18,725,254 100% $15.22
=========== ============ ============= ============ ============
</TABLE>
ANNUAL OFFICE LEASE EXPIRATION -- G&L LOAN
<TABLE>
<CAPTION>
SUM OF PERCENT OF PERCENT OF ANNUALIZED
YEAR ENDING NO. OF OCCUPIED TOTAL ANNUALIZED ANNUALIZED BASE RENT
DEC. 31 LEASES SQUARE FT OCCUPIED SF BASE RENT BASE RENT PER SF
- ------------- -------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1997.......... 9 7,399 3% $ 199,321 3% $26.94
1998.......... 15 30,502 12 953,542 13 31.26
1999.......... 13 24,647 10 662,079 9 26.86
2000.......... 29 45,733 18 1,458,578 21 31.89
2001.......... 17 24,473 10 694,367 10 28.37
2002.......... 7 23,150 9 601,389 8 25.98
2003.......... 2 3,753 2 80,565 1 21.47
2004.......... 2 49,847 20 1,152,401 16 23.12
2005.......... 4 7,700 3 339,115 5 44.04
2006.......... 5 12,989 5 411,121 6 31.65
2007.......... 1 4,998 2 283,716 4 56.77
2009.......... 1 6,000 2 148,218 2 24.70
2011.......... 1 1,340 1 27,528 0 20.54
MTM........... 18 6,257 3 89,300 1 14.27
-------- ----------- ------------- ------------ ------------ ------------
Grand Total .. 124 248,788 100% $7,101,239 100% $28.54
======== =========== ============= ============ ============ ============
</TABLE>
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<PAGE>
The following table sets forth scheduled lease expirations at the DCOTA
Property 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 -- DCOTA LOAN
<TABLE>
<CAPTION>
PERCENT OF ANNUALIZED
NUMBER OF SUM OF PERCENT ANNUALIZED ANNUALIZED BASE RENT
PROPERTY YEAR ENDING DEC. 31 LEASES TOTAL SF OF TOTAL SF BASE RENT BASE RENT PER SF
- ---------------------------- ----------- ---------- ------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
1997......................... 14 41,543 7% $ 896,749 7% $21.59
1998......................... 15 51,881 9 1,319,574 11 25.43
1999......................... 14 50,831 9 1,339,592 11 26.35
2000......................... 26 140,190 25 3,003,882 24 21.43
2001......................... 19 85,152 15 2,114,337 17 24.83
2002......................... 6 40,791 7 979,006 8 24.00
2003......................... 9 64,523 12 1,544,560 12 23.94
2004......................... 1 1,684 0 42,437 0 25.20
2005......................... 1 3,039 1 74,874 1 24.64
2006......................... 8 54,264 10 1,112,881 9 20.51
Vacant....................... N/A 20,375 4 -- 0 --
----------- ---------- ------------- ------------- ------------ ------------
Grand Total.................. 113 554,273 100% $12,427,892 100% $22.42
=========== ========== ============= ============= ============ ============
</TABLE>
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<PAGE>
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 twelve months. Additionally, all borrowers were required to
provide 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 in connection with the origination of each Mortgage Loan. The
appraisals were performed by independent MAI appraisers who 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. See
"Risk Factors and Other Special Considerations -- Limitations of Appraisals."
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 market, 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 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 a 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
Mortgaged Properties" herein. The Servicer does not manage any of the
Mortgaged Properties and will not be expected to manage any REO Properties.
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<PAGE>
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.
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<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS AND MORTGAGED PROPERTIES
THE FAIRFIELD INN POOL LOAN AND PROPERTIES
The Loan. The Fairfield Inn Pool Loan was originated by the Originator on
January 13, 1997, had a principal balance at origination of $165,400,000 and
has a principal balance as of the Cut-off Date of $164,825,657 and is secured
by Mortgages (the "Fairfield Inn Mortgages") encumbering 50 hotel properties
(the "Fairfield Inn Properties") located in 16 states. The Fairfield Inn
Mortgages are cross-collateralized with each other (i.e. each Fairfield Inn
Mortgage secures the full principal balance of the Fairfield Inn Pool Loan)
and cross-defaulted.
The Borrower. Fairfield Inn by Marriott Limited Partnership (the
"Fairfield Inn Borrower") is a Delaware limited partnership formed on August
23, 1989 for the sole purpose of investing in, acquiring, owning, using,
operating or managing the Fairfield Inn Properties as part of the Fairfield
Inn by Marriott system and engaging in any other activities related thereto.
The Fairfield Inn Borrower has represented to the Originator under the loan
documents that it has not engaged in any business unrelated to the ownership
and operation of the Fairfield Inn Properties, nor does it own any assets
other than those related to the Fairfield Inn Properties. The general partner
of the Fairfield Inn Borrower is Marriott FIBM One Corporation, a special
purpose Delaware corporation, whose corporate authority is limited to acting
as the general partner of the Fairfield Inn Borrower. Marriott FIBM One
Corporation is a wholly owned subsidiary of Host Marriott Corporation, a
Delaware corporation. The Fairfield Inn Borrower has over 3,000 limited
partners who are entitled to receive periodic partnership distributions based
on net cash flow, if available, after payment of debt service and reserves.
Security. The Fairfield Inn Pool Loan is a nonrecourse loan, secured by 50
limited service hotels operated under the "Fairfield Inn By Marriott" name
(18 of which are owned in fee simple by the Fairfield Inn Borrower and 32 of
which are located on land that the Fairfield Inn Borrower leases from
affiliates of Marriott International, Inc. ("MII"), a Delaware corporation,
see "--Ground Leases" below), and certain collateral relating thereto
(including an assignment of leases and rents and funds in certain accounts).
Subject to exceptions for fraud or material misrepresentation,
misappropriation of funds and certain environmental matters, neither the
Fairfield Inn Borrower nor any of its affiliates is personally liable for
payment of the Fairfield Inn Pool Loan. The Fairfield Inn Borrower has agreed
to indemnify the lender and its successors and assigns against certain
environmental liabilities and expenses arising from or in connection with
certain environmental matters. The Fairfield Inn Borrower has made certain
environmental representations and has specially warranted that it owns good
and marketable title to the fee and leasehold estates, subject only to
specified permitted encumbrances. The lender is the named insured under
mortgagee title insurance policies (which will be assigned to the Trust Fund)
which insure that each Fairfield Inn Mortgage constitutes a valid and
enforceable first priority lien on the applicable property subject to certain
exceptions and exclusions from coverage set forth therein.
Payment Terms. The Fairfield Inn Pool Loan matures on January 11, 2017
(the "Fairfield Inn Maturity Date"). The loan bears interest at a fixed rate
per annum equal to 8.40% (the "Fairfield Inn Current Interest Rate") through
and including January 10, 2007. On and after January 11, 2007 (the "Fairfield
Inn Anticipated Repayment Date"), the Fairfield Inn Pool Loan bears interest
at a fixed rate per annum (as in effect for any such annual period, the
"Fairfield Inn Revised Interest Rate") equal to the greater of (i) the
Fairfield Inn Current Interest Rate plus 2.00% or (ii) the yield as of
January 11, 2007 or such annual adjustment date, as the case may be,
calculated by linear interpolation of the yields on U.S. Treasury Constant
Maturities with terms (one longer and one shorter) most nearly approximating
those of non-callable U.S. Treasury Obligations having maturities as close as
possible to January 11, 2017 plus 2%. However, as described below, until the
principal balance of the Fairfield Inn Pool Loan has been reduced to zero,
the Fairfield Inn Borrower will be required to pay interest at the Fairfield
Inn Current Interest Rate and the interest accrued at the excess of the
Fairfield Inn Revised Interest Rate over the Fairfield Inn Current Interest
Rate will be deferred and will bear interest at the Fairfield Inn Revised
Interest Rate then in effect (such accrued and deferred interest thereon, the
"Fairfield Inn Excess Interest"). Interest on the Fairfield Inn Pool Loan is
calculated based on the actual number of days elapsed and a 360-day year.
Commencing on February 11, 1997, the Fairfield Inn Pool Loan requires
constant monthly payments of principal and interest of $1,424,928.44 (the
"Fairfield Inn Monthly Debt Service Payment") (based on a 240 month
amortization schedule and the Fairfield Inn Current Interest Rate). Payment
of the balance of the principal, if any, together with all accrued and unpaid
interest (including Fairfield Inn Excess Interest) is required on the
Fairfield Inn Maturity Date. Commencing on the first payment date after the
Fairfield Inn Anticipated Repayment Date and continuing on each monthly
payment date thereafter, in addition to the Fairfield Inn Monthly Debt
Service Payments, the Fairfield Inn
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<PAGE>
Borrower is required to pay 100% of Fairfield Inn Excess Cash Flow (as
defined below) for each of the operating profit payment dates occurring
during the Fairfield Inn Accounting Periods (as defined below) ending during
the Fairfield Inn Debt Service Period (as defined below) relating to the
payment for application in the following order of priority: first, to pay
principal until the principal balance of the Fairfield Inn Pool Loan is
reduced to zero; and second, to pay the Fairfield Inn Excess Interest. As
used herein, "Fairfield Inn Excess Cash Flow" means, for each period of
determination, the difference between gross revenues of the Fairfield Inn
Properties (calculated as provided in the related loan documents) and the sum
of (a) operating expenses (as so calculated), (b) amounts required to fund
any shortfall in the Ground Rent Reserve Account (as defined below), (c)
certain servicing expenses (including those resulting from any activity of
the Special Servicer following an event of default), as required under the
loan documents (the "Servicing Expenses"), (d) the Fairfield Inn Monthly Debt
Service Payment, (e) any other amounts then due and payable to the lender
under the loan documents, (f) amounts required to fund the Tax and Insurance
Account, the Debt Service Reserve Account and the Capital Expenditure/FF&E
Reserve Account, (g) amounts due in respect of certain loans made to the
Fairfield Inn Borrower by the Fairfield Inn Manager, subordinated rental
obligations on ground leases and current Incentive Management Fees (as
described below under "--Cash Management Procedures"), (h) payments for
certain repairs, alterations, improvements, renewals or replacements with
respect to the Fairfield Inn Properties, (i) an annual amount equal to the
lesser of (y) the aggregate amount of payments for, or reserves created for
payment of, administrative expenses of the Fairfield Inn Borrower or (z)
$450,000 for fiscal year 1997, which amount will be increased by increases in
the Consumer Price Index for each fiscal year thereafter and (j) if an
earthquake has occurred and the cost of restoring the applicable Fairfield
Inn Property is less than 50% of the related Allocated Loan Amount, at the
direction of the Fairfield Inn Borrower to fund the Earthquake Restoration
Reserve Account (as defined below) in the amount of such cost. A "Fairfield
Inn Accounting Period" generally means each period of four consecutive weeks
having the same beginning and ending dates as the Fairfield Inn Manager's
corresponding four week accounting period. A "Fairfield Inn Debt Service
Period" means the period from and including the eleventh day of the calendar
month or the next business day thereafter (the "Fairfield Inn Debt Service
Payment Date") immediately preceding each respective Fairfield Inn Debt
Service Payment Date to and including the tenth day of the month in which
such Fairfield Inn Debt Service Payment Date occurs.
The scheduled principal balance of the Fairfield Inn Pool Loan as of the
Fairfield Inn Anticipated Repayment Date is expected to be approximately
$118,178,860.
Any interest payment or principal payment not paid when due will bear
interest at a default rate equal to the lesser of (i) 2.00% above the
Fairfield Inn Current Interest Rate or the Fairfield Inn Revised Interest
Rate, as applicable, and (ii) the maximum rate allowed by law.
The Fairfield Inn Borrower has agreed to pay a portion of the Rating
Agency surveillance fees relating to the Certificates.
Prepayment. Voluntary prepayment of the Fairfield Inn Pool Loan is
prohibited prior to the Fairfield Inn Anticipated Repayment Date. From and
after the Anticipated Repayment Date, the Fairfield Inn Borrower will be
permitted to prepay the Fairfield Inn Pool Loan, in whole or in part, on any
payment date, without payment of a yield maintenance premium. Principal
payments on the Fairfield Inn Pool Loan may occur on payment dates on or
after the Fairfield Inn Anticipated Repayment Date through the application of
Fairfield Inn Excess Cash Flow as described above under "--Payment Terms."
The Fairfield Inn Pool Loan may also be prepaid as a result of certain events
with respect to condemnation or casualty, as described below under
"--Condemnation and Casualty." If the Fairfield Inn Borrower prepays any
portion of the principal balance of the Fairfield Inn Pool Loan on or after
the Fairfield Inn Anticipated Repayment Date (in connection with the release
of a Fairfield Inn Property), the Fairfield Inn Monthly Debt Service Payment
will be reduced proportionately.
In the event of a prepayment in part of the Fairfield Inn Pool Loan as the
result of a voluntary sale of a Fairfield Inn Property after the Fairfield
Inn Anticipated Repayment Date, the Fairfield Inn Borrower may obtain the
release of such Fairfield Inn Property if (a) no event of default has
occurred and is continuing (other than a default that will be cured by such
release), (b) the Fairfield Inn Borrower has paid (i) all accrued and unpaid
interest and all other sums due under the Fairfield Inn Pool Loan and all
other loan documents executed in connection therewith, through and including
such payment date and (ii) an amount equal to 125% of the Allocated Loan
Amount of the Fairfield Inn Property to be released and (c) evidence
satisfactory to the Servicer is provided to the effect that the Fairfield Inn
DSCR (as defined below) will be maintained for thirteen full Fairfield Inn
Accounting Periods commencing after the date of such release at the greater
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<PAGE>
of (i) 1.6 and (ii) the ratio computed by dividing net operating income
(calculated as provided in the related loan documents) of the Fairfield Inn
Properties for the thirteen full Fairfield Inn Accounting Periods immediately
preceding the date of such release by the difference between (A) debt service
expense payable for such period and (B), if applicable, the payments received
for such period from U.S. Obligations held as security for the Fairfield Inn
Pool Loan, as described below under "--Release in Exchange for Substitute
Collateral" (the ratio in clause (ii) being the "Fairfield Inn Defeasance
DSCR"). The "Fairfield Inn DSCR" for any fiscal period is the quotient
obtained by dividing (a) the operating income (as so calculated) for the
thirteen full Fairfield Inn Accounting Periods immediately preceding the
release date by (b) the difference between (i) the debt service expense
payable with respect to the Fairfield Inn Pool Loan for such period and (ii)
if applicable, the payments to be received for such period from U.S.
Obligations held as security for the Fairfield Inn Pool Loan, as described
below under "--Release in Exchange for Substitute Collateral."
Release in Exchange for Substitute Collateral. Prior to the Fairfield Inn
Anticipated Repayment Date and provided no event of default has occurred and
is continuing, the Fairfield Inn Borrower is permitted on any payment date
after the second anniversary of the Closing Date (a "Fairfield Inn Defeasance
Date") to defease all or a portion of the Fairfield Inn Pool Loan, provided
that, among other conditions, the Fairfield Inn Borrower pays on such payment
date (a) all interest accrued and unpaid on the principal balance of the
Fairfield Inn Pool Loan to and including such Fairfield Inn Defeasance Date,
(b) all other sums then due under the Fairfield Inn Pool Loan and all other
loan documents executed in connection therewith and (c) the Fairfield Inn
Defeasance Deposit (as defined below). In addition, the Fairfield Inn
Borrower is required to deliver to the Servicer, among other things, (a) a
security agreement granting the Trustee a first priority perfected lien on
the Fairfield Inn Defeasance Deposit and the U.S. Obligations purchased with
the Fairfield Inn Defeasance Deposit, (b) an opinion of counsel for the
Fairfield Inn Borrower in form satisfactory to the Servicer stating, among
other things, that the Trustee will have a perfected first priority security
interest in such U.S. Obligations and that the transfer of such U.S.
Obligations will not adversely affect the status of the Trust Fund 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 "Fairfield Inn Defeasance Deposit" is generally the amount necessary
to purchase U.S. Obligations in amounts and with maturities that are
sufficient to make (i) on each payment date between the Fairfield Inn
Defeasance Date and the Fairfield Inn Anticipated Repayment Date, monthly
debt service payments that would be sufficient to amortize and pay interest
on a principal amount equal to the Fairfield Inn Applicable Defeasance Amount
(as defined below), based on the Fairfield Inn Current Interest Rate and a
240-month amortization schedule and (ii) a payment in full of the remaining
amount of such principal amount, together with accrued interest thereon, on
the Fairfield Inn Anticipated Repayment Date. As used above, if less than all
of the Fairfield Inn Properties will have been released as of such Fairfield
Inn Defeasance Date, the "Fairfield Inn Applicable Defeasance Amount" is
equal to 125% of the Allocated Loan Amount for each Fairfield Inn Property to
be released, and if all of the Fairfield Inn Properties will have been
released as of such Fairfield Inn Defeasance Date, the "Fairfield Inn
Applicable Defeasance Amount" is equal to 100% of the principal amount of the
Fairfield Inn Pool Loan. If the defeasance is the result of a casualty or
condemnation, the Fairfield Inn Applicable Defeasance Amount shall be the
amount described below under "--Condemnation and Casualty." The Fairfield Inn
Defeasance Deposit will also include any costs and expenses incurred in
connection with the purchase of such U.S. Obligations and, if necessary, the
Fairfield Inn Defeasance Deposit may also include the amount sufficient to
purchase additional U.S. Obligations in order to obtain a Fairfield Inn DSCR
sufficient to satisfy the debt service coverage condition to partial
defeasance described in the next paragraph. The Servicer will be responsible
for purchasing the U.S. Obligations on behalf of the Fairfield Inn Borrower.
As a condition to any release of any of the Fairfield Inn Properties in
connection with a partial defeasance, the Fairfield Inn Borrower must also
provide evidence that, after giving effect to the release, the Fairfield Inn
DSCR calculated with respect to the remaining Fairfield Inn Properties would
be maintained, for the twelve full months commencing after the Fairfield Inn
Defeasance Date, at the greater of (a) 1.60 and (b) the Fairfield Inn DSCR
based on the aggregate net operating income of the Fairfield Inn Properties
pledged immediately prior to the release during the thirteen full Fairfield
Inn Accounting Periods next preceding the Fairfield Inn Defeasance Date.
The Fairfield Inn Borrower is permitted to cure an event of default under
the loan documents with respect to one or more of the Fairfield Inn
Properties by obtaining the release of such Fairfield Inn Properties so long
as (a) such event of default affects less than all of the Fairfield Inn
Properties and (b) the Fairfield Inn Borrower satisfies the requirements
described above.
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<PAGE>
Reserves. The Fairfield Inn Borrower has established the following
reserves with respect to the Fairfield Inn Pool Loan and the Fairfield Inn
Properties: (a) a ground rent escrow fund (the "Ground Rent Reserve Account")
to be used to pay ground rent (other than subordinated ground rent) with
respect to the related Fairfield Inn Properties if the Fairfield Inn Borrower
fails to make such payments, which is to be funded initially in six equal
monthly installments commencing on March 11, 1997 until the balance is equal
to one month's ground rent and is to be replenished on a monthly basis such
that the balance is maintained equal to one month's ground rent, (b) a debt
service reserve fund (the "Debt Service Reserve Account"), which is to be
funded initially in twelve equal monthly installments commencing on March 11,
1997 until the balance is equal to two months of Fairfield Inn 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+" or less, in which
case the balance of such reserve is to be maintained at three months of
Fairfield Inn Monthly Debt Service Payments (with the additional payment to
be funded in six equal monthly installments), and (c) a capital expenditures
and furniture, fixtures and equipment reserve fund (the "Capital
Expenditure/FF&E Reserve Account") is to be funded, within three weeks after
the end of each Fairfield Inn Accounting Period, in an amount equal to 7% of
gross revenues for such period. In addition $111,750 has been deposited to
effectuate certain environmental remediation work on the Fairfield Inn
Properties. A tax and insurance escrow account (the "Tax and Insurance
Account") is to be established only if the long-term senior unsecured debt
rating of MII is downgraded to "BBB+" or less as described below under
"--Cash Management Procedures."
An earthquake restoration reserve fund (the "Earthquake Restoration
Reserve Account") has been established by the Fairfield Inn Borrower into
which $200,000 has been deposited and an additional $100,000 is to be
deposited on March 31, 1997. Thereafter such fund is to be maintained at such
level for so long as the Fairfield Inn Properties located at Placentia and
Buena Park, California remain subject to the lien of the applicable Fairfield
Inn Mortgages. The required level is $189,000 if only the Placentia Fairfield
Inn Property remains subject to the lien of the related Mortgage and $111,000
if only the Buena Park Fairfield Inn Property remains subject to the lien of
its Mortgage. If neither of such Fairfield Inn Properties is subject to such
lien, or if both such properties are covered by insurance in a manner
satisfactory to the lender pursuant to the related Mortgages, the amounts in
the Earthquake Restoration Reserve Account will be transferred to the
Fairfield Inn Cash Collateral Account (as defined below). Amounts on deposit
in the Earthquake Restoration Reserve Account will be available to pay for
the cost of restoring either Fairfield Inn Property located in California if
earthquake damage occurs and the cost of restoration is not covered by
insurance in a manner satisfactory to the lender. In such a case, the
Earthquake Restoration Reserve Account shall be funded with an additional
amount equal to the difference between (A) the sum of (y) the applicable
required level of funding described in the first three sentences of this
paragraph and (z) 125% of the estimated cost of restoration of the Fairfield
Inn Property (unless it is released from the lien of the Mortgage) and (B)
any funds previously withdrawn from the Earthquake Restoration Reserve
Account, such amount under any circumstance to be not less than the required
level of funding described in the first three sentences of this paragraph. If
the California properties suffer a total loss as a result of an earthquake,
the Servicer may apply the Earthquake Restoration Reserve Account towards
prepayment of the loan. On the first payment date after the Fairfield Inn
Anticipated Repayment Date all amounts on deposit in such reserve fund are to
be applied to prepay the Fairfield Inn Pool Loan.
Cash Management Procedures. The procedures to be used for the collection
of revenues generated by the Fairfield Inn Properties and the payment of debt
service and other expenses of the Fairfield Inn Pool Loan and the expenses of
the operation of the Fairfield Inn Properties will depend primarily upon the
S&P rating of MII, the corporate parent of Fairfield FMC Corporation, a
Delaware corporation which is the property manager for the Fairfield Inn
Properties (the "Fairfield Inn Manager"). As of the Closing Date, MII is
rated by S&P as "A-."
Establishment of Accounts. The Fairfield Inn Manager will establish a
segregated bank account (the "Manager's Account"), which may be a subaccount
in MII's cash management system (the "MII Master Account") maintained for
various hotel and other properties managed by MII and its subsidiaries.
Separate accounting of deposits into and withdrawals from the Manager's
Account will be made. The Manager may transfer funds from the Manager's
Account into the MII Master Account in accordance with the Manager's and
MII's customary cash management practices.
At the earliest reasonably practicable date, but not later than 120 days
after origination of the Fairfield Inn Pool Loan, the Fairfield Inn Manager
is required to direct all credit card companies to deposit all card revenues
generated by the Fairfield Inn Properties into the Manager's Account. All
other revenues will be deposited in the Manager's Account or in a segregated
account established by the Fairfield Inn Manager at a financial institution
located in the vicinity of individual properties or the Fairfield Inn
Manager's principal business offices (each a "Local Account"). At least once
each week, the
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Fairfield Inn Manager will transfer into the Manager's Account funds in each
Local Account, less amounts (a) required to pay management expenses
customarily paid out of the Local Accounts and (b) held as petty cash or as a
reserve for management expenses customarily paid out of the Local Accounts.
However, the aggregate amount of such petty cash and reserves for all of the
Local Accounts may not exceed $500,000 (subject to adjustment at the end of
each year for increases in the Consumer Price Index and subject to reduction
by $8,000 for each Mortgaged Property that is released from the applicable
Fairfield Inn Mortgage). The Servicer has established a segregated cash
collateral account in its name (the "Fairfield Inn Cash Collateral Account").
Procedures Prior to Lockbox Event. Unless the procedures described below
under "--Lockbox Procedures" are in effect, on the last business day of the
third week of each Fairfield Inn Accounting Period (except as provided in the
last paragraph of this section), the Fairfield Inn Manager will transfer from
the Manager's Account or the MII Master Account to the Fairfield Inn Cash
Collateral Account for application by the Servicer on the next payment date
an amount equal to the operating profit of the Fairfield Inn Borrower
(calculated as provided in the related loan documents) for the immediately
preceding accounting period less amounts paid or provided by the Fairfield
Inn Manager for ground rent. On each payment date, up to and including the
Fairfield Inn Anticipated Repayment Date, the Servicer is to apply the
operating profit in the following order of priority: (a) to fund any
shortfall in the Ground Rent Reserve Account, (b) to pay the Servicing
Expenses, (c) to pay the Fairfield Inn Monthly Debt Service Payment and any
other amounts then due and payable to the lender under the loan documents,
(d) to fund the Tax and Insurance Account, if any, as described in the next
paragraph, (e) commencing March 11, 1998, to fund any shortfall in the Debt
Service Reserve Account, (f) to fund any shortfall in the Capital
Expenditure/FF&E Reserve Account, (g) to pay subordinated rental obligations
to the applicable landlords under the ground leases, such amount being equal
to the aggregate rental payments under the terms of the ground leases in
excess of 3% of gross revenues from the 32 inns subject to ground leases
(rental payments due, up to and including 3% of gross revenues, are not
subordinate to the Fairfield Inn Mortgage in any manner), (h) to pay the
Fairfield Inn Manager Incentive Management Fees to which it is entitled
pursuant to the Fairfield Inn Management Agreement, (i) to fund any shortfall
in the Earthquake Restoration Reserve Account, (j) to pay the Fairfield Inn
Manager any other amounts to which it is entitled pursuant to the Fairfield
Inn Management Agreement and (k) so long as no event of default has occurred
and is continuing, to remit the balance to the Fairfield Inn Borrower.
Unless the procedures described below under "--Lockbox Procedures" are in
effect, on each payment date after the Fairfield Inn Anticipated Repayment
Date, the Servicer will apply operating profit in the following order of
priority: (a) to fund any shortfall in the Ground Rent Reserve Account, (b)
to pay the Servicing Expenses, (c) to pay the Fairfield Inn Monthly Debt
Service Payment and any other amounts then due and payable to the lender
under the loan documents (except as described in clauses (k) and (l) below),
(d) to fund the Tax and Insurance Account, if any, (e) to fund any shortfall
in the Debt Service Reserve Account, (f) to fund any shortfall in the Capital
Expenditure/FF&E Reserve Account, (g) to pay current subordinated rental
obligations, current Incentive Management Fees and certain loans from the
Fairfield Inn Manager, (h) to pay the Fairfield Inn Manager certain amounts
that are necessary to effect certain legally required or mutually agreed upon
repairs, alterations, improvements, renewals or replacements of the Fairfield
Inn Properties, (i) to pay to the Fairfield Inn Borrower for administrative
expenses in an amount equal to the lesser of the actual administrative
expenses with respect to the current fiscal year not previously remitted and
$450,000 for such fiscal year (as increased each fiscal year by the
percentage change in the Consumer Price Index), (j) if an earthquake has
occurred and the earthquake restoration cost of the applicable property is
less than 50% of its Allocated Loan Amount, at the direction of the Fairfield
Inn Borrower: (1) to fund the Earthquake Restoration Reserve Account in the
amount of such earthquake restoration cost or (2) to apply such amount to
restore the affected Fairfield Inn Property in accordance with the provisions
of the applicable Mortgage, (k) to prepayment of the outstanding principal
balance until reduced to zero of the Fairfield Inn Pool Loan, and (l) to
payment of the Fairfield Inn Excess Interest.
If the S&P rating of MII's long term debt falls to "BBB+," the following
additional cash management procedures will be in effect. The Servicer will
maintain the Tax and Insurance Account as a subaccount of the Fairfield Inn
Cash Collateral Account for payments of insurance premiums and real estate
taxes (together, "Impositions"). The subaccount will be funded (a) initially
by transfers from the Fairfield Inn Manager's Account to the Fairfield Inn
Cash Collateral Account of amounts previously deducted by the Fairfield Inn
Manager for payment of Impositions but not expended and (b) thereafter, by
transfers from the Fairfield Inn Cash Collateral Account on each payment date
so that sufficient funds are accumulated in the Tax and Insurance Account to
pay each Imposition when due. On the last business day of the first and third
week of each Fairfield Inn Accounting Period, the Fairfield Inn Manager will
transfer cash from the Manager's Account or the MII Master Account to the
Fairfield Inn Cash Collateral Account for application by the Servicer on the
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next payment date. The amount of cash transferred for the first week in each
such period will be equal 50% of the budgeted operating profit for the
immediately preceding Fairfield Inn Accounting Period. The amount of cash
transferred for the third week in each such period will be an amount equal to
the actual operating profit for the immediately preceding Fairfield Inn
Accounting Period less the amount previously transferred with respect to the
related period. Operating profits transferred will be less amounts paid to
the Fairfield Inn Manager for current ground rent. On each payment date, the
Servicer will apply the operating profit in the Fairfield Inn Cash Collateral
Account in the same order of priority as described above for circumstances
where MII's rating is at least "A-."
Lockbox Procedures. Notwithstanding the foregoing, if (a) the Fairfield
Inn Properties are not managed by the Fairfield Inn Manager, (b) the
Fairfield Inn Manager is not MII or a wholly-owned, direct or indirect,
subsidiary of MII, (c) the S&P rating of MII's long term debt is not at least
"BBB+" or (d) (i) S&P rates MII's long term debt at least "A-" and at any
time after August 11, 1997 the Debt Service Reserve Account contains less
than one Fairfield Inn Monthly Debt Service Payment or (ii) S&P rates MII's
long term debt "BBB+" and at any time after February 11, 1998 the Debt
Service Reserve Account contains less than two Fairfield Inn Monthly Debt
Service Payments and (iii) in either case the Fairfield Inn Borrower does not
fund the shortfall therein within fifteen days' notice to such effect from
the Servicer, a lockbox account in the name of the Servicer (the "Fairfield
Inn Lockbox Account") will be established (which may be the Manager's Account
if the Manager's Account is an eligible account, or if the Rating Agencies
otherwise agree) and, if the Manager's Account cannot be converted to the
Fairfield Inn Lockbox Account, the Servicer will also take sole control of
the Manager's Account (upon assumption of control, the "Manager Lockbox
Account"). The Fairfield Inn Borrower and the Fairfield Inn Manager will be
obligated to instruct all credit card companies and other third party payors
to cause all payments (except amounts that may be maintained in Local
Accounts or as petty cash at the Fairfield Inn Properties) to be sent to the
Fairfield Inn Lockbox Account at the earliest practicable date (but no later
than 120 days from the institution of the lockbox procedures) and, until such
point, payments may continue to be made into the Manager Lockbox Account
(deposits in which will be transferred on a daily basis into the Fairfield
Inn Cash Collateral Account). At the earliest possible date but in no event
later than 120 days from the institution of the lockbox procedures, all other
revenues received by the Fairfield Inn Manager from the Fairfield Inn
Properties will, subject to the limits described in the second paragraph of
"--Established Accounts," be sent directly to the Fairfield Inn Lockbox
Account or will be deposited by the Fairfield Inn Manager in a Local Account.
The Fairfield Inn Manager will transfer into the Fairfield Inn Lockbox
Account, at least once each week, funds in each Local Account, less amounts
(a) required to pay management expenses customarily paid out of the Local
Accounts and (b) subject to the limits described above, held as petty cash or
as a reserve for management expenses customarily paid out of the Local
Accounts.
The Servicer will transfer daily all funds in the Fairfield Inn Lockbox
Account to the Fairfield Inn Cash Collateral Account and will apply funds in
the Fairfield Inn Cash Collateral Account each day first, to fund the Ground
Rent Reserve Account; second, to fund the Tax and Insurance Account; third,
after March 11, 1998, to fund any shortfall in the Debt Service Reserve
Account; fourth, to fund any shortfalls in the Capital Expenditure/FF&E
Reserve Account; and fifth, to the Fairfield Inn Operating Account (as
defined below). Within the 120 day period described above, the Servicer will
establish a segregated account (the "Fairfield Inn Operating Account") in its
name into which the Fairfield Inn Manager will transfer all funds of the
Fairfield Inn Borrower then held in the MII Master Account. The Fairfield Inn
Manager will have the authority to write checks on and make other transfers
from the Fairfield Inn Operating Account for payment of management expenses
and ground rent. At least one business day prior to each debt service payment
date, the Fairfield Inn Manager will transfer from the Fairfield Inn
Operating Account to the Fairfield Inn Cash Collateral Account an amount
equal to the operating profit of the Fairfield Inn Borrower for the Fairfield
Inn Accounting Periods that ended at least three weeks before such date and
as to which a transfer of funds from the Fairfield Inn Operating Account to
the Fairfield Inn Cash Collateral Account has not previously occurred (less
the amount of such operating profits earlier used to fund the Debt Service
Reserve Account pursuant to the first sentence of this paragraph). On each
payment date up to and including the Fairfield Inn Anticipated Repayment
Date, the Servicer will apply the operating profit in the following order of
priority: (a) to pay the Servicing Expenses, (b) to pay the Fairfield Monthly
Debt Service Payment and any other amounts due the lender under the loan
documents, (c) to pay subordinated rental obligations to the applicable
landlords under the ground leases, (d) to pay the Fairfield Inn Manager
Incentive Management Fees to which it is entitled pursuant to the Fairfield
Inn Management Agreement, (e) to fund any shortfall in the Earthquake
Restoration Reserve Account, (f) to pay the Fairfield Inn Manager any other
amounts to which it is entitled pursuant to the Fairfield Inn Management
Agreement and (g) so long as no event of default has occurred and is
continuing, to remit the balance to the Fairfield Inn Borrower. On each
payment date after the Fairfield Inn Anticipated Repayment Date, the Servicer
will apply the operating profit in the following order of priority: (a) to
pay the Servicing Expenses, (b) to pay the Fairfield Inn Monthly
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Debt Service Payment and any other amounts then due and payable to the lender
under the loan documents (except as described in clauses (g) and (h) below),
(c) to pay current subordinated rental obligations under the ground leases,
current Incentive Management Fees and certain loans from the Fairfield Inn
Manager, (d) to pay the Fairfield Inn Manager certain amounts that are
necessary to effect certain legally required or mutually agreed upon repairs,
alterations, improvements, renewals or replacements of the Fairfield Inn
Properties, (e) to pay to the Fairfield Inn Borrower for administrative
expenses in an amount equal to the lesser of the actual administrative
expenses with respect to the current fiscal year not previously remitted and
$450,000 for such fiscal year (as increased each fiscal year by the
percentage change in the Consumer Price Index), (f) if an earthquake has
occurred and the cost of restoring the Fairfield Inn Property is less than
50% of its Allocated Loan Amount, at the direction of the Fairfield Inn
Borrower, (1) to fund the Earthquake Reserve Account in the amount of such
cost or (2) to apply such amount in accordance with the provisions of the
applicable Mortgage with respect to casualty, (g) to prepayment of the
principal amount of the Fairfield Inn Pool Loan, and (h) to payment of
Fairfield Inn Excess Interest.
Transfer of Properties and Interest in Borrower; Encumbrance. The
Fairfield Inn Borrower is generally prohibited from encumbering the Fairfield
Inn Properties without the written consent of the Servicer. However, on and
after January 11, 1999, the Fairfield Inn Borrower is permitted to place a
subordinate mortgage on a Fairfield Inn Property provided that, among other
things, (a) the Fairfield Inn DSCR will not be less than 2.25 as a result of
the incurrence of the subordinate debt and (b) 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.
The Fairfield Inn Borrower is prohibited from incurring any additional
indebtedness except for (a) after January 11, 1999, subordinate debt secured
by mortgages on the Fairfield Inn Properties, provided, among other things,
that the mortgagee is an institutional investor and provided that each of 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) unsecured indebtedness incurred (i) in connection with capitalized
equipment leases, (ii) to provide (x) working capital (including loans made
for such purpose that may be made by the Fairfield Inn Manager or the general
partner of the Fairfield Inn Borrower) in an aggregate amount, which when
added to the outstanding balance of previous indebtedness incurred for such
purpose, will not exceed the average amount of management expenses for each
Fairfield Inn Accounting Period during the preceding thirteen accounting
periods and (x) funds (including loans made for such purpose that may be made
by the Fairfield Inn Manager or the general partner of the Fairfield Inn
Borrower) to the Servicer where required to pay the Fairfield Inn 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 the Fairfield Inn Pool Loan is outstanding or
(c) purchase money financings for furniture, fixtures and equipment, in an
aggregate amount not to exceed $3,000,000 for all Fairfield Inn Properties
and $100,000 for each Fairfield Inn Property, in each case outstanding at any
time.
The Fairfield Inn Borrower has the right to sell all, but not less than
all, of the Fairfield Inn Properties subject to the Fairfield Inn Pool Loan
provided that (a) the transferee is approved by the lender and 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) no event of default has occurred and is continuing and (c) the transferee
executes a new note in a principal amount equal to the then outstanding
principal amount of the Fairfield Inn Pool Loan.
The loan documents prohibit any transfer of (i) an equity interest in the
general partner of the Fairfield Inn Borrower, (ii) such general partner's
interest in the Fairfield Inn Borrower or (iii) any interest of a limited
partner of the Fairfield Inn Borrower such that any person other than Host
Marriott Corporation, directly or indirectly, holds more than 49% of the
limited partnership interests therein unless in any such case (a) no event of
default has occurred and is continuing, (b) the Fairfield Inn Borrower
supplies a substantive 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. The Fairfield Inn Borrower is required to maintain (a) property
insurance on each building and contents against loss or damage by all perils
covered by an "all risk" (as such term is commonly used in the insurance
industry, excluding earthquake and flood policy) in an amount not less than
100% of the full replacement cost of the improvements; (b) earthquake
insurance to the extent available at commercially reasonable rates and to the
extent such coverage is customarily obtained for similar properties in the
vicinity in an amount reasonably satisfactory to lender; (c) if the
improvements are located within an area designated by the U.S. Department of
Housing and Urban Development as a 100 year flood hazard area, or an area
designated as flood prone pursuant to the National Flood Insurance Act of
1968 and
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the Flood Disaster Protection Act of 1973, flood insurance in an amount not
less than the maximum amount available under the National Flood Insurance
Program; (c) business interruption insurance on an actual loss basis but in
no event less than an amount equal to 18 months' gross rents; (d) broad form
comprehensive general liability insurance with a combined single limit for
each occurrence in an amount not less than $2,000,000 with respect to
personal injury or death and with umbrella liability coverage of not less
than $18,000,000; (e) broad form repair and replacement cost insurance on
boilers and machinery on each Mortgaged Property, (f) during the performance
of any material construction or renovations, broad form builder's risk
insurance coverage on an all-risk, completed value basis, (g) workers'
compensation and employer's liability insurance complying with the laws of
the state in which each Mortgaged Property is located, and (j) such other
insurance as is generally available on commercially reasonable terms and is
generally required by institutional lenders for properties similar to the
Fairfield Inn Properties. No earthquake insurance is required in connection
with the two California properties unless the Fairfield Inn Borrower fails to
comply with the provisions relating to the Earthquake Restoration Reserve
Account. Insurance generally is required to be maintained by insurance
carriers having a rating of at least "AA-" by S&P. However, the Fairfield Inn
Borrower's current property insurer, Allendale Mutual Insurance Company is
rated "A" by S&P. Such insurer is permitted to continue to provide coverage
only until April 1, 1997.
Condemnation and Casualty. The Fairfield Inn Borrower is required to
restore the affected Mortgaged Property in casualty situations and in all
condemnation situations, other than those which involve a total taking. A
"total taking" means any taking or any constructive taking of the Fairfield
Inn Borrower's title to the related Fairfield Inn Property in condemnation
proceedings or by agreement which shall, in the reasonable opinion of the
lender, render it impracticable to restore, within six months prior to the
Fairfield Inn Maturity Date, the portion of the property not subject to such
taking to a complete architectural unit of substantially the same economic
viability and for the same purposes and uses as existed immediately prior to
the date of commencement of the condemnation proceedings. In the event of (i)
any casualty or (ii) a condemnation that results in a total taking , the
Fairfield Inn Borrower has a right to obtain the release of the affected
property if it provides the lender with an amount equal to the greater of (a)
and (b), where (a) is 100% of the Allocated Loan Amount for such property and
(b) is the lesser of (i) 125% of such Allocated Loan Amount and (ii) the net
condemnation proceeds or net insurance proceeds received on account of such
property.
Following a casualty, if no event of default exists at the time of
settlement and if the estimated restoration cost is less than the lesser of
$100,000 or 5% of the Allocated Loan Amount of the damaged property (the
"Restoration Benchmark"), then the Fairfield Inn Borrower may settle the
insurance claim without the lender's consent and may receive the settlement
proceeds from the insurer. If the estimated restoration cost equals or
exceeds the Restoration Benchmark, then, unless the Fairfield Inn Borrower
has obtained a release of the affected property as described above, 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
Fairfield Inn Cash Collateral Account and to be advanced to the Fairfield Inn
Borrower in reimbursement for amounts expended in restoration of the affected
Fairfield Inn Property. Amounts not required for restoration will be released
to the Fairfield Inn Borrower.
However, if an event of default has occurred and is continuing, or if, in
the lender's reasonable judgment based on professional consultation: (a) the
restoration of the Fairfield Inn Property cannot be completed (i) so as to
constitute an economically viable building or (ii) at least six months prior
to the Fairfield Inn Maturity Date, (b) the amount of business interruption
insurance is insufficient to cover all fixed and operating expenses of the
Fairfield Inn Property, including such portion of the debt service as is
allocable thereto, during restoration and until the operation of the
Fairfield Inn Property is resumed, (c) the amount of insurance proceeds
equals or exceeds the amount of the outstanding principal balance of the
Fairfield Inn Pool Loan or (d) the Fairfield Inn Property cannot be completed
except at a cost which exceeds the amount of available insurance proceeds and
the Fairfield Inn Borrower refuses to post the deficiency, then the Servicer
shall have the option to apply insurance proceeds to a partial defeasance or
prepayment of the Fairfield Inn Pool Loan, interest accrued and unpaid
thereon, any other unpaid amounts then due the lender and, if an event of
default has occurred and is continuing or if the Fairfield Inn Pool Loan has
been accelerated prior to the Fairfield Inn Anticipated Repayment Date, a
yield maintenance premium, all in such order as the Servicer shall designate.
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 Servicer's consent. The proceeds of any condemnation
award equaling or exceeding the Restoration Benchmark are required to be
deposited with the Servicer for deposit by the Servicer in a segregated
subaccount of the Fairfield Inn Cash Collateral Account. In the case of a
total taking of any
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Fairfield Inn Property, the proceeds of the condemnation award will be
applied by the Servicer to a partial prepayment of the Fairfield Inn Pool
Loan but no yield maintenance premium shall be payable. In the case of a
partial taking, a condemnation award will be applied in a manner
substantially identical to those applicable to the disposition of insurance
proceeds.
Financial Reporting. The Fairfield Inn Borrower is required to keep and
maintain accurate books and records on a fiscal basis in accordance with
GAAP. The Fairfield Inn Borrower will furnish annually to the lender: (a)
within 120 days following the end of the fiscal year, its annual financial
statements audited by a big six accounting firm, (b) not later than 27 days
after the end of each Fairfield Inn Accounting Period (i) unaudited financial
statements covering such accounting period and the annual amount for the
period to date showing in detail for each Fairfield Inn Property, among other
things, sales, house profit, average room and average occupancy rates, each
with a comparison to the prior year and (ii) an unaudited profit and loss
statement and escrow analysis on a consolidated basis, (c) not later than 60
days after the end of each accounting quarter, quarterly and year-to-date
unaudited financial statements and (d) on or before February 15 of each year,
an annual operating budget and capital expenditure budget for each Fairfield
Inn Property.
Ground Leases Each of the 32 ground leases on the Fairfield Inn Properties
has a term which extends until November 30, 2088. Estoppels were executed in
favor of the lender by the respective ground lessors which, among other
things, contain the respective ground lessors' undertaking to provide the
lender with notice of default under the ground leases and an opportunity to
cure. The ground leases require the payment of ground rent in an amount equal
to the greater of a stipulated minimum rent and a certain percentage rental.
The minimum rent under the ground leases is payable in equal installments
with respect to each Fairfield Inn Accounting Period. Percentage rent, if
any, is payable quarterly. On January 1, 2000 and at the end of each
successive five year period thereafter, the annual minimal rent for the five
year period commencing on such date shall be adjusted based on a specified
formula. The percentage rental is equal to a specified percentage of gross
revenues for any fiscal year which varies by ground lease. Such percentage is
scheduled to escalate for all but one of the ground leases in 2003. A Ground
Rent Reserve Account has been established as described above in "--Reserves."
Each ground lessor has entered into a subordination, estoppel, consent and
amendment of ground leases agreement under which it has agreed that aggregate
rents payable under the ground lease in excess of three percent of aggregate
gross revenues of the related leased Fairfield Inn Properties are, taken as a
whole, subordinate to the payment of all principal, interest and any other
amounts payable under the Fairfield Inn Pool Loan documents. The benefits of
the subordination provisions shall extend to any refinancing of the Fairfield
Inn Pool Loan with a maturity date prior to January 11, 2017, but only to the
extent of the amount of regularly scheduled principal and interest payments
based on the Fairfield Inn Current Interest Rate and 20 year amortization
schedule under the loan documents.
During the term of the ground lease, the landlord has agreed that it will
not convey or encumber its fee interest in the land under the related
Fairfield Inn Property unless, if an encumbrance, such transfer is both
subject and subordinate to the ground lease and the applicable Fairfield Inn
Mortgage, and, if a conveyance, the transferee assumes the landlord's
obligations under the ground lease
The Properties. The Fairfield Inn Properties securing the Fairfield Inn
Pool Loan consist of 50 limited service hotels, operated as Fairfield Inns
and located in 16 states. All of the hotels securing the Fairfield Inn Pool
Loan were built between 1987 and 1991. The average occupancy rate of the
hotels for the year ended approximately December 31, 1996 (calculated for the
trailing thirteen consecutive Fairfield Inn Accounting Periods) ranged from
59% to 86%, with a weighted average of 77%. The ADRs for the hotels for the
year ended approximately December 31, 1996 (calculated for the trailing
thirteen consecutive Fairfield Inn Accounting Periods) ranged from
approximately $41 to $58, with a weighted average of $50. The Fairfield Inn
Properties contain in the aggregate 6,672 guestrooms, with the individual
Fairfield Inn Properties ranging from 120 guestrooms to 135 guestrooms, and
averaging 133 guestrooms per Fairfield Inn Property. Based on appraisals
conducted from October to November, 1996, as of January 1, 1997 the appraised
value of the Fairfield Inn Properties in a cross collateralized portfolio is
$271,305,000.
The Fairfield Inn Borrower owns 18 of the Fairfield Inn Properties in fee
simple. 32 of the Fairfield Inn Properties are located on ground leased land
as described above under "--Ground Leases."
With the exception of certain environmental remediation work to be
performed in connection with the Fairfield Inn Properties located in North
Carolina, South Carolina and Florida, for which the Fairfield Inn Borrower
has deposited certain reserves (see "--Reserves," above), the Fairfield Inn
Borrower has warranted that each Fairfield Inn Property is in good repair and
free and clear of any damage that could affect materially and adversely the
value of the Fairfield Inn Property as security for the Fairfield Inn Pool
Loan or the use for which such property is intended.
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Property Management All of the Fairfield Inn Properties are managed by
the Fairfield Inn Manager under a management agreement (the "Fairfield Inn
Management Agreement"). Pursuant to this agreement, as amended, the Fairfield
Inn Manager is responsible for managing each Fairfield Inn Property under
standards comparable to those prevailing for other properties in the
"Fairfield Inn" system. Each Fairfield Inn Property will be part of the
Fairfield Inn system and will be entitled to so identify itself. The
Fairfield Inn Manager will provide certain services which are furnished
generally on a central or regional basis to all Fairfield Inn properties in
the Fairfield Inn chain which are managed by the Fairfield Inn Manager or any
Marriott affiliate, including (a) development and operation of computer
systems and reservation systems, (b) computer payroll services, (c)
accounting services, (d) regional engineering support and (e) such additional
central or regional services (including marketing services) as may from time
to time be furnished for the benefit of the inns in the Fairfield Inn system.
The Fairfield Inn Borrower is responsible for all operating costs of the
Fairfield Inn Properties, as well as an allocable share of the Fairfield Inn
Manager's costs for the services described in clauses (a) through (e) of this
paragraph.
The Fairfield Inn Manager is entitled to receive as compensation for its
services three fees: (a) a "Base Management Fee" equal to 2% of gross
revenues, (b) a "Fairfield Inn System Fee" equal to 3% of gross revenues and
(c) an "Incentive Management Fee" equal to 15% of the operating profit of the
Fairfield Inn Properties, increasing to 20% of the operating profit of the
Fairfield Inn Properties after the end of the first period of thirteen
consecutive Fairfield Inn Accounting Periods during which operating profit
equals or exceeds a certain operating profit objective, $33,900,000.
The lender has the right to terminate the Fairfield Inn Manager for a
failure to satisfy certain performance standards, whether or not an event of
default under the Fairfield Inn Pool Loan has occurred and, if there has been
such an event of default, the lender may exercise all rights of the Fairfield
Inn Borrower to terminate the Fairfield Inn Management Agreement. The
Fairfield Inn Manager may not assign the Fairfield Inn Management Agreement
unless (a) the Rating Agencies confirm that the assignment will not result in
a withdrawal, qualification or downgrade of the then existing ratings of the
Certificates, and (b) a guarantee has been received from MII of the
obligations of the assignee in a form reasonably satisfactory to the lender.
The Fairfield Inn Manager is prohibited from terminating (other than for
cause) or modifying the Fairfield Inn Management Agreement in any material
respect without the consent of the lender, except as expressly provided in
the Fairfield Inn Management Agreement or in agreements with the lender. The
Fairfield Inn Manager cannot terminate the Fairfield Inn Management Agreement
without giving the lender notice and an opportunity to cure.
The term of the Fairfield Inn Management Agreement expires December 31,
2019 but may be renewed by the Fairfield Inn Manager for four successive
periods of ten years each followed by one period of five years. The Fairfield
Inn Borrower does not have a right to renew.
The lender, the Fairfield Inn Borrower, and the Fairfield Inn Manager have
entered into an agreement (the "Fairfield Inn Modification, Subordination and
Non-Disturbance Agreement") which modifies the Fairfield Inn Management
Agreement. Among other things, under the Fairfield Inn Modification,
Subordination and Non-Disturbance Agreement, (a) the Fairfield Inn Manager
agrees to comply with the procedures described above under "--Cash Management
Procedures," (b) consents to the collateral assignment of the Fairfield Inn
Management Agreement to the lender and (c) subordinates its rights under the
Fairfield Inn Management Agreement to the lien of the Fairfield Inn Mortgages
subject to its non-disturbance rights. The Fairfield Inn Modification,
Subordination and Non-Disturbance Agreement provides that all Fairfield Inn
Incentive Management Fees and Fairfield Inn Manager loans are (except as
otherwise described above under "--Cash Management Procedures" with respect
to periods on and after the Fairfield Inn Anticipated Repayment Date)
subordinated to all payments of Fairfield Inn Monthly Debt Service Payment
under the Fairfield Inn Pool Loan, provided that the Fairfield Inn Manager is
entitled to receive payment thereof from available cash until (and in certain
circumstances following) an event of default under the Fairfield Inn Pool
Loan. The Fairfield Inn Management Agreement is binding upon any successor
owner of a Fairfield Inn Property (including the lender) taking title by
foreclosure or deed in lieu of foreclosure, but such successor owner is not
liable for any defaults of the Fairfield Inn Borrower under the Fairfield Inn
Management Agreement.
It is an event of default under the Fairfield Inn Pool Loan (subject to
certain notice and cure rights) if (a) the Fairfield Inn Borrower cancels,
releases, terminates or surrenders the Fairfield Inn Management Agreement or
amends said agreement in any material respect or (b) certain insolvency
events affecting the Fairfield Inn Manager occur, unless (i) the Fairfield
Inn Borrower causes the properties to come under management by a nationally
recognized hotel operator acceptable to the lender, in the exercise of
reasonable discretion, (ii) the Fairfield Inn Properties continue to be part
of a comparable nationally recognized hotel system acceptable to the lender
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.
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The Fairfield Inn Manager manages or franchises for approximately 284
hotels containing approximately 27,251 rooms and constituting the Fairfield
Inn system, including the Fairfield Inn Properties, and employs approximately
1,519 persons in property management. The Fairfield Inns system focuses on
providing economically priced lodging for value-oriented business and other
travelers.
THE 101 HUDSON STREET LOAN AND PROPERTY
The Loan. The 101 Hudson Street Loan (the "Hudson Loan") was originated by
the Originator as of December 31, 1996. The Hudson Loan had a principal
balance at origination of $135,000,000 and has a principal balance as of the
Cut-off Date of approximately $134,505,878 and is secured by a Mortgage
encumbering a single commercial office building located at 101 Hudson Street,
Jersey City, New Jersey.
The Borrower. Each of 101 Hudson Street Associates ("Street"), 101 Hudson
Urban Renewal Associates ("Urban") and 101 Hudson Leasing Associates
("Leasing") (collectively, the "Hudson Borrower") is a Borrower under the
Hudson Loan and is a special purpose New Jersey general partnership whose
principal purpose and business is limited to (a) acquiring, owning, holding,
leasing, financing, mortgaging and selling the Hudson Property (as defined
below) and (b) conducting such other activities as may be necessary or
appropriate to promote or conduct such business. Each of Street, Urban and
Leasing is jointly and severally liable for the entire Hudson Loan. Street is
the fee owner of the land (the "Hudson Land") making up the Hudson Property.
Street leased the Hudson Land to Urban as the lessee under a ground lease
(the "Hudson Ground Lease") and Urban constructed and owns the improvements
(the "Hudson Improvements," and, collectively with the Hudson Land, the
"Hudson Property") on the Hudson Land. Urban leased the improvements to
Leasing as the lessee under a lease (the "Building Lease") and Leasing
operates the Hudson Property. The Hudson Borrower has no material assets
other than the Hudson Property and related interests. The general partners of
the Hudson Borrower are Hudson Street Owners Limited Partnership I ("LP I"),
a Delaware limited partnership, Hudson Street Owners Limited Partnership II
("LP II"), a Delaware limited partnership, Hudson Street Owners SPE, Inc.
("SPE I"), a special purpose Delaware corporation formed solely for the
purpose of acting as a general partner of the Hudson Borrower and Hudson
Street Owners SPE II, Inc. ("SPE II"), a special purpose Delaware corporation
formed solely for the purpose of acting as a general partner of the Hudson
Borrower. The general partners of LP I and LP II are Linpro-CP Hudson Street
Limited Partnership, a New Jersey limited partnership ("Linpro-CP"), and OTR,
an Ohio general partnership, and the limited partner of LP I and LP II is
Green Equities, Inc., a New Jersey corporation ("Green Equities"). Each of
the stock of SPE I and SPE II is owned by Linpro-CP, OTR and Green Equities
(an affiliate of Merrill Lynch, Pierce, Fenner & Smith Incorporated). LP I is
the managing general partner of the Hudson Borrower.
Security. The Hudson Loan is a nonrecourse loan, secured only by the fee
estates of Street and Urban in the Hudson Land and Hudson Improvements,
respectively, and the leasehold estates of Urban and Leasing in the Hudson
Land and the Hudson Improvements, respectively, all of which collectively
constitute the Hudson Property, and certain collateral relating thereto
(including an assignment of leases and rents, the funds in certain accounts
and a guaranty agreement under which OTR has agreed to guarantee payment to
the lender of certain Hudson Lease Rollover Expenses (see "--Reserves"), and,
subject to exceptions applicable to the Hudson Borrower and in certain cases
to the Hudson Borrower's affiliates for, among other things, losses resulting
from fraud, material misrepresentation, misappropriation of funds or breach
of any provision of a related environmental indemnity agreement, neither the
Hudson Borrower's partners nor any of its affiliates is personally liable for
payment thereof. The Hudson 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. Street has represented
that it has good and marketable title to the fee simple estate in the Hudson
Land and the leasehold estate of lessor under the Hudson Ground Lease, Urban
has represented that it has good and marketable title to the leasehold estate
of lessee under the Ground Lease and of lessor under the Building Lease and
Leasing has represented that it has good and marketable title to the
leasehold estate of lessee under the Building Lease and of lessor under any
leases between Leasing, as lessor, and tenants of the Hudson Improvements, as
lessees. The foregoing estates are subject only to encumbrances described in
the applicable title insurance policy and those customary encumbrances
permitted by the lender. The term of the Hudson Ground Lease is January 12,
2032 and the term of the Building Lease is January 12, 2032. The Originator
is the named insured under the title insurance policy (which will be assigned
to the Trust Fund) which insures that the related Mortgage constitutes a
valid and enforceable first lien on the Hudson Property, subject to certain
exceptions and exclusions from coverage set forth therein. The Ground Lease
and Building Lease are subject and subordinate to the Hudson Loan.
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Payment Terms. The Hudson Loan matures on January 11, 2022 (the "Hudson
Maturity Date") and bears interest at a fixed rate per annum equal to 7.916%
(the "Hudson Interest Rate"). Interest on the Hudson Loan is calculated on
the basis of the actual number of days elapsed and a 360-day year.
Commencing on February 11, 1997, the Hudson Loan requires 300 constant
monthly payments (the "Hudson Monthly Debt Service Payment") of principal and
interest of $1,034,451 (based on a 300-month amortization schedule and the
Hudson Interest Rate). Such amount will be applied first to the payment of
interest at the Hudson Interest Rate or the Hudson Default Rate (as defined
below), as applicable, and then to repay principal. Payment of the principal
balance of the Hudson Loan, together with all accrued and unpaid interest, is
required on the Hudson Maturity Date. Commencing on February 11, 1997, in
addition to the Hudson Monthly Debt Service Payment, the Hudson Borrower is
required to apply Hudson Excess Cash Flow (as defined below) for the month
preceding the month in which the payment date occurs, to reduce the
outstanding principal balance of the Hudson Loan in an aggregate monthly
amount not to exceed the sum of (a) $87,696 (the "Hudson Base Additional
Amortization Amount") and (b) any portion of the Hudson Base Additional
Amortization Amount not paid on any prior payment date (the sum of clauses
(a) and (b) will be referred to as the "Hudson Monthly Additional
Amortization Amount"). Such application of Hudson Excess Cash Flow would
result in the amortization of the Hudson Loan generally on a 240-month
amortization schedule. Commencing on the first payment date after January 11,
2007 (the "Hudson Anticipated Repayment Date"), in addition to the Hudson
Monthly Debt Service Payment, the Hudson Borrower is required to apply Hudson
Excess Cash Flow for the month preceding the month in which the payment date
occurs to prepayment of each principal payment required to be made on each
payment date, in the inverse order of maturity until the principal balance of
the Hudson Loan has been reduced to zero. "Hudson Excess Cash Flow" means the
difference between rents and the sum of (a) amounts required to fund the tax
and insurance account, (b) amounts required to fund the debt service reserve
account (which for this purpose includes servicing expenses relating to (i)
the operation of the reserve accounts (see " -- Reserves") and (ii) the
activity of any special servicer incurred as a result of an event of default
(the "Hudson Particular Servicing Expenses")), (c) amounts required to pay
operating expenses in an amount not greater than 105% of the monthly
operating budget, (d) amounts required to fund the capital expenditure
reserve account and the lease rollover reserve account and (e) if prior to
the Hudson Anticipated Repayment Date, amounts required to fund the
additional amortization account. See "--Reserves".
The scheduled principal balance of the Hudson Loan as of the Hudson
Anticipated Repayment Date (assuming payment in full of the Hudson Monthly
Additional Amortization Amount) is expected to be approximately $94,876,938.
Upon the occurrence and during the continuation of an event of default,
the entire unpaid principal balance of the Hudson Loan and any other amounts
owing to lender under the Hudson Loan will bear interest at a rate (the
"Hudson Default Rate") equal to the lesser of (a) the maximum rate permitted
by applicable law and (b) the Hudson Interest Rate plus 5%.
Prepayment. Voluntary prepayment is prohibited under the Hudson Loan prior
to the Hudson Anticipated Repayment Date. Thereafter, the Hudson Loan may be
voluntarily prepaid in whole or in part without payment of a yield
maintenance premium. In connection with a prepayment after the Hudson
Anticipated Repayment Date, the Hudson Borrower may obtain a release of the
Hudson Property from the lien of the Mortgage if, among other things, the
Hudson Borrower prepays an amount equal to the outstanding principal amount
of the Hudson Loan, interest accrued and unpaid on such principal balance and
any other amounts then due to the lender. Upon satisfaction of such
conditions, the Hudson Property will be released from the lien of the
Mortgage.
To the extent the Hudson Borrower is not required to apply any insurance
proceeds or condemnation awards to repair, replace and/or restore the Hudson
Property under the Hudson Loan, the lender has the option to apply insurance
proceeds or condemnation awards to prepay the Hudson Loan or to repair,
replace and/or restore the Hudson Property as described below under
"--Condemnation and Casualty." In the event of a total taking of the Hudson
Property, lender shall apply all condemnation proceeds to prepayment of the
Hudson Loan. Any prepayment made in connection with a casualty or
condemnation will be made without payment of a yield maintenance premium
unless an event of default has occurred and is continuing and such prepayment
is being made prior to the Hudson Anticipated Repayment Date.
Upon the occurrence of an event of default prior to the Hudson Anticipated
Repayment Date, the Hudson Loan is prepayable, together with a yield
maintenance premium (as described below), at the lender's option.
A yield maintenance premium under the Hudson Loan is an amount in cash
necessary to purchase U.S. Obligations that would be sufficient to provide
the payments due on or prior to, but as close as possible to, all successive
monthly
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payment dates after the receipt of such amount in respect of (i) the
remaining Hudson Monthly Debt Service Payments that would be required under
the Hudson Loan through and including the Hudson Anticipated Repayment Date
and (ii) a balloon payment of the outstanding principal balance of the Hudson
Loan and accrued and unpaid interest as of the Hudson Anticipated Repayment
Date as if such balloon payment were then due and payable.
Release in Exchange for Substitute Collateral. The Hudson Borrower is
permitted, prior to the Hudson Anticipated Repayment Date but after the
second anniversary of the Closing Date, on any date selected by the Hudson
Borrower with at least thirty days' notice to lender (the "Hudson Defeasance
Date"), provided no event of default has occurred and is then continuing, to
defease all of the Hudson Loan, provided that, among other conditions, the
Hudson Borrower pays on the Hudson Defeasance Date (a) all scheduled
principal and interest payments on the Hudson Loan payable on such payment
date (including all interest accrued and unpaid on the principal balance of
the Hudson Loan) (and, if the Hudson Defeasance Date is not a regularly
scheduled payment date, amounts that would have accrued through the next
regularly scheduled payment date), (b) the Hudson Defeasance Deposit (as
defined below) and (c) all other sums then due and payable under the Hudson
Loan. In addition, in connection with any defeasance, the Hudson Borrower is
required to deliver to the lender, among other things, (a) a security
agreement in customary form and substance creating a first priority lien on
the Hudson Defeasance Deposit and the U.S. Obligations purchased with the
Hudson Defeasance Deposit (together, the "Defeasance Collateral") and (b) an
officer's certificate as may be requested by lender's counsel so that such
counsel can render an opinion that the transfer of the Defeasance Collateral
in exchange for release of the Hudson Property will not constitute an
avoidable preference under the Bankruptcy Code.
"Hudson Defeasance Deposit" means generally an amount sufficient to
purchase U.S. Obligations providing payments on or prior to, but as close as
possible to, all successive scheduled payment dates upon which interest and
principal payments are required under the Hudson Loan after the Hudson
Defeasance Date through and including the Hudson Anticipated Repayment Date
and in amounts equal to the payments due on such dates under the Hudson Loan
and in the amount of the full outstanding principal balance and all accrued
interest thereon on the Hudson Anticipated Repayment Date. Upon the
satisfaction of such conditions, the Hudson Property will be released from
the lien of the Mortgage and the U.S. Obligations purchased by the Servicer
will serve as the sole collateral for the repayment of the Hudson Loan.
Reserves. Pursuant to the terms of the Hudson Loan, the Hudson Borrower
has established (a) a tax and insurance reserve account, for the payment of
taxes and insurance premiums, funded at the initial closing of the Hudson
Loan in an amount equal to $232,960 and on January 11, 1997 in an amount
equal to $135,033 and to be funded monthly generally in an amount equal to
one twelfth ( 1/12) of the annual tax payments and insurance premiums, (b) a
debt service reserve account from which the Servicer may draw on any payment
date if amounts in the Cash Collateral Account (as defined below) are
insufficient to pay any amount payable by the Hudson Borrower on such date
and which must be funded and maintained by the Hudson Borrower in an amount
equal to one Hudson Monthly Debt Service Payment or by a letter of credit in
an equal amount from a bank whose long-term unsecured debt obligations are
rated at least AA by S&P (as of the date hereof, such account has been funded
by a letter of credit from Bank One, Columbus, N.A.) and further subject to
increase to two Hudson Monthly Debt Service Payments as described below under
"--Lock Box," (c) a capital expenditure reserve account to fund the cost of
ongoing capital and emergency expenditures, which was funded at the initial
closing of the Hudson Loan in the amount of $62,500 for ADA compliance work
and $39,000 for other deferred maintenance work identified, in each case, in
engineering reports prepared for the Originator, and to be additionally
funded on each payment date in a monthly amount equal to $18,829, (d) a lease
rollover reserve account, for the payment of certain costs and expenses, such
as leasing commissions and tenant improvements, incurred in connection with
the re-leasing of any portion of the Hudson Property as to which a lease has
expired or become vacant due to a default by a tenant under a lease (the
"Hudson Lease Rollover Expenses"), such account to be funded on each monthly
payment date (i) through and including December 11, 2006, in the amount of
$30,000, (ii) between January 11, 2007 through and including December 11,
2008, in the amount of $87,500 and (iii) commencing on January 11, 2009, to
the extent of available Hudson Excess Cash Flow, in an amount necessary to
maintain in such account an amount equal to 4% of the outstanding principal
balance of the Hudson Loan, (e) a reserve account in respect of the Hudson
Borrower's payment obligations under the UDC Loan as described below under
"--Transfer of Properties and Interests in Borrower; Encumbrance" which was
funded by certain U.S. Obligations delivered by the Hudson Borrower on the
initial closing of the Hudson Loan in amounts sufficient to pay sixty equal
monthly installments of principal and interest payments of $88,399.31 due
each month from February, 2005 through and including December, 2009 to the
New Jersey Urban Development Corporation and (f) following the occurrence of
any Hudson Lock Box Event as described below under "--Lock Box," an
additional amortization account, into which the Hudson Borrower will deposit
the Hudson Monthly Additional Amortization Amount.
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In addition to the lease rollover reserve account, OTR (the "Hudson Lease
Rollover Guarantor") has issued a guaranty on behalf of the lender, pursuant
to which it has agreed to pay the lender any costs (the "Hudson Lease
Rollover Guaranteed Costs") associated with (i) lost rental payments in
connection with expired or vacant spaces within the Hudson Building and (ii)
in connection with the re-leasing of such spaces, leasing commissions,
leasehold improvements and legal fees. The aggregate amount required to be
paid by the Hudson Lease Rollover Guarantor may not exceed the cumulative sum
of $1,050,000 for each year of the Hudson Loan (less any Hudson Lease
Rollover Guaranteed Costs paid by the Hudson Borrower from sources other than
the lease rollover reserve account) and may not exceed $10,500,000 in the
aggregate. In addition, the Hudson Lease Rollover Guarantor will not be
required to make any payments under the guaranty in the event that sufficient
sums are available for the payment of debt service and any other payments
required under the Hudson Loan, and to the extent that there are funds
remaining in the lease rollover reserve account.
Lock Box. Prior to the occurrence and continuation of a Lock Box Event (as
defined below) the Hudson Borrower will not be obligated to, or cause any
tenants at the Hudson Property to, make deposits into the lock box account
established by the Hudson Borrower in the name of the Servicer on behalf of
the lender (the "Hudson Lock Box Account") and the Hudson Borrower shall pay
the Hudson Monthly Debt Service Payment and all other scheduled amounts
payable to lender under the Hudson Loan (including the funding of the ongoing
reserve accounts) by depositing such amounts directly into the cash
collateral account (the "Hudson Cash Collateral Account") established by the
Servicer on behalf of lender before the payment date on which such amounts
are due. Prior to the occurrence and continuation of a Lock Box Event, on
each monthly payment date up to and including the Hudson Anticipated
Repayment Date, amounts on deposit in the Hudson Cash Collateral Account will
be applied to the following items in the following order of priority: (a) to
the Collection Account in the amount needed to pay the Hudson Particular
Servicing Expenses, and all scheduled principal, interest and other amounts
then due and owing under the Hudson Loan, (b) to fund (i) the tax and
insurance reserve, (ii) the debt service reserve, (iii) the capital
expenditure reserve and (iv) the lease rollover reserve, (c) to prepay
principal, in the inverse order of maturity, in the amount of the Hudson
Monthly Additional Amortization Amount for such month but only to the extent
such amounts are available out of Hudson Excess Cash Flow and (d) provided no
event of default has occurred and is continuing, the remainder, if any, to
the Hudson Borrower.
Following the occurrence and during the continuation of any Lock Box
Event, the Hudson Borrower is required to use its best efforts to cause all
tenants to send rents directly to the Hudson Lock Box Account, and will cause
the deposit of all other revenues within one Business Day after receipt into
the Hudson Lock Box Account. All available funds on deposit in the Hudson
Lock Box Account will be transferred daily to the Hudson Cash Collateral
Account.
Following the occurrence and during the continuation of any Lock Box
Event, the Servicer will apply funds in the Hudson Cash Collateral Account to
the following items in the following order of priority: (i) the tax and
insurance reserve, (ii) the debt service reserve, (iii) an operating account,
in an amount requested by the Hudson Borrower in an officer's certificate to
pay certain operating expenses, which expenses (excluding expenses for tenant
services and utilities) will, subsequent to the occurrence of an event of
default or the Hudson Anticipated Repayment Date, be capped at an amount of
105% of the monthly operating budget, (iv) the capital expenditure reserve,
(v) the lease rollover reserve and (vi) if prior to the Hudson Anticipated
Repayment Date, to pay the Hudson Monthly Additional Amortization Amount for
such month, in each case to the extent of available funds and until the
balance in each such account equals the monthly amount required to be
deposited therein. Prior to the Hudson Anticipated Repayment Date and so long
as no event of default has occurred and is continuing, the remaining funds in
the Hudson Cash Collateral Account will be distributed to the Hudson Borrower
and subsequent to the Hudson Anticipated Repayment Date, the Servicer will
retain such funds for application first to prepayment of principal, in
inverse order of maturity, until the principal of the Hudson Loan has been
paid in full. Upon the occurrence and during the continuation of an event of
default, the remaining funds in the Hudson Cash Collateral Account may be
applied by the lender to payment of any sums owing to it under the Hudson
Loan, in any order selected by the Servicer.
Following the occurrence and during the continuation of any Lock Box
Event, on each monthly payment date up to and including the Hudson
Anticipated Repayment Date, withdrawals will be made by the Servicer to
transfer funds to the Collection Account from (i) the debt service reserve to
pay Hudson Particular Servicing Expenses, the Hudson Monthly Debt Service
Payment, and any other amounts then owing to the lender under the loan
documents and (ii) the additional amortization account, for the prepayment of
outstanding principal of the Hudson Loan, in the inverse order of maturity,
in the amount of the Hudson Monthly Additional Amortization Amount.
Following the occurrence and during the continuation of any Lock Box
Event, on each monthly payment date after the Hudson Anticipated Repayment
Date until the Hudson Loan has been paid in full, withdrawals will be made by
the
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Servicer, to transfer funds to the Collection Account from (i) the debt
service reserve to pay the Hudson Particular Servicing Expenses, the Hudson
Monthly Debt Service Payment and any other amounts then due the lender under
the loan documents and (ii) the Hudson Cash Collateral Account to prepay the
outstanding principal balance of the Hudson Loan, in inverse order of
maturity, until the principal has been paid in full.
A "Lock Box Event" means the occurrence of any of the following events:
(i) the Hudson Loan is not paid in full on the Hudson Anticipated Repayment
Date or if at any time an event of default exists, (ii) the lender is
entitled to cause the Hudson Borrower to terminate the Hudson Management
Agreement due to a monetary event of default under the Hudson Loan or a
failure of the Hudson Property to generate a certain amount of net operating
income, and the Hudson Borrower fails to effect an optional defeasance of the
Hudson Loan, as described below in "--Property Management", (iii) the debt
service reserve contains less than one Hudson Monthly Debt Service Payment,
(iv) (x) the Servicer is required to use funds from the debt service reserve
to make a Hudson Monthly Debt Service Payment and (y) the debt service
reserve is not restored and increased within two business days of such use so
that it contains an amount equal to two Hudson Monthly Debt Service Payments
and (z) such amount is not thereafter maintained therein and restored within
two business days after any subsequent use by the Servicer, (v) the tax and
insurance reserve contains less than 1/12 of the amount reasonably projected
by the Hudson Manager to be due for payment of all real estate taxes and
insurance premiums coming due for the Hudson Property for the 12 full months
next succeeding the last day of any month, (vi) the capital expenditure
reserve does not contain at least $18,829 or (vii) an entity beneficially
owned by the State Teachers Retirement Board of Ohio is not, directly or
indirectly, the controlling general partner of the Hudson Borrower.
Transfer of Properties and Interest in Hudson Borrower; Encumbrance. If no
event of default has occurred and is continuing under the Hudson Loan, upon
at least sixty days' notice to the lender, the Hudson Borrower may sell the
Hudson Property subject to the Hudson Loan so long as (i) the lender receives
an opinion of counsel satisfactory to the Rating Agencies that such sale will
not adversely affect the validity of certain property tax abatements in favor
of the owner of the Hudson Property and (ii) the Rating Agencies confirm in
writing that such transfer will not result in the downgrade, withdrawal or
qualification of the then current rating of any of the Certificates. Upon
such sale, the lender will deliver to the Hudson Borrower for execution and
delivery instruments as required to effect the assignment and assumption of
the Hudson Loan and a release of the Hudson Borrower's obligations therein.
"Change of Control" means any sale, conveyance or transfer of (a) the
general partnership interests in the Hudson Borrower other than to LP I, LP
II, SPE I or SPE II, (b) a general partnership interest in LP I and LP II
other than to Linpro-CP, Green Equities or OTR, (c) a general partnership
interest in Linpro-CP other than to Linpro Jersey City Highrise Offices I
Limited Partnership, a Delaware limited partnership ("Linpro Jersey City"),
(d) a limited partnership interest in Linpro-CP such that any entity other
than Colgate-Palmolive N.J., Inc., a New Jersey corporation and/or Linpro
Jersey City holds more than a 49% limited partnership interest in such
entity, (e) a limited partnership interest in LP I and LP II such that any
entity other than Green Equities, OTR and/or Linpro-CP owns more than a 49%
limited partnership interest in LP I or LP II or (f) capital stock in SPE I,
or SPE II other than to LP I and LP II. The Hudson Loan prohibits a Change of
Control unless (i) no event of default has occurred and is continuing, (ii)
the Hudson Borrower supplies an opinion in customary form and substance
regarding non-consolidation of the relevant entity with its partners in the
event of bankruptcy and (iii) the Rating Agencies confirm in writing that
such transfer will not result in the downgrade, withdrawal or qualification
of the then current rating of any of the Certificates.
The Hudson Property is subject to a second mortgage in the principal
amount of $3,000,000 held by the New Jersey Urban Development Corporation
(the "UDC Loan"). The second mortgage is subject and subordinate to the
Hudson Mortgage. Under a subordination agreement between the Originator and
the second mortgagee, dated as of December 30, 1996, the second mortgagee
acknowledged its subordination to the Hudson Mortgage, affirmed the
outstanding amount of the second mortgage, and agreed that the lender would
be given notice of the commencement of any foreclosure or other similar
action, and the opportunity to cure any defaults under the Hudson Loan. The
principal amount and interest on the second mortgage is payable in sixty
equal monthly payments commencing on February 1, 2005 and ending on December
20, 2009, and has been fully paid for by the Hudson Borrower through the
delivery by the Hudson Borrower of certain U.S. Obligations used to fund the
reserve account in respect of the UDC Loan. See "--Reserves."
Insurance. The Hudson Borrower is required to maintain (a) fire and
extended coverage insurance insuring against all hazards included in an "all
risk" endorsement in an amount equal to at least 100% of the full replacement
cost of the improvements, equipment and personal property relating thereto,
(b) with respect to any part of the Hudson Property that is located in an
area identified by the U.S. Department of Housing and Urban Development as a
flood hazard area, or in
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an area designated as "flood prone" pursuant to the National Flood Insurance
Act of 1968 and the Flood Disaster Protection Act of 1973, such insurance as
is available under the National Flood Insurance Program, (c) comprehensive
public liability insurance in an amount not less than $2,000,000 per
occurrence with combined single limit coverage for bodily injury or property
damage and umbrella liability coverage of not less than $23,000,000, (d)
business interruption insurance which will cover actual losses for a period
of at least eighteen months, (e) not less than $2,000,000 of boiler and
machinery insurance on a comprehensive form, (f) workers' compensation and
employer's liability insurance in amounts required by state law and (g)
during any period of construction or renovation, builder's "all risk"
insurance in an amount equal to not less than the full insurable value of the
Hudson Property. The Hudson Loan requires the Hudson Borrower to obtain the
insurance described above from insurance carriers having claims paying
abilities rated not less than "AA" by S&P. In addition, the lender has agreed
that the Hudson Borrower may obtain insurance from Royal Indemnity Company
unless such company's rating by S&P falls below "AA-." If permitted by the
laws of New Jersey, the worker's compensation and employer's liability
insurance may be provided by a state approved and regulated employer's
self-insurance fund. All policies of insurance, other than the worker's
compensation and employer's liability insurance, name the lender as
additional insured or loss payee, as applicable.
Condemnation and Casualty. The Hudson Borrower is required to restore the
Hudson Property in all casualty situations and in all condemnation situations
other than those which involve a total taking, unless the Hudson Borrower
obtains the release of the Hudson Property as described above under
"--Prepayments" and "--Release in Exchange for Substitute Collateral". If no
event of default exists at the time of settlement, the Hudson Borrower has
the right to settle insurance claims with respect to any casualty where the
estimated restoration cost is less than $1,000,000 (the "Restoration
Benchmark"), and the Hudson Borrower may receive the proceeds of such
insurance for the purpose of paying the cost of such restoration. If the
restoration cost exceeds the Restoration Benchmark, the lender may
participate in the settlement of all insurance claims relating to such
casualty and all insurance proceeds will be paid directly to the lender and
advanced to the Hudson Borrower in reimbursement for amounts expended to
restore the Hudson Property. Amounts not required for the purpose of
restoration will be paid to the Hudson Borrower.
If (a) an event of default has occurred and is continuing, (b) the
restoration of the Hudson Property cannot be completed (i) so as to
constitute an economically viable building or (ii) at least six months prior
to the Hudson Maturity Date, (c) the amount of business interruption
insurance, together with other funds of the Hudson Borrower, is insufficient
to cover all fixed and operating expenses of the Hudson Property, including
payment of debt service on the Hudson Loan, during restoration and until the
operation of the Hudson Borrower's business at the Hudson Property is
resumed, (d) the amount of insurance proceeds equals or exceeds the amount of
the outstanding principal balance of the Hudson Loan or (e) restoration of
the Hudson Property cannot be completed except at a cost which exceeds the
amount of available insurance proceeds, and the Hudson Borrower shall not
have deposited with the lender an amount equal to the excess of the estimated
cost of restoration within ninety days following the lender's receipt of the
insurance proceeds and delivery to the Hudson Borrower of notice of such
deficiency (clauses (a) through (e), collectively, the "Prepayment
Conditions"), then the lender shall have the option, subject to the
provisions of certain subordination, nondisturbance and attornment agreements
with certain tenants, to apply insurance proceeds to prepay the Hudson Loan
and such prepayment shall be without payment of a yield maintenance premium
unless an event of default has occurred and is continuing.
In the event of a total taking of the Hudson Property, the proceeds of any
condemnation award will be applied by the lender, at its option, to prepay
the Hudson Loan. Any portion of such award remaining after payment in full of
the Hudson Loan will be released to the Hudson Borrower. Provided that no
event of default has occurred and is continuing under the Hudson Loan, in the
event of a partial taking where the restoration cost is less than the
Restoration Benchmark, the award may be settled by the Hudson Borrower. If
the restoration cost exceeds the Restoration Benchmark, the lender may
participate in the settlement of such proceedings and all condemnation
proceeds will be paid directly to the lender and advanced to the Borrower to
pay the costs of restoration of the Hudson Property. Amounts not required for
the purpose of restoration will be paid to the Borrower. However, if one of
the Prepayment Conditions has been satisfied, then the lender shall have the
option to apply the condemnation proceeds to prepay the Hudson Loan and such
prepayment shall be without payment of a yield maintenance premium unless an
event of default has occurred and is continuing.
Financial Covenants and Reporting. The Hudson Borrower is required to
furnish to the lender: (a) not later than 120 days after the end of each
year, audited financial statements (including balance sheet, statement of
operations (profit and loss), and statement of cash flows of the Hudson
Borrower), prepared in accordance with GAAP, (b) not later than 20 days after
the end of each month, monthly cash flow operating reports and occupancy
statements and rent roll for such month and (c) not later than 60 days after
the end of each year, unaudited financial statements in a form agreed upon by
the Hudson Borrower and the lender.
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The Property. The Mortgaged Property securing the Hudson Loan is a
forty-two story office building (the "Hudson Building") constructed between
1990 and 1992 of steel and concrete and located on a lot of approximately
1.79 acres on the Hudson Waterfront submarket in Jersey City, New Jersey. The
Hudson Building has a GLA of approximately 1,230,087 square feet, including
approximately 1,200,834 square feet of GLA comprised of office space,
approximately 19,457 square feet of GLA comprised of retail space and
approximately 9,796 square feet of GLA comprised of space leased to Lehman
Brothers (as described below) for certain emergency generators. The Hudson
Building has mechanical space of approximately 61,000 square feet and spaces
in a parking garage of approximately 215,000 square feet in which 1,004
automobiles are permitted to be parked. Retail space comprises most of the
first floor of the Hudson Building, while the second through fifth floors
consist of the parking garage. Various tenants, including Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Lehman Brothers
Holdings, Inc. ("Lehman Brothers"), occupy space on the remaining floors,
with the exception of four floors which contain the mechanical areas of the
Hudson Building. Merrill Lynch & Co. is the ultimate parent of Green
Equities. The occupancy rates, as of December 31, 1996, were approximately
100% and 22% for the office and retail portions of the Hudson Building,
respectively, with an overall occupancy rate of 98.6%. Although the Hudson
Property was leased-up prior to such date, a number of tenants, including
Lehman Brothers, had a rent abatement which did not expire until January
1996. Major tenants include Merrill Lynch (as of January 1, 1997, 590,174
square feet of GLA, 48% of current annualized base rent, $15.01 rent per
square foot, $16.01 rent per square foot as of April 1, 1997, $9,448,686
annualized rent, lease expires after the Hudson Anticipated Repayment Date in
2007) and Lehman Brothers (as of January 1, 1997, 402,564 square feet of GLA
(excluding space leased for certain emergency generators), 27% of current
annualized rent, $13.00 rent per square foot, $5,234,928 annualized rent,
lease expires in 2010). Based on an appraisal conducted in 1996 as of August
13, 1996, the appraised value of the Hudson Property was $236,000,000.
Property Management. The Hudson Property is managed by LCOR Asset
Management Limited Partnership, a Delaware limited partnership (the "Hudson
Manager"), pursuant to a management agreement (the "Hudson Management
Agreement") between Leasing and the Hudson Manager, dated December 31, 1989,
as amended on December 31, 1996. The Hudson Manager is an affiliate of an
indirect owner of the Hudson Borrower. The limited partner and general
partner of the Hudson Manager are LCOR Investment Corporation and LCOR
Incorporated, respectively. The Hudson Management Agreement provides for (a)
a monthly management fee equal to 3% of monthly gross receipts actually
received from the Hudson Property, payable monthly in arrears and (b) a fee
for the arrangement of any sale or financing of the Hudson Property not to
exceed 1% of the gross sales price or the gross amount of any financing, as
applicable.
The initial term of the Hudson Management Agreement will terminate on
December 31, 1999 if Leasing gives written notice of such termination on or
before July 1, 1999. If Leasing fails to give such notice of termination, the
Hudson Management Agreement will continue beyond December 31, 1999 for
successive periods of one calendar month each commencing on January 1, 2000
until the agreement is terminated in a manner described below.
The Hudson Management Agreement may be terminated at any time by Leasing
upon any of the following occurrences, among others: (a) failure of the
Hudson Manager to timely produce certain financial statements or budgets, (b)
Linpro-CP, a general partner of LP I and LP II (i.e., two of the general
partners of the Hudson Borrower) defaults under either of the LP I or LP II
partnership agreements or (c) Merrill Lynch, one of the tenants of the Hudson
Property (see "--Property"), exercises its right to terminate its lease (the
"ML Lease"). In addition, the Hudson Management Agreement will automatically
terminate if the general partner of LP I and LP II ceases to be a partner in
such partnerships.
The lender may require Leasing and the Hudson Manager to terminate the
Hudson Management Agreement upon any of the following occurrences, among
others: (a) the occurrence of an event of default under the Hudson Loan
(other than those specified in clause (c) below), (b) the failure of the
Hudson Manager to provide certain financial information to lender, or(c)(i)
an event of default arising from the failure of the Hudson Borrower to pay
principal, interest or any other amounts due under the Hudson Loan or (ii) if
the net operating income of the Hudson Property for any twelve month period
ending at the end of any calendar quarter is less than $14,514,543. However,
if, following notice of the lender's intention to terminate the Hudson
Management Agreement pursuant to clause (c) above, the Hudson Borrower
delivers to the lender U.S. Obligations that provide Hudson Monthly Debt
Service Payments on or prior to, but as close as possible to, all successive
payment dates after the date of such delivery that would be required with
respect to the outstanding principal balance of the Hudson Loan (the "Hudson
Additional Pledged Property") (if prior to the Hudson Anticipated Repayment
Date) or prepayment (if subsequent to the Hudson Anticipated Repayment Date)
of the Hudson Loan, in an amount sufficient to cause the Hudson Loan DSCR for
the immediately preceding twelve months ending on a calendar quarter (after
giving effect to the optional delivery of Hudson Additional Pledged Property
or prepayment, as applicable) to be at least 1.15, then no termination of the
Hudson Management Agreement will occur.
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"Hudson Loan DSCR" means, for any period, the quotient obtained by
dividing net operating income for such period by the Hudson Monthly Debt
Service Payment (after giving effect to the optional delivery of Hudson
Additional Pledged Property or prepayment, as applicable) for such period.
If the Hudson Management Agreement is terminated as the result of an
occurrence specified in the second preceding paragraph, then a third party
replacement property manager will be selected at market rates and on
customary terms, with such rates and terms to be approved by the Rating
Agencies and the lender.
Subject to the provisions described in the foregoing paragraphs, the
Hudson Borrower has agreed not to terminate or modify the terms of the Hudson
Management Agreement, unless such termination or modification is accompanied
by the replacement of the Hudson Manager, such replacement manager is
acceptable to the lender and the Rating Agencies confirm in writing that such
replacement will not result in the downgrade, withdrawal or qualification of
the then current rating of any of the Certificates.
Pursuant to a Subordination Agreement between the Hudson Manager and the
lender with respect to the Hudson Management Agreement, the Hudson Manager
has agreed that its rights under the Hudson Management Agreement are in all
respects subordinate to the rights of the lender. The Hudson Manager has also
agreed that, upon the occurrence of an event of default under the Hudson
Loan, all payments owed or to become due to it under the Hudson Management
Agreement will be deferred and the lender may terminate the Hudson Management
Agreement. The Hudson Manager further agrees that, if the Hudson Loan DSCR
for the twelve months ending on the last day of any calendar quarter is less
than 1.15, then all management fees will be deferred and will continue to
accrue without interest until the Hudson DSCR exceeds 1.15 for the twelve
months ending on the last day of any calendar quarter. The Hudson Manager
agrees not to cause the filing of a petition in bankruptcy against the Hudson
Borrower for the non-payment of sums owing to the Hudson Manager under the
Hudson Management Agreement until payment in full of the Hudson Loan.
The Hudson Manager is organized in Delaware and, it and/or its affiliates
has been a provider, with several decades of experience, of development,
financing, marketing, property management and asset management services. As
of 1997, the Hudson Manager manages 24 properties containing an aggregate of
4,770,000 square feet (including one property in Jersey City, New Jersey with
1,500,000 square feet and eleven properties in other locations throughout New
Jersey containing an aggregate of 940,000 square feet). Eric Eichler is
President of the Hudson Manager's general partner, LCOR Incorporated, a
Pennsylvania corporation.
THE M&H RETAIL POOL LOAN AND PROPERTIES
The Loan. The M&H Retail Pool Loan was originated by the Originator as of
December 20, 1996. The M&H Retail Pool Loan had a principal balance at
origination of $58,400,000 and has a principal balance as of the Cut-off Date
of approximately $58,300,969 and is secured by Mortgages encumbering six
community and neighborhood retail shopping located in California (the "M&H
Retail Pool Properties"). The Mortgages encumbering the M&H Retail Pool
Properties are cross-collateralized and cross-defaulted.
The Borrower. M&H Realty Partners II L.P. (the "M&H Retail Pool Borrower")
is a special purpose California limited partnership formed on October 1,
1994. The limited partnership agreement of the M&H Retail Pool Borrower
provides that it was organized for the purpose of owning the M&H Retail Pool
Properties and carrying on all incidental or related activities. The M&H
Retail Pool Borrower owns no material assets other than the M&H Retail Pool
Properties and related interests. The sole general partner of the M&H Retail
Pool Borrower is MHRP II L.P. ("MHRP"), a special purpose California limited
partnership organized solely for the purpose of acting as general partner of
the M&H Retail Pool Borrower. The sole general partner of MHRP is
Merlone/Hagenbuch II Inc. (the "MHRP GP"), a California corporation. The
limited partners of the M&H Retail Pool Borrower are Yale University, a
Connecticut corporation, The Church Pension Fund, a New York corporation, and
Gothic Corporation, a North Carolina nonprofit corporation, and ten other
individuals and entities, none of which owns greater than a 1.3959% limited
partnership interest in the M&H Retail Pool Borrower.
Security. The M&H Retail Pool Loan is a nonrecourse loan, secured only by
the fee estate of the M&H Retail Pool Borrower in the M&H Retail Pool
Properties and certain other collateral relating thereto (including an
assignment of leases and rents, an assignment of certain agreements and the
funds in certain accounts), and subject to exceptions for, among other
things, fraud, knowing material misrepresentation, breach of environmental
indemnities and covenants, misapplication of funds and misappropriation of
security deposits, neither the M&H Retail Pool Borrower nor any of its
affiliates is personally liable for payment therefor. The M&H Retail Pool
Borrower has made certain environmental
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representations and has represented that it owns each M&H Retail Pool
Property free and clear of all liens, except for certain encumbrances
permitted under the loan documents. The Originator is the named insured under
the title insurance policies (which will be assigned to the Trust Fund) which
insure, among other things, that each of the Mortgages constitutes a valid
and enforceable first lien on the M&H Retail Pool Properties, subject to
certain exceptions and exclusions from coverage set forth therein.
Payment Terms. The M&H Retail Pool Loan matures on January 11, 2027 (the
"M&H Retail Maturity Date") and bears interest at a fixed rate per annum
equal to (a) 7.50% (the "M&H Retail Current Interest Rate") through and
including January 10, 2007 and (b) from and including January 11, 2007 (the
"M&H Retail Anticipated Repayment Date"), at a fixed rate per annum (the "M&H
Retail Revised Interest Rate") equal to the lesser of (i) the maximum rate
permitted by applicable law, and (ii) the greater of (A) the M&H Retail
Current Interest Rate plus 2% and (B) the yield, as of the M&H Retail
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 U.S. Obligations having maturities as close
as possible to the M&H Retail Maturity Date, plus 2%. However, as described
below, until the principal balance of the M&H Retail Pool Loan has been
reduced to zero, the M&H Retail Pool Borrower will only be required to pay
interest at the M&H Retail Current Interest Rate. The interest accrued at the
excess of the M&H Retail Revised Interest Rate over the M&H Retail Current
Interest Rate will be deferred and will bear interest at the M&H Retail
Revised Interest Rate (such accrued and deferred interest and interest
thereon, the "M&H Retail Excess Interest"). Interest on the M&H Retail Pool
Loan is calculated on the basis of the actual number of days elapsed and a
360-day year.
Commencing on February 11, 1997, the M&H Retail Pool Loan requires 360
constant monthly payments of principal and interest (the "M&H Retail Monthly
Debt Service Payment Amount") of $408,341.27 (based on a 360-month
amortization schedule and the M&H Retail Current Interest Rate). Payment of
the then outstanding balance of the principal, if any, together with all
accrued and unpaid interest (including the M&H Retail Excess Interest) is
required on the M&H Retail Maturity Date. Commencing on the first payment
date after the M&H Retail Anticipated Repayment Date, in addition to the M&H
Retail Monthly Debt Service Payment Amount, the M&H Retail Pool Borrower is
required to apply 100% of M&H Retail Excess Cash Flow (as defined below) for
the current interest accrual period under the loan documents, to the
following items in the following order of priority: (a) to the outstanding
principal balance of the M&H Retail Pool Loan until reduced to zero, (b) to
M&H Retail Excess Interest and (c) to any other amounts due under the loan
documents. "M&H Retail Excess Cash Flow" means the amounts remaining in the
M&H Retail Cash Collateral Account (as defined below under "--Lock Box")
after monthly application of funds as described in clauses (a), (b), (c) and
(d) under "--Lock Box" below and amounts for the funding of additional
reserves for working capital, extraordinary operating expenses and ongoing
capital reserves at levels reasonably satisfactory to the lender. The
scheduled principal balance of the M&H Retail Pool Loan as of the M&H Retail
Anticipated Repayment Date will be approximately $51,572,473.
Upon the occurrence of an event of default, the entire unpaid principal
amount of the M&H Retail Pool Loan 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 then applicable interest rate on
the M&H Retail Pool Loan (i.e. the M&H Retail Current Interest Rate or the
M&H Retail Revised Interest Rate) plus 5%.
Prepayment. Voluntary prepayment is prohibited under the M&H Retail Pool
Loan prior to 90 days before the M&H Retail Anticipated Repayment Date.
Thereafter, the M&H Retail Pool Loan may be voluntarily prepaid in whole or
in part on any payment date, or if such prepayment is made prior to the M&H
Anticipated Repayment Date, on any date (provided that such prepayment
includes an additional amount equal to the amount of interest that would have
been due on the next payment date if no prepayment had occurred) without the
payment of a yield maintenance premium or penalty. In connection with a
voluntary prepayment in part relating to a sale or refinancing of a Mortgaged
Property during the period commencing 90 days prior to the M&H Retail
Anticipated Repayment Date and continuing through the M&H Retail Maturity
Date, the M&H Retail Pool Borrower may obtain the transfer and release of one
or more Mortgaged Properties; provided that, among other conditions, (a) no
event of default has occurred and is continuing with respect to the M&H
Retail Pool Loan and (b) the M&H Retail Pool Borrower prepays the M&H Retail
Pool Loan in an amount equal to 125% of the Allocated Loan Amount for such
Mortgaged Property.
Principal prepayments on the M&H Retail Pool Loan may occur on payment
dates after the M&H Retail Anticipated Repayment Date through application of
the M&H Retail Excess Cash Flow, as described above under "--Payment Terms"
or upon the occurrence of an event of default, as described below under
"--Lockbox." Prepayments made
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following an event of default will be subject to the payment of a yield
maintenance premium which is the amount that, when added to the amount
otherwise due, would be sufficient to purchase U.S. Obligations (a) having
maturity dates on or prior to, but as close as possible to, successive
scheduled payment dates (after the date such yield maintenance premium became
due) upon which interest and principal payments would be required under the
M&H Retail Pool Loan as though the M&H Retail Maturity Date was the M&H
Retail Anticipated Repayment Date and (b) in amounts sufficient to pay all
scheduled principal and interest payments under the M&H Retail Pool Loan (at
the M&H Current Interest Rate or M&H Revised Interest Rate, as applicable) as
if the M&H Retail Maturity Date was the M&H Retail Anticipated Repayment Date
(but without any adjustment of the monthly amortization schedule); provided,
however, that under no circumstances shall a yield maintenance premium be
less than zero.
To the extent that the M&H Retail Pool Borrower is not permitted to apply
any insurance or condemnation proceeds to the restoration of the Mortgaged
Property under the M&H Retail Pool Loan, the Servicer may, at its option,
apply such proceeds to prepay the M&H Retail Pool Loan. No yield maintenance
premium is required to be paid in connection with any proceeds that are paid
with respect to insurance proceeds received under any insurance policy or
condemnation proceeds received as a result of a taking or other condemnation
proceeding. Any insurance proceeds or condemnation proceeds made available to
the M&H Retail Pool Borrower under the loan documents for restoration or
repair, to the extent not used by the M&H Retail Pool Borrower in connection
with, or to the extent they exceed the cost of, such restoration or repair,
shall be paid to the M&H Retail Pool Borrower. See "--Condemnation and
Casualty" below.
Release in Exchange for Substitute Collateral. The M&H Retail Pool
Borrower is permitted on any payment date after the second anniversary of the
Closing Date (but only prior to the M&H Retail Anticipated Repayment Date),
provided no event of default has occurred and is continuing, to defease all
or a portion of the M&H Retail Pool Loan, provided that, among other
conditions, the M&H Retail Pool Borrower pays on such payment date (the "M&H
Retail Defeasance Date") (i) all interest accrued and unpaid on the principal
balance of the M&H Retail Pool Loan, (ii) all other sums then due and payable
under the loan documents and (iii) the M&H Retail Defeasance Deposit (as
defined below). In addition, the M&H Retail Pool Borrower must deliver to the
lender, among other things, (a) a security agreement in form and substance
reasonably satisfactory to the lender creating a first priority perfected
lien on the M&H Retail Defeasance Deposit and the U.S. Obligations purchased
on behalf of the M&H Retail Pool Borrower, (b) an opinion of counsel for the
M&H Retail Pool Borrower in form and substance reasonably satisfactory to the
lender stating that the lender has a first priority perfected security
interest in the M&H Retail Defeasance Deposit and a first priority perfected
security interest in the U.S. Obligations purchased therewith and that the
defeasance will not adversely affect the status of either Trust REMIC as a
REMIC, (c) 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, (d) a certificate from an independent
certified public accountant certifying that the amounts of the U.S.
Obligations purchased in connection with such defeasance satisfy the
requirements of the loan documents and (e) an officer's certificate from the
M&H Retail Pool Borrower certifying that the foregoing requirements have been
satisfied. Neither a defeasance in whole or in part will serve to release the
M&H Retail Pool Borrower from any liability or obligation relating to certain
environmental covenants and indemnities.
"M&H Retail Defeasance Deposit" means an amount equal to the total cost
incurred in purchasing U.S. Obligations providing payments on or prior to,
but as close as possible to, all successive payment dates upon which
principal and interest payments would be required after the M&H Retail
Defeasance Date and through the M&H Retail Anticipated Repayment Date in
amounts sufficient to pay when due all scheduled principal and interest
payments due as if the M&H Retail Anticipated Repayment Date was the M&H
Retail Maturity Date (but without any adjustment of the monthly amortization
schedule), in the case of a defeasance in full, or, in the case of a partial
defeasance of the M&H Retail Pool Loan, in amounts sufficient to pay when due
all scheduled principal and interest payments due as if (x) the M&H Retail
Maturity Date was the M&H Retail Anticipated Repayment Date (but without any
adjustment of the monthly amortization schedule) and (y) the outstanding
principal amount due on the M&H Retail Pool Loan was an amount equal to 125%
of the Allocated Loan Amount for the Mortgaged Property or Properties being
defeased.
In connection with the partial defeasance of the M&H Retail Pool Loan, the
M&H Retail Pool Borrower may obtain the release of one or more Mortgaged
Properties from the lien of the related Mortgage, provided, among other
things, that the M&H Retail Pool Borrower has satisfied all of the conditions
to a defeasance described above, that no event of default exists, and further
subject to the condition that the M&H Retail Defeasance DSCR for all the M&H
Retail Pool Properties not being released (after giving effect to the
defeasance and calculated on the basis of the prior 12 calendar months) is
not less than the greater of (x) 1.90 and (y) the M&H Retail DSCR (calculated
on the basis of the prior 12 calendar months) for all of the M&H Retail Pool
Properties as of the payment date immediately preceding the M&H Retail
Defeasance Date.
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"M&H Retail Defeasance DSCR" means, for any period in connection with a
partial defeasance, the quotient obtained by dividing (i) adjusted net
operating income for the M&H Retail Pool Properties not being released for
such period by (ii) the M&H Retail Monthly Debt Service Payment Amount due
for that period less the payments that would have been received had the
relevant U.S. Obligations purchased in connection with such defeasance been
held as security for such period. "M&H Retail DSCR" means, for any period,
the quotient obtained by dividing (x) adjusted net operating income for such
period by (y) the M&H Retail Monthly Debt Service Payment Amount due for that
period.
Upon receipt of the M&H Retail Defeasance Deposit, the Servicer will
purchase U.S. Obligations on behalf of the M&H Retail 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 M&H Retail Pool Loan or, if
the M&H Retail Pool Loan is being defeased in full, as the sole collateral
for payment of amounts due under the M&H Retail Pool Loan. Following the
defeasance of the M&H Retail Pool Loan, the M&H Retail Pool Properties as to
which such defeasance has been consummated will be released from the lien of
the related Mortgage.
Reserves. Pursuant to the terms of the M&H Retail Pool Loan, the M&H
Retail Pool Borrower has established (a) an extraordinary operating expense
account funded at the initial closing of the M&H Retail Pool Loan in the
amount of $268,985 and to be funded each month in an additional amount equal
to the greater of (i) 1/12 of the product of (A) $0.15 and (B) the number of
square feet of gross rentable area for each Mortgaged Property and (ii) 1/12
of the amount indicated in engineering reports for each Mortgaged Property as
the annual amount required to maintain such Mortgaged Property, (b) a tenant
improvement reserve account in the amount of $400,000 which was funded at the
initial closing of the M&H Retail Pool Loan to be used (A) for the cost of
tenant improvements only for the space currently leased to Home Express at
Westgate Mall in the event Home Express (or a trustee in bankruptcy on behalf
of Home Express) rejects its lease of space at Westgate Mall or the M&H
Retail Pool Borrower is otherwise entitled to lease such space to another
tenant or (B) for the cost of tenant improvements at any M&H Retail Pool
Property in the event Home Express (or a trustee in bankruptcy on behalf of
Home Express) affirms its store lease at Westgate Mall; upon the occurrence
of either of the situations in clause (A) or (B) the M&H Retail Pool Borrower
shall be entitled to receive, to the extent of available funds in the tenant
improvement reserve account, the entire $400,000 upon (i) written request to
the lender to release such funds and (ii) an officer's certificate stating
that such tenant improvement costs are reasonable, the work relating thereto
has been completed and that such amounts are then due or have been paid, (c)
an operating expense reserve account (the "M&H Operating Expense Account") to
be funded only on and after the M&H Retail Anticipated Repayment Date, or
upon the occurrence of an event of default, monthly in an amount equal to the
amount indicated for such month on the Servicer-approved annual operating
budget and (d) a tax and insurance reserve account funded at the initial
closing of the M&H Retail Pool Loan in the amount of $635,000 and to be
funded each month in an amount equal to 1/12 of the annual amount of
insurance premiums and taxes payable with respect to the M&H Retail Pool
Properties; provided, that the M&H Retail Pool Borrower shall not be required
to make monthly deposits into the tax and insurance reserve account if (i)
the M&H Retail Pool Borrower pays all taxes and insurance premiums when due,
(ii) no event of default has occurred and is continuing and (iii) the M&H
Retail Pool Borrower notifies the Servicer in writing within five business
days following the payment of taxes and insurance premiums.
Lock Box. The M&H Retail Pool Borrower is obligated to cause all rents and
other revenues (other than security deposits) with respect to the M&H Retail
Pool Properties to be deposited directly by the tenants to a collection
account. Any amounts received by the M&H Retail Pool Borrower as to the
foregoing will be deposited within one business day directly into the
collection account. The collection account will be established and maintained
by the M&H Retail Pool Borrower in the name of the lender. On a daily basis
all funds in excess of $10,000 in the collection account will be swept into a
central deposit account (the "M&H Retail Cash Collateral Account")
established by the lender in the lender's name.
The Servicer will distribute funds held in the M&H Retail Cash Collateral
Account to fund the following items in the following order: (a) if then
required, to fund the tax and insurance account, (b) to fund the M&H Retail
Monthly Debt Service Payment Amount, (c) to fund the extraordinary operating
expense reserve account, (d) if on or after the M&H Retail Anticipated
Repayment Date or upon an event of default, to fund the M&H Operating Expense
Account, (e) if on or after the M&H Retail Anticipated Repayment Date, to pay
any accrued and unpaid interest (other than M&H Retail Excess Interest) due
under the loan and to repay principal until the outstanding principal balance
of the M&H Retail Pool Loan has been reduced to zero, (f) if after the M&H
Retail Anticipated Repayment Date, to the payment of M&H Retail Excess
Interest, (g) if after the M&H Retail Anticipated Repayment Date, to pay any
other amounts due under the loan documents and (h) to the M&H Retail Pool
Borrower. Notwithstanding the foregoing, upon an event of default any amounts
deposited into or remaining in the M&H Retail Cash Collateral Account shall
be for the account of the lender and may be withdrawn by the lender to be
applied in any manner as the lender may elect in its sole discretion.
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Transfer of Properties and Interest in Borrower; Encumbrance. The M&H
Retail Pool Borrower is generally prohibited from transferring or encumbering
the M&H Retail Pool Properties except for: (a) a transfer by the M&H Retail
Pool Borrower of all (but not less than all) of the M&H Retail Pool
Properties to a single purchaser not more than one time during the term of
the M&H Retail Pool Loan provided that, among other things, (i) the lender
consents to such transfer (such consent not be unreasonably withheld), (ii)
the Rating Agencies confirm in writing that the transfer will not result in a
downgrade, withdrawal or qualification of the then current rating of the
Certificates, (iii) the transferee assumes in writing all obligations of the
M&H Retail Pool Borrower under the loan documents and executes and delivers
such other documentation as may be reasonably required by the lender or the
Rating Agencies and (iv) the M&H Retail Pool Borrower pays all reasonable
expenses incurred by the lender in connection with such transfer; (b) a
transfer of a Mortgaged Property that has been released as described under
"--Release in Exchange for Substitute Collateral" above; (c) a transfer of a
property in connection with a payment of the M&H Retail Pool Loan in whole or
in part and release thereof on or after the M&H Retail Anticipated Repayment
Date, as described under "--Prepayment" above; (d) a transfer in connection
with a prepayment of the M&H Retail Pool Loan as a result of the application
of insurance or condemnation proceeds as described under "--Condemnation and
Casualty" below; and (e) Permitted Encumbrances. "Permitted Encumbrances"
means (i) the lien created by the related Mortgages or other loan documents,
(ii) all liens disclosed in the applicable title insurance policy and
approved by the lender, (iii) liens for taxes and government charges not yet
due or delinquent or being contested in good faith, (iv) all restrictions,
covenants, reservations, easements, licenses or other agreements of an
immaterial nature, and (v) all other liens, restrictions, covenants,
reservations, easements, licenses or other such encumbrances approved by the
lender and as to which the Rating Agencies have confirmed in writing will not
result in a downgrade, withdrawal or qualification of the then current rating
of the Certificates.
The M&H Retail Pool Loan generally prohibits the conveyance, transfer or
sale of any direct or indirect legal, beneficial or profit interest, whether
by law or otherwise, in the M&H Retail Pool Borrower, MHRP and MHRP GP other
than (a) certain transfers of limited partnership interests in the M&H Retail
Pool Borrower and MHRP, profit interests in MHRP or shareholder interests in
MHRP GP which, in the aggregate during the term of the M&H Retail Pool Loan
do not exceed 49% of the aggregate of such interests in each such entity, (b)
certain transfers of the shareholder interests in MHRP GP occurring as a
result of the death of an individual who is a shareholder of MHRP GP,
provided that following such event the surviving shareholder continues to own
more than 49.9% of such interests, and (c) transfers consented to by the
lender and as to which the Rating Agencies have confirmed in writing that
such transfer will not result in a downgrade, withdrawal or qualification of
the then current rating of the Certificates.
The M&H Retail Pool Borrower is not permitted to incur any additional
indebtedness other than unsecured trade payables incurred in the ordinary
course of business which do not exceed, at any time, for all Mortgaged
Properties, 4% of the M&H Retail Pool Loan and are paid within (a) 60 days of
the date incurred or (b) if the M&H Retail DSCR for all Mortgaged Properties
is greater than or equal to 2.0, 180 days of the date incurred; unless, in
each case, the M&H Retail Pool Borrower is in good faith contesting its
obligation to pay such trade payables in a manner satisfactory to the lender
(which may include the lender's requirement that the M&H Retail Pool Borrower
post security with respect to the contested trade payables).
Insurance. The M&H Retail Pool Borrower is required to maintain for each
M&H Retail Pool Property (a) during any period of repair or restoration,
builder's "all risk" insurance in an amount not less than the full insurable
value of the Mortgaged Property and fixtures, equipment and improvements
thereto, (b) insurance against all perils included within the classification
"All Risks of Physical Loss" with extended coverage in an amount equal to 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
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 $22,000,000 per occurrence, (d) statutory workers' compensation
insurance, (e) business interruption and/or loss of "rental value" insurance
in an amount equal to at least 12 months estimated gross revenues, (f) flood
insurance with respect to any of the M&H Retail Pool Properties 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, (g) sprinkler leakage and machinery and boiler explosion
insurance in such amounts as are required by the lender and which are
customarily required by institutional mortgagees with respect to similar
properties similarly situated, (h) earthquake insurance (see below) (A) if no
earthquake engineering study is performed, from an insurer satisfactory to
the lender and the Rating Agencies in an amount equal to the lesser of (i)
the full insurable value of the improvements and (ii) the principal amount of
the M&H Retail Pool Loan on the Closing Date, or (B) if an earthquake
engineering study is
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performed (by an earthquake engineering firm acceptable to the lender and the
Rating Agencies), from an insurer satisfactory to the lender and the Rating
Agencies in an amount equal to the probable maximum loss (based on a 100-year
return earthquake); provided that such coverage is available at commercially
reasonable rates and the probable maximum loss (based on a 475-year return
earthquake) is greater than 10% of the actual replacement cost of
improvements, equipment and inventory with a deductible not in excess of 10%
of the full replacement value of the improvements or such other amount that
is acceptable to the lender, and (i) such other insurance with respect to the
improvements, equipment and inventory provided such insurance is of the kind
customarily insured against and in such amounts as are generally required by
institutional lenders for comparable properties. Any such insurance may be
effected under a blanket policy so long as, except in the case of public
liability insurance, the portion of the total coverage that is allocated to
each of the M&H Retail Pool Properties is not less than the required amount
of such insurance as set forth above. The M&H Retail Pool Loan requires the
M&H Retail Pool 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 one or more of the other Rating Agencies.
Royal Insurance Company, the property insurer for the M&H Retail Pool
Properties, has a claims paying ability rating of "AA" by S&P and a rating of
"A-/XI" by Best's. An earthquake engineering study performed on the M&H
Retail Pool Properties has determined that the properties located in San
Jose, Diamond Bar, Buena Park and Oceanside have probable maximum losses
(based on a 100-year return earthquake) greater than 10% of the actual
replacement cost of improvements, equipment and inventory and the M&H Retail
Pool Borrower has obtained separate earthquake insurance for these
properties. See "Risk Factors and Other Special Considerations --
Availability of Earthquake, Flood and Other Insurance."
Condemnation and Casualty. Following a casualty or condemnation at any
Mortgaged Property, the lender is obligated to make available all insurance
proceeds and condemnation proceeds (other than business interruption
insurance proceeds and condemnation proceeds in respect of a temporary
taking) to the M&H Retail Pool Borrower if the following conditions, among
others, are met: (a) no event of default has occurred and is continuing, (b)
the property can be restored to materially the same condition and utility as,
and having a value equal to or greater than, that prior to the casualty or
condemnation, and such restoration is capable of being completed at least six
months prior to the earlier to occur of (i) the M&H Retail Maturity Date and
(ii) the full pay-out of any business interruption insurance, (c) the M&H
Retail Pool Borrower shall demonstrate to the lender's reasonable
satisfaction its ability to pay the M&H Retail Pool Loan during the
restoration period, (d) within 30 days after the casualty or condemnation the
M&H Retail Pool Borrower shall have given written notice to the lender of its
intention to restore such property, (e) within 60 days following the date of
such notice, the M&H Retail Pool Borrower shall have provided to the lender
such additional funds as in the lender's opinion are necessary to complete
repair, (f) if the loss or damage exceeds $100,000, within 60 days following
the date of such notice the M&H Retail Pool Borrower shall have provided to
the lender (i) complete plans and specifications for repair or restoration,
(ii) fixed price or maximum cost construction contracts for completion of the
repair or restoration in accordance with such plans, (iii) builder's risk
insurance for the full cost of construction with the lender named as
loss-payee, and (iv) all permits and licenses necessary to the complete the
work, (g) the M&H Retail Pool Borrower must commence such work within 120
days after such casualty or condemnation and diligently pursue such work to
completion, and (h) the lender shall have a first priority lien and security
interest in all building materials and completed restoration work. If the
loss or damage exceeds $100,000 then (i) each disbursement of insurance or
condemnation proceeds shall be funded subject to conditions and in accordance
with reasonable disbursement procedures which a commercial construction
lender would typically establish in the exercise of sound banking practices
and shall only be made upon receipt of disbursement requests signed by the
M&H Retail Pool Borrower and its architect and general contractor with
appropriate invoices, lien waivers and other documents reasonably required by
the lender, and (ii) the lender may retain an independent contractor, at the
M&H Retail Pool Borrower's expense, to review and approve plans and
specifications and completed construction and to approve all requests for
disbursement. Unless the lender is required to make available insurance and
condemnation proceeds to the M&H Retail Pool Borrower pursuant to the
conditions set forth above, the lender is entitled to all insurance proceeds
and condemnation proceeds payable with respect to a casualty or condemnation
(other than business interruption insurance proceeds and condemnation
proceeds in respect of a temporary taking which will be disbursed in
accordance with the loan agreement). In the event such insurance or
condemnation proceeds are not required to be made available to the M&H Retail
Pool Borrower pursuant to the loan documents, or the M&H Retail Pool Borrower
fails to make a timely election to restore or fails to meet the conditions
required under the loan documents, upon five business days notice to the M&H
Retail Pool Borrower, the lender, at its option, may either (x) apply such
proceeds to the full extent thereof either to the full or partial prepayment
(without the payment of a yield maintenance premium) of the M&H Retail Pool
Loan or (y) to restore and repair such property. In connection with any such
required prepayment,
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the M&H Retail Pool Borrower is entitled to obtain the reconveyance of the
Mortgaged Property which was the subject of such casualty or condemnation
provided that the M&H Retail Pool Borrower (i) gives the lender written
notice of its desire to have the property reconveyed at least 10 days prior
to such reconveyance and (ii) pays to the lender, on or before the third
payment date occurring after the date the lender required the M&H Retail Pool
Borrower to prepay the M&H Retail Pool Loan with insurance or condemnation
proceeds, an amount, which when added to the amount of such required
prepayment is equal to the Allocated Loan Amount for such Mortgaged Property.
Provided no event of default has occurred and is continuing, any insurance or
condemnation proceeds made available to the M&H Retail Pool Borrower in
accordance with the loan documents to the extent not used in connection with,
or to the extent they exceed the cost of, such restoration or repair will be
released to the M&H Retail Pool Borrower.
Financial Reporting. The M&H Retail Pool Borrower is required to furnish
to the lender: (a) annually, within 90 days after the end of each fiscal year
a copy of the M&H Retail Pool Borrower's year-end financial statement audited
by a "Big Six" accounting firm or other firm reasonably acceptable to the
lender; (b) annually, within 45 days after each fiscal year year-end
unaudited financial statements; (c) quarterly, within 45 days of each
calendar quarter quarterly unaudited financial statements; (d) monthly,
within 20 days after the end of each calendar month, a complete rent roll;
and (e) within 10 business days, such further information regarding the M&H
Retail Pool Properties, the M&H Retail Property Manager, and the financial
affairs of the M&H Retail Pool Borrower as the lender may reasonably request.
Concurrently with delivery of the financial statements to the lender, the M&H
Retail Pool Borrower will provide a copy of the foregoing items to the Rating
Agencies, the Trustee, and the Servicer. The M&H Retail Pool Borrower will
provide the lender with updated information concerning the tax and insurance
costs for the next succeeding fiscal year prior to the termination of each
fiscal year.
The Properties. The M&H Retail Pool Properties securing the M&H Retail
Pool Loan are five neighborhood retail shopping centers and one community
retail shopping center located in California containing an aggregate of
approximately 1,398,516 square feet of GLA. The M&H Retail Pool Properties
contain approximately 1,383,636 square feet of GLA. As of December 31, 1996,
the occupancy rate for the M&H Retail Pool Properties ranged from
approximately 73% to 98% and the annualized base rent for such properties
ranged from approximately $9.07 per square foot of GLA which represents an
increase in the occupancy rate of 6% and base rents of 9%, in each case from
December 31, 1995.
Westgate Mall. Westgate Mall, located at the intersection of Saratoga
Avenue and Campbell Avenue in San Jose, California, is a community shopping
center built in 1960 and renovated in 1988 and 1996. It has approximately
665,461 square feet of GLA. As of December 31, 1996, the center was
approximately 88% occupied. The property serves a market of over 425,000
people within a five mile radius. Major tenants include Home Express (58,000
square feet of GLA, approximately 13% of current annualized base rent, lease
expires in 2004), Safeway (37,875 square feet of GLA, approximately 10% of
current annualized base rent, lease expires in 2010), Lil' Things (30,000
square feet of GLA, approximately 7% of current annualized base rent, lease
expires in 2011), Burlington Coat Factory (67,000 square feet of GLA,
approximately 6% of current annualized base rent, lease expires in 1999),
Barnes & Noble (24,992 square feet of GLA, approximately 6% of current
annualized base rent, lease expires in 2011), Ross Dress 4 Less (45,000
square feet of GLA, approximately 4% of current annualized base rent, lease
expires in 1998) and Montgomery Ward (167,154 square feet of GLA,
approximately 2% of current annualized base rent, lease expires in 2007).
Based on an appraisal completed in June 1996, the appraised value of the
property was $61,000,000.
Home Express is a debtor in a Chapter 11 bankruptcy proceeding. Home
Express has not yet assumed or rejected its lease, but continues to pay rent.
See "Risk Factors and Other Special Considerations -- Risk of Bankruptcy of
Major Tenants."
The Promenade. The Promenade, located at the intersection of Standiford
Avenue and McHenry Avenue in Modesto, California, is a neighborhood shopping
center built in 1988 and renovated in 1996. It has approximately 118,485
square feet of GLA. As of December 31, 1996, the center was approximately 94%
occupied. Major tenants include Copelands Sporting Goods (39,334 square feet
of GLA, approximately 26% of current annualized base rent, lease expires in
2008), Circuit City (25,000 square feet of GLA, approximately 22% of current
annualized base rent, lease expires in 2008) and Barnes & Noble (21,353
square feet of GLA, approximately 20% of current annualized base rent, lease
expires in 2011). Based on an appraisal completed on January 31, 1997, the
appraised value of the property was $13,000,000.
Country Hills Towne Center. The Country Hills Towne Center, located on
Diamond Bar Boulevard between Cold Springs Lane and Fountain Springs Lane in
Diamond Bar, California, is a neighborhood shopping center built in 1965 and
renovated in 1990. It has approximately 164,338 square feet of GLA. As of
December 31, 1996, the center was
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approximately 85% occupied. There is no other significant retail business
within two miles of the property. Major tenants include Regal Cinemas (23,428
square feet of GLA, approximately 28% of current annualized base rent, lease
expires in 2009), Ralphs Grocery Store (25,600 square feet of GLA,
approximately 16% of current annualized base rent, lease expires in 2011) and
Thrifty Drug Store (21,440 square feet of GLA, approximately 6% of current
annualized base rent, lease expires in 2009). Based on an appraisal completed
in June 1996, the appraised value of the property was $15,100,000.
Lincoln Park Center. The Lincoln Park Center, located on the corner of
Knott Avenue and Lincoln Avenue in Buena Park, California, is a neighborhood
shopping center built in 1958 and renovated in 1995. It has approximately
144,046 square feet of GLA. As of December 31, 1996, the center was
approximately 73% occupied. Major tenants include Family Fitness Center
(19,665 square feet of GLA, approximately 24% of current annualized base
rent, lease expires in 2004), Thrifty Drug Store (17,884 square feet of GLA,
approximately 11% of current annualized base rent, lease expires in 2005),
Big 5 Sporting Goods (9,990 square feet of GLA, approximately 11% of current
annualized base rent, lease expires in 1998) and Hometown Buffet (9,282
square feet of GLA, approximately 8% of current annualized base rent, lease
expires in 2010). Based on an appraisal completed in June 1996, the appraised
value of the property was $12,700,000.
Mission Square. Mission Square, located on Mission Avenue at the
intersection of Interstate 5 in Oceanside, California, is a neighborhood
shopping center built in 1963 and renovated in 1988. The property serves a
community dominated by Camp Pendleton. It has approximately 191,673 square
feet of GLA. As of December 31, 1996, the center was approximately 82%
occupied. Major tenants include Mira Costa College (19,600 square feet of
GLA, approximately 18% of current annualized base rent, lease expires in
2000), Office Depot (31,830 square feet of GLA, approximately 17% of current
annualized base rent, lease expires in 2009), Family Bargain Center (11,281
square feet of GLA, approximately 12% of current annualized base rent, lease
expires in 2000), Canned Foods Grocery Outlet (30,280 square feet of GLA,
approximately 11% of current annualized base rent, lease expires in 2001) and
Thrifty Drug Store (19,560 square feet of GLA, approximately 8% of current
annualized base rent, lease expires in 2014). Based on an appraisal completed
in June 1996, the appraised value of the property was $11,200,000.
Plaza La Quinta. Plaza La Quinta, located on the corner of Highway 111 and
Washington Street in La Quinta, California, is a neighborhood shopping center
built in 1982. It has approximately 114,483 square feet of GLA. As of
December 31, 1996, the center was approximately 80% occupied. Major tenants
include Vons Supermarket (36,800 square feet of GLA, approximately 23% of
current annualized base rent, lease expires in 2012), Lumpy's Discount Golf
Shop (7,000 square feet of GLA, approximately 11% of current annualized base
rent, lease expires in 2001) and The Beer Hunter Pub and Restaurant (6,853
square feet of GLA, approximately 10% of current annualized base rent, lease
expires in 2003). Based on an appraisal completed in June 1996, the appraised
value of the property was $10,200,000.
Property Management. The M&H Retail Pool Properties are managed by M&H
Property Management Inc., a California corporation (the "M&H Retail
Manager"), pursuant to a management agreement, dated as of December 20, 1996
(the "M&H Retail Management Agreement"), between the M&H Retail Manager and
the M&H Retail Pool Borrower. The M&H Retail Management Agreement provides
for a management fee equal to 5% of the gross revenues for each Mortgaged
Property during the first 30 months of the M&H Retail Pool Borrower's
ownership thereof, and 4% thereafter payable monthly in arrears. The M&H
Retail Management Agreement is for an initial term ending December 31, 1997
and, unless sooner terminated in accordance with the M&H Retail Management
Agreement, renews automatically each year, commencing January 1, 1998, for an
additional eight consecutive one year periods. Therefore, the M&H Retail
Management Agreement will terminate prior to the M&H Retail Anticipated
Repayment Date and, although the loan documents require the M&H Retail Pool
Borrower to maintain a property manager throughout the term of the M&H Retail
Loan, there can be no assurance that the M&H Retail Pool Borrower will be
able to reach an agreement with the M&H Retail Manager to manage the M&H
Retail Pool Properties thereafter. In such case, a successor property manager
would have to be appointed.
The M&H Retail Manager is an affiliate of the M&H Retail Pool Borrower.
The sole shareholders of the M&H Retail Manager are also the sole
shareholders of the MHRP GP.
Pursuant to the loan agreement the M&H Retail Management Agreement will be
terminated, subject to certain exceptions set forth therein, by the M&H
Retail Pool Borrower at the lender's request upon 30 days written notice to
the M&H Retail Pool Borrower and M&H Retail Manager (i) upon the occurrence
and continuation of an event of default under the M&H Retail Pool Loan, (ii)
if the M&H Retail Manager fails to perform its obligations under the M&H
Retail Management Agreement, (iii) in the event that as of the last day of
any calendar quarter the M&H Retail DSCR for the M&H Retail Pool Properties,
computed on the basis of the prior 12 calendar months, is less than 1.40 or
(iv) in the event
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that, as of the last day of a calendar quarter, the adjusted net operating
income for the M&H Retail Pool Properties, computed on the basis of the prior
12 calendar months, is less than 70% of $9,317,372. From and after the second
anniversary of the Closing Date (but prior to the M&H Retail Anticipated
Repayment Date), the lender will not have the right to terminate the M&H
Retail Management Agreement under clause (iii) above if, on the second
payment date following the date upon which the lender makes a determination
to so terminate the M&H Retail Manager, the M&H Retail Pool Borrower defeases
the M&H Retail Pool Loan in an amount sufficient to cause the M&H Retail DSCR
to be at least equal to 1.50 calculated as if such amount was actually
applied to reduce the principal balance upon which debt service was paid and
calculated as if principal balance was reamortized on a straight-line basis
(as if the reduction had occurred over the remaining number of months until
the M&H Retail Maturity Date) for the M&H Retail Pool Properties, computed on
the basis of the prior 12 months. The M&H Retail Pool Borrower can defease a
portion of the M&H Retail Pool Loan in accordance with the preceding sentence
by making the M&H Management Defeasance Deposit and pursuant to the
conditions set forth under "--Release in Exchange for Substitute Collateral."
The failure of the M&H Retail Pool Borrower to appoint a successor property
manager within 60 days following such termination will be an event of default
under the M&H Retail Pool Loan. All successor property managers shall be
approved in writing by the lender and shall be a reputable property manager
with at least seven years' experience in managing commercial properties
similar to and located in the jurisdictions of the M&H Retail Pool
Properties.
"M&H Management Defeasance Deposit" means an amount equal to the total
cost incurred in purchasing U.S. Obligations providing payments on or prior
to, but as close as possible to, all successive payment dates upon which
principal and interest payments would be required after the M&H Retail
Defeasance Date and through the M&H Retail Anticipated Repayment Date in
amounts sufficient to pay when due all scheduled principal and interest
payments as if (x) the M&H Retail Maturity Date was the M&H Retail
Anticipated Repayment Date (but without any adjustment of the monthly
amortization schedule) and (y) the outstanding principal amount due on the
M&H Retail Pool Loan was an amount equal to the amount required to be
defeased in accordance with the fourth to last sentence of the preceding
paragraph.
Pursuant to a manager's consent and subordination of management agreement
for each of the M&H Retail Pool Properties, the M&H Retail Manager has agreed
(i) to allow the lender to exercise such termination rights, (ii) that all
liens, rights and interests owned, claimed or held by the M&H Retail Manager
in and to any of the M&H Retail Pool Properties are and will be in all
respects subordinate and inferior to the liens and security interests created
by the M&H Retail Pool Loan; provided that such subordination shall not
affect the M&H Retail Manager's rights or remedies under the M&H Retail
Management Agreement against the M&H Retail Pool Borrower for non-payment of
its compensation or constitute a release of the obligations of the M&H Retail
Pool Borrower thereunder, and (iii) that the M&H Retail Manager will not
amend or otherwise change the M&H Retail Management Agreement without the
lender's prior consent.
The M&H Retail Manager together with its affiliates have managed,
recapitalized, renovated and retenanted over $500 million of shopping center
properties throughout California. As of February 28, 1997, the M&H Retail
Manager and its affiliates oversee the management and leasing of over
3,500,000 square feet of neighborhood and community shopping center space in
California.
THE INNKEEPERS POOL LOAN AND PROPERTIES
The Loan. The Innkeepers Pool Loan was originated by the Originator on
March 5, 1997, had a principal balance at origination of $43,545,085, has a
principal balance as of the Cut-off Date of $42,000,000 and is secured by
mortgages and deeds of trust (the "Innkeepers Mortgages") encumbering eight
hotels (the "Innkeepers Properties") located in California, Colorado,
Florida, Kansas, New Jersey and New York. The Innkeepers Mortgages are
cross-collateralized (with certain exceptions to accommodate recording tax
requirements, as described below under "--Security") and cross-defaulted with
each other.
The Borrower. Each of Innkeepers Residence Denver-Downtown, L.P.,
Innkeepers Residence Wichita East, L.P., Innkeepers Residence Sili I, L.P.
and Innkeepers Financing Partnership III, L.P. (each, an "Innkeepers
Individual Borrower", and collectively, the "Innkeepers Borrowers") is a
borrower under the Innkeepers Pool Loan and is a special purpose Virginia
limited partnership whose purpose is owning, financing, leasing, operating
and managing the applicable Innkeepers Properties. Each Innkeepers Individual
Borrower is jointly and severally liable for the entire Innkeepers Pool Loan.
The Innkeepers Borrower has represented to the Originator that it does not
own any assets other than those related to the Innkeepers Properties, nor
will it engage in any business unrelated to the ownership of the Innkeepers
Properties. The sole general partner of each Innkeepers Individual Borrower
is Innkeepers Financial Corporation III, Inc. (the
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"Innkeepers GP"), a special purpose Virginia corporation organized only for
the purpose of being and acting as the general partner of each of the
Individual Innkeepers Borrowers. The sole shareholder of the Innkeepers GP is
Innkeepers USA Trust, a publicly-traded Maryland real estate investment trust
(the "Innkeepers REIT"), the stock of which is traded on the New York Stock
Exchange. The limited partner of each Innkeepers Individual Borrower is
Innkeepers USA Limited Partnership (the "Innkeepers LP"), a Virginia limited
partnership.
Security. The Innkeepers Pool Loan is a non-recourse loan, secured only by
the interest of the Innkeepers Borrowers in the related Innkeepers Properties
and certain related collateral (including assignments of leases and rents and
the funds in certain accounts). Because each of New York, Kansas and Florida
law requires the payment of mortgage recording tax based on the principal
amount of the debt secured by a mortgage, each Innkeepers Mortgage
encumbering an Innkeepers Property in these states will secure the Innkeepers
Loan in an amount limited to 110% of the fair market values of such
Innkeepers Property. Because of certain limitations on the activities of real
estate investment trusts and their subsidiaries, the Innkeepers Borrowers
have leased the Innkeepers Properties to the Innkeepers Operators (as defined
below under "--Property Operation"). The rental income received from the
Innkeepers Operators is the principal source of revenue for the Innkeepers
Borrowers. The interest of the Innkeepers Borrowers as lessors under such
leases is assigned to the lender under the Innkeepers Mortgages. Subject to
exceptions for, among other things, losses resulting from fraud, intentional
misrepresentation, breach of any provision of a related environmental
indemnity agreement or misappropriation of security deposits or other certain
funds, neither the Innkeepers Borrowers nor any of their affiliates are
personally liable for payment of the Innkeepers Pool Loan. The Innkeepers
Borrowers have agreed to indemnify the lender and its successors and assigns
with respect to liabilities arising from certain environmental matters. The
Innkeepers Borrowers have made certain environmental representations and have
represented that they have good and indefeasible title to the Innkeepers
Properties, subject only to encumbrances described in the applicable title
insurance policies and other customary encumbrances permitted by the Servicer
on behalf of the lender (the "Innkeepers Permitted Encumbrances"). The lender
is the named insured under title insurance policies (which will be assigned
to the Trust Fund) which insure that each of the Innkeepers Mortgages
constitutes a valid and enforceable first priority lien on the respective
Innkeepers Property, subject to certain exceptions and exclusions from
coverage set forth therein.
Payment Terms. The Innkeepers Pool Loan matures on March 11, 2019 (the
"Innkeepers Maturity Date") and bears interest at (a) a fixed rate per annum
equal to 8.15% (the "Innkeepers Current Interest Rate") through March 10,
2009, and (b) from March 11, 2009 (the "Innkeepers Anticipated Repayment
Date") at a fixed rate per annum equal to the greater of (i) the Innkeepers
Current Interest Rate plus 2.00% and (ii) the yield, as of the week prior to
the Innkeepers Anticipated Repayment Date, calculated by the linear
interpolation of the bond equivalent yields of U.S. Treasury Constant
Maturities having maturity dates (one longer and one shorter) most nearly
approximating the remaining term of the Innkeepers Pool Loan as of the
Innkeepers Anticipated Repayment Date, plus 2.00% (the "Innkeepers Revised
Interest Rate"). However, after the Innkeepers Anticipated Repayment Date,
until the principal balance of the Innkeepers Pool Loan has been reduced to
zero, the Innkeepers Borrowers will be required to pay interest at the
Innkeepers Current Interest Rate, and the interest accrued at the excess of
the Innkeepers Revised Interest Rate over the Innkeepers Current Interest
Rate will be deferred and will bear interest at the Innkeepers Revised
Interest Rate, compounded monthly, until the earlier of (a) the date on which
principal of the Innkeepers Pool Loan has been paid in full and (b) the
Innkeepers Maturity Date (such accrued and deferred interest and interest
thereon at the Innkeepers Revised Interest Rate, the "Innkeepers Excess
Interest").
Commencing on April 11, 1997 and ending on March 11, 1999, the Innkeepers
Pool Loan requires monthly payments of interest only on the then outstanding
principal balance of the Innkeepers Pool Loan at the Innkeepers Current
Interest Rate. Commencing on April 11, 1999 and ending on the Innkeepers
Anticipated Repayment Date, the Innkeepers Pool Loan requires 240 constant
monthly payments (the "Innkeepers Monthly Debt Service Payments") of
principal and interest of $355,235.77 (based on a 264-month amortization
schedule and the Innkeepers Current Interest Rate). Such amounts will be
applied first to the payment of interest at the Innkeepers Current Interest
Rate or the Innkeepers Default Rate (as defined below), as applicable, and
then to repay principal. Payment of the balance of the principal, and all
accrued and unpaid interest (including Innkeepers Excess Interest) is
required on the Innkeepers Maturity Date.
Commencing on the first payment date after the Innkeepers Anticipated
Repayment Date and continuing on each payment date thereafter until the
Innkeepers Pool Loan has been paid in full, and at any time during the
continuance of an event of default, all rental income (i.e. substantially all
income generated by the Innkeepers Properties) for the month preceding the
month in which the payment date occurs will be applied by the lender, after
payment of the Innkeepers Monthly Debt Service Payment and certain other
payments made in connection with the funding of certain reserve
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accounts and the payment of certain approved operating expenses (the
"Innkeepers Excess Cash Flow"), in the following order of priority: (a) to
prepay principal until the outstanding balance of the Innkeepers Pool Loan
has been reduced to zero, (b) to pay Innkeepers Excess Interest and (c) to
the Innkeepers Borrowers (as described below under "--Lockbox Reserves.") The
scheduled principal balance of the Innkeepers Pool Loan as of the Innkeepers
Anticipated Repayment Date is approximately $29,797,520.
Upon the occurrence and during the continuation of an event of default,
the entire unpaid principal balance and any other outstanding amounts owing
to the lender under the Innkeepers Pool Loan, including interest, will bear
interest at a rate (the "Innkeepers Default Date") per annum equal to the
lesser of (a) the maximum rate permitted by applicable law or (b) 5% above
the Innkeepers Current Interest Rate or the Innkeepers Revised Interest Rate,
as applicable. Interest on the Innkeepers Pool Loan is calculated on the
basis of the actual number of days elapsed and a 360-day year.
Prepayment. Except for the Innkeepers Initial Prepayment, voluntary
prepayment is prohibited under the Innkeepers Pool Loan prior to the third
payment date prior to the Innkeepers Anticipated Repayment Date. If, prior to
the third payment date prior to the Innkeepers Anticipated Repayment Date and
during the continuation of any event of default, the Innkeepers Borrowers
prepay the entire Innkeepers Pool Loan prior to a sale of an Innkeepers
Property (either through foreclosure or other remedies available to lender
under the Innkeepers Mortgages), then such payment will be deemed to be
voluntary and the Innkeepers Borrowers will pay the Innkeepers Yield
Maintenance Premium (as defined below "--Release in Exchange for Substitute
Collateral"), if any, in addition to the principal amount of the Innkeepers
Pool Loan then being repaid.
From and after the third payment date prior to the Innkeepers Anticipated
Repayment Date, the Innkeepers Pool Loan may be prepaid in whole or in part
without penalty or premium. In addition, principal payments on the Innkeepers
Pool Loan may occur on payment dates after the Innkeepers Anticipated
Prepayment Date or during the continuation of an event of default through the
application of the rental income from the Innkeepers Properties as described
above under "--Payment Terms." In connection with a prepayment in full or in
part after the third payment date prior to the Innkeepers Anticipated
Repayment Date, the Innkeepers Borrowers may obtain a release of all of the
Innkeepers Properties from the lien of the Innkeepers Mortgages if, among
other things, the Innkeepers Borrowers prepay an amount equal to the
outstanding principal amount of the Innkeepers Pool Loan, interest accrued
and unpaid on such principal balance and any other amounts then due to the
lender under the Innkeepers Pool Loan. Upon satisfaction of such conditions,
the Innkeepers Properties will be released from the lien of the Innkeepers
Mortgages.
The Innkeepers Pool Loan may also be prepaid as a result of certain events
occurring with respect to casualty or condemnation as described below under
"--Condemnation and Casualty." In addition, upon the occurrence and during
the continuance of an event of default, the lender has the option to apply
amounts on deposit in certain escrow accounts to the prepayment of the
Innkeepers Pool Loan. See "--Reserves."
Release in Exchange for Substitute Collateral. The Innkeepers Borrowers
are permitted on any date (the "Innkeepers Defeasance Date") after the second
anniversary of the Closing Date and prior to the Innkeepers Anticipated
Repayment Date, to defease all or a portion of the Innkeepers Pool Loan upon
at least thirty days' notice to the lender, provided that no event of default
has occurred and is continuing and, among other conditions, the Innkeepers
Borrowers pay on the Innkeepers Defeasance Date (a) all scheduled principal
and interest payments on the Innkeepers Pool Loan payable on such date if
such date is a payment date (including all interest accrued and unpaid on the
principal balance of the Innkeepers Pool Loan, up to but not including the
Innkeepers Defeasance Date) and, if the Innkeepers Defeasance Date is not a
payment date, amounts that would have accrued through the next regularly
scheduled payment date, (b) all other sums, excluding scheduled interest or
principal, due and payable under the Innkeepers Pool Loan and (c) the
Innkeepers Defeasance Deposit (as defined below). In addition, in connection
with any defeasance, the Innkeepers Borrowers are required to deliver to the
lender, among other things, (a) a security agreement in form and substance
satisfactory to the lender creating a first priority lien on the Innkeepers
Defeasance Deposit and the U.S. Obligations purchased with the Innkeepers
Defeasance Deposit, (b) an opinion of counsel for the Innkeepers Borrowers in
form satisfactory to the lender stating that the lender has a perfected first
priority security interest in such Innkeepers Defeasance Deposit and U.S.
Obligations and that such U.S. Obligations have been validly transferred to
the Trust Fund and (c) written confirmation from each of the Rating Agencies
that the defeasance will not result in a reduction, withdrawal or downgrade
of the respective ratings on the Certificates in effect immediately prior to
the Innkeepers Defeasance Date.
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Upon receipt of the Innkeepers Defeasance Deposit, the Servicer will
purchase U.S. Obligations on behalf of the Innkeepers Borrowers and such U.S.
Obligations will serve as the sole collateral for the payment of amounts due
under the Innkeepers Pool Loan or the portion thereof being defeased.
The "Innkeepers 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 Innkeepers Defeasance Date through and including the
Innkeepers Anticipated Repayment Date and in amounts equal to the scheduled
payments due under the entire Innkeepers Pool Loan or the portion thereof
being defeased, as applicable (including, on the Innkeepers Anticipated
Repayment Date, the amount of the outstanding principal balance of the entire
Innkeepers Pool Loan, in the case of a defeasance for the entire outstanding
principal balance of the Innkeepers Pool Loan, or the defeased portion
thereof, in the case of a defeasance for only a portion of the outstanding
principal balance of the Innkeepers Pool Loan).
The Innkeepers Yield Maintenance Premium shall mean the amount (if any)
which, when added to the then outstanding principal amount of the entire
Innkeepers Pool Loan or the portion thereof being defeased, as applicable,
will be sufficient to equal the Innkeepers Defeasance Deposit.
In connection with the partial defeasance of the Innkeepers Pool Loan, the
Innkeepers Borrowers may obtain the release of one or more Innkeepers
Properties from the lien of the Innkeepers Mortgages, provided, among other
things, that the Innkeepers Borrowers have satisfied all of the conditions to
a defeasance described above, that no event of default exists and further
subject to the conditions that (a) after giving effect to such release and
defeasance, the Innkeepers Pool Loan DSCR (as defined below) for all of the
Innkeepers Properties not being released must not be less than the greater of
(x) the Innkeepers Pool Loan DSCR on March 5, 1997 and (y) the Innkeepers
Pool Loan DSCR for all of the Innkeepers Properties on the date of such
release (after giving effect to such defeasance) and (b) the principal
balance of the portion of the Innkeepers Pool Loan being partially defeased
must equal, 125% of the Allocated Loan Amount for the Innkeepers Properties
sought to be released (the "Innkeepers Release Amount").
The "Innkeepers Pool Loan DSCR" means, as of any date, the quotient
obtained by dividing (a) actual net operating income for the Innkeepers
Properties for the twelve-month period ending immediately preceding such date
by (b) the sum of all payments of interest and principal that would have been
due and payable under the Innkeepers Pool Loan for such period assuming
outstanding principal equal to the principal balance of the Innkeepers Pool
Loan outstanding on such date, and an interest rate equal to the Innkeepers
Current Interest Rate.
The "Innkeepers Allocated Loan Amount" with respect to each of the
Innkeepers Properties is the portion of the principal amount of the
Innkeepers Pool Loan allocated to such Innkeepers Property, as agreed to by
the Originator and the Innkeepers Borrowers.
Reserves. Pursuant to the terms of the Innkeepers Pool Loan, the
Innkeepers Borrowers have established (a) a required repairs reserve funded
by the Innkeepers Borrowers on March 5, 1997 in the amount of [$2,916,219.00]
to pay for certain deferred maintenance and repair work at the Innkeepers
Properties which is required to be completed by specified deadlines, (b) a
capital reserve fund to pay for capital expenditures approved by the Servicer
to be funded on each payment date in an amount equal to five percent (5%) of
the gross revenues of the Innkeepers Properties for the second calendar month
preceding the month in which such payment date occurs and (c) a tax and
insurance reserve fund to pay taxes and insurance premiums to be funded on
each payment date in an amount equal to 1/12 of annual estimated insurance
premiums and taxes in respect of the Innkeepers Properties.
The Innkeepers Borrowers will not be required to make monthly deposits in
respect of the capital reserve fund for the Innkeepers Properties managed by
Residence Inn By Marriott, Inc., a Delaware corporation (the "Innkeepers
Marriott Manager") so long as (a) the Innkeepers Borrowers establish and
maintain (i) a capital reserve escrow fund with the lender in an amount equal
to $604,362 or (ii) an unconditional, irrevocable stand-by letter of credit
for the benefit of the lender issued by a commercial bank having a long term
debt rating by S&P of at least "AA-" in such amount for a term of at least
one year and (b) within 30 days after the end of each calendar year, the
Innkeepers Borrowers shall provide the lender with evidence satisfactory to
the lender in all respects certifying (i) that the Innkeepers Borrowers have
made payments into an escrow reserve account established by the Innkeepers
Marriott Manager for each of the Innkeepers Properties managed by it in an
amount equal to five percent (5%) of the gross revenues for such Innkeepers
Properties during the calendar year and (ii) the actual amount spent by the
Innkeepers Marriott Manager on capital expenditures and FF&E expenditures at
each of the Innkeepers Properties managed by it during the calendar year. If
at any time the
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Innkeepers Borrowers fail to satisfy the requirements of clause (a) above, or
if there is an event of default has occurred and is continuing under the
Innkeepers Pool Loan, then the Innkeepers Borrowers will no longer be
permitted to maintain an alternative capital reserve fund for the Innkeepers
Properties managed by the Innkeepers Marriott Manager and shall be required,
on the next Innkeepers Debt Service Payment Date, to commence making monthly
deposits into the capital reserve held by lender.
Lock Box. The lender has established a deposit account (the "Innkeepers
Deposit Account") in its own name for purposes of collecting and retaining
all rents and any other receipts received by the Innkeepers Borrowers which
are generated by the Innkeepers Properties. The Innkeeper Operators (as
defined below under "--Property Operation") have agreed to deposit all rents
payable to the Innkeepers Borrowers by the Innkeepers Operators under the
Innkeepers Operating Leases (as defined below under "--Property Operation")
directly into the Innkeepers Deposit Account. All other rents and security
deposits from the Innkeepers Properties received by the Innkeepers Borrowers
will be transmitted directly into the Innkeepers Deposit Account or, at the
Innkeepers Borrowers' option, into accounts controlled by the lender at local
banks selected by the Innkeepers Borrowers which shall be swept on a daily
basis into the Innkeepers Deposit Account. All other income or revenue
received by the Innkeepers Borrowers in connection with the Innkeepers
Properties will be deposited into the Innkeepers Deposit Account within one
business day of receipt.
Any monies deposited into the Innkeepers Deposit Account or otherwise
received by the Innkeepers Borrowers during the immediately preceding
calendar month will be applied by the Servicer in the following order of
priority: (a) to make required payments to the tax and insurance reserve
fund, (b) to pay the Innkeepers Monthly Debt Service Payment on each payment
date (plus interest at the Innkeepers Default Rate, if applicable), (c) to
make required payments to the capital reserve fund, if any, (d) to make
payments for approved operating expenses for any Innkeepers Property for
which there is no operating lease, (e) if on or after the Innkeepers
Anticipated Repayment Date or during the continuation of an event of default
under the Innkeepers Pool Loan, (x) first to repay principal until the
principal balance of the Innkeepers Pool Loan has been reduced to zero and
then to pay Innkeepers Excess Interest and (f) to the Innkeepers Borrowers.
So long as, among other things, no event of default has occurred and is
continuing under the Innkeepers Pool Loan, the Innkeepers Borrowers may, not
more than twice in any month upon notice given 5 days prior to the payment
date in such month, request a disbursement of funds held in the Innkeepers
Deposit Account with respect to any Innkeepers Property for which there is no
operating lease, if any, to pay certain approved operating expenses.
Transfer of Properties and Interest in Borrower, Encumbrance. Without the
prior consent of the lender, neither the Innkeepers Borrowers nor any holder
of a legal or beneficial interest in any Innkeepers Individual Borrower or
Innkeepers Property is permitted to sell, assign or transfer (i) any
Innkeepers Property or any portion thereof, (ii) any general or limited
partnership interest in the Innkeepers Borrowers or (iii) any direct or
indirect interest in any partner of the Innkeepers Borrowers, except for (a)
a sale by the Innkeepers Borrowers of all the Innkeepers Properties to a
single purchaser, provided that the lender receives written confirmation from
the Rating Agencies that such a sale does not result in a qualification,
withdrawal or downgrade of the ratings in effect immediately prior to such
sale of the Certificates and an assumption fee equal to 1% of the outstanding
amount of the Innkeepers Pool Loan being assumed, (b) the transfer of an
Innkeepers Property following a release in connection with a defeasance as
described above under "--Release in Exchange for Substitute Collateral," (c)
on and after the Innkeepers Anticipated Repayment Date, a prepayment (as
described above under "--Prepayment") in full of the Innkeepers Pool Loan,
(d) transfers of publicly traded interests in the Innkeepers REIT and (e)
transfers of limited partnership interests in any Innkeepers Individual
Borrower (or transfers of interests in any such limited partner), provided
that any transfers aggregating more than 49% of the direct or indirect
interests in any Innkeepers Individual Borrower, or which result in any
limited partner (other than a limited partner currently owning more than a
49% interest) owning more than 49% of the direct or indirect interests in any
Innkeepers Individual Borrower, will require (i) written confirmation from
the Rating Agencies that such transfers will not cause a qualification,
withdrawal or downgrading of the ratings of the Certificates and (ii) a
substantive non-consolidation opinion with respect to such Innkeepers
Individual Borrower in form satisfactory to the lender and the Rating
Agencies.
The Innkeepers Pool Loan also prohibits the Innkeepers Borrowers from
encumbering the Innkeepers Properties, other than by the Innkeepers Permitted
Encumbrances (as defined under "--Security," above).
Insurance. The Innkeepers Borrowers are required to maintain, at their
sole cost and expense, for the mutual benefit of itself and the lender,
insurance on the Innkeepers Properties against risks of loss or damage
covered by an "all risk" policy. Such insurance will (a) be in an amount
equal to the greater of (i) the then full replacement cost of each Innkeepers
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Property without deduction for physical depreciation and (ii) the outstanding
balance of the Innkeepers Pool Loan and (b) have deductibles of no greater
than 5% of such replacement cost. The Innkeepers Borrowers are also required
to maintain the following polices of insurance: (a) flood insurance covering
any part of any Innkeepers Property that is located in an area identified by
the Federal Emergency Management Agency as having special flood hazards and
in which flood insurance has been made available under the National Flood
Insurance Program, in an amount at least equal to the Innkeepers Allocated
Loan Amount for such Innkeepers Property or the maximum limit of coverage
available under such program, whichever is less, (b) comprehensive public
liability insurance with minimum limits per occurrence of $1,000,000 and
$2,000,000 in the aggregate for any policy year, as well as $10,000,000
excess and/or umbrella liability insurance for any claims incurred in
connection with the ownership, operation and maintenance of the Innkeepers
Properties, (c) rental loss and/or business interruption insurance which will
cover a period of at least eighteen months, (d) leakage of sprinkler systems
and machinery and boiler explosion insurance in an amount of at least
$2,000,000 for each Innkeepers Property, (e) statutory workers compensation
insurance, (f) during any material repair or restoration of any Innkeepers
Property, builder's "all-risk" insurance in an amount equal to not less than
the full insurable value of the applicable Innkeepers Property against such
risks (including fire and extended coverage) as the lender may request, (g)
coverage to compensate for the cost of demolition and increased cost of
construction for each Innkeepers Property and (h) such other insurance,
including earthquake insurance, as lender may reasonably request. The
Innkeepers Pool Loan requires the Innkeepers Borrowers to obtain the
insurance described above from insurance carriers having claims paying
abilities rated not less than "AA" by S&P. The Innkeepers Borrowers have
obtained such insurance from [ ] which is rated [ ] by S&P and
[ ] by Best's. All insurance policies are required to name the lender
as the mortgagee.
Condemnation and Casualty. The Innkeepers Borrowers are required to
restore the affected Innkeepers Property following any casualty or
condemnation, regardless of whether insurance proceeds or condemnation awards
are available. If any Innkeepers Property is affected by a casualty or a
condemnation giving rise to an insurance claim or condemnation award of less
than $250,000, the Innkeepers Borrowers may settle the claim and collect the
proceeds without the consent of the lender. If the amount of such proceeds or
awards equals or exceeds $250,000, the lender may settle and adjust any claim
and collect the proceeds without the consent of the Innkeepers Borrowers. If
an Innkeepers Property suffers a casualty loss or a condemnation in an
aggregate amount of less than sixty percent (60%) of its Innkeepers Allocated
Loan Amount, and if, in the reasonable judgment of the lender, such
Innkeepers Property can be restored within six (6) months and prior to the
Innkeepers Maturity Date, such that the Innkeepers Property will adequately
secure the Innkeepers Allocated Loan Amount of such Innkeepers Property, then
so long as no event of default has occurred and is continuing and the
Innkeepers Borrowers will continue to be able to make all Innkeepers Monthly
Debt Service Payments, proceeds of insurance or condemnation awards will be
made available by the lender to reimburse the Innkeepers Borrowers for the
cost of restoring the affected Innkeepers Property. If such conditions are
not met, any insurance proceeds or condemnation awards may, at the option of
the lender, either be applied to the restoration of the affected Innkeepers
Property or be applied to the payment of the Innkeepers Pool Loan up to the
Innkeepers Release Amount for such Innkeepers Property so affected. No
Innkeepers Yield Maintenance Premium will be payable in the event of a
prepayment resulting from any casualty or condemnation, unless at the time of
payment there is an event of default continuing. If an event of default has
occurred and is continuing at the time the insurance proceeds or condemnation
awards are received, and the lender elects to apply any casualty or
condemnation proceeds to repay the Innkeepers Pool Loan, then the Innkeepers
Borrowers will pay the lender an additional amount equal to the Innkeepers
Yield Maintenance Premium, if any, that would be payable if the Innkeepers
Pool Borrowers were defeasing an amount equal to such proceeds or awards.
Special Covenants and Events of Default. The Innkeepers Pool Loan provides
that the following events, among others, constitute events of default
thereunder: (a) if, without the lender's prior consent, the Innkeepers
Operating Leases are modified or terminated and (b) if certain events of
default occur under the Innkeepers Operating Leases, any Innkeepers Franchise
Agreement or any Innkeepers Marriott Management Agreement (each as defined
below in "--Property Operation.")
Financial Covenants and Reporting. The Innkeepers Borrowers will furnish
to lender annually (a) within 45 days following the end of each fiscal year,
unaudited financial statements of the Innkeepers Borrowers and (b) within 90
days following the end of each fiscal year, a complete copy of the Innkeepers
Borrowers' annual financial statements, audited by a big six accounting firm,
covering the Innkeepers Properties on a combined and property by property
basis and containing statements of profit and loss for the Innkeepers
Borrowers and the Innkeepers Properties. The Innkeepers Borrowers will also
furnish to the lender, on or before the 35th day after the end of each
calendar month: (a) monthly and
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year to date operating statements on an aggregate and property by property
basis, noting actual net operating income, (b) a monthly and year to date
comparison of the budgeted income and expenses and the actual income and
expenses for the properties, (c) a statement of the actual capital
expenditures made by the Innkeepers Borrowers during each calendar quarter as
of the last day of such calendar quarter, (d) a calculation reflecting the
annual Innkeepers Pool Loan DSCR as of the last day of each calendar month
and (e) occupancy rates, room rate statistics, rent rolls (for any Innkeepers
Property which has leases other than the Innkeepers Operating Leases, as
described below in "--Property Operation") and a delinquency report for the
Innkeepers Properties. Within 10 days of such request, the Innkeepers
Borrower will furnish the lender with any detailed information with respect
to the operation of the Innkeepers Properties as the lender or the Rating
Agencies may reasonably request.
The Properties. The Innkeepers Properties consist of eight hotels located
in California, Colorado, Florida, Kansas, New Jersey and New York. Three of
the hotels are limited service Hampton Inns and five are extended stay
Residence Inns. Each Innkeepers Property contains from 64 to 231 rentable
guestrooms, and was constructed between 1981 and 1993. The average occupancy
rates for the twelve months ended December 31, 1996 for the Innkeepers
Properties ranged from approximately 72% to approximately 91%, with a
weighted average occupancy rate of approximately 85%. The ADRs for the twelve
month period ending December 31, 1996 for the Innkeepers Properties ranged
from approximately $60 to approximately $99, with a weighted average of
approximately $85. The appraisals performed in February, 1997 determined an
aggregate value for the Innkeepers Properties of approximately $80,500,000.
All of the hotels are built on real property that is owned by the
Innkeepers Borrowers in fee simple and leased to the Innkeepers Operators as
described below under "--Property Operation."
Hampton Inn Naples. The Hampton Inn Naples, located on approximately 2.01
acres of land in Naples, Florida, consists of a limited service lodging
facility with one building, approximately 107 rooms, a small meeting room, a
complimentary breakfast room, a game room, outdoor swimming pool and other
amenities typically found in a limited service hotel. The facility opened in
1990 and was purchased by the Innkeepers Individual Borrrower from Avel Hotel
of Naples, Inc., an unaffiliated entity, in September, 1994. For the twelve
month period ended December 31, 1996, the average occupancy rate was
approximately 72% and the average daily room rate was approximately $66. The
underwritten average occupancy rate was 70%. As of March 1, 1997, the
appraised value of the property was $6,500,000.
Hampton Inn Islandia. The Hampton Inn Islandia, located on approximately
3.20 acres of land in Islip, New York, consists of a limited service lodging
facility with one building, approximately 121 rooms, a complimentary
breakfast area, a small meeting room and other amenities typically found in a
limited service hotel. The facility opened in 1988 and was purchased by the
Innkeepers Individual Borrower from Islandia Hotel Associates, L.P., an
unaffiliated entity in September, 1994. For the twelve month period ended
December 31, 1996, the average occupancy rate was approximately 76% and the
average daily room rate was approximately $76. The underwritten average
occupancy rate was 75%. As of March 1, 1997, the appraised value of the
property was $10,300,000.
Hampton Inn Tallahassee. The Hampton Inn Tallahassee, located on
approximately 2.66 acres of land in Tallahassee, Florida, consists of a
limited service lodging facility with two buildings. The facility contains
approximately 93 rooms, an outdoor swimming pool, complimentary breakfast
room, and other amenities typically found in a limited service hotel. The
facility opened in 1993 and was purchased by the Innkeepers Individual
Borrower from HT Enterprises, an unaffiliated entity, in January, 1995. For
the twelve month period ended December 31, 1996, the average occupancy rate
was approximately 82% and the average daily room rate was approximately $60.
The underwritten average occupancy rate was 78%. As of March 1, 1997, the
appraised value of the property was $6,300,000.
Residence Inn I Sunnyvale. The Residence Inn I Sunnyvale, located on
approximately 5.77 acres of land in Sunnyvale, California, consists of an
extended stay lodging facility with twenty-nine guest suite buildings and one
common building. The facility contains approximately 231 guest suites, an
outdoor swimming pool, three spas, an exercise room, complimentary breakfast
room, a small meeting room, guest laundry and other amenities typically
associated with extended stay hotels. The facility opened in 1984 and was
purchased by the Innkeepers Individual Borrower from Oakmead Residence
Associates, L.P., an unaffiliated entity in November, 1996. For the twelve
month period ended December 31, 1996, the average occupancy rate was
approximately 91% and the average daily room rate was approximately $99. The
underwritten average occupancy rate was 80%. As of March 1, 1997, the
appraised value of the property was $32,300,000.
Residence Inn Cherry Hill. The Residence Inn Cherry Hill, located on
approximately 5.50 acres of land in Cherry Hill, New Jersey, consists of an
extended stay lodging facility with twelve buildings and one common building.
The facility
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contains approximately 96 guest suites, an outdoor swimming pool,
complimentary breakfast room, fitness room, sports court, two small meeting
rooms and other amenities typically found in extended stay hotels. The
facility opened in 1989 and was purchased by the Innkeepers Individual
Borrower from Amerimar Cherry Hill Associates, an unaffiliated entity, in
May, 1996. For the twelve month period ended December 31, 1996, the average
occupancy rate was approximately 89% and the average daily room rate was
approximately $93.56. The underwritten average occupancy rate was 80%. As of
March 1, 1997, the appraised value of the property was $9,900,000.
Residence Inn Denver. The Residence Inn Denver, located on approximately
3.98 acres of land in Denver, Colorado, consists of an extended stay lodging
facility with twenty guest suite buildings and a common building. The
facility contains approximately 156 guest suites, an outdoor swimming pool,
complimentary breakfast room, sports court, meeting facilities and other
amenities typically found in extended stay hotels. The facility opened in
1981 and was purchased by the Innkeepers Individual Borrower from the Denver
Downtown Associates, L.P., an unaffiliated entity, in November, 1996. For the
twelve month period ended December 31, 1996, the average occupancy rate was
approximately 86% and the average daily room rate was approximately $82. The
underwritten average occupancy rate was 80%. As of March 1, 1997, the
appraised value of the property was $11,100,000.
Residence Inn Wichita. The Residence Inn Wichita, located on approximately
3.13 acres of land in Wichita, Kansas, consists of an extended stay lodging
facility with eight guest suite buildings and one common building. The
facility contains approximately 64 guest suites, an outdoor swimming pool,
complimentary breakfast room and other amenities typically found in extended
stay hotels. The facility opened in 1981 and was purchased by the Innkeepers
Individual Borrower from Wichita East Residence Associates, L.P., an
unaffiliated entity, in November, 1996. For the twelve month period ended
December 31, 1996, the average occupancy rate was approximately 81% and the
average daily room rate was approximately $79. The underwritten average
occupancy rate was 80%. As of March 1, 1997, the appraised value of the
property was $3,900,000.
Residence Inn Binghamton. The Residence Inn Binghamton, located on
approximately 3.25 acres of land in Vestal, New York, consists of an extended
stay hotel with nine guest suite buildings and one common building, The
facility contains approximately 72 guest suites, an outdoor pool, spa,
complimentary breakfast room, boardroom, and other amenities typically found
in extended stay hotels. The property was built in 1987 and was purchased by
the Innkeepers Individual Borrower from Liberty/Binghamton L.P., an
unaffiliated entity, in 1994. For the twelve month period ended December 31,
1996, the average occupancy rate was approximately 83% and the average daily
room rate was approximately $84. The underwritten average occupancy rate was
80%. As of March 1, 1997, the appraised value of the property was $5,700,000.
Property Operation. The Innkeepers Borrowers have leased the Innkeepers
Properties in Naples, Tallahassee, Islandia, Binghamton and Cherry Hill to JF
Hotel IV, Inc. and the Innkeepers Properties in Denver, Wichita and Sunnyvale
to JF Hotel V, Inc. (individually, the "JF Hotel IV Operator" and the "JF
Hotel V Operator," and collectively, the "Innkeepers Operators") pursuant to
four separate operating leases (collectively the "Innkeepers Operating
Leases"), between the Innkeepers Operators and the Innkeepers Borrowers. Each
of the Innkeepers Operators are special purpose Virginia corporations. The
Innkeepers Operators are responsible for the operation, management and
supervision of the Innkeepers Properties. Pursuant to the terms of the
Innkeepers Operating Leases, each month the Innkeepers Operators must pay the
Innkeepers Borrowers base rent, percentage rent and additional charges
related thereto in accordance with a formula such that substantially all of
the net operating income of the Innkeepers Operators is paid to the
Innkeepers Borrowers as lease payments. Such payments are the primary source
of income for the Innkeepers Borrowers. The Innkeepers Operating Leases
provide for terms ranging from approximately seven and one half years to
thirteen years from their dates of execution, and the Innkeepers Operating
Leases executed with the JF Hotel IV Operator may be renewed for additional
terms of approximately four to eight years at the option of the JF Hotel IV
Operator.
It is an event of default under the Innkeepers Pool Loan if the Innkeepers
Operating Leases are modified or terminated without the consent of the
lender. However, if (a) an event of default has occurred and is continuing
under the Innkeepers Operating Leases, the Innkeepers Marriott Management
Agreements or the Innkeepers Franchise Agreements (as defined below under
"--Franchise and Management Agreements"), (b) on the last day of any calendar
quarter, the Innkeepers Pool Loan DSCR is less than 1.4, or (c) the
Innkeepers Borrowers enter into a contract to sell the Innkeepers Property to
an non-affiliate, then the Innkeepers Borrowers may (x) terminate the
Innkeepers Operating Leases and/or (y) except as otherwise provided in the
Innkeepers Marriott Management Agreements, cause the JF Hotel V Operator to
terminate the Innkeepers Marriott Management Agreements and designate either
a replacement manager
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or operator for the Innkeepers Property, as the case may be, acceptable to
the lender. The Innkeepers Borrowers may terminate the Innkeepers Operators
or modify, amend or cancel the Innkeepers Operating Leases only with the
prior written consent of the lender, which consent will not be given unless
the Servicer has received written confirmation from each of the Rating
Agencies that such termination will not cause a withdrawal, qualification or
downgrading of the then outstanding Certificates.
Pursuant to a Subordination and Attornment Agreement between the
Innkeepers Operators and the Innkeepers Borrowers, the Innkeepers Operators
have agreed to recognize a successor to the Innkeepers Borrowers (including a
lender in a foreclosure) as the landlord under the Innkeepers Operating
Leases. The Innkeepers Operators have also agreed in such subordination
agreement that all liens, rights and interests owned, claimed or held by the
Innkeepers Operators in and to any of the Innkeepers Properties are in all
respects subordinate and inferior to the liens and security interest created
by the Innkeepers Pool Loan and the Mortgages securing such loan.
Furthermore, the Innkeepers Operators have covenanted not to amend, modify,
terminate or cancel the Innkeepers Operating Leases without the consent of
the lender. The Innkeepers Operators have acknowledged the lender's right to
(a) cause the Innkeepers Borrowers to terminate the Innkeepers Operating
Leases upon the occurrence and continuation of an event of default under the
Innkeepers Pool Loan or if the Innkeepers Pool Loan DSCR is less than 1.4 by
giving the Innkeepers Operators 30 days' prior written notice of such
termination and (b) terminate the Innkeepers Operating Leases directly in the
event of a transfer of one or more of the Innkeepers Properties pursuant to a
foreclosure of the Innkeepers Mortgages by giving the Innkeepers Operators
180 days' notice.
The controlling shareholder of the Innkeepers Operators is also the
chairman of the board of directors and president of the Innkeepers REIT. The
Innkeepers Operators are corporations formed solely for the purpose of
operating the Innkeepers Properties. The Innkeepers Operators and their
affiliates lease and/or operate 35 hotels (including the Innkeepers
Properties) containing a total of over 4,200 rooms.
Franchise and Management Agreements. The JF Hotel V Operator has entered
into management agreements with the Innkeepers Marriott Manager (the
"Innkeepers Marriott Management Agreements"), in connection with the
Innkeepers Properties in Denver, Wichita and Sunnyvale. The remainder of the
Innkeepers Properties are managed directly by the JF Hotel IV Operator, and
are subject to franchise and license agreements with Promus Hotel
Corporation, a Delaware corporation, (the "Hampton Inn Franchisor"), for the
Innkeepers Properties in Naples, Islandia and Tallahassee (the "Hampton Inn
Franchise Agreements"), and with the Innkeepers Marriott Manager for the
Innkeepers Properties in Cherry Hill and Binghamton (the "Marriott Franchise
Agreements") (collectively, the "Innkeepers Franchise Agreements").
The Innkeepers Marriott Management Agreements require the JF Hotel V
Operator to pay certain management fees, including (a) a base management fee
of 2% gross revenues for the relevant Innkeepers Properties, (b) a system fee
of 5% of gross revenues from the relevant Innkeepers Properties to pay for
services provided by the Innkeepers Marriott Manager, and (c) an incentive
management fee equal to a certain percentage of gross revenues for the
relevant Innkeepers Properties, such percentage to be decreased according to
available cash flows. The Innkeepers Marriott Management Agreements expire in
2009, however the Innkeepers Marriott Manager has the option to renew the
agreement for an additional period of 13 years if the average operating
profit for the last three fiscal years of the term exceeds certain
thresholds, or, in the alternative, if the Innkeepers Marriott Manager pays
the JF Hotel V Operator the difference between the actual operating profit
for such years and such threshhold amount. The JF Hotel V Operator may
terminate the Innkeepers Marriott Management Agreements prior to 2009 if
certain performance thresholds are not met, however the Innkeepers Marriott
Manager may avoid such early termination by paying to the JF Hotel V Operator
an amount equal to the amount of any shortfalls.
The Innkeepers Marriott Manager, under certain Subordination,
Non-Disturbance and Attornment Agreements has agreed that the Innkeepers
Marriott Management Agreements and all right, title and interest of the
Innkeepers Marriott Manager in the Innkeepers Properties managed by it are
made subject and subordinate to the Innkeepers Pool Loan and the Innkeepers
Mortgages. The Innkeepers Marriott Manager has agreed to recognize any
Innkeepers subsequent owner under the Innkeepers Marriott Management
Agreements for the balance of the remaining term thereof. In addition, in the
event of a default by the JF Hotel V Operator under the Innkeepers Marriott
Management Agreements, the Innkeepers Marriott Manager has agreed to give the
lender notice and an opportunity to cure such default prior to terminating
such agreement. The Subordination, Non-Disturbance and Attornment Agreements
also provide that if any of the Mortgages
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on any of the Innkeepers Properties that are managed by the Innkeepers
Marriott Manager are foreclosed upon by the lender, then the Innkeepers
Marriott Manager has the right to enter into management agreements with
respect to the Innkeepers Properties in Cherry Hill or Binghamton in
substantially the same form as the Innkeepers Marriott Management Agreements.
The Innkeepers Franchise Agreements are scheduled to expire between 2003
and 2010. The Hampton Inn Franchise Agreements do not provide for any renewal
options. The Marriott Franchise Agreements provide the JF Hotel IV Operator
with an option to renew for an additional ten year term, provided that (x) no
default under the Marriott Franchise Agreements has occurred and is
continuing and (y) the JF Hotel IV Operator pays a renewal fee and executes a
new franchise agreement on the Innkeepers Marriott Manager's then-current
form. A renewal of any of the Marriott Franchise Agreements may provide for
increased marketing and royalty fees. Pursuant to the terms of the Innkeepers
Pool Loan, the Innkeepers Borrowers are obligated to obtain the consent of
the lender prior to changing any franchise affiliation for any of the
Innkeepers Properties, which consent will not be given without the Servicer
first obtaining written confirmation from the Rating Agencies that such
change in affiliation in and of itself will not result in a withdrawal,
qualification or downgrading of any then-current rating for the Certificates.
Each of the Innkeepers Franchise Agreements imposes certain obligations on
the Innkeepers Operators, including the obligation to pay the relevant
franchisor a monthly franchise and marketing fee equal to a percentage of
gross sales. The Innkeepers Franchise Agreements may be terminated by the
related franchisors upon the Innkeepers Operators' failure to pay such fees.
The Innkeepers Franchise Agreements also prohibit any assignment of any
interest in, or other transfer of, such agreements and thus any subsequent
owner of the related Innkeepers Property (including the Trust Fund in the
event of foreclosure or deed acquisition in lieu of foreclosure) would not be
entitled to assume such the Innkeepers Franchise Agreements without the
consent of the relevant franchisor acting in its sole discretion.
The Innkeepers Franchise Agreements may be terminated by the Hampton Inn
Franchisor or the Innkeepers Marriott Manager, as applicable, if, among other
things, the Innkeepers Operators cease to use the franchise or if certain
bankruptcy or insolvency events occur. In the event that any such franchisor
terminates any of the Innkeepers Franchise Agreements on account of a default
by the Innkeepers Operators, the Innkeepers Operators must pay a substantial
termination fee. The Innkeepers Operators may terminate the Innkeepers
Franchise Agreements prior to their scheduled expiration dates by paying a
substantial termination fee.
Pursuant to comfort letters delivered by the Hampton Inn Franchisor and
the Innkeepers Marriott Manager to the lender, such franchisors and manager
are obligated to notify the lender if the Innkeepers Operators default under
the Innkeepers Franchise Agreements and provide the lender with the
opportunity to cure any such defaults. The Marriott Franchise Agreements may
not be terminated by the Innkeepers Marriott Manager if the lender cures any
monetary default within ten days of notice or any non-monetary default within
30 days of notice. The Hampton Inn Franchise Agreements may not be terminated
by the Hampton Inn Franchisor if the lender cures any monetary or
non-monetary default within 30 days of notice, provided that an extension of
15 days may be available for non-monetary defaults where the lender provides
a written request for such extension with an explanation of corrective
actions to be taken. In the event the Trust Fund acquires any of the
Innkeepers Properties through foreclosure, then the Servicer will have a
30-day option to elect to obtain, new Innkeepers Franchise Agreements for the
affected Innkeepers Property provided that the lender cures all outstanding
defaults and satisfies the relevant franchisor that competent management will
be retained to operate such property.
See "Risk Factors and Other Special Considerations -- Commercial Lending
Generally" and "Risk Factors and Other Special Considerations -- Risks
Associated with Hotels" for a discussion of certain matters associated with
franchise agreements.
THE DESIGN CENTER OF THE AMERICAS LOAN AND PROPERTY
The Loan. The Design Center of the Americas Loan (the "DCOTA Loan") was
originated by the Originator on December 12, 1996, had a principal balance at
origination of $40,000,000 and has a principal balance as of the Cut-off Date
of $39,899,849. The DCOTA Loan is secured by a Mortgage (the "DCOTA
Mortgage") encumbering two parcels of land and buildings with tenants
primarily in the business of selling goods to consumers represented by
members of the design trade. Such land and buildings comprise a retail design
center known as The Design Center of the Americas (the "DCOTA Property")
located in Dania, Florida.
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The Borrower. Design Center Of The Americas, Limited Partnership (the
"DCOTA Borrower") is a special purpose Michigan limited partnership formed
solely for the purpose of owning, leasing, and operating the DCOTA Property.
The DCOTA Borrower has no material assets other than the DCOTA Property and
related interests. The sole general partner of the DCOTA Borrower is DCOTA,
Inc. (the "DCOTA GP"), a special purpose Florida corporation, formed solely
for the purpose of acting as the 1% general partner of the DCOTA Borrower.
100% of the stock of the DCOTA GP is held by Marvin Danto and James Danto,
who are the CEO and Chairman of the Board and the President, respectively, of
Danto Investment Company, Inc. (the "DCOTA Manager"), which is the property
manager for the DCOTA Property as described below under "--Property
Management." Marvin and James Danto together with their family and affiliates
hold approximately 78% of the limited partner interests in the Borrower and
the balance is held by unrelated investors.
Security. The DCOTA Loan is a nonrecourse loan, secured only by the DCOTA
Property and other collateral related thereto (including an assignment of
leases and rents and the funds in certain accounts). Subject to certain
exceptions, including fraud or misrepresentation, gross negligence or willful
misconduct, certain environmental matters and misappropriation of certain
funds, neither the DCOTA Borrower nor any of its affiliates is personally
liable for the payment of the DCOTA Loan. The DCOTA Borrower has made certain
environmental representations and has represented that it has good,
marketable and insurable title to the DCOTA Property free and clear of all
liens, except for encumbrances permitted by the lender. The DCOTA Borrower
has agreed to indemnify the lender and its successors and assigns with
respect to liabilities arising from or in connection with certain
environmental matters. The lender is the named insured under a title
insurance policy (which will be assigned to the Trust Fund) which insures,
among other things, that the related Mortgage constitutes a valid and
enforceable first lien on the DCOTA Property, subject to certain exceptions
and exclusions from coverage set forth therein.
Payment Terms. The DCOTA Loan matures on January 11, 2022 (the "DCOTA
Maturity Date"). The loan bears interest (a) at a fixed rate per annum equal
to 7.47% (the "DCOTA Current Interest Rate") through January 10, 2007 and (b)
from and after January 11, 2007 (the "DCOTA Anticipated Repayment Date")
through the DCOTA Maturity Date, at a fixed rate per annum equal to the
greater of (i) the DCOTA Current Interest Rate plus 2.00% and (ii) the yield
as of the DCOTA Anticipated Repayment Date, calculated by linear
interpolation of the yields on U.S. Treasury Constant Maturities, with terms
(one longer and one shorter) most nearly approximating those of non-callable
U.S. Treasury obligations having maturities as close as possible to January
11, 2022, plus 2.00%. However, until the principal balance of the DCOTA Loan
has been reduced to zero, the DCOTA Borrower will only be required to pay
interest at the DCOTA Current Interest Rate. The interest accrued at the
excess of the applicable DCOTA Revised Interest Rate over the DCOTA Current
Interest Rate will be deferred and will bear interest at the DCOTA Revised
Interest Rate until after the outstanding principal loan balance is paid in
full (such accrued and deferred interest and interest thereon at the DCOTA
Revised Interest Rate, the "DCOTA Excess Interest"); provided, that if the
DCOTA Borrower repays the entire DCOTA Loan on or prior to the third payment
date after the DCOTA Anticipated Repayment Date, the DCOTA Borrower shall
have no obligation to pay any DCOTA Excess Interest and any DCOTA Excess
Interest accrued prior to the date of such repayment shall be forgiven by the
lender. Interest on the DCOTA Loan is calculated on the basis of the actual
number of days elapsed and a 360-day year.
Commencing on February 11, 1997 through the DCOTA Maturity Date, the DCOTA
Loan requires constant monthly payments (the "DCOTA Monthly Debt Service
Payment") of principal and interest of $294,816.36 (based on a 300-month
amortization schedule and the DCOTA Current Interest Rate). Payment of the
balance of the principal, if any, together with all accrued and unpaid
interest (including the DCOTA Excess Interest) is required on the DCOTA
Maturity Date. Commencing on the DCOTA Anticipated Repayment Date and
continuing on each payment date thereafter, in addition to the DCOTA Monthly
Debt Service Payment, the DCOTA Borrower is required to apply 100% of the
DCOTA 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)
first, to repay principal until the outstanding principal balance of the
DCOTA Loan is reduced to zero, and (b) then to pay DCOTA Excess Interest.
"DCOTA Excess Cash Flow" means for any period (i) any and all amounts held as
collected funds in the DCOTA Deposit Account (as defined below under "--Lock
Box") for such period less (ii) amounts required to fund the following items
in the following order of priority: (a) amounts required to fund the tax and
insurance escrow fund as described below under "--Reserves," (b) to the DCOTA
Monthly Debt Service Payment, (c) to approved operating expenses, and (d) to
fund the capital reserve fund as described below under "--Reserves." The
scheduled principal balance of the DCOTA Loan as of the DCOTA Anticipated
Repayment Date is $32,445,946.
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Upon the occurrence of an event of default, the entire unpaid principal
sum and any other amounts due under the DCOTA Loan 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 DCOTA Loan
(i.e., the DCOTA Current Interest Rate or the DCOTA Revised Interest Rate, as
applicable) plus 5%.
Prepayment. Voluntary prepayment is prohibited under the DCOTA Loan prior
to the DCOTA Anticipated Repayment Date. From and after the DCOTA Anticipated
Repayment Date, the DCOTA Loan may be voluntarily prepaid in whole or in part
without payment of a yield maintenance premium. In addition, principal
prepayments on the DCOTA Loan may occur on payment dates after the DCOTA
Anticipated Repayment Date through application of the DCOTA Excess Cash Flow,
as described above under "--Payment Terms."
To the extent any insurance proceeds or condemnation awards are not
required to be applied to the restoration of the DCOTA Property as described
below under "--Condemnation and Casualty," the lender will be entitled to
apply such proceeds to prepay the DCOTA Loan. Unless an event of default has
occurred and is continuing, such prepayment will be made without payment of a
yield maintenance premium. If an event of default has occurred and is
continuing at the time such proceeds are applied to the prepayment of the
DCOTA Loan, such prepayment must be accompanied by a yield maintenance
premium.
Release in Exchange for Substitute Collateral. The DCOTA Borrower is
permitted at any time prior to the DCOTA Anticipated Repayment Date upon
thirty days prior written notice to lender after the second anniversary of
the Closing Date (the "DCOTA Defeasance Date") to defease all or any portion
of the DCOTA Loan, provided that, among other conditions, the DCOTA Borrower
pays on such date (a) all accrued and unpaid interest due on the DCOTA Loan
on such date, and if the DCOTA is not a payment date, then the DCOTA Borrower
shall have paid all interest and principal due on the next succeeding payment
date, (b) all other sums (including principal payments) then due and payable
under the DCOTA Loan and (c) the DCOTA Defeasance Deposit (as defined below).
In addition, the DCOTA Borrower is required to deliver to the Servicer, among
other things, (i) a security agreement granting the Trustee a first priority
lien on the U.S. Obligations purchased with the DCOTA Defeasance Deposit, (ii)
an opinion of counsel for the DCOTA Borrower in form satisfactory to the
Servicer stating, among other things, that the Trustee will have a perfected
first priority security interest in such U.S. Obligations and that such U.S.
obligations have been validly assigned to the Trust Fund and (iii) written
confirmation from the Rating Agencies that such defeasance will not result in
a downgrade, withdrawal or qualification of the then respective ratings of
the Certificates. The "DCOTA Defeasance Deposit" is generally the amount
necessary to purchase U.S. Obligations in amounts and with maturities that
are sufficient to make all successive scheduled payments on each payment date
after the DCOTA Defeasance Date upon which interest and principal payments
are required under the DCOTA Loan (including, on the DCOTA Anticipated
Repayment Date, the full outstanding principal balance of the DCOTA Loan).
The DCOTA Defeasance Deposit will also include all costs and expenses
incurred in connection with the purchase of such U.S. Obligations. The DCOTA
Borrower will be entitled to obtain a release of the DCOTA Property in
connection with the defeasance of the entire DCOTA Loan.
Reserves. The DCOTA Borrower is required to fund the following escrow and
reserve funds: (a) a tax and insurance reserve fund to be funded monthly on
each payment date in an amount equal to 1/12 of the taxes estimated to be
payable during the ensuing twelve months and 1/12 of the insurance premiums
estimated to be payable for the renewal of insurance policies for the
succeeding annual period, (b) a debt service escrow funded on December 12,
1996 in an amount equal to two DCOTA Monthly Debt Service Payments, and (c) a
capital reserve fund to be funded monthly on each payment date in an amount
equal to 1/12 of the estimated annual capital repair and deferred maintenance
amount of $171,000.
The DCOTA Borrower is not required to fund the monthly deposit for
insurance premiums into the tax and insurance reserve so long as the DCOTA
Borrower (i) continues to make timely payments of insurance premiums and (ii)
establishes and maintains a reserve fund with lender in an amount equal to no
less than two installments of the monthly insurance premium. The DCOTA
Borrower funded the tax and insurance reserve on December 12, 1996 in an
amount equal to three installments of the monthly insurance premium. The
DCOTA Borrower is not required to fund the monthly deposit for the capital
reserve fund so long as (i) the DCOTA Borrower establishes and maintains with
lender a reserve in an amount equal to $171,000, (ii) no event of default has
occurred and is continuing and (iii) within 30 days following each calendar
year-end, the DCOTA Borrower provides the lender with a certificate of an
executive officer of the DCOTA Borrower certifying that the DCOTA Borrower
has made capital expenditures at the DCOTA Property of at least $171,000
during the preceding calendar year. The DCOTA Borrower has funded the capital
reserve in an amount equal to $171,000.
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Lock Box. Prior to the occurrence of a Lock Box Event (as defined below)
the DCOTA Borrower is not required to deposit rents or other income into a
lock box account controlled by the lender. Instead, all rents and other
income from the DCOTA Property will be deposited by the DCOTA Borrower
directly into a clearing account established and maintained in the name of
the DCOTA Borrower. Prior to the occurrence of a Lock Box Event, the DCOTA
Borrower may withdraw funds from the clearing account.
Following the occurrence of a Lock Box Event, all amounts held in the
DCOTA Borrower clearing account will be swept into a deposit account
established in the name of lender (the "DCOTA Deposit Account") on a daily
basis for application by the lender as described below. The occurrence of any
of the following events shall constitute a "Lock Box Event": (a) an event of
default or (b) the DCOTA Anticipated Repayment Date. Upon the occurrence of a
Lock Box Trigger Event, the Servicer shall disburse funds held in the DCOTA
Deposit Account in the following order of priority: (a) to fund the tax and
insurance reserve, if the DCOTA Borrower is required to make such monthly
deposits, (b) to pay the DCOTA Monthly Debt Service Payment, (c) to the DCOTA
Borrower to pay for approved operating expenses, (d) to make required
payments, if any, to the capital reserve fund, (e) following the DCOTA
Anticipated Repayment Date, to the lender to prepay the outstanding principal
balance under the DCOTA Loan until paid in full, (f) following the DCOTA
Anticipated Repayment Date, to the lender to be applied against DCOTA Excess
Interest. In addition, following the occurrence of a Lock Box Event the DCOTA
Borrower shall, at the direction of the lender, require all tenants at the
DCOTA Property to pay all rents directly to the DCOTA Deposit Account and the
DCOTA Borrower shall have no further right to make withdrawals from such
account.
Transfer of Property and Interest in Borrower; Encumbrance. The DCOTA
Borrower is prohibited from transferring or encumbering the DCOTA Property
without the prior written consent of the lender, except that the DCOTA
Borrower has the one-time right to sell the DCOTA Property subject to the
DCOTA Loan without the consent of the lender, provided that, among other
things, (a) the purchaser assumes in writing all obligations of the DCOTA
Borrower under the DCOTA Loan and (b) the Rating Agencies confirm in writing
that such sale will not result in a qualification, downgrade or withdrawal of
the ratings then applicable to the Certificates.
The DCOTA Loan prohibits transfers without the prior written consent of
the lender of any direct interest in the DCOTA Borrower and transfers of any
direct or indirect interest in any partner of the DCOTA Borrower other than
(a) a one-time transfer following the death of Marvin Danto, by the DCOTA GP
of its interest in the DCOTA Borrower to a special purpose entity provided
that such special purpose entity: (i) complies with the then current criteria
of S&P for special purpose entities; (ii) is 100% owned by James Danto or an
immediate family member of James Danto; and (iii) the DCOTA Borrower delivers
a substantive consolidation opinion in form satisfactory to the lender and
the Rating Agencies, (b) any transfer of stock in the DCOTA GP and the
limited partner interests in the DCOTA Borrower provided that such transfer
does not result in the proposed transferee (together with its immediate
family members and affiliates) owning more than 49% of the stock in the DCOTA
GP, obtaining control of the DCOTA GP or the DCOTA Borrower or owning more
than 49% of the limited partnership interests in the DCOTA Borrower, and
provided further that: (i) the Rating Agencies confirm in writing that such
sale or transfer will not result in a qualification, downgrade or withdrawal
of the ratings then applicable to the Certificates and (ii) the DCOTA
Borrower delivers a non-consolidation opinion in form satisfactory to the
lender and the Rating Agencies and (c) transfers of equity interests that
occur by inheritance, devise, bequest or operation of law upon the death of
any natural person; provided such transfers are to immediate family members
and, if required by the Rating Agencies, the DCOTA Borrower delivers a
non-consolidation opinion.
The DCOTA Borrower is prohibited from incurring debt other than (a)
equipment leases with annual payment obligations not exceeding $400,000 and
(b) unsecured trade debt customarily payable within thirty days in an
aggregate amount not to exceed $1,200,000 at any time. In addition, the
direct and/or indirect partners in the DCOTA Borrower may be entitled to
receive a mezzanine loan in an amount not to exceed $5,000,000 provided that,
among other things: (a) the loan is secured by a pledge of stock in the DCOTA
GP and limited partnership interests in the DCOTA Borrower; (b) the lender of
such mezzanine loan agrees in writing that such pledge may not be enforced if
such enforcement would result in the withdrawal, downgrade or qualification
of the ratings then applicable to the Certificates; and (c) the Rating
Agencies confirm in writing that neither the making of the mezzanine loan nor
the identity of the lender thereof will result in the withdrawal, downgrade
or qualification of the then applicable rating of the Certificates.
Insurance. The DCOTA Borrower is required to maintain (a) all-risk
insurance in an amount equal to the greater of (i) the outstanding principal
balance of the DCOTA Loan and (ii) the replacement cost of the improvements,
(b) comprehensive public liability insurance in an amount equal to $1,000,000
per occurrence and $2,000,000 in the aggregate,
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plus $10,000,000 in excess and/or umbrella liability insurance, (c) rental
loss and/or business interruption insurance covering a period of at least
eighteen months, (d) sprinkler leakage and machinery and boiler explosion
insurance, (e) statutory workers' compensation insurance and (f) during any
period of repair or restoration, builder's "all risk" insurance in an amount
not less than the full insurable value of the DCOTA Property. The DCOTA Loan
requires the DCOTA Borrower to obtain the insurance described above from
insurance companies with a claims paying ability rating of "AA-" or better by
S&P. The insurance for the DCOTA Property is currently with American Motorist
Insurance Company. These insurance policies expire on April 1, 1997, and the
DCOTA Borrower is required to replace them with insurance meeting the
requirements of the loan documents.
Condemnation and Casualty. The DCOTA Borrower is obligated to restore the
DCOTA Property following the occurrence of a casualty or condemnation,
regardless of whether insurance proceeds or condemnation awards are
available, unless the DCOTA Borrower elects to defease the entire amount of
the DCOTA Loan and cause the release of the DCOTA Property, as described
above under "--Release in Exchange for Substitute Collateral." In the event
of any casualty or condemnation where (a) the loss or award is in an
aggregate amount less than $4,000,000, (b) in the reasonable judgment of the
lender, the DCOTA Property can be restored (i) within twelve months in the
event of a casualty (or six months in the event of any condemnation) and (ii)
prior to the DCOTA Maturity Date, in each case, to an economic unit not less
valuable and not less useful than the same was prior to such casualty or
condemnation and, after such restoration, the DCOTA Property adequately
secures the outstanding balance of the DCOTA Loan and (c) no event of default
has occurred and is continuing, the lender is obligated to make any insurance
proceeds or condemnation award available to reimburse the DCOTA Borrower for
the cost of restoring the DCOTA Property. Any surplus insurance proceeds or
condemnation awards remaining after payment of the costs of restoration will
be paid to the DCOTA Borrower. In all other events, the lender has the right
to apply the insurance proceeds or condemnation award to prepay the DCOTA
Loan. Unless an event of default has occurred and is continuing, such
prepayment is not required to be accompanied by a yield maintenance premium.
If, however, an event of default has occurred and is continuing, such
prepayment will include a yield maintenance premium. If the amount of
insurance proceeds resulting from any casualty does not exceed $500,000, the
DCOTA Borrower may settle any insurance claim without the lender's consent
and may receive the proceeds directly from the insurer. In the event
insurance proceeds exceed $500,000, such proceeds shall be paid directly to
the lender who will make such proceeds available to the DCOTA Borrower to the
extent required by the DCOTA Loan. The DCOTA Borrower is required to pay
directly to the lender all condemnation awards payable to the DCOTA Borrower.
Financial Reporting. The DCOTA Borrower is required to furnish to the
lender, within 90 days following the end of each fiscal year, the DCOTA
Borrower's annual financial statements audited by an independent certified
public accountant acceptable to the Servicer, together with a certificate of
an executive officer of the DCOTA Borrower certifying that (a) such annual
financial statements present fairly the financial condition of the DCOTA
Property and have been prepared in accordance with GAAP and (b) whether there
has been an event of default and, if so, describing the nature of such event.
The DCOTA Borrower is also required to furnish to the lender on or before the
20th day following the end of each calendar month the following items,
accompanied by a certificate of an executive officer of the DCOTA Borrower
certifying that such items are true, correct, accurate and complete and
present fairly the financial condition of the DCOTA Property during such
calendar month: (a) monthly and year to date operating statements prepared
for each calendar month, (b) a monthly balance sheet, (c) a comparison of the
budgeted and actual income and expenses for each month and year to date, (d)
a rent roll, including occupancy statistics and lease expiration dates for
the DCOTA Property, (e) a calculation of the DCOTA DSCR for the immediately
preceding twelve month period as of the last day of each such month, (f)
quarterly, together with such monthly statements, a statement of actual
capital expenditures for each calendar quarter as of the last day of such
quarter and (g) a statement that certain representation and warranties of the
DCOTA Borrower are true and correct as of the date of such certificate.
The Property. The DCOTA Property consists of a four-story building on
approximately 11.7 acres of land located in Dania, Broward County, Florida
adjacent to the Ft. Lauderdale Airport on I-95 and contains approximately
550,000 square feet of GLA. The building was built in two phases: the first
phase opened in 1985 and the second phase opened in 1988. Space in the DCOTA
Property is leased to tenants who primarily provide goods and related
services to professionals in the design trade, including architects,
builders, and designers who represent home and office owners.
The land adjacent to the DCOTA Property is owned by an affiliate of the
DCOTA Borrower and is subject to certain restrictive use covenants in favor
of the lender, among other things, prohibiting the owner of such parcel from
operating such parcel as a design center. The DCOTA Property contains parking
spaces for 716 vehicles on site. The DCOTA Property utilizes a parking area
contained on such adjacent parcel for additional parking spaces. An easement
agreement grants the DCOTA Borrower a perpetual non-exclusive easement to use
this parking area.
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As of December 31, 1996, the DCOTA Property had an occupancy rate of
approximately 96% and an average base rent per square foot of $23. As of May
7, 1996, the appraised value of the DCOTA Property was $97,000,000.
Property Management. The DCOTA Property is managed, leased and maintained
by the DCOTA Manager, pursuant to an exclusive leasing and management
agreement, dated as of March 1, 1988, between the DCOTA Borrower and the
DCOTA Manager (the "DCOTA Management Agreement"). The DCOTA Management
Agreement provides for a monthly management fee equal to 5% of monthly gross
revenues from the DCOTA Property calculated on a cash basis. The DCOTA
Management Agreement provides for a 12-year term and will expire on March 1,
2000 unless earlier terminated by the DCOTA Borrower, the DCOTA Manager or
the lender pursuant to the terms thereof.
Under the DCOTA Loan, the DCOTA Borrower is obligated to achieve and
maintain a DCOTA DSCR (as defined below) of not less than 1.15. If such ratio
is not maintained, the lender has the right to terminate the DCOTA Management
Agreement and to instruct the DCOTA Borrower to remove the DCOTA Manager and
designate a replacement property manager acceptable to the lender unless the
DCOTA Borrower defeases a portion of the DCOTA Loan sufficient to increase
the DCOTA DSCR on the undefeased portion of the DCOTA Loan to not less than
1.15:1.0. Upon the termination of the DCOTA Management Agreement, the DCOTA
Manager shall continue to receive a monthly management fee of 2.5% of all
gross revenues, calculated on a cash basis, for a period of five years
following the termination thereof. "DCOTA DSCR" means, for any 12-month
period, the ratio of (a) the net operating income for such period to (b) the
amount of principal and interest actually due and payable on the DCOTA Loan
for such period.
Pursuant to a side letter to the DCOTA loan documents, the DCOTA Manager
has agreed that (a) the DCOTA Management Agreement is subordinate in all
respects to the DCOTA Mortgage and the DCOTA loan documents, (b) should the
lender obtain title to and possession of the DCOTA Property from the DCOTA
Borrower, (i) the DCOTA Manager will continue performance under the terms of
the DCOTA Management Agreement if requested by the lender, and (ii) the
lender may terminate the DCOTA Management Agreement, (c) the DCOTA Manager
will notify the lender of any default by the Borrower under the terms of the
DCOTA Management Agreement and will allow the lender the same time period
within which to cure that default as the DCOTA Borrower would have, and (d)
the DCOTA Manager will not modify the DCOTA Management Agreement without the
prior approval of the lender.
The DCOTA Manager was organized in 1973 and as of December 31, 1996, owned
and managed various industrial, warehouse office and design center properties
located primarily in Michigan and Florida, including: 1500 North Woodward
Building, a 54,000 square foot prime office building located in Bloomfield
Hills, Michigan which is 100% leased; 2700 Buchanan Company, a 32,000 square
foot industrial facility and a 14,000 square foot office/warehouse building
located in Troy, Michigan; and the Michigan Design Center, a 210,000 square
foot design center.
THE G&L MEDICAL OFFICE II POOL LOAN AND PROPERTIES
The Loan. The G&L Medical Office II Pool Loan was originated by the lender
on May 24, 1996, in the aggregate principal amount of $19,800,000, and
amended and restated on August 29, 1996 (the "G&L II Loan Origination Date"),
to, among other things, add an additional property and increase the principal
amount to $35,000,000 (the "G&L II Loan Amount"). The G&L Medical Office II
Pool Loan has a principal balance as of the Cut-off Date of approximately
$34,801,294 and is secured by Mortgages encumbering four medical office
buildings (the "G&L Medical Office II Pool Properties") located in
California. The Mortgages encumbering the G&L Medical Office II Pool
Properties are cross-defaulted and cross-collateralized.
The Borrower. G&L Medical Partnership, L.P. (the "G&L Medical Office II
Pool Borrower") is a single purpose limited partnership formed on May 7,
1996. The partnership agreement of the G&L Medical Office II Pool Borrower
provides that until the G&L Medical Office II Pool Loan is repaid (including
any successive refundings or refinancings thereof), the sole purposes of the
G&L Medical Office II Pool Borrower are to own, operate, finance, refinance,
and mortgage the G&L Medical Office II Pool Properties and related facilities
and to carry on other incidental and related activities. The G&L Medical
Office II Pool Borrower has no material assets other than the G&L Medical
Office II Properties and incidental personal property necessary for the
ownership or operation thereof. The sole general partner of the G&L Medical
Office II Pool Borrower is G&L Medical, Inc. (the "G&L II GP"), a Delaware
corporation formed solely for the purpose of acting as general partner of the
G&L Medical Office II Pool Borrower and engaging in other activities
incidental to that purpose. The voting stock of the G&L II GP is wholly owned
by G&L Realty Corp. (the "G&L II REIT"). The G&L II REIT is a Maryland
corporation which is a real estate investment trust, the shares of which are
traded on the New York Stock Exchange. The sole limited partner of the G&L
Medical Office II Pool Borrower is G&L
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Realty Partnership, L.P. (the "G&L II LP"), a Delaware limited partnership.
The sole general partner of the G&L II LP is the G&L II REIT. The G&L II LP
is also the property manager for the G&L Medical Office II Pool Properties as
described below under "--Property Management."
Security. The G&L Medical Office II Pool Loan is a nonrecourse loan,
secured only by the interest of the G&L Medical Office II Borrower in the G&L
Medical Office II Properties and by certain collateral therefor (including an
assignment of leases and rents and the funds in certain accounts). Subject to
exceptions for, among other things, intentional misrepresentation, breach of
any provision of a related environmental indemnity agreement, or
misappropriation of funds, neither the G&L Medical Office II Pool Borrower
nor any of its affiliates are personally liable for the payment of the G&L
Medical Office II Pool Loan. The G&L Medical Office II Pool Borrower, the G&L
II LP and the G&L II REIT have agreed to indemnify the lender and its
successors and assigns with respect to the liabilities arising from and in
connection with certain environmental matters. There can be no assurance that
the G&L II LP or the G&L II REIT will have sufficient assets to make payments
under such indemnity. The G&L Medical Office II Pool Borrower has represented
that it owns good and marketable title to the G&L Medical Office II Pool
Properties, subject only to certain permitted encumbrances. The Originator is
the named insured under mortgage title insurance policies, which insure,
among other things, that each of the related Mortgages constitutes a valid
and enforceable first lien on the applicable G&L Medical Office II Pool
Property, subject to certain exceptions and exclusions from coverage set
forth therein.
Payment Terms. The G&L Medical Office II Pool Loan matures on September
11, 2021 (the "G&L II Maturity Date"), and bears interest at (a) a fixed rate
per annum equal to 8.492% (the "G&L II Current Interest Rate") through
September 10, 2006, and (b) from and including September 11, 2006 (the "G&L
II Anticipated Repayment Date"), at a fixed rate per annum (the "G&L II
Revised Interest Rate") equal to the greater of (i) the sum of (A) the G&L II
Current Interest Rate plus (B) 2.00% and (ii) the sum of (A) the yield,
calculated by linear interpolation of the yields of the 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 G&L II Maturity Date, plus (B) 2.00%. Interest
accrued at the excess of the G&L Revised Interest Rate over the G&L Current
Interest Rate will be deferred until the earlier to occur of the date on
which the G&L Medical Office II Pool Loan has been paid in full and the G&L
II Maturity Date (such accrued and deferred interest and interest thereon at
the G&L II Revised Interest Rate, the "G&L II Excess Interest"). Interest on
the G&L Medical Office II Pool Loan is calculated on the basis of the actual
number of days elapsed and a 360-day year.
Commencing on August 29, 1996, the G&L Medical Office II Pool Loan
requires 300 constant monthly payments (the "G&L II Monthly Debt Service
Amount") of principal and interest of $281,640.81 (based on a 300-month
amortization schedule and the G&L Current Interest Rate, subject to
adjustment in connection with certain prepayments relating to the release of
a property -though not in connection with defeasances -as described below
under "--Prepayment"). Payment of the balance of the principal, if any,
together with all accrued and unpaid interest (including the G&L II Excess
Interest), is required on the G&L II Maturity Date. Commencing on the first
payment date after the G&L Anticipated Repayment Date, in addition to the G&L
II Monthly Installment Amount, the G&L Medical Office II Pool Borrower is
required to apply 100% of the G&L 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
G&L Medical Office II Pool Loan until such principal is reduced to zero and
(b) to the G&L II Excess Interest. "G&L II Excess Cash Flow" means for any
period the excess of the gross revenues (operating and investment) of the G&L
Medical Office II Pool Borrower (calculated on a cash basis) for such period
over operating expenses (calculated on a cash basis) relating to the G&L
Medical Office II Pool Properties (calculated on a cash basis) for such
period after deduction of the following amounts (without duplication): (a)
amounts necessary to fund the capital reserve with respect to the G&L Medical
Office II Pool Properties as described below under "--Reserves"; (b) property
management fees equal to the lesser of (i) actual management fees paid
pursuant to the management agreement and (ii) 4% of the operating income of
the G&L Medical Office II Pool Borrower; (c) amounts necessary to fund
required reserves in respect of real property taxes and insurance premiums
(as described below under "--Reserves"); (d) amounts necessary to fund
required leasing reserves for such period as described below under
"--Reserves" and (e) to fund any additional required reserves required by the
lender from time to time as a result of vacancies and similar factors
adversely affecting cash flow. The scheduled principal balance of the G&L
Medical Office II Pool Loan as of the G&L II Anticipated Repayment Date is
$29,240,098.
If the G&L Office II Pool Borrower pays the entire outstanding principal
balance of the G&L Medical Office II Pool Loan together with all accrued but
unpaid interest calculated at the G&L II Base Interest Rate thereon and any
other amounts required to be paid under the G&L Medical Office II Pool Loan
on or before the payment date which is six months after the G&L II
Anticipated Repayment Date, then all accrued but unpaid G&L II Excess
Interest will be forgiven by the lender.
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Upon the occurrence of an event of default, the entire unpaid principal
sum of the G&L Medical Office II Pool Loan and any other amounts due in
respect thereof will bear interest at a default rate equal to the lesser of
(a) the maximum rate permitted by applicable law and (b) (i) prior to the G&L
II Anticipated Repayment Date, 13.492%, or (ii) on or after the G&L II
Anticipated Repayment Date, the G&L II Revised Interest Rate plus 5%.
Prepayment. Voluntary prepayment is prohibited under the G&L Medical
Office II Pool Loan prior to the G&L II Anticipated Repayment Date.
Thereafter, the G&L Medical Office II Pool Loan may be voluntarily prepaid in
whole or in part in connection with the release of a property on any payment
date without payment of a yield maintenance premium. In addition, principal
prepayments on the G&L Medical Office II Pool Loan may occur on payment dates
following the G&L Anticipated Repayment Date through the application of the
G&L II Excess Cash Flow.
The G&L Medical Office II Pool Borrower may obtain a release of a G&L
Medical Office II Pool Property from lien of the related Mortgage in
connection with a transfer, sale, assignment, or conveyance of that G&L
Medical Office II Pool Property on or after the G&L II Anticipated Repayment
Date if, among other things, (a) no event of default has occurred and is
continuing, (b) after giving effect to the release, the G&L II Loan DSCR (as
defined below) for all of the remaining G&L Medical Office II Pool Properties
is not less than the greater of (i) the G&L II Loan DSCR of all G&L Medical
Office II Pool Properties (without giving effect to such release) calculated
immediately prior to such release and (ii) the G&L II Loan DSCR of all G&L
Medical Office II Pool Properties (without giving effect to such release)
calculated as of the G&L II Loan Origination Date, (c) the G&L Medical Office
II Pool Borrower provides the lender with an officer's certificate stating
that the principal amount of the principal indebtedness, after deducting the
prepaid amount, is equal to or exceeds an amount equal to 125% of the sum of
the fair market values of the remaining G&L Medical Office II Pool Properties
as of the date, (d) the G&L Medical Office II Pool Borrower prepays principal
of the G&L II Loan in an amount equal to 125% of the Allocated Loan Amount
for the G&L Medical Office II Pool Property being released (the "G&L II
Release Price"), provided that there shall be credited against that G&L II
Release Price the amount of any principal of the G&L Medical Office II Pool
Loan prepaid prior to such release which was not credited against the G&L II
Release Price of another G&L II Medical Office II Property, and (e) the G&L
II Medical Office II Pool Borrower has paid to the lender all other amounts
then due and payable to the lender pursuant to the loan documents. Upon
satisfaction of such conditions, the G&L Medical Office II Pool Property will
be released from the lien of the G&L Medical Office II Pool Loan.
"G&L II Loan DSCR" means for any period a ratio, (a) the numerator of
which is the G&L II Net Cash Flow (as defined below) for the specified
period, and (b) the denominator of which is the aggregate amount of principal
and interest payments that would be due and payable during the applicable
period using a debt constant of 9.66% per annum. "G&L Net Cash Flow" means,
for any period, the excess, if any, of the gross revenues (operating and
investment) of the G&L Medical Office II Pool Borrower (calculated on an
accrual basis) for such period over operating expenses relating to the G&L
Medical Office II Pool Properties (calculated on an accrual basis) for such
period, adjusted as follows (without duplication): (i) income derived from
signed, non-cancelable leases in place as of the date of the calculation will
be included; (ii) deduction will be made for (x) income derived from leases
in effect during some or all of the covered period but terminated as of the
date of the calculation and (y) income derived from a defaulting tenant for
the period for which such calculation is being made; (iii) amounts referred
to in clauses (a), (b), (d) and (e) of the definition of G&L II Excess Cash
Flow as described above under "--Payment Terms," will be deducted; and (iv)
amounts allocated to the G&L II Leasing Reserve Sub-Account (as defined
below) for such period will be deducted.
Upon any prepayment relating to the release of a G&L Medical Office II
Property, though not in connection with any defeasance, the amount of the G&L
II Monthly Debt Service Installment will be recalculated to equal the amount
of the equal monthly installments of principal and interest which would be
necessary to amortize fully the then-outstanding principal balance of the G&L
Medical Office II Pool Loan over the remaining term to the G&L II Maturity
Date.
To the extent that the G&L Medical Office II Pool Borrower is not required
to apply any insurance proceeds or condemnation awards to the restoration of
a G&L Medical Office II Pool Property under the G&L Medical Office II Pool
Loan, the lender may apply such proceeds to prepay the G&L Medical Office II
Pool Loan after the Anticipated Repayment Date. Such prepayments will be made
without payment of a yield maintenance premium.
Release in Exchange for Substitute Collateral. The G&L Medical Office II
Pool Borrower is permitted on any payment date after the second anniversary
of the Closing Date and prior to the G&L II Anticipated Repayment Date,
provided no event of default has occurred and is continuing, to defease all
or a portion of the G&L Medical Office II Pool Loan, provided that, among
other conditions, (a) the G&L Medical Office II Pool Borrower pays on such
payment date
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(the "G&L II Defeasance Date") (i) all interest accrued and unpaid on the
principal balance of the G&L Medical Office II Pool Loan; (ii) with respect
to any defeasance of the entire G&L Medical Office II Pool Loan, all other
sums due and payable under the G&L Medical Office II Pool Loan and (iii) the
G&L II Defeasance Deposit (as defined below), (b) after giving effect to the
release, the G&L II Loan DSCR for all of the remaining G&L Medical Office II
Pool Properties is not less than the greater of (i) the G&L II Loan DSCR of
all G&L Medical Office II Pool Properties (without giving effect to such
release) calculated immediately prior to release and (ii) the G&L II Loan
DSCR of all G&L Medical Office II Pool Properties (without giving effect to
such release) calculated as of the G&L II Loan Origination Date and (c) the
G&L Medical Office II Pool Borrower has defeased a principal portion of the
G&L II Loan in an amount equal to 125% of the Allocated Loan Amount for the
G&L Medical Office II Pool Property being released (the "G&L II Release
Price"), provided that there shall be credited against that G&L II Release
Price the amount of any principal of the G&L Medical Office II Pool Loan paid
prior to such release which was not credited against the G&L II Release Price
of another G&L II Medical Office II Property. In addition, in connection with
any defeasance, the G&L Medical Office II Pool Borrower is required to
deliver to the lender, among other things, (a) an officer's certificate
stating that the principal amount of the G&L II defeased note is equal to or
exceeds an amount equal to 125% of the sum of the fair market values of the
remaining G&L Medical Office II Pool Properties as of the date, (b) a
security agreement in form and substance satisfactory to the lender creating
a first priority lien on the U.S. Obligations purchased with the G&L II
Defeasance Deposit, (c) an opinion of counsel for the G&L Medical Office II
Pool Borrower in form satisfactory to the lender stating, among other things,
that the lender has a perfected first priority security interest in the G&L
II Defeasance Deposit and the U.S. Obligations delivered by the G&L Medical
Office II Pool Borrower and that as a result of such defeasance, neither will
fail to maintain its status as a REMIC and (d) written confirmation from the
applicable Rating Agencies that such defeasance will not result in a
downgrade, withdrawal or qualification of then-existing ratings of the
Certificates.
"G&L II Defeasance Deposit" means an amount equal to the total cost
incurred or to be incurred in the purchase of U.S. Obligations in amounts and
with maturities sufficient to make payments on or prior to, but as close as
possible to, (a) each scheduled payment date after the G&L II Defeasance Date
through and including the payment date immediately preceding the G&L II
Anticipated Repayment Date, in amounts equal to the scheduled payments due on
such payment dates (or, if only a portion of the G&L Medical Office II Pool
Loan has been defeased, including in connection with any release, in amounts
equal to the portion of the scheduled payments due on such payment dates
allocated to the amount of the principal so defeased), and (b) the G&L II
Anticipated Repayment Date, in the amount of the unpaid principal balance of
the G&L Medical Office II Pool Loan (or, if only a portion of the G&L Medical
Office II Pool Loan has been defeased, including in connection with any
release, the amount of principal of the G&L Medical Office II Pool Loan so
defeased) together with any accrued and unpaid interest thereon.
Reserves. Pursuant to the terms of the G&L Medical Office II Pool Loan,
the G&L Medical Office II Pool Borrower has established (a) a reserve account
relating to real property taxes and insurance premiums to be funded each
month in an amount equal to the lender's good faith estimate of 1/12 of the
aggregate annual amount of such costs, (b) a capital expense account for the
purpose of funding ongoing capital repairs, replacement and improvements, to
be funded each month in an amount equal to $6,544.50, (c) a leasing reserve
account for the purpose of paying certain leasing costs associated with all
leases other than the Schabarum Avenue Lease (as defined below), to be funded
on the G&L Loan II Origination Date in an amount equal to $525,000 and
maintained at that level through monthly funding, and (d) a Schabarum Avenue
replacement lease reserve account, for paying certain re-letting costs with
respect to the Schabarum Avenue Lease, to be funded in a monthly amount equal
to the sum of (i) the lease termination fees received by the G&L Medical
Office II Borrower in respect of the Schabarum Avenue Lease and (ii) from the
payment date occurring in November 1998 through the Schabarum Avenue
Replacement Lease Reserve Funding Termination Date, an amount equal to
$6,500. The "Schabarum Avenue Replacement Lease Reserve Funding Termination
Date" means the earlier to occur of (a) November 1, 2004, and (b) the first
day of the month immediately following the month during which (i) all tenant
improvements required under the terms of any lease replacing the Schabarum
Avenue Lease are satisfactorily completed and (ii) all leasing costs relating
to an executed lease replacing the Schabarum Avenue Lease are paid in full.
The Schabarum Avenue Lease is held by Friendly Hills Healthcare Network, as
described below under "--Properties."
Lock Box. The G&L Medical Office II Pool Borrower is obligated to cause
all rents to be deposited directly by tenants to a central collection account
(the "G&L II Collection Account") and to deposit by the fifteenth day of each
month all parking receipts generated by the G&L Medical Office II Properties
during the immediately preceding month. The G&L II Collection Account is held
in the name of both the G&L Medical Office II Pool Borrower, as debtor, and
the lender, as secured party. The funds in the G&L II Collection Account will
be swept on a daily basis into a cash collateral account (the "G&L II Cash
Collateral Account") held by the lender.
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The funds held in the G&L Cash Collateral Account will be distributed for
the following purposes to its sub-accounts by the deposit bank in the
following order of priority: (a) to fund the tax and insurance reserve
account (as defined above under "--Reserves"), (b) to fund the G&L II Monthly
Debt Service Amount, (c) to fund the capital expense reserve account (as
described above under "--Reserves"), (d) to fund the leasing reserve account
(as described above under "--Reserves"), (e) to fund the Schabarum Avenue
replacement lease reserve account (as described above under "--Reserves").
Except if an event of default has occurred and is continuing, any amounts
deposited into or remaining in the G&L II Cash Collateral Account after the
minimum amounts set forth in clauses (a) through (e) above have been
satisfied will be disbursed once a week to the G&L Medical Office II Pool
Borrower, which is required to use those funds (a) first, to pay operating
expenses (calculated on an accrual basis) relating to the G&L Medical Office
II Pool Properties, and (b) then, for any other purpose, including to pay
dividends or to make other distributions. If an event of default has occurred
and is continuing, the lender may elect to have held for its own account any
amounts deposited into or remaining in the G&L II Cash Collateral Account
after the lender has (a) allocated minimum amounts as provided in clauses (a)
through (e) above, and (b) allocated amounts required to pay any operating
expenses (calculated on an accrual basis) approved by the lender, and the
lender may withdraw those deposited or remaining amounts to pay any amounts
payable under the G&L Medical Office II Loan in the order determined by the
lender, in its sole discretion.
All security deposits will be paid to the G&L II LP in its capacity as
property manager or to any other property manager as may be designated (see
"--Property Management"). The G&L II LP is required to deposit the security
deposits into the Collection Account within one business day after receipt,
except that those security deposits held by the G&L II Medical Office II Pool
Borrower or the G&L II LP as security deposits on the G&L II Loan Origination
Date or those security deposits received by them after the G&L II Loan
Origination Date need not be deposited into the G&L II Collection Account if
and to the extent that a letter of credit is delivered to the lender. The
funds held in the G&L II Collection Account will be transferred to the G&L II
Cash Collateral Account in an amount equal to the amount of security deposits
deposited in the G&L II Collection Account and not yet transferred to the G&L
II Security Deposit Account.
Transfer of Properties and Interest in Borrower; Encumbrance. Other than
with respect to (a) G&L Medical Office II Pool Properties which have been
released from the lien of the Mortgage through prepayment or defeasance as
described above under "--Prepayment" and "--Release in Exchange for
Substitute Collateral" and (b) customary permitted encumbrances, the G&L
Medical Office II Pool Borrower is prohibited from conveying, selling,
transferring, or otherwise disposing of or encumbering the G&L Medical Office
II Pool Properties without the prior written consent of the lender.
The G&L Medical Office II Pool Loan generally prohibits the G&L Medical
Office II Pool Borrower from entering into, among other transactions, any
transaction of merger, consolidation, liquidation, dissolution, acquisition
or sale of its assets. It is an event of default under the G&L Medical Office
II Pool Loan if either the G&L II GP or the G&L II LP fails to remain a
wholly-owned subsidiary of the G&L II REIT, fails to continue to own its
partnership interest in the G&L Medical Office II Pool Borrower, or conveys,
sells, transfers, pledges, mortgages, or otherwise disposes of or encumbers
its partnership interest in the G&L Medical Office II Pool Borrower. However,
the G&L II LP may convey, sell, transfer, pledge, mortgage, or otherwise
dispose of or encumber its limited partnership interests in the G&L Medical
Office II Pool Borrower aggregating not more than 49.9% of the total
partnership interests in the G&L Medical Office II Pool Borrower, so long as
prior to such an action, each Rating Agency confirms in writing that such
action will not result in downgrading, qualification or withdrawal of the
ratings then assigned to the Certificates.
The G&L Medical Office II Pool Borrower cannot incur any other
indebtedness except (a) trade payables not more than thirty days past due
incurred in the ordinary course of business (other than for borrowed money)
in an aggregate principal amount not exceeding $200,000 at any time; and (b)
other indebtedness secured by customary permitted encumbrances.
Insurance. The G&L Medical Office II Pool Borrower is required to maintain
(a) physical hazard insurance against any peril included within the
classification "All Risks of Physical Loss" with extended coverage in amounts
equal to the actual replacement cost of the improvements and personal
property constituting a part of the G&L Medical Office II Pool Properties or
relating thereto, (b) comprehensive general liability insurance in such
amounts as are generally required by institutional lenders for properties
comparable to the G&L Medical Office II Pool Properties but in no event with
limits of less than $1,000,000 per occurrence per property with combined
single limit coverage for bodily injury or property damage and excess
(umbrella) liability coverage of no less than $10,000,000 per occurrence per
property, (c) statutory workers' compensation insurance, (d) rental loss
and/or business interruption insurance which will cover a period of at
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least eighteen months, (e) flood insurance with respect to any part of a G&L
Medical Office II Pool Property or its improvements which is located within a
federally designated flood hazard zone, and which, if lost or flooded, would
have a material adverse effect on the collateral as a whole, (f) boiler and
machinery insurance (including coverage against leakage of sprinkler
systems), (g) earthquake insurance in an amount not less than the probable
maximum loss for the G&L Medical Office II Pool Properties (as determined by
engineering reports prepared for the lender) with deductibles not greater
than 10% of such probable maximum loss, (h) during any period of major
restoration, builders "all risk" insurance for the full cost of construction
and (i) such other insurance as is reasonably requested by the lender. The
G&L Medical Office II Pool Loan requires the G&L Medical Office II Pool
Borrower to obtain the insurance described above from insurance carriers
having claims-paying abilities rated not less than "AA" (or, in the case of
earthquake insurance, "A") or better from at least two of the Rating Agencies
or a national equivalent or otherwise acceptable to the lender in its sole
discretion. The lender must be named as the loss payee or additional insured,
as applicable with respect to such insurance policies.
The worker's compensation policy held by the G&L Medical Office II Pool
Borrower is from California Compensation Insurance Company, which has a
claims paying ability rating of [ ] by S&P and [ ] by Best's. An automobile
casualty policy is held from Fireman's Fund Insurance Company, which has a
claims paying ability rating of [ ] by S&P and [ ] by Best. A difference in
conditions policy is held from Royal Surplus Lines, which has a claims paying
ability rating of [ ] from S&P and [ ] from Best and from Westchester
Fire, which has a claims paying ability rating of [ ] from S&P and [ ]
from Best. All other policies are from Fireman's Fund, which has a claims
paying ability rating of [ ] by S&P and [ ] by Best.
Condemnation and Casualty. The G&L Medical Office II Pool Borrower is
required to repair and restore in a good and workmanlike manner any portion
of the G&L Medical Office II Pool Properties that may be damaged or destroyed
from any cause whatsoever.
The lender is required to make condemnation awards and casualty proceeds
available to the G&L Medical Office II Pool Borrower for the repair,
restoration, and replacement of the G&L Medical Office II Pool Properties if
(i) no default (other than a default caused solely and directly by the
casualty or condemnation) or event of default exists; (ii) the affected G&L
Medical Office II Properties are capable of being restored to their
pre-existing condition and utility in all material respects with a value
equal to or greater than their value as of the G&L II Loan Origination Date,
(iii) such restoration can be accomplished no later than the earlier of (x)
one month prior to the G&L II Maturity Date, and (y) the date on which the
business interruption insurance proceeds expire, (iv) the G&L Medical Office
II Pool Borrower has demonstrated its ability to fulfill its obligations
under the G&L Medical Office II Pool Loan during the restoration period; (v)
the cost of repair, restoration and replacement is not more than 25% of the
replacement cost of the G&L Medical Office II Properties, (vi) no tenant
under a lease covering 3,000 square feet or more of gross leasable area in
any G&L Medical Office II Pool Property has the right to terminate that lease
as a result of the casualty or condemnation or such tenants have waived that
right, (vii) the G&L Medical Office II Pool Borrower elects within 30 days of
the loss or damage to repair, restore or replace the damaged G&L Medical
Office II Property, (viii) the G&L Medical Office II Pool Borrower has
provided to the lender such additional funds the lender deems necessary to
complete the repair, restoration, and replacement, (ix) the G&L Medical
Office II Pool Borrower begins the repair, restoration, and replacement
within 90 days of the loss or damage and diligently pursues the repair,
restoration, and replacement to completion, (x) the G&L Medical Office II
Pool Borrower presents evidence to the lender that the required rental loss
and/or business interruption insurance is in effect with respect to the
damaged G&L Medical Office II Pool Property, (xi) the G&L Medical Office II
Pool Borrower grants a first lien and security interest in all building
materials and completed repair and restoration work and in all fixtures and
equipment acquired with the insurance proceeds, (xii) if the loss or damage
exceeds $250,000, the G&L Medical Office II Pool Borrower has provided to the
lender prior to the disbursement of any insurance proceeds (A) complete plans
and specifications for restoration, repair and replacement and (B) evidence
that builder's risk insurance for the full cost of construction is in effect
for the period of reconstruction and (xiii) if the loss or damage to the G&L
Medical Office II Pool Properties exceeds $1,000,000, the G&L Medical Office
II Pool Borrower has provided to the lender (A) fixed-price or
guaranteed-maximum-cost construction contracts for completion of the repair
and restoration work in accordance with such plans and specifications, (B)
copies of all permits and licenses and (C) all additional funds which are
necessary to complete the repair, restoration or replacements. In addition,
if the loss or damage exceeds $1,000,000, the lender may, at the expense of
the G&L Medical Office II Pool Borrower, retain an independent inspector to
review and approve plans and specifications and completed construction and to
approve all requests for disbursement.
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In the event the amount of the insurance proceeds or the condemnation
award is less than $250,000, and provided (other than a default caused solely
and directly by the casualty) no default or event of default has occurred and
is continuing, then regardless of whether the conditions described above are
met, the lender is required to make such proceeds and/or awards available to
the G&L Medical Office Borrower for its repair, restoration and replacement
of the G&L Medical Office II Pool Properties.
If (a) any condemnation award or insurance proceeds are not required or
used for such repair, restoration and replacement or (b) the G&L Medical
Office II Borrower fails to comply with the conditions described in the
previous paragraph, then the lender may apply the proceeds either to the
repayment of the G&L Medical Office II Loan, without any yield maintenance
premium, or to the repair, restoration or replacement of the G&L Medical
Office II Property affected by the loss or condemnation. In the event any
proceeds remain following the restoration by the G&L Medical Office II Pool
Borrower or application by the lender either to repay or to repair, restore
or replace, such excess will be paid to the G&L Medical Office II Pool
Borrower.
The proceeds of all casualty insurance or any condemnation involving the
G&L Medical Office II Properties will be assigned to the lender and deposited
directly into the G&L II Cash Collateral Account.
Financial Reporting. The G&L Medical Office II Pool Borrower is obligated
to furnish to the lender or its designee (a) within 90 days after the end of
the each fiscal year, consolidated financial statements for the G&L Medical
Office II Pool Borrower, audited by independent certified public accountants
of recognized national standing, (b) within 45 days after the end of each
fiscal quarter, unaudited consolidated financial statements for the G&L
Medical Office II Pool Borrower for that fiscal quarter and for the period
from the beginning of the fiscal year to the end of that period, (c) for each
G&L Medical Office II Pool Property: (i) a profit and loss statement and
income statement, (ii) a detailed statement of operations, (iii) the status
of leasing and other matters including occupancy rates and (iv) a detailed
calculation of operating income, operating expenses, net cash flow and, for
all periods after the G&L II Anticipated Repayment Date, the G&L II Excess
Cash Flow, (d) within 15 days after the end of each month (i) a written
statement certified by a senior officer of the G&L II GP showing occupancy
rates for each G&L Medical Office II Pool Property, (ii) certified copies of
the current rent rolls, (iii) a list of all new leases entered into by the
G&L Medical Office II Pool Borrower in the last month for each G&L Medical
Office II Pool Property, with details of those leases and (e) such other
information regarding the business affairs or financial condition of the G&L
Medical Office II Pool Borrower, its affiliates, or any G&L Medical Office II
Pool Property and such additional statements, reports, projections, budgets,
and other information regarding the collateral as the lender may reasonably
request.
The Properties. The G&L Medical Office II Pool Properties securing the G&L
Medical Office II Pool Loan are four medical office buildings containing an
aggregate of approximately 261,780 square feet of GLA.
Sherman Oaks Medical Plaza. This seven-story, 69,326 square foot
multi-tenanted medical office building, completed in 1969 and substantially
rehabilitated between 1994 and 1996, is located in the San Fernando Valley,
in the city of Los Angeles. The property stands next to the Sherman Oaks
Hospital and Health Center, which is owned by Triad Healthcare, an entity
unaffiliated with the G&L Medical Office II Pool Borrower or its affiliates.
Ancillary to the building is a three-level, 426-space parking structure. The
G&L Medical Office II Borrower owns in fee simple the parking structure and
part of the parcel on which it stands, with an easement over the part of that
parcel which it does not own.
Sherman Oaks Medical Plaza had an occupancy rate of approximately 89% and
an average base rent per square foot of $22, as of January 1, 1997. As of
January 9, 1996, the building contained approximately 43 tenancies, generally
occupied by physicians and dentists. As of that date, the appraised value of
Sherman Oaks Medical Plaza was $9,130,000.
The property was damaged by the January 17, 1994, Northridge earthquake.
Repair and renovation costing approximately $1.2 million commenced thereafter
and was completed in 1996. The repair included a high-strength grout and
epoxy injection to repair cracks in concrete beams and columns and masonry
shear walls and the beam/column joints and a new curtain wall. All but
cosmetic repairs have been completed.
Regents Medical Centre. This three-story, 65,906 square-foot,
multi-tenanted medical office building, with ancillary retail space, is
located in the University Towne Centre area of La Jolla, California, in San
Diego County. The property, built in 1989, is part of Regents Park, a
six-building office park that also contains a Marriott hotel. The building
has an underground parking lot with 178 spaces, a surface lot with 89 spaces
and an easement to use an additional 17 spaces adjacent to the property. A
final phase for future development of the Regents Park project is planned for
the northwestern portion of the project, which remains in finished lot
condition. The property is near major transportation corridors and the
University of California at San Diego and is located in a prestigious
neighborhood. There are three major hospital/medical clinics within a
three-mile radius of the property.
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Regents Medical Centre had an occupancy rate as of December 1, 1996 of
approximately 94% and an average base rent per square foot of approximately
$2.08. As of April 16, 1996, the appraised value of Regents Medical Centre
was $10,200,000. The tenants consist of retailers and medical and dental
offices.
Friendly Hills Healthcare Building. This two-story, 47,604 square foot,
single-tenant medical facility, with surface parking for 238 cars, is located
in Irwindale, California, in the San Gabriel Valley. The building, which was
constructed in 1992, is wholly leased to Friendly Hills Healthcare Network, a
subsidiary of Caremark International, Inc. Friendly Hills Healthcare Network
obtained its lease by assignment from Cigna Healthcare of California, Inc.
which remains liable for the lease obligations and has a long term debt
rating of "A-" from S&P, "A-" from DCR and "A3" from Moody's.
The Friendly Hills Healthcare Building had an occupancy rate as of January
1, 1997 of approximately 100% and an average base rent per square foot of
approximately $23 as of November 30, 1996. As of February 8, 1996, the
appraised value of the Schabarum Avenue Building was $9,610,000.
436 North Bedford Drive. This three-story, 78,944 square-foot,
multi-tenanted office building located in Beverly Hills, California. The
building was constructed in 1990 and has first-floor retail space and three
levels of subterranean parking. The Beverly Hills Golden Triangle, within
which the property is located, provides the highest concentration of medical
office space in Beverly Hills, though it contains no hospitals. Hospital
facilities, including Cedars Sinai Medical Center, are located nearby in the
surrounding city of Los Angeles. Affiliates of the G&L Medical Office II Pool
Borrower own five other buildings within a half-block of the 436 North
Bedford Drive Property, making up a significant portion of the Beverly Hills
medical office market.
436 North Bedford Drive had an occupancy rate as of January 1, 1997 of
approximately 98% and an average base rent per square foot of approximately
$3.55 as of February 15, 1997. As of March 14, 1996, the appraised value of
436 North Bedford Drive was $22,230,000. As of that date, there were 37
tenancies, with 40 office suites and 7 retail spaces. The tenants are medical
and dental offices and retail entities. The property is a legal but
non-conforming use under the zoning laws of Beverly Hills.
Property Management. The G&L Medical Office II Pool Properties are managed
by the G&L II LP pursuant to a management agreement dated as of August 29,
1996 (the "G&L Medical Office II Management Agreement"), between the G&L II
LP and the G&L Medical Office II Pool Borrower. The G&L Medical Office II
Management Agreement provides for a monthly management fee equal to the
greater of (i) $3,000 per month per G&L Medical Office II Pool Property and
(ii) 4% of gross monthly collections and revenues (calculated on an accrual
basis) from the G&L Medical Office II Pool Property. The term of the G&L
Medical Office II Management Agreement is one year, which, if not terminated
by the parties or renewed in writing for an additional fixed period, will be
extended on a month-to-month basis, cancelable by either party on at least
thirty days' written notice.
Under the G&L Medical Office II Loan, the G&L Medical Office II Pool
Borrower is obligated to achieve a G&L II Loan DSCR for the G&L Medical
Office II Pool Properties of not less than 1.15. If the G&L Medical Office II
Properties fail to satisfy the borrower's covenant with respect to this
ratio, the lender may terminate the G&L Medical Office II Management
Agreement and replace the G&L II LP as the property manager. In such an
event, the lender will select a replacement property manager (a) willing to
manage the G&L Medical Office II Pool Properties for total annual fees not to
exceed the current market rates, (b) at the lender's discretion, the senior
manager(s) of which having had not less than five years' experience in the
management of properties in the nature of the G&L Medical Office II Property
to be managed and (c) under the terms of a property management agreement (i)
containing a provision permitting such agreement to be terminated as
described above in this section with reference to the G&L Medical Office II
Management Agreement and (ii) except in the event of default, acceptable to
the G&L Medical Office II Pool Borrower.
In addition, pursuant to an Amended and Restated Manager's Consent and
Subordination of Management Agreement with respect to the G&L Medical Office
II Management Agreement, the lender and the G&L Medical Office II Pool
Borrower will have the right to terminate the G&L Medical Office II
Management Agreement upon, or at any time after, an event of default under
the G&L Medical Office II Pool Loan by giving the G&L II LP 30 days' prior
written notice of such termination. The G&L II LP has also agreed in such
subordination agreement that its right to receive the management fee and all
liens, rights and interests owned, claimed or held by the G&L II LP in and to
any of the G&L Medical Office II Pool Properties are and will be, in all
respects, subordinate and inferior to the liens and security interest created
by the G&L Medical Office II Pool Loan.
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The G&L II Manager was organized on November 15, 1993. Steven D. Lebowitz
is the President of G&L Realty Corp., a Maryland corporation, which is the
sole general partner of the G&L II Manager; Daniel M. Gottlieb is the Chief
Executive Officer of G&L Realty Corp. The G&L II Manager currently owns and
manages fourteen medical office buildings in Southern California.
THE INSURANCE COMPANY OF THE WEST LOAN AND PROPERTY
The Loan. The ICW Loan was originated by the lender on February 26, 1997,
in the aggregate principal amount of $25,277,612. The ICW Loan has a
principal balance as of the Cut-off Date of approximately $25,234,505 and is
secured by a Mortgage encumbering a parcel of land and the Insurance Company
of the West corporate headquarters building ("ICW Plaza") thereon located in
northwestern San Diego and an assignment of the ICW Borrower's rights to an
adjacent common area and parking lot (the "ICW Parking Parcel"; collectively,
the "ICW Property," described more fully below under "--The Property").
The Borrower. ICW Plaza, L.P. (the "ICW Borrower") is a special purpose
limited partnership formed for the sole purposes of owning, leasing,
operating, and managing the ICW Property and carrying on other incidental and
related activities. The ICW Borrower has no material assets other than the
ICW Property and incidental personal property necessary for the ownership or
operation thereof.
The sole general partner of the ICW Borrower is ICW Plaza, Inc. (the "ICW
GP"), a special purpose Delaware corporation formed solely for the purpose of
acting as the 1% general partner of the ICW Borrower and engaging in other
activities incidental to that purpose. The voting stock of the ICW GP is
wholly owned by a trust (the "ICW Trust") established by a majority equity
owner of the sole leaseholder, Insurance Company of the West (the "ICW
Tenant"). Consequently, the ICW Borrower and the ICW Tenant are affiliates.
The ICW Borrower has twenty-six limited partners, with Pacific American
Assets Holdings, Ltd. holding an approximately 88% limited partner interest,
the ICW Trust holding an approximately 6% limited partner interest, and the
other limited partners holding in the aggregate the remaining limited partner
interests in the ICW Borrower.
Security. The ICW Loan is a nonrecourse loan, secured only by the interest
of the ICW Borrower in the ICW Property and by certain collateral relating
thereto (including an assignment of leases and rents, including the ICW
Borrower's bonded 100% net lease to the ICW Tenant described under "--Credit
Lease" below, and the funds in certain accounts). The ICW Property is the
corporate headquarters for the ICW Tenant, which leases 100% of the ICW
Property from the Borrower pursuant to the terms of a net lease (the "ICW
Lease") as further described below under "--The Property." The ICW Tenant
subleases a portion of ICW Plaza to subtenants, the ICW Tenant remaining
liable for all obligations in such subleased portion. Subject to exceptions
for, among other things, intentional misrepresentation, breach of any
provision of a related environmental indemnity agreement executed by the ICW
Borrower in favor of the lender, or misappropriation of funds, neither the
ICW Borrower nor any of its affiliates is personally liable for the payment
of the ICW Loan, though, as noted below, the ICW Tenant is personally liable
for payment of rents and other charges under the ICW Lease. The ICW Borrower
has agreed to indemnify the lender and its successors and assigns with
respect to the liabilities arising from and in connection with certain
environmental matters. The ICW Borrower has represented that it owns good and
marketable title to the ICW Property, subject only to certain encumbrances
permitted by the lender. The Originator is the named insured under a
mortgagee title insurance commitment (which will be assigned to the Trust
Fund), which insures, among other things, that the ICW Mortgage constitutes a
valid and enforceable first lien on the ICW Property, subject to certain
exceptions and exclusions from coverage set forth therein.
Payment Terms. The ICW Loan matures on February 11, 2017 (the "ICW
Maturity Date"), and bears interest at (a) a fixed rate per annum equal to
7.506% (the "ICW Current Interest Rate") through February 10, 2007, and (b)
from and including February 11, 2007 (the "ICW Anticipated Repayment Date"),
at a fixed rate per annum (the "ICW Revised Interest Rate") equal to the
greater of (i) the ICW Current Interest Rate plus 2.00% and (ii) the sum of
(A) the yield as of the ICW Anticipated Repayment Date, calculated by linear
interpolation of the yields of the 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 ICW Maturity Date, plus (B) 2.00%. Interest accrued at the excess of
the ICW Revised Interest Rate over the ICW Current Interest Rate will be
deferred until the earlier to occur of the date on which the ICW Loan has
been paid in full and the ICW Maturity Date (such accrued and deferred
interest and interest thereon at the ICW Revised Interest Rate, the "ICW
Excess Interest"). Interest on the ICW Loan is calculated on the basis of the
actual number of days elapsed and a 360-day year.
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Commencing on March 11, 1997, the ICW Loan requires 240 graduated monthly
payments (the "ICW Monthly Debt Service Amount") of principal and interest on
each payment date as follows:
<TABLE>
<CAPTION>
<S> <C>
March 11, 1997.............................. $111,622.24
April 11, 1997, through July 11, 1999 ..... $190,677.97
August 11, 1999, through July 11, 2002 .... $196,398.31
August 11, 2002, through July 11, 2005 .... $202,290.26
August 11, 2005, through July 11, 2008 .... $208,358.96
August 11, 2008, through July 11, 2011 .... $212,577.83
August 11, 2011, through July 11, 2014 .... $221,048.03
August 11, 2014, through February 11, 2017.. $227,679.46
</TABLE>
The ICW Monthly Debt Service Payment represents a 1.003 debt service
coverage ratio relative to the net rent payable by the ICW Tenant under the
ICW Lease. Consequently, the ability of the ICW Borrower to make interest or
principal payments on the ICW Loan is dependent upon the financial condition
of the ICW Tenant, which is currently rated "A" by S&P. The ICW Tenant is
required to pay rents and other charges under the ICW Lease regardless of any
casualty or condemnation. Payment of the balance of the principal, if any,
together with all accrued and unpaid interest (including the ICW Excess
Interest, as defined above), is required on the ICW Maturity Date. On and
after the ICW Anticipated Repayment Date, each monthly payment will be
applied first to the payment of interest computed at the ICW Current Interest
Rate and then to the reduction of the outstanding principal balance of the
ICW Loan. The scheduled principal balance of the ICW Loan as of the ICW
Anticipated Repayment Date is $18,634,587.
Upon the occurrence of an event of default, the entire unpaid principal
sum of the ICW Loan and any other amounts due in respect thereof will bear
interest at a default rate equal to the lesser of (a) the maximum rate
permitted by applicable law and (b) (i) prior to the ICW Anticipated
Repayment Date, the ICW Current Interest Rate or (ii) on or after the ICW
Anticipated Repayment Date, the ICW Revised Interest Rate plus, in each case,
5%.
Prepayment. Voluntary prepayment is prohibited under the ICW Loan prior to
the payment date which is three months before the ICW Anticipated Repayment
Date. Thereafter, the ICW Loan may be voluntarily prepaid in whole on any
payment date without payment of a yield maintenance premium. In addition, on
the ICW Anticipated Repayment Date or on any payment date thereafter, the ICW
Loan may be voluntarily prepaid in part without payment of a yield
maintenance premium. The ICW Borrower cannot obtain a release of the ICW
Property from lien of the ICW Mortgage in connection with a partial
prepayment, but will be entitled to a release in connection with a prepayment
of the ICW Loan in full.
To the extent that the ICW Borrower is not permitted to apply any
insurance proceeds or condemnation awards to the restoration of the ICW
Property under the ICW Loan or to retain proceeds in excess of restoration
costs, the lender may apply such proceeds to prepay the ICW Loan, which
amounts will be applied to prepay principal in the inverse order of maturity.
Such prepayments will be made without payment of a yield maintenance premium,
except that if an event of default under the loan documents has occurred,
then the ICW Borrower will pay a yield maintenance premium equal to the
amount by which the ICW Defeasance Deposit (as defined below) would exceed
the then-outstanding principal amount of the ICW Loan if a total defeasance
were to be made at such time by the ICW Borrower.
If prior to the ICW Anticipated Repayment Date and following the
occurrence of an event of default under the loan documents, the ICW Borrower
prepays the ICW Loan in full, then the ICW Borrower shall pay a yield
maintenance premium equal to the amount by which the ICW Defeasance Deposit
would exceed the then-outstanding principal amount of the ICW Loan if a total
defeasance were to be made at such time by the ICW Borrower.
Release in Exchange for Substitute Collateral. The ICW Borrower is
permitted on any payment date after the second anniversary of the Closing
Date, provided no event of default has occurred and is continuing under the
ICW Loan, to defease all or a portion of the ICW Loan, provided that, among
other conditions, the ICW Borrower pays on such payment date (the "ICW
Defeasance Date") (a) all interest accrued and unpaid on the principal
balance of the ICW Loan, (b) all other sums due and payable under the ICW
Loan and (c) the ICW Defeasance Deposit. In addition, in connection with any
defeasance, the ICW Borrower must deliver to the servicer, among other
things, (a) an officer's certificate certifying that all requirements for
defeasance have been met, (b) a security agreement in form and substance
satisfactory to the Servicer creating a first priority lien on the U.S.
Obligations purchased with the ICW Defeasance Deposit, (c) an opinion
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of counsel for the ICW Borrower in a form satisfactory to the Servicer
stating, among other things, that the lender has a perfected first priority
security interest in the ICW Defeasance Deposit and the U.S. Obligations
delivered by the ICW Borrower and (d) written confirmation from the
applicable Rating Agencies that such defeasance will not result in a
downgrade, withdrawal or qualification of the then-existing ratings of the
Certificates.
"ICW Defeasance Deposit" means an amount equal to the sum of (a) the total
amount of cash sufficient to purchase U.S. Obligations in amounts and with
maturities sufficient to make payments on or prior to, but as close as
possible to, (i) each scheduled payment date after the ICW Defeasance Date
through and including the payment date immediately preceding the ICW
Anticipated Repayment Date, in amounts equal to the scheduled payments due on
such payment dates (or, if only a portion of the ICW Loan has been defeased,
in amounts equal to the portion of the scheduled payments due on such payment
dates allocated to the amount of the principal so defeased), and (ii) the ICW
Anticipated Repayment Date, in the amount of the unpaid principal balance of
the ICW Loan (or, if only a portion of the ICW Loan has been defeased,
including in connection with any release, the amount of principal of the ICW
Loan so defeased) together with any accrued and unpaid interest thereon, (b)
any costs and expenses incurred in the purchase of the U.S. Obligations, and
(c) any tax or charge required to accomplish the requirements for defeasance.
If the ICW Borrower chooses to defease the ICW Loan in its entirety and
satisfies the requirements for defeasance, the ICW Borrower will be entitled
to obtain the release of the ICW Property from the lien of the Mortgage upon
presentation to the lender of certain documentation. The ICW Borrower will
not be entitled to the release of the ICW Property from the lien of the
Mortgage upon a partial defeasance.
Lock Box. The ICW Borrower is obligated to cause all rents to be deposited
directly by the ICW Tenant, and the ICW Tenant has agreed to deposit all
rents directly, to a central collection account (the "ICW Collection
Account") in the name of the servicer with respect to which the ICW Borrower
does not have any right to withdraw funds. Prior to the ICW Anticipated
Repayment Date, the funds held in the ICW Collection Account will be
distributed for the following purposes in the following order of priority:
(a) to pay the ICW Monthly Debt Service Amount, and (b) to the extent any
excess is remaining, to the ICW Borrower. After the ICW Anticipated Repayment
Date, or if an event of default under the loan documents exists at any time,
the funds held in the ICW Collection Account will be distributed for the
following purposes in the following order of priority: (a) to pay the ICW
Monthly Debt Service Amount, (b) to the ICW Borrower to pay the operating
expenses of the ICW Property not required to be paid by the ICW Tenant under
the ICW Lease, as set forth in the annual budget, to the extent that such
expenses are actually incurred by the ICW Borrower, (c) to pay approved
extraordinary operating expenses or capital expenses not set forth in the
approved annual budget, (d) to repay outstanding principal of the ICW Loan,
(e) to pay ICW Accrued Interest, if any, and (f) to the ICW Borrower. To the
extent that rent payments under the ICW Lease exceed the ICW Monthly Debt
Service Payment (and expenses under classes (b) and (c) above, if any), that
amount will be applied to prepay the principal of the ICW Loan after the ICW
Anticipated Repayment Date. Such excess cash is not expected to be material.
Transfer of Properties and Interest in Borrower; Encumbrance. The ICW
Borrower is prohibited from conveying, selling, transferring, or otherwise
disposing of or encumbering the ICW Property without the prior written
consent of the lender, other than in connection with a release from the lien
of the ICW Mortgage following defeasance as described above under "--Release
in Exchange for Substitute Collateral." The servicer will not unreasonably
withhold such consent so long as (a) no default exists under the loan
documents, (b) the transferee is reputable, creditworthy, financially
qualified, and sufficiently experienced, (c) the lender shall have received
confirmation from the Rating Agencies that such sale, assignment, or transfer
will not result in a re-qualification, reduction or withdrawal of the ratings
assigned to the Certificates, and (d) the transferee has executed an
assumption agreement with respect to the ICW Loan and the loan documents.
The ICW Loan generally prohibits any transactions involving the sale,
assignment, or transfer of (i) any direct or indirect interest (legal or
beneficial) in the ICW Borrower or (ii) any direct or indirect interest
(legal or beneficial) in any partner in the ICW Borrower. However, direct or
indirect interests in the ICW Borrower may be transferred upon prior written
notice to the Servicer on behalf of the lender provided that (a) not more
than 49% of the aggregate legal and beneficial interests in the ICW Borrower
is sold, assigned, or transferred during the term of the ICW Loan, (b) no
transferee becomes, as a result of such sale, assignment, or transfer, the
owner of more than a 49% interest in the ICW Borrower, (c) there is no change
in control of the ICW Borrower or the day-to-day operation of the ICW
Property, (d) no event of default has occurred and remains uncured and (e)
the ICW Borrower continues to be a single-purpose entity satisfactory to the
lender.
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The ICW Borrower is not permitted to incur any indebtedness other than
the ICW Loan and an unsecured loan in the principal amount of $1,867,522.31
made by Western Insurance Holdings, Inc., an affiliate (the "WIH Loan"). The
WIH Loan is subject to a subordination and standstill agreement in favor of
the lender, providing that until one year and one day after the ICW Loan has
been paid in full, together with any other amounts due under the terms of the
ICW Loan, the ICW Borrower will not make any payment of principal, interest,
or other amounts under the WIH Loan. Moreover, until that date, WIH will not
(i) accept any payment under the WIH Loan, (ii) accept any security for the
repayment of the WIH Loan, (iii) declare a default under the WIH Loan
documents, accelerate the WIH Loan, or exercise any remedies under the WIH
Loan, (iv) commence any legal proceedings or enforcement action against the
ICW Borrower, (v) consent to any amendment or modification of the WIH Loan
documents, except to extend the maturity date of the WIH Loan, (vi) dispose
of or encumber any part of the WIH Loan or (vii) commence or consent to any
bankruptcy, reorganization or similar proceeding by or against the ICW
Borrower.
Insurance. The ICW Borrower is required to, or to cause the ICW Tenant to,
maintain (a) physical hazard insurance against any peril included within the
classification "All Risks of Physical Loss" with extended coverage in amounts
equal to the greater of (i) the actual replacement cost of the improvements
and personal property constituting a part of the ICW Property or relating
thereto and (ii) the principal balance of the ICW Loan, (b) flood insurance
with respect to any part of the ICW Property or its improvements which is
located within a federally designated flood hazard zone, in an amount equal
to the lesser of (i) the outstanding principal balance of the ICW Loan or
(ii) the maximum limit of coverage available, (c) broad form comprehensive
public liability insurance with limits of no less than $1,000,000 per
occurrence and $2,000,000 in the aggregate for any policy year (and, in
addition, at least $10,000,000 excess and/or umbrella liability insurance
obtained and maintained for any and all claims), (d) rental loss and/or
business interruption insurance in an amount equal to the greater of (i) the
estimated gross revenues for twelve months from operations of the ICW
Property and (ii) the projected operating expenses for twelve months for
maintenance and operation of the ICW Property, with that amount to be
increased if gross revenues increase, (e) statutory workers' compensation
insurance, (f) during any period of repair or restoration, builders "all
risk" insurance in an amount at least equal to the full insurable value of
the ICW Property against such risks as the lender may request, (g) earthquake
insurance in an amount equal to the lesser of (i) $3,000,000 and (ii) the
maximum amount permitted by law and (h) such other insurance as is reasonably
requested by the lender. The ICW Borrower must obtain the insurance described
above from insurance carriers (a) having claims-paying abilities rated not
less than "AA" by Standard & Poor's Rating group and a rating of "A X" or
better by Best's or (b) covered by a "cut through" agreement acceptable to
the lender from a company having such ratings. The lender must be named as
the loss payee or additional insured, as applicable, with respect to such
insurance policies. On the closing date of the ICW Loan, all required
insurance policies were in place and met these ratings requirements except
for the umbrella liability policy, as noted below.
ICW is the insurer for all of the policies to which it has subscribed as
required under the loan agreements. However, in the case of all policies
except for the umbrella liability policy, these policies are subject to a
cut-through endorsement to St. Paul Fire & Marine Insurance Company, which is
rated "AAA" by S&P and "A+ XIV" by Best's. The umbrella liability policy is
subject to a reinsurance endorsement to General Reinsurance, rated "AAA" by
S&P and "A VII" by Best's.
Condemnation and Casualty. The ICW Borrower is required to, or to cause
the ICW Tenant to, repair, restore, replace, or rebuild in a good and
workmanlike manner any portion of the ICW Property that may be damaged or
destroyed by a casualty or condemnation. The ICW Tenant is required to pay
rents and other charges under the ICW lease regardless of any casualty or
condemnation.
Following any casualty, the servicer must make insurance proceeds
available to reimburse the ICW Borrower for the repair, restoration,
replacement, or rebuilding of all or part of the ICW Property if (a) the loss
is in an aggregate amount less than 80% of the original principal balance of
the ICW Loan, (b) the ICW Property can be restored within six months and
prior to the ICW Maturity Date to an economic unit with a value and use which
(i) is equal to or greater than its value prior to the casualty and (ii)
after the restoration will adequately secure the outstanding balance of the
ICW Loan, (c) no event of default under the loan documents has occurred and
is continuing, (d) the ICW Lease remains in full force without any reduction
in rent or other charges and (e) the lender's security in all leases and
rents is unaffected. If such conditions are not met, the lender may, at its
option, either (a) apply the casualty proceeds to repay outstanding principal
on the ICW Loan or (b) reimburse the ICW Borrower or the ICW Tenant, as the
case may be, for the cost or restoring, repairing, replacing, or rebuilding
the ICW Property.
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Following any condemnation at the ICW Property, the lender must make the
condemnation award available to reimburse the ICW Borrower for the repair,
restoration, replacement, or rebuilding of all or part of the ICW Property if
(a) the award is in an aggregate amount less than 15% of the original
principal balance of the ICW Loan, (b) the ICW Property can be restored
within six months of such condemnation and prior to the ICW Maturity Date to
an economic unit with a value which (i) is equal to or greater than its value
prior to the condemnation and (ii) after the restoration will adequately
secure the outstanding balance of the ICW Loan and (c) no event of default
has occurred and is continuing; provided that even if such conditions are not
met, the condemnation award will be equitably divided between the ICW
Borrower and the ICW Tenant on the basis of their respective losses suffered
from the condemnation so long as (a) the ICW Net Lease remains in effect and
(b) no event of default has occurred and is continuing. In all other events,
the lender may, at its option, either (a) apply the condemnation proceeds to
repay outstanding principal on the ICW Loan or (b) reimburse the ICW Borrower
or the ICW Tenant, as the case may be, for the cost of restoring, repairing,
replacing, or rebuilding the ICW Property.
Financial Reporting. The ICW Borrower must furnish to the lender or its
designee (a) within 90 days after the end of the calendar year, (i)
financial statements for the ICW Borrower, audited by independent certified
public accountants acceptable to the lender, and (ii) balance sheets and
statements of profit and loss for the ICW Tenant and the ICW Property in such
detail as the lender requests, (b) within 60 days after the end of each
calendar year, unaudited financial statements for the ICW Tenant, (c) within
20 days of the end of each calendar month, monthly and year-to-date operating
statements, including actual income and expenditures for the ICW Property.
The ICW Property. The ICW Property consists of (a) ICW Plaza, a four-story
office building completed in 1996 and containing approximately 164,764 square
feet of GLA, including 87 basement-level parking spaces, and (b) the ICW
Parking Parcel, which is a surface-level common area and parking lot
containing 469 parking spaces. The ICW Property is located in the northwest
portion of the city of San Diego, in an area representing a mix of office,
scientific, residential, and commercial uses. The building is part of a
planned seventeen-acre commercial development, with commercial office
buildings and visitor commercial uses. Two other buildings are under
construction there, and others are planned. The ICW Property is close to
Interstate 5 and California State Route 56.
The ICW Parking Parcel is subject to a reciprocal easement and maintenance
agreement between the ICW Borrower and an affiliated neighboring land owner,
American Assets, Inc. ("AAI"), related to the use, maintenance, and operation
of the ICW Parking Parcel. The ICW Parking Parcel is a common area and
parking lot maintained by the ICW Borrower for the benefit of the ICW
Property and the neighboring land owned by AAI. The reciprocal easement over
the ICW Parking Parcel is a perpetual, non-terminable easement for which the
ICW Borrower is obligated to pay an 88% share of the tax, insurance,
maintenance, utility and other operating expenses. The ICW Tenant is
obligated under the ICW Lease to pay the ICW Property's share of those
expenses and, if AAI does not pay its share of such expenses, the ICW Tenant
must pay that share as well. AAI has no reciprocal obligation.
The ICW Tenant has agreed to subordinate unconditionally the ICW Lease to
the Mortgage. The ICW Tenant has also agreed that in the event of any default
under the ICW Loan on the part of the ICW Borrower, the ICW Tenant will
recognize the lender or its successors or assigns as the landlord following
the foreclosure, and the lease will not terminate. The ICW Property has an
occupancy rate of 100%, all of its rentable area being leased to the ICW
Tenant under the ICW Lease.
Credit Lease. The ICW Property is leased in its entirety to the ICW Tenant
pursuant to the ICW Lease dated as of January 22, 1997. The ICW Lease is a
bonded triple net lease to the ICW Tenant, which means that the ICW Tenant is
responsible for managing, operating, and maintaining the ICW Property (and
thus, as there is no independent property manager, acts as property manager),
that the rent payable thereunder is paid to the ICW Borrower net of expenses.
The ICW Tenant subleases a portion of the space in ICW Plaza to third
parties. AAI, an affiliate of the ICW Borrower and the ICW Tenant, is the
leasing agent for the ICW Tenant. The ICW Lease cannot be terminated by the
ICW Tenant for any reason prior to February 28, 2017. In addition, the ICW
Tenant is entitled to two ten-year renewal options. The rent payable under
the ICW Net Lease is fixed at the following rates:
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<PAGE>
<TABLE>
<CAPTION>
<S> <C>
July 18, 1996, through July 31, 1999 ..... $191,250.00
August 1, 1999, through July 31, 2002 .... $196,987.50
August 1, 2002, through July 31, 2005 .... $202,897.13
August 1, 2005, through July 31, 2008 .... $208,984.04
August 1, 2008, through July 31, 2011 .... $215,253.56
August 1, 2011, through July 31, 2014 .... $221,711.17
August 1, 2014, through February 28, 2017 $228,362.50
</TABLE>
The rent and other charges under the ICW Lease are payable by the ICW
Tenant regardless of whether there has been a casualty or condemnation at the
ICW Property. A default by the ICW Tenant under the ICW Net Lease beyond the
applicable grace period in the ICW Lease, or the termination of the ICW
Lease, constitutes an event of default under the Mortgage. The lease is fully
subordinated to the Mortgage under the terms of a Subordination,
Non-Disturbance and Attornment Agreement among the ICW Borrower, the ICW
Tenant, and the lender. The ICW Tenant has agreed to pay rent directly to the
ICW Collection Account.
The ICW Tenant is a specialty property and casualty insurance company that
writes lines of business targeted to narrow market niches that fall outside
the business strategies of most major property and casualty companies. The
ICW Tenant is rated "A" by S&P and has a statutory surplus as of December 31,
1996, of over $184.5 million.
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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 fifteen classes to be designated as the Class
A-1A Certificates, the Class A-1B Certificates, the Class PS-1 Certificates,
the Class CS-1 Certificates, the Class A-1C Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the
Class A-5 Certificates, the Class B-1 Certificates, the Class B-1H
Certificates, the Class V-1 Certificates, the Class V-2 Certificates, the
Class R Certificates and the Class LR Certificates. The 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 Class PS-1 and Class
CS-1 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) 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 Interest Reserve Account, the Excess Interest
Distribution Account, the Default Interest Distribution Account and any
account established in connection with REO Properties (an "REO Account");
(iv) the rights of the mortgagee under all insurance policies with respect to
the Mortgage Loans; (v) the Depositor's rights and remedies under the
Mortgage Loan Purchase and Sale Agreement; and (vi) 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, 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 B-1 and Class B-1H Certificates will have initial
Certificate Balances of $[ ], $[ ], $[ ], $[ ], $[ ], $[ ],
$[ ], $[ ] and approximately $1,000, respectively. The Class PS-1
Certificates will have an initial Notional Balance equal to $[ ], which is
equal to the aggregate Stated Principal Balance of the Mortgage Loans as of
the Cut-off Date. The Class CS-1 Certificates will have an initial Notional
Balance equal to $[ ], which is equal to the initial Certificate Balance
of the Class A-1A Certificates.
The Class PS-1, Class CS-1, Class R, Class LR, Class V-1 and Class V-2
Certificates will not 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 Realized Losses 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 -- Payment
Priorities" herein.
The respective Certificate Balance of each class of Certificates entitled
to distributions of principal will in each case be reduced by amounts
actually distributed thereon that are allocable to principal and by any
Realized Losses allocated to such class of Certificates. The Notional Balance
of the Class CS-1 Certificates will be reduced in accordance with
distributions of principal on, and allocations of Realized Losses to, the
Certificate Balance of the Class A-1A Certificates. The Notional Balance of
the Class CS-1 Certificates will at all times equal the Certificate Balance
of the Class A-1A Certificates. The Notional Balance of the Class PS-1
Certificates will be reduced to the extent of all reductions in the aggregate
Stated Principal Balance of the Mortgage Loans. The Notional Balance of the
Class PS-1 Certificates will for purposes of distributions on each
Distribution Date equal the aggregate Stated Principal Balance of the
Mortgage Loans as of the first day of the related Interest Accrual Period.
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 April 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
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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 April 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 or Notional Balance, as applicable, 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 or Notional Balance, as applicable, thereof has been reduced to zero)
of such Certificate at the location specified in the notice to the
Certificateholder 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 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 on any
Distribution Date will equal the Available Funds. The "Available Funds" for a
Distribution Date will be the sum of (i) all 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 other
amounts required to be deposited in the Collection Account by the Servicer
pursuant to the Pooling and Servicing Agreement in respect of such
Distribution Date that are allocable to the Mortgage Loans, including all P&I
Advances made by the Servicer, the Trustee or the Fiscal Agent, as
applicable, in respect of such Distribution Date, (iii) for the Distribution
Date occurring in each March, the related Withheld Amounts as described under
"The Pooling and Servicing Agreement -- Accounts -- Interest Reserve Account"
and required to be deposited in the Upper-Tier Distribution Account pursuant
to the Pooling and Servicing Agreement and (iv) 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 (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 Fee, "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 unanticipated or default-related
expenses reimbursable or payable to the Servicer, the Special Servicer,
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;
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(i) With respect to the [ ] Loans and any Distribution Date
occurring in each February or any January occurring in a year that is not
a leap year, an amount equal to one day of interest at the related
Mortgage Rate on the Stated Principal Balance, as of the first day of the
related Interest Accrual Period, of each such Mortgage Loan 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; and
(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.
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 related Net Mortgage Pass-Through Rate
which is payable by the related borrower on such 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,
any Repurchase Price received with respect to a Mortgage Loan 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 are all revenues received by the Special Servicer with respect
to such REO Property or REO Mortgage Loan (other than the proceeds of a
liquidation thereof) 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 (or, in the
case of the Distribution Date occurring in April 1997, beginning on the
Cut-off Date) 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 Special 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 related Default Rate over (ii)
the sum of the related Mortgage Rate plus, if applicable, the related Excess
Rate.
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.
"Excess Interest" with respect to the Fairfield Inn Pool Loan, M&H Retail
Pool Loan, Innkeepers Pool Loan, DCOTA Loan and G&L Medical Office II Pool
Loan is Fairfield Inn Excess Interest, M&H Retail Excess Interest, Innkeepers
Excess Interest, DCOTA Excess Interest and G&L II Excess Interest,
respectively.
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<PAGE>
"Excess Rate" with respect to each of the Mortgage Loans identified in
the paragraph above is the excess of the Revised Interest Rate for such
Mortgage Loan over the Current Interest Rate for such Mortgage Loan.
Payment Priorities. As used below in describing the priorities of
distribution of Available Funds for each Distribution Date, the terms set
forth below will have the following meanings.
The "Interest Accrual Amount" with respect to any Distribution Date and
any class of Certificates (other than the Class PS-1, Class CS-1, 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 the Class
CS-1 Certificates is equal to interest for the related Interest Accrual
Period at the Pass-Through Rate for such class for such Interest Accrual
Period on the Notional Balance of such class (provided, that any reductions
in the Notional Balance of such class as a result of distributions in
reduction of the Certificate Balance of the Class A-1A Certificates or
allocations of Realized Losses to the Certificate Balance of the Class A-1A
Certificates 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 the Class PS-1 Certificates is equal to interest for
the related Interest Accrual Period at the Pass-Through Rate for such class
for such Interest Accrual Period on the Notional Balance of such class.
Calculations of interest due in respect of the Certificates will be made on
the basis of a 360-day year consisting of twelve 30-day months.
The "Interest Distribution Amount" with respect to any Distribution Date
and each class of Offered Certificates other than the Class PS-1 Certificates
will equal the Interest Accrual Amount for such Distribution Date, and with
respect to the Class PS-1 Certificates will equal the Interest Accrual Amount
for such Distribution Date minus the aggregate Reduction Interest
Distribution Amounts in respect of such Distribution Date.
The "Reduction Interest Distribution Amount" for the Class PS-1
Certificates with respect to any Distribution Date and each of clauses Sixth,
Tenth, Fourteenth, Eighteenth and Twenty-Second of the paragraph on pages
S-123 and S-124 below is the amount of interest accrued for the Interest
Accrual Period at the applicable Reduction Interest Pass-Through Rate for
such Interest Accrual Period on the aggregate amount of Appraisal Reduction
Amounts and Delinquency Reduction Amounts notionally allocated to the related
classes referred to in subclause (B) of each such clause as of such
Distribution Date, as described below under "--Delinquency Reduction Amounts
and Appraisal Reduction Amounts."
The "Reduction Interest Pass-Through Rate" with respect to any
Distribution Date is (i) when the Class A-5 Certificates are the most
subordinate class outstanding, [ ]%, (ii) when the Class A-4 Certificates
are the most subordinate class outstanding, [ ]%, (iii) when the Class A-3
Certificates are the most subordinate class outstanding, [ ]%, (iv) when the
Class A-2 Certificates are the most subordinate class outstanding, [ ]% and
(v) when the Class A-1C Certificates are the most subordinate class
outstanding, the Weighted Average Net Mortgage Pass-Through Rate less the
Pass-Through Rate on such class.
A "Reduction Interest Shortfall" with respect to any Distribution Date and
each of clauses Sixth, Tenth, Fourteenth, Eighteenth and Twenty-Second of
such paragraph is any shortfall in the Reduction Interest Distribution Amount
required to be distributed to the Class PS-1 Certificates pursuant to such
clause on such Distribution Date.
"Appraisal Reduction Amount" is the amount described under "--Appraisal
Reductions."
"Delinquency Reduction Amount" is, in connection with a Delinquency with
respect to a Mortgage Loan, 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 with respect to the interest portion thereof) and
not received from the borrower. See "--Delinquency Reduction Amounts and
Appraisal Reduction Amounts" below.
"Delinquency" means any failure of the borrower to make a scheduled
payment on a Mortgage Loan on a Due Date.
The "Interest Accrual Period" means with respect to any Distribution Date
other than the Distribution Date occurring in April 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
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occurs; the Interest Accrual Period with respect to the Distribution Date
occurring in April 1997 means the period commencing on and including the
Closing Date to and including April 10, 1997 and is assumed to consist of [
] days. Each Interest Accrual Period other than the Interest Accrual Period
with respect to the Distribution Date occurring in April 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 Interest Distribution
Amount required to be distributed to such class on such Distribution Date.
The "Pass-Through Rate" for any class of Offered Certificates for any
Interest Accrual Period is the per annum rate at which interest accrues on
the Certificates of such class during such 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 PS-1 Certificates is a per annum rate equal to
the Weighted Average Net Mortgage Pass-Through Rate minus the Weighted
Average Pass-Through Rate. The Pass-Through Rate on the Class CS-1
Certificates is a per annum rate equal to the Weighted Average Net Mortgage
Pass-Through Rate minus [ ]%. The Pass-Through Rate on the Class A-2
Certificates is a per annum rate equal to the 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 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 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 Weighted Average Net Mortgage
Pass-Through Rate minus [ ]%. The Pass-Through Rate on the Class B-1 and
Class B-1H Certificates is a per annum rate equal to the Weighted Average Net
Mortgage Pass-Through Rate minus [ ]%. The Class V-1, Class V-2, Class R and
Class RL Certificates do not have Pass-Through Rates.
The "Weighted Average Pass-Through Rate" for purposes of calculating the
Pass-Through Rate on the Class PS-1 Certificates, with respect to any
Interest Accrual Period, is the amount (expressed as a percentage), the
numerator of which is the sum of (i) the sum of the products of (A) the
Pass-Through Rate with respect to each class of Certificates having a
Pass-Through Rate (other than the Coupon Strip Certificates) and (B) the
Certificate Balance of such class as of the first day of such Interest
Accrual Period and (ii) the product of (A) the Pass-Through Rate on the Class
CS-1 Certificates and (B) the Notional Balance of such class as of such date
and the denominator of which is the sum of the Certificate Balances of each
class included in clause (i)(A) above as of such date (provided in each case,
any reductions in Certificate Balance or Notional Balance, as applicable, as
a result of distributions or allocations of Realized Losses to such class or
the related class, respectively, occurring in an Interest Accrual Period will
be deemed to have been made on the first day of such Interest Accrual
Period).
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 as of the first day of such Interest
Accrual Period and the denominator of which is the sum of the Stated
Principal Balances of all Mortgage Loans as of such date.
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 for such Mortgage Loan minus the Servicing Fee Rate.
The "Mortgage Pass-Through Rate" with respect to each Mortgage Loan (other
than the [ ] Loans) for any Interest Accrual Period (other than the
Interest Accrual Period relating to the Distribution Date occurring in April
1997) is the per annum rate 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 [ ] Loans for any
Interest Accrual Period commencing in any (a) January, February, April, June,
September and November and any December occurring in a year immediately
preceding any year which is not a leap year, is the Mortgage Rate thereof, or
(b) March (other than March 1997), May, July, August and October and 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 Pass-Through Rate" with respect to each Mortgage Loan and
the Interest Accrual Period relating to the Distribution Date occurring in
April 1997 will be equal to a per annum rate equal to the related Mortgage
Rate.
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The "Mortgage Rate" with respect to a Mortgage Loan and any Interest
Accrual Period is the per annum rate at which interest accrues on such
Mortgage Loan during such period as stated in the related Note, which does
not include the Excess Rate.
The Mortgage Rate with respect to any Mortgage Loan for purposes of
calculating the Weighted Average Net Mortgage Pass-Through Rate and for
purposes of calculating P&I Advances 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 "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 or, if applicable, Extended Monthly Payment due on such
Mortgage Loan after the Cut-off Date and prior to such date of determination,
if received from the borrower or advanced by the Servicer, Trustee or Fiscal
Agent 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 or applied to
other payments required under the Pooling and Servicing Agreement 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 by
the Trust Fund 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 or the Special Servicer has
determined that it has received all payments and recoveries which it expects
to be finally recoverable on such Mortgage Loan is zero.
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) on the Mortgage Loans on the related
Due Date;
(ii) the principal component of all Extended Monthly Payments due (if
received or advanced) 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 in the related Collection Period;
(iv) to the extent not included in the preceding clauses, the principal
component of the purchase price of each Mortgage Loan that was, during the
related Collection Period, repurchased from the Trust Fund in connection
with missing or defective documentation or the breach of a representation
or warranty or purchased from the Trust Fund as described herein under
"The Pooling and Servicing Agreement -- Optional Termination; Optional
Mortgage Loan Purchase";
(v) to the extent not included in the preceding clauses, 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
(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 received in the related Collection Period (in the case of clauses
(iii) through (vii), net of any related outstanding P&I Advances allocable
to principal).
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 PS-1 and Class CS-1 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 PS-1 and
Class CS-1 Certificates, in respect of interest, up to an amount equal to
the aggregate unpaid Interest Shortfalls previously allocated to such
classes;
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(iii) Third, to the Class A-1A Certificates, in reduction of the
Certificate Balance thereof, up to 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, up to an amount equal to the Principal
Distribution Amount less the portion of the 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 respect of interest, up to
an amount equal to the aggregate Interest Distribution Amount of such
class;
(vi) Sixth, pro rata, (A) to the Class A-1C 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 PS-1
Certificates in respect of the Reduction Interest Distribution Amount
attributable to the notional reduction in the Certificate Balance of the
Class A-1C Certificates as described under "--Delinquency Reduction
Amounts and Appraisal Reduction Amounts," up to an amount equal to the
aggregate Reduction Interest Distribution Amount so attributable and (C)
to the Class PS-1 Certificates, up to an amount equal to the aggregate
unpaid Reduction Interest Shortfalls previously allocated to such class;
(vii) Seventh, to the Class A-1C Certificates, in reduction of the
Certificate Balance thereof, up to an amount equal to the Principal
Distribution Amount less the portion of the Principal Distribution Amount
distributed pursuant to all prior clauses, until the Certificate Balance
thereof is reduced to zero;
(viii) Eighth, to the Class A-1C Certificates, for the unreimbursed
amounts of Realized Losses, if any, up to an amount equal to the Principal
Distribution Amount less the portion 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;
(ix) Ninth, to the Class A-2 Certificates, in respect of interest, up to
an amount equal to the aggregate Interest Distribution Amount of such
class;
(x) Tenth, 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 PS-1
Certificates in respect of the Reduction Interest Distribution Amount
attributable to the notional reduction in the Certificate Balance of the
Class A-2 Certificates as described under "--Delinquency Reduction Amounts
and Appraisal Reduction Amounts," up to an amount equal to the aggregate
Reduction Interest Distribution Amount so attributable and (C) to the
Class PS-1 Certificates, up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such class;
(xi) Eleventh, to the Class A-2 Certificates, in reduction of the
Certificate Balance thereof, up to an amount equal to the Principal
Distribution Amount less the portion of the Principal Distribution Amount
distributed pursuant to all prior clauses, until the Certificate Balance
thereof is reduced to zero;
(xii) Twelfth, 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 the portion 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;
(xiii) Thirteenth, to the Class A-3 Certificates, in respect of interest,
up to an amount equal to the aggregate Interest Distribution Amount of
such class;
(xiv) Fourteenth, 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 PS-1
Certificates in respect of the Reduction Interest Distribution Amount
attributable to the notional reduction in the Certificate Balance of the
Class A-3 Certificates as described under "--Delinquency Reduction Amounts
and Appraisal Reduction Amounts," up to an amount equal to the aggregate
Reduction Interest Distribution Amount so attributable and (C) to the
Class PS-1 Certificates, up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such class;
(xv) Fifteenth, to the Class A-3 Certificates, in reduction of the
Certificate Balance thereof, up to an amount equal to the Principal
Distribution Amount less the portion of the Principal Distribution Amount
distributed pursuant to all prior clauses, until the Certificate Balance
thereof is reduced to zero;
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(xvi) Sixteenth, 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 the portion 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;
(xvii) Seventeenth, to the Class A-4 Certificates in respect of interest,
up to an amount equal to the aggregate Interest Distribution Amount of
such class;
(xviii) Eighteenth, 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
PS-1 Certificates in respect of the Reduction Interest Distribution Amount
attributable to the notional reduction in the Certificate Balance of the
Class A-4 Certificates as described under "--Delinquency Reduction Amounts
and Appraisal Reduction Amounts," up to an amount equal to the aggregate
Reduction Interest Distribution Amount so attributable and (C) to the
Class PS-1 Certificates, up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such class;
(xix) Nineteenth, to the Class A-4 Certificates, in reduction of the
Certificate Balance thereof, up to an amount equal to the Principal
Distribution Amount less the portion of the Principal Distribution Amount
distributed pursuant to all prior clauses, until the Certificate Balance
thereof is reduced to zero;
(xx) Twentieth, 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 the portion 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;
(xxi) Twenty-first, to the Class A-5 Certificates in respect of interest,
up to an amount equal to the aggregate Interest Distribution Amount of
such class;
(xxii) Twenty-second, 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
PS-1 Certificates in respect of the Reduction Interest Distribution Amount
attributable to the notional reduction in the Certificate Balance of the
Class A-5 Certificates as described under "--Delinquency Reduction Amounts
and Appraisal Reduction Amounts," up to an amount equal to the aggregate
Reduction Interest Distribution Amount so attributable and (C) to the
Class PS-1 Certificates, up to an amount equal to the aggregate unpaid
Reduction Interest Shortfalls previously allocated to such class;
(xxiii) Twenty-third, to the Class A-5 Certificates in reduction of the
Certificate Balance thereof, up to an amount equal to the Principal
Distribution Amount less the portion of the Principal Distribution Amount
distributed pursuant to all prior clauses, until the Certificate Balance
thereof is reduced to zero;
(xxiv) Twenty-fourth, 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 the portion 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;
(xxv) Twenty-fifth, pro rata, to the Class B-1 and Class B-1H
Certificates in respect of interest, up to an amount equal to the
aggregate Interest Distribution Amounts of such classes;
(xxvi) Twenty-sixth, pro rata, to the Class B-1 and Class B-1H
Certificates in respect of interest, up to an amount equal to the
aggregate unpaid Interest Shortfalls previously allocated to such classes;
(xxvii) Twenty-seventh, pro rata, to the Class B-1 and Class B-1H
Certificates in reduction of the Certificate Balances thereof, up to an
amount equal to the Principal Distribution Amount less the portion of the
Principal Distribution Amount distributed pursuant to all prior clauses,
until the Certificate Balance of each such class is reduced to zero; and
(xxviii) Twenty-eighth, pro rata, to the Class B-1 and Class B-1H
Certificates, for the unreimbursed amounts of Realized Losses, if any, up
to an amount equal to the Principal Distribution Amount less the portion
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 classes.
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On each Distribution Date occurring on and after the Cross-over Date,
regardless of the allocation of principal payments described in priorities
Third and Fourth above, an amount equal to the Principal Distribution Amount
will be distributed, first, to the Class A-1A and Class A-1B 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 and Class A-1B
Certificates, for unreimbursed amounts of Realized Losses previously
allocated to such classes, pro rata in accordance with the amount of such
unreimbursed Realized Losses so allocated. The "Cross-over Date" is the
Distribution Date on which the Certificate Balance of each class of
Certificates entitled to principal distributions (other than the Class A-1A
and Class A-1B Certificates) has been reduced to zero.
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 PS-1, Class CS-1, Class
A-1A and Class A-1B Certificates outstanding on such Distribution Date, in
the following amounts and order of priority to the extent remaining amounts
of such Prepayment Premiums are available therefor, 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 a per annum rate equal to the Discount Rate
for the Class CS-1 Certificates plus the Spread Rate 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 (B) the present value (discounted at a per
annum rate equal to 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 (in each case, assuming all scheduled payments are timely made
and no further prepayments are made except that all Mortgage Loans prepay
on their respective Anticipated Repayment Dates);
(ii) Second, to the Class PS-1 Certificates, an amount equal to (A) the
present value (discounted at a per annum rate equal to the Discount Rate
for the Class PS-1 Certificates plus the Spread Rate for the Class PS-1
Certificates) of the aggregate interest that would have been paid in
respect of the Class PS-1 Certificates from the Distribution Date
occurring in the following month until the Notional Balance of the Class
PS-1 Certificates would have been reduced to zero had the related
prepayment not occurred, minus (B) the present value (discounted at a per
annum rate equal to the Discount Rate for the Class PS-1 Certificates plus
the Spread Rate for the Class PS-1 Certificates) of the aggregate interest
that will be paid in respect of the Class PS-1 Certificates from the
Distribution Date occurring in the following month until the Notional
Balance of the Class PS-1 Certificates is reduced to zero following such
prepayment (in each case, assuming all scheduled payments are timely made
and no further prepayments are made except that all Mortgage Loans prepay
on their respective Anticipated Repayment Dates);
(iii) Third, to the Class A-1A Certificates, an amount equal to (A) the
present value (discounted at a per annum rate equal to 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 (B) the sum of (1) the amount of such
prepayment distributed in respect of the Class A-1A Certificates and (2)
the present value (discounted at a per annum rate equal to 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 (in
each case, assuming all scheduled payments are timely made and no further
prepayments are made except that all Mortgage Loans prepay on their
respective Anticipated Repayment Dates); and
(iv) Fourth, to the Class A-1B Certificates, an amount equal to (A) the
present value (discounted at a per annum rate equal to the Discount Rate
for the Class A-1B Certificates plus the Spread Rate for the Class A-1B
Certificates) of the aggregate principal and interest that would have been
paid in respect of the Class A-1B Certificates from the Distribution Date
occurring in the following month until the Certificate Balance of the
Class A-1B Certificates would have been reduced to zero had the related
prepayment not occurred, minus (B) the sum of (1) the amount of such
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prepayment distributed in respect of the Class A-1B Certificates and (2)
the present value (discounted at a per annum rate equal to the Discount
Rate for the Class A-1B Certificates plus the Spread Rate for the Class
A-1B Certificates) of the aggregate principal and interest that will be
paid in respect of the Class A-1B Certificates from the Distribution Date
occurring in the following month until the Certificate Balance of the
Class A-1B Certificates is reduced to zero following such prepayment (in
each case, assuming all scheduled payments are timely made and no further
prepayments are made except that all Mortgage Loans prepay on their
respective Anticipated Repayment Dates).
In all clauses above, Prepayment Premiums will only be distributed on a
Distribution Date (i) if the respective Certificate Balance or Notional
Balance of the related class is greater than zero on the last business day of
the Interest Accrual Period ending immediately prior to such Distribution
Date and (ii) if the amount computed pursuant to the related clause above is
greater than zero. Any such Prepayment Premiums remaining following the
distributions described in the preceding clauses (i) through (iv) shall be
distributed to holders of the Private Certificates in accordance with the
Pooling and Servicing Agreement.
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 yield
(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 closest to the then computed weighted average life (or, in the
case of the Class PS-1 and Class CS-1 Certificates, the weighted average life
of the interest payments) of such class (without taking into account the
related prepayment).
The "Spread Rate" for the Class A-1A Certificates is [ ]%, the Class
A-1B Certificates is [ ]%, the Class PS-1 Certificates is [ ]% and the
Class CS-1 Certificates is [ ]%.
It is not anticipated that any Prepayment Premiums will be received.
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.
Realized Losses. The Certificate Balances of all classes of Certificates
entitled to distributions of principal 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 all such classes of Certificates
after giving effect to distributions made on such Distribution Date exceeds
the aggregate Stated Principal Balance of the Mortgage Loans as of the first
day of the Interest Accrual Period commencing immediately prior to such
Distribution Date. Any such write-offs will be applied to such 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-5 Certificates;
third, to the Class A-4 Certificates; fourth, to the Class A-3 Certificates;
fifth, to the Class A-2 Certificates; sixth, to the Class A-1C Certificates;
and, finally, pro rata, to the Class A-1A and Class A-1B 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 described above 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 of 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 other unanticipated or
default-related expenses, will be allocated to each class of Certificates in
the same manner as Realized Losses. The Notional Balance of the Class CS-1
Certificates will be reduced to reflect reductions in the Certificate Balance
of the Class A-1A Certificates resulting from allocations of Realized Losses.
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, 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 to the extent offset by the Servicing Fee. 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 in the same manner as Realized Losses.
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The "Servicer Prepayment Interest Shortfall" with respect to any Mortgage
Loan and any Distribution Date is equal to the amount of any shortfall in
collections of interest, adjusted to the applicable Net Mortgage Pass-Through
Rate, 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 aggregate amount of any Servicer
Prepayment Interest Shortfalls 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 aggregate 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.
Delinquency Reduction Amounts and Appraisal Reduction Amounts. In the
event that a Delinquency or an Appraisal Reduction Event occurs with respect
to a Mortgage Loan, distributions of interest in respect of the Class PS-1
Certificates that are attributable to the notional reductions in Certificate
Balances described below will be payable at a lower payment priority than the
priority typically in effect for distributions of interest in respect of the
Class PS-1 Certificates.
On or after any Distribution Date on which the Class A-5 Certificates are
the most subordinate class of Certificates outstanding, the Certificate
Balances of the Class A-1C, Class A-2, Class A-3, Class A-4, and Class A-5
Certificates will be notionally reduced (solely for purposes of determining
the payment priority of interest on the Class PS-1 Certificates in respect of
Reduction Interest Distribution Amounts) 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 with respect to the same Distribution
Date and the same Mortgage Loan, the reduction will equal the Appraisal
Reduction Amount, (ii) following the occurrence of an Appraisal Reduction
Event with respect to any Mortgage Loan, no further Delinquency Reduction
Amounts will be applied with respect to such Mortgage Loan and any
Delinquency Reduction Amounts previously applied will be reversed and (iii)
for any Distribution Date, the aggregate of the Appraisal Reduction Amounts
and Delinquency Reduction Amounts may not exceed the Certificate Balance (as
adjusted by any notional reductions) of the most subordinate class of
Certificates outstanding among the Class A-1C, Class A-2, Class A-3, Class
A-4 and Class A-5 Certificates. Any such reductions will be applied to the
Class A-1C, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates in the
following order of priority: first, to the Class A-5 Certificates; second to
the Class A-4 Certificates; third to the Class A-3 Certificates; fourth to
the Class A-2 Certificates; and finally to the Class A-1C Certificates
(provided in each case that no Certificate Balance in respect of any such
class may be notionally reduced below zero). See "--Payment Priorities"
above. Any notional reduction of the Certificate Balance of the Class A-1C,
Class A-2, Class A-3, Class A-4 and Class A-5 Certificates as a result of any
Delinquency or Appraisal Reduction Event with respect to a Mortgage Loan will
be reversed to the extent there is a recovery of any or all of the
Delinquency Reduction Amounts or a Realized Loss. Additionally, a reversal or
additional reduction will occur to the extent that the Servicer's estimate of
the value of the related Mortgaged Properties is less than or greater than
the Appraisal Reduction Amount as adjusted to take into account a subsequent
independent MAI appraisal.
SUBORDINATION
As a means of providing a certain amount of protection to the holders of
the Class A-1A, Class A-1B, Class PS-1 and Class CS-1 Certificates against
losses associated with delinquent and defaulted Mortgage Loans, the rights of
the holders of the Class A-1C, Class A-2, Class A-3, Class A-4, Class A-5 and
Private 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 PS-1 and Class CS-1 Certificates. The Class A-1C
Certificates will likewise be protected by the subordination of the Class
A-2, Class A-3, Class A-4, Class A-5 and Private Certificates. The Class A-2
Certificates will likewise be protected by the subordination of the Class
A-3, Class A-4, Class A-5 and Private Certificates. The Class A-3
Certificates will likewise be protected by the subordination of the Class
A-4, Class A-5 and Private Certificates. The Class A-4 Certificates will be
likewise protected by the subordination of the Class A-5 and Private
Certificates. The Class A-5 Certificates will be likewise protected by the
subordination of the Private 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 first to the Private Certificates; second, to the Class A-5
Certificates; third, to the Class A-4 Certificates; fourth, to the Class A-3
Certificates; fifth, to the Class A-2 Certificates; sixth, to the Class A-1C
Certificates; and, finally, to the Class A-1A
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and Class A-1B 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 PS-1 Certificates, the protection against reductions due
to Appraisal Reduction Events and Delinquencies will only be afforded to the
extent described under "--Distributions -- Delinquency Reduction Amounts and
Appraisal Reduction Amounts" above.
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 other
unanticipated or default-related expenses of the Lower-Tier REMIC for which
there is no corresponding collection 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, pro rata, based
upon the amount distributable to each class and will be allocated, first, in
respect of interest and, second, in respect of principal.
APPRAISAL REDUCTIONS
With respect to the first Distribution Date following 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" 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 as of the last day
of the related Collection Period 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, including, if
applicable, ground rents, due and unpaid under the Mortgage Loan (which
taxes, premiums and other amounts have not been the subject of an Advance).
If no independent MAI appraisal has been obtained within twelve months 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|Als Appraisal Reduction Estimate") and such
estimate will be used for purposes of determining 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, the cost of which will be a Property
Advance. 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). Annual updates of such independent MAI
appraisal will be obtained during the continuance of an Appraisal Reduction
Event and the Appraisal Reduction Amount will be adjusted accordingly.
DELIVERY, FORM AND DENOMINATION
The Offered Certificates will be issued, maintained and transferred in the
book-entry form only in denominations of $50,000 initial Certificate Balance
or Notional Balance, as applicable, and in multiples of $1 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 below
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under "--Definitive Certificates." 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 to the Pooling and
Servicing Agreement 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. The Percentage Interest of any Offered Certificate of any class
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.
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
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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 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
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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.
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
Definitive Certificates will be delivered to beneficial owners of Offered
Certificates ("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 Depositor or 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 of any class 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 such 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
affected 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
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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.
TRANSFER RESTRICTIONS
Each Class A-1C, Class A-2, Class A-3, Class A-4 and Class A-5 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 or a Keogh
plan, which is subject to ERISA, the Code, or any Similar Law (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 of ERISA, Section 4975 of the Code, or a
materially similar characterization under any Similar Law.
Holders of Class A-1C, Class A-2, Class A-3, Class A-4 and Class A-5
Certificates that are in book-entry form will be deemed to have represented
that they are not persons or entities referred to in clause (A) or (B) of the
legend described in the preceding paragraph. In the event that holders of the
Class A-1C, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates become
entitled to receive Definitive Certificates under the circumstances described
under "--Definitive Certificates," each prospective transferee of a Class
A-1C, Class A-2, Class A-3, Class A-4 and Class A-5 Certificate that is a
Definitive Certificate will be required to either 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 or provide an opinion to the
Certificate Registrar as described in the Pooling and Servicing Agreement.
Any transfer of a Class A-1C, Class A-2, Class A-3, Class A-4 or Class A-5
Certificate that would result in a prohibited transaction under ERISA,
Section 4975 of the Code, or a materially similar characterization under any
Similar Law will be deemed absolutely null and void ab initio.
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PREPAYMENT AND YIELD CONSIDERATIONS
YIELD
The yield to maturity on the Offered Certificates will depend upon the
price paid by the Certificateholders, the rate and timing of the
distributions in reduction of Certificate Balances or Notional Balances, as
applicable, of the related classes of Certificates and the rate, timing and
severity of losses on the Mortgage Loans and the extent to which such losses
are allocable in reduction of the Certificate Balances or Notional Balances,
as applicable, of such classes of 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
missing or defective documentation or 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; Optional
Mortgage Loan Purchase."
Disproportionate principal payments (whether resulting from differences in
amortization terms, prepayments following expirations of the respective
Prepayment Lockout Periods or otherwise) on the Mortgage Loans will affect
the Weighted Average Net Mortgage Pass-Through Rate and accordingly the
Pass-Through Rate of each class of Certificates (other than the Class A-1A,
Class A-1B and Class A-1C Certificates) for future periods and therefore the
yield on such class.
The Certificate Balance (or Notional Balance, as applicable) of any class
of Offered Certificates (other than the Class PS-1 Certificates) may be
reduced without distributions thereon as a result of the occurrence and
allocation of Realized Losses, reducing the maximum amount distributable in
respect of Certificate Balance, if applicable, as well as the amount of
interest that would have accrued on such Certificates 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. The Notional Balance of the Class PS-1 Certificates will be
reduced as a result of losses on the Mortgage Loans.
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, if applicable, 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 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 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.
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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 the respective Mortgage Loans (other than the ICW Loan) 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
the principal balance of Offered Certificates entitled to distributions of
principal, 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 such amounts distributed to it may be lower than the
applicable 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 entitled to distributions of
principal, may coincide with periods of high prevailing interest rates.
During such periods, the amount of principal distributions resulting from
prepayments available to an investor in such Certificates 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 applicable Pass-Through Rate and
applicable purchase prices because while interest will accrue during each
Interest Accrual Period, the distribution of such interest will not be made
until the Distribution Date immediately following such Interest Accrual
Period, and principal paid on any Distribution Date will not bear interest
during the period from the end of such Interest Accrual Period to the
Distribution Date that follows. 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 available therefor 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 PS-1 AND CLASS CS-1 CERTIFICATES
Because distributions on the Class PS-1 and Class CS-1 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 Appraisal Reduction Amounts and Delinquency Reduction Amounts, in
which case the right of the Class PS-1 Certificates to receive a portion of
its interest would be reduced in priority. See "Description of the Offered
Certificates -- Distributions -- Payment Priorities." 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.
The following tables indicate the assumed purchase price (including
accrued interest, if any) and the pre-tax yield on the Class PS-1 and Class
CS-1 Certificates to maturity, stated on a corporate bond equivalent basis.
S-134
<PAGE>
For purposes of preparing the tables, it was assumed that (i) each of the
Mortgage Loans has the following characteristics as of the Cut-off Date:
<TABLE>
<CAPTION>
REMAINING TERM
CUT-OFF TO ANTICIPATED REMAINING TERM
DATE REPAYMENT DATE TO MATURITY
MORTGAGE LOAN BALANCE (MONTHS) (MONTHS) INTEREST ACCRUAL
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
1. Fairfield Inn Pool
Loan.................... 164,825,657 118 238 Actual/360
2. Hudson Loan............. 134,505,878 118 238 Actual/360
3. M&H Retail Pool Loan ... 58,300,969 118 358 Actual/360
4. Innkeepers Pool Loan ... 42,000,000 144 264 Actual/360
5. DCOTA Loan.............. 39,899,849 118 298 Actual/360
6. G&L Medical Office II
Pool Loan.............. 34,801,294 114 294 Actual/360
7. ICW Loan................ 25,234,505 119 239 Actual/360
</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 aggregate Servicing Fee for each Distribution Date is an
amount equal to a per annum rate of 0.055% of the aggregate Stated Principal
Balance of the Mortgage Loans as of the first day of the related Interest
Accrual Period; (vi) the date of determination of weighted average life is
March [ ], 1997; 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 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 PS-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>
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 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 PS-1 or
Class CS-1 Certificates and consequently, do not purport to reflect the
return on any investment in the Class PS-1 or Class CS-1 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 PS-1 or
Class
S-135
<PAGE>
CS-1 Certificates will correspond to any of the pre-tax yields shown herein
or that the aggregate purchase prices of the Class PS-1 or Class CS-1
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 PS-1 or Class CS-1 Certificates.
RATED FINAL DISTRIBUTION DATE
The "Rated Final Distribution Date" is the Distribution Date occurring
three years after the latest maturity date 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 or
allocation to the investor of each dollar in reduction of Certificate Balance
or Notional Balance, as applicable. 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 occur as a result 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; Optional Mortgage Loan Purchase" 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 above
under "--Yield on the Class PS-1 and Class CS-1 Certificates." The tables
have also been prepared on the basis of the Mortgage Loan Assumptions
described under "--Yield on the Class PS-1 and Class CS-1 Certificates." The
Mortgage Loan Assumptions made in preparing the previous and 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.
S-136
<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%
March 13, 1998 ........................
March 13, 1999 ........................
March 13, 2000 ........................
March 13, 2001 ........................
March 13, 2002 ........................
March 13, 2003 ........................
March 13, 2004 ........................
March 13, 2005 ........................
March 13, 2006 ........................
March 13, 2007 ........................
March 13, 2008 ........................
March 13, 2009 ........................
March 13, 2010 ........................
March 13, 2011 ........................
March 13, 2012 ........................
March 13, 2013 ........................
March 13, 2014 ........................
March 13, 2015 ........................
March 13, 2016 ........................
March 13, 2017 ........................
March 13, 2018 ........................
March 13, 2019 ........................
March 13, 2020 ........................
March 13, 2021 ........................
March 13, 2022 ........................
March 13, 2023 ........................
March 13, 2024 ........................
March 13, 2025 ........................
March 13, 2026 ........................ 0 0 0
Weighted Average Life: (years)(2) ....
</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). The
weighted average life data presented above in respect of the Class
CS-1 Certificates is for illustrative purposes only, as the Class
CS-1 Certificates are not entitled to distributions of principal and
have no weighted average lives.
S-137
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS A-1B
----------------------------
SCENARIO
----------------------------
DISTRIBUTION(1) 1 2 3
- -------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Initial Percentage .................... 100% 100% 100%
March 13, 1998 ........................
March 13, 1999 ........................
March 13, 2000 ........................
March 13, 2001 ........................
March 13, 2002 ........................
March 13, 2003 ........................
March 13, 2004 ........................
March 13, 2005 ........................
March 13, 2006 ........................
March 13, 2007 ........................
March 13, 2008 ........................
March 13, 2009 ........................
March 13, 2010 ........................
March 13, 2011 ........................
March 13, 2012 ........................
March 13, 2013 ........................
March 13, 2014 ........................
March 13, 2015 ........................
March 13, 2016 ........................
March 13, 2017 ........................
March 13, 2018 ........................
March 13, 2019 ........................
March 13, 2020 ........................
March 13, 2021 ........................
March 13, 2022 ........................
March 13, 2023 ........................
March 13, 2024 ........................
March 13, 2025 ........................
March 13, 2026 ........................ 0 0 0
Weighted Average Life: (years)(2) ....
</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 Certificates is
determined by (i) multiplying the amount of each distribution 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 in reduction of Certificate Balance referred to in
clause (i).
S-138
<PAGE>
PERCENTAGE OF INITIAL NOTIONAL BALANCE
OUTSTANDING FOR EACH DESIGNATED SCENARIO
<TABLE>
<CAPTION>
CLASS PS-1
----------------------------
SCENARIO
----------------------------
DISTRIBUTION(1) 1 2 3
- -------------------------------------- -------- -------- --------
<S> <C> <C> <C>
Initial Percentage .................... 100% 100% 100%
March 13, 1998 ........................
March 13, 1999 ........................
March 13, 2000 ........................
March 13, 2001 ........................
March 13, 2002 ........................
March 13, 2003 ........................
March 13, 2004 ........................
March 13, 2005 ........................
March 13, 2006 ........................
March 13, 2007 ........................
March 13, 2008 ........................
March 13, 2009 ........................
March 13, 2010 ........................
March 13, 2011 ........................
March 13, 2012 ........................
March 13, 2013 ........................
March 13, 2014 ........................
March 13, 2015 ........................
March 13, 2016 ........................
March 13, 2017 ........................
March 13, 2018 ........................
March 13, 2019 ........................
March 13, 2020 ........................
March 13, 2021 ........................
March 13, 2022 ........................
March 13, 2023 ........................
March 13, 2024 ........................
March 13, 2025 ........................
March 13, 2026 ........................ 0 0 0
Weighted Average Life: (years)(2) ....
</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 PS-1 Certificates is
determined by (i) multiplying the amount of each 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
allocations in reduction of Notional Balance referred to in clause
(i). The weighted average life data presented above is for
illustrative purposes only, as the Class PS-1 Certificates are not
entitled to distributions of principal and have no weighted average
lives.
S-139
<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%
March 13, 1998 ........................
March 13, 1999 ........................
March 13, 2000 ........................
March 13, 2001 ........................
March 13, 2002 ........................
March 13, 2003 ........................
March 13, 2004 ........................
March 13, 2005 ........................
March 13, 2006 ........................
March 13, 2007 ........................
March 13, 2008 ........................
March 13, 2009 ........................
March 13, 2010 ........................
March 13, 2011 ........................
March 13, 2012 ........................
March 13, 2013 ........................
March 13, 2014 ........................
March 13, 2015 ........................
March 13, 2016 ........................
March 13, 2017 ........................
March 13, 2018 ........................
March 13, 2019 ........................
March 13, 2020 ........................
March 13, 2021 ........................
March 13, 2022 ........................
March 13, 2023 ........................
March 13, 2024 ........................
March 13, 2025 ........................
March 13, 2026 ........................ 0 0 0
Weighted Average Life: (years)(2) ....
</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 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 in reduction of Certificate Balance referred to in
clause (i).
S-140
<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%
March 13, 1998 ........................
March 13, 1999 ........................
March 13, 2000 ........................
March 13, 2001 ........................
March 13, 2002 ........................
March 13, 2003 ........................
March 13, 2004 ........................
March 13, 2005 ........................
March 13, 2006 ........................
March 13, 2007 ........................
March 13, 2008 ........................
March 13, 2009 ........................
March 13, 2010 ........................
March 13, 2011 ........................
March 13, 2012 ........................
March 13, 2013 ........................
March 13, 2014 ........................
March 13, 2015 ........................
March 13, 2016 ........................
March 13, 2017 ........................
March 13, 2018 ........................
March 13, 2019 ........................
March 13, 2020 ........................
March 13, 2021 ........................
March 13, 2022 ........................
March 13, 2023 ........................
March 13, 2024 ........................
March 13, 2025 ........................
March 13, 2026 ........................ 0 0 0
Weighted Average Life: (years)(2) ....
</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 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
in reduction of Certificate Balance referred to in clause (i).
S-141
<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%
March 13, 1998 ........................
March 13, 1999 ........................
March 13, 2000 ........................
March 13, 2001 ........................
March 13, 2002 ........................
March 13, 2003 ........................
March 13, 2004 ........................
March 13, 2005 ........................
March 13, 2006 ........................
March 13, 2007 ........................
March 13, 2008 ........................
March 13, 2009 ........................
March 13, 2010 ........................
March 13, 2011 ........................
March 13, 2012 ........................
March 13, 2013 ........................
March 13, 2014 ........................
March 13, 2015 ........................
March 13, 2016 ........................
March 13, 2017 ........................
March 13, 2018 ........................
March 13, 2019 ........................
March 13, 2020 ........................
March 13, 2021 ........................
March 13, 2022 ........................
March 13, 2023 ........................
March 13, 2024 ........................
March 13, 2025 ........................
March 13, 2026 ........................ 0 0 0
Weighted Average Life: (years)(2) ....
</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 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
in reduction of Certificate Balance referred to in clause (i).
S-142
<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%
March 13, 1998 ........................
March 13, 1999 ........................
March 13, 2000 ........................
March 13, 2001 ........................
March 13, 2002 ........................
March 13, 2003 ........................
March 13, 2004 ........................
March 13, 2005 ........................
March 13, 2006 ........................
March 13, 2007 ........................
March 13, 2008 ........................
March 13, 2009 ........................
March 13, 2010 ........................
March 13, 2011 ........................
March 13, 2012 ........................
March 13, 2013 ........................
March 13, 2014 ........................
March 13, 2015 ........................
March 13, 2016 ........................
March 13, 2017 ........................
March 13, 2018 ........................
March 13, 2019 ........................
March 13, 2020 ........................
March 13, 2021 ........................
March 13, 2022 ........................
March 13, 2023 ........................
March 13, 2024 ........................
March 13, 2025 ........................
March 13, 2026 ........................ 0 0 0
Weighted Average Life: (years)(2) ....
</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 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
in reduction of Certificate Balance referred to in clause (i).
S-143
<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%
March 13, 1998 ........................
March 13, 1999 ........................
March 13, 2000 ........................
March 13, 2001 ........................
March 13, 2002 ........................
March 13, 2003 ........................
March 13, 2004 ........................
March 13, 2005 ........................
March 13, 2006 ........................
March 13, 2007 ........................
March 13, 2008 ........................
March 13, 2009 ........................
March 13, 2010 ........................
March 13, 2011 ........................
March 13, 2012 ........................
March 13, 2013 ........................
March 13, 2014 ........................
March 13, 2015 ........................
March 13, 2016 ........................
March 13, 2017 ........................
March 13, 2018 ........................
March 13, 2019 ........................
March 13, 2020 ........................
March 13, 2021 ........................
March 13, 2022 ........................
March 13, 2023 ........................
March 13, 2024 ........................
March 13, 2025 ........................
March 13, 2026 ........................ 0 0 0
Weighted Average Life: (years)(2) ....
</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 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
in reduction of Certificate Balance referred to in clause (i).
S-144
<PAGE>
THE POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement to be dated as of March 27, 1997 (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 Note endorsed without recourse
to the order of the Trustee, as trustee; (ii) the original Mortgage(s) or
counterpart(s) thereof; (iii) the assignment(s) of the Mortgage(s) in
recordable form in favor of the Trustee; (iv) to the extent not contained in
the Mortgages, the original assignment of leases and rents or counterpart
thereof; (v) if applicable, the original assignment of leases
and rents to the Trustee; (vi) where applicable, a copy of the UCC-1
financing statements, if any, including UCC-3 assignments; and (vii) 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 (in certain cases only to the extent such documents
are identified by the Depositor as being part of the related mortgage file)
within 45 days after the later of delivery or execution of the Pooling and
Servicing Agreement and report any missing documents or certain types of
defects therein to the Depositor. The Depositor is itself required to, or to
cause the Originator to, supply the missing document or cure the defect
within 90 days or to repurchase the related Mortgage Loan at the Repurchase
Price if the failure to deliver an executed, recorded or undamaged document,
as applicable, has a material adverse effect on the security provided by the
related Mortgaged Property.
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 sale, 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) 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);
(v) each related assignment of leases and rents, if any, creates a valid,
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 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;
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(vi) each related assignment of Mortgage from the Originator to the
Depositor constitutes the legal, valid, binding and enforceable 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, binding and
enforceable 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 creditors' rights generally, or by general principles of equity
(regardless of whether such enforcement is considered in a proceeding in
equity or at 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), as of the date of origination of
such Mortgage Loan, 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 first priority
lien of the Mortgage in the original principal amount of such Mortgage
Loan or Allocated Loan Amount of the related Mortgaged Property (as set
forth on the Mortgage Loan Schedule) 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 or operation 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 lender's title insurance 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, use or
operation of the Mortgaged Property; the Originator or its successors or
assigns is the sole named insured of such policy; such policy 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;
(xiii) based on the inspection reports contained in the mortgage file,
each related Mortgaged Property is free of any material damage for which
amounts at least sufficient to cure such damage have not been reserved, or
that would affect materially and adversely the value of such Mortgaged
Property as security for the Mortgage Loan; the Mortgaged Property 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 that if not obtained would
have a material adverse effect on the conduct of its business or its
ability to repay the related Mortgage Loan and all such licenses,
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permits and authorizations are valid and in full force and effect and if a
related Mortgaged Property is improved by a hotel, the most recent
inspection or review by the franchisor, if any, did not cite such
Mortgaged Property for material violations of the related franchise
agreement which have not been cured;
(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; neither the Originator nor
any of its affiliates has or is entitled to any preferred equity interest
in a borrower;
(xviii) 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 applicable to such
Mortgage Loan have been complied with as of the date of origination of
such Mortgage Loan;
(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, are being appealed, 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, 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) except as disclosed herein, each related Mortgaged Property is
insured by a fire and extended perils insurance policy, issued by an
insurer or reinsured by a reinsurer 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 Closing Date 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) except for payments due but not yet one month delinquent, there is
no default, breach, violation or event of acceleration existing under the
related Mortgage or the related Note and, to the Originator's knowledge,
no event 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 more than one month delinquent
since origination and as of the Cut-off Date was not more than one month
delinquent;
(xxvi) each related Mortgage contains customary and enforceable
provisions (subject to the matters described in clause (iv) above) such as
to render the rights and remedies of the holder thereof adequate for the
realization against the Mortgaged Property of the 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, except as set forth in certain environmental
reports or other documents previously provided to the Rating Agencies and
to the best of its knowledge, 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,
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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
consultant 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, except as
disclosed herein, is in material compliance with all applicable federal,
state and local laws pertaining to environmental hazards, and to the best
of the Originator's knowledge, except as disclosed herein, 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) to the Originator's knowledge, and in reliance upon an opinion of
counsel to the extent received, (A) when the related UCC financing
statements are filed and indexed in the appropriate state and local
offices for such filing and indexing, such filings shall be sufficient to
perfect a lien on the Mortgaged Property described therein to the extent a
security interest can be perfected under the applicable Uniform Commercial
Code and (B) no re-filing of such financing statements will be necessary
for the perfection of the lien intended to be created or 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 UCC financing statements;
(xxx) (A) Each related 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 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 and the fee interest of the
ground lessor is not subject and subordinate to the related Mortgage, that
(A) the related lease or a memorandum thereof has been or will be duly
recorded; such lease or an estoppel letter or lender protective agreement
between the Originator and the lessor under such lease permits the
interest of the lessee thereunder to be encumbered by the related
Mortgage; and there has been no material amendment or modification of such
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 referred to
in clause (xi) above, to the best of the Originator's knowledge, the
lessee's interest in the related 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) 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 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 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;
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(D) as of the date the related Mortgage Loan was made, the related lease
was in full force and effect and, to the Originator's knowledge, no
default had occurred under such lease, nor, to the Originator'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
lease and, as of the Closing Date, 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 lease;
(E) the related 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
lease, estoppel letter or lender protective agreement; the mortgagee has
provided the lessor with such notice;
(F) the related 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 lease,
which is curable after the receipt of notice of any such default before
the lessor thereunder may terminate such lease;
(G) the related lease has a term which extends not less than ten years
beyond the maturity date of the related Mortgage Loan;
(H) under the terms of the related 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
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;
(I) the related lease does not impose restrictions on subletting of all
or portions of the Mortgaged Property by the lessee which would be viewed,
as of the date of origination of such Mortgage Loan, as commercially
unreasonable by the Originator; and
(J) the related lease or an estoppel letter provides that, in the event
that a lessee in bankruptcy rejects any or all of its leases, the
leasehold mortgagee will have the right to succeed to the lessee's
position under the lease, provided that written notice has been sent to
the lessor and all defaults with respect to the 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), (xxii), (xxiv),
(xxix) or (xxx) and (b) any breach of any representation or warranty
contained in clauses (x), (xiii), (xiv), (xxi), (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
(with interest thereon) and other reimburseable expenses 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
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 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.
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Notwithstanding the foregoing, upon discovery by the Trustee, any
custodian for the Trustee, 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 with respect to a
Mortgage Loan. 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. Nor can any
assurance be given that the Depositor will perform any obligation to cure, or
repurchase a Mortgage Loan for, a breach of the representation referred to in
the preceding paragraph. See "The Depositor" in the Prospectus. 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 the 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, skill, prudence and diligence
with which, it (a) 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 known 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 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 properties (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. 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 misconduct, bad faith, fraud or negligence in the
performance of its duties or by reason of its reckless disregard of its
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 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 Lockout 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
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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; Modification" below. With respect to any
defaulted Mortgage Loan, subject to the restrictions set forth below under
"--Realization Upon Mortgage Loans; Modification," 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 (with interest at the Net Mortgage Pass-Through Rate plus the
Trustee Fee Rate) 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 Special Servicer has elected to extend the
payments as described in "--Realization Upon Mortgage Loans; Modification"
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 and Class A-1B Certificates and
the Coupon Strip Certificates together will, in each case, be treated as one
class) and (b) will not make any P&I Advance in respect of Reduction Interest
Distribution Amounts and Reduction Interest Shortfalls. On any Servicer
Remittance Date on which the Servicer is not required to make a P&I Advance
to the most subordinate class of Certificates (as described in the preceding
sentence), the Servicer will initially make such P&I Advance but will be
required, immediately subsequent to the making of such P&I Advance, to
reimburse itself (without interest) for such P&I Advance from and up to all
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 Reduction Interest Distribution 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 as of the last day of related
Collection Period less any Appraisal Reduction Amounts thereof and the
denominator of which is the Stated Principal Balance as of such date.
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'
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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 "--Duties of the
Trustee" and "--Duties of the 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 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%
(the "Advance Rate"), compounded monthly, as of each Servicer Remittance 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. 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
Fairfield Inn Pool Loan, the Hudson Loan and the DCOTA Loan (which will have
Lock Boxes only in the circumstances described with respect to each such
Mortgage Loan under "Description of the Mortgage Loans and Mortgaged
Properties"), 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 Mortgaged 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 or, in the case of the Innkeepers Pool Loan, remain in
the Lock Box Account. The Lock Box Accounts will not be an asset of the Trust
REMICs.
Cash Collateral Accounts. With respect to each Mortgage Loan other than
the Innkeepers Pool 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 Fairfield Inn Pool Loan, Hudson Loan or DCOTA Loan, when no Lock
Box is required, into which funds will be deposited directly by the related
borrowers). The Reserve Accounts generally will be sub-accounts of the Cash
Collateral Accounts, except in the case of the Innkeepers Pool Loan, in which
case such accounts will be sub-accounts of the Lockbox Account. 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 (or Lockbox Account, in the
case of the Innkeepers Loan) in excess of the amount necessary to fund the
Monthly Payment and Reserve Accounts will be applied to (i) operating and
capital expenses (except in the case of the Hudson Loan, pursuant to which
such expenses will be met through funding of the Reserve Accounts), (ii) the
reduction of the principal balance of the related Mortgage Loan until such
principal is paid in full and (iii) if applicable, Excess Interest, in that
order. The Cash Collateral Accounts will not be an asset of the Trust REMICs.
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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 two
segregated accounts (the "Lower-Tier Distribution Account" and the
"Upper-Tier 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 (ii) the portion of the Servicing Compensation
representing the Trustee 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 Distribution Account as
described herein. On each Distribution Date, the Trustee will withdraw
amounts distributable on such date on the Regular Certificates and on the
Class R Certificates from the Lower-Tier Distribution Account and deposit
such amounts in the Upper-Tier Distribution Account. See "Description of the
Offered Certificates -- Distributions" herein.
Interest Reserve Account. The Trustee will establish and maintain an
"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 that is not a leap year, the Servicer will be required to
deposit, in respect of the [ ] Loans, into the Interest Reserve Account,
an amount equal to one day's interest at the related Mortgage Rate on the
Stated Principal Balance, as of the first day of the immediately preceding
Interest Accrual Period, of each such Mortgage Loan, 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 January and February, if any, and deposit
such amount into the Upper-Tier 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 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 Interest Reserve Account,
the Escrow 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 the equivalent thereof) 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 qualify, 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, the Interest Reserve Account, Cash Collateral Account and
any REO 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 by the Rating Agencies of the Offered Certificates.
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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 Lower-Tier Distribution Account an amount equal to
the sum of (i) Available Funds and any Prepayment Premiums and (ii) the
Trustee 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, if any, (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 Fee) in respect of the immediately preceding Interest Accrual Period;
(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), together with interest thereon, 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 any taxes imposed on the Upper-Tier REMIC or the Lower-Tier REMIC; (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 itself to
terminate, or to cause the related borrower to terminate, the manager under
the Mortgage Loan, the Servicer will promptly give notice to the Trustee (who
will copy the holders of Certificates and the Rating Agencies). 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 and Class A-1B Certificates are the only classes
outstanding (other than any class of Coupon Strip Certificates) the Class
A-1A and Class A-1B 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. 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;
or (ii) the Servicer determines that effecting such recommendation to
terminate is not consistent with the servicing standard set forth herein and
either (A) within 30 days of giving notice of such recommendation to all
holders of Certificates (other than those holders making such recommendation)
the notice of rejection described in clause (i) above is given to the
Servicer or (B) notwithstanding the lack of such rejection, the Servicer
elects not to effect such recommendation. If the Servicer does not receive a
required response (or if the response received is 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, or if applicable cause the related
borrower, 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. 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
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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
Subject to certain exceptions in the case of certain of the Mortgage Loans
(see "Description of the Mortgage Loans and Mortgaged Properties"), the
Mortgage Loans contain provisions in the nature of "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.
Subject to certain exceptions in the case of certain of the Mortgage Loans
(see "Description of the Mortgage Loans and Mortgaged Properties"), 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 the Servicer or the Special Servicer, as applicable, (x)
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 March
1998 (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 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, 1998,
a statement to the effect that such firm has examined certain
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documents and records relating to the servicing of the 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, 1998,
an officers' certificate of the Servicer stating that, to the best of each
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 each 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 Certificates evidencing aggregate Voting Rights of greater
than 50% may remove the Servicer or the Special Servicer upon the occurrence
of a good faith dispute under the Pooling and Servicing Agreement and upon
written notice to the Servicer, the Special 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 of the Special Servicer will be entitled to payment of its portion
of unpaid Servicing Fees and unreimbursed Advances (with interest thereon)
and other amounts to which the Servicer or the Special Servicer is entitled,
in each case which accrued prior to its termination. No such resignation or
removal may become effective until a successor Servicer of the Special
Servicer has assumed the obligations of the Servicer or the Special Servicer
under the Pooling and Servicing Agreement. The Trustee or any other successor
Servicer or Special Servicer assuming the obligations of the Servicer or the
Special Servicer under the Pooling and Servicing Agreement will be entitled
to the compensation to which the Servicer or the Special Servicer would have
been entitled. If no successor Servicer or Special Servicer can be obtained
to perform such obligations for such compensation, additional amounts payable
to such successor Servicer or Special 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 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 in
the performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder.
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
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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, 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 and if such default is not capable of being
cured within such 30 day period and the Servicer is diligently pursuing such
cure, the Servicer shall be entitled to an additional 30 day period; 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.
RIGHTS UPON EVENT OF DEFAULT
If an Event of Default with respect to the Servicer (acting as Servicer or
Special Servicer) occurs, then 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 reimbursement for 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
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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 compensation payable
to such successor exceeds that to which the predecessor Servicer was
entitled, the additional servicing compensation will be allocated to the
Certificates in the same manner as Realized Losses.
If the Special Servicer is not the Servicer and an Event of Default with
respect to the Special Servicer occurs, the Trustee may, and at the direction
of the holders of at least 25% of the aggregate Voting Rights of all
Certificateholders, 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 each 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.
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,
or to prevent the imposition of any material state or local taxes; (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. The
Pooling and Servicing Agreement provides that 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
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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) [ ]% in the case
of the Class V-1, Class V-2, Class R and Class LR Certificates, (b) [ ]% in
the case of the Class PS-1 Certificates and 1.0% in the case of the Class
CS-1 Certificates; provided that the Voting Rights of each of the Class PS-1
and Class CS-1 Certificates will be reduced to zero upon the reduction of the
Notional Balance of each such class to zero (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 B-1 and Class B-1H 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 (which will be
reduced for this purpose by the amount of Appraisal Reductions allocated to
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 is required
to obtain an appraisal 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 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 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 described 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).
In no event will the Special Servicer be permitted to modify or extend any
Mortgage Loan at a rate lower than the Mortgage Rate.
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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 Servicer 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, or 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 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 Lower-Tier REMIC will not be taxable on income received with
respect to a 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 Lower-Tier REMIC,
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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 Lower-Tier REMIC, including
but not limited to a hotel, 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 Lower-Tier 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, 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.
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. 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 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.
Following a default in the payment of principal or interest on a Mortgage
Loan, the Special Servicer, after consultation and agreement by the Servicer,
may elect not to foreclose or institute similar proceedings or modify the
loan (as described below) and instead the Servicer shall continue to make P&I
Advances with respect to such delinquencies so long as the Special Servicer,
in its reasonable judgment, after consultation and agreement by the Servicer,
concludes (a) that the election not to foreclose or modify would likely
result in a greater recovery, on a present value basis, than would
foreclosure or modification and (b) such P&I Advances will not be
Nonrecoverable Advances.
Modifications. During the term of a Mortgage Loan, the Special Servicer,
may, consistent with the Servicing Standard, agree to modify such Mortgage
Loan to reduce the amount of principal (but not interest) payable monthly on
such Mortgage Loan provided that (a) a material default in respect of payment
on such Mortgage Loan has occurred or, in the Special Servicer's reasonable
and good faith judgment, a default in respect of payment on such Mortgage
Loan is reasonably foreseeable, and such modification is reasonably likely to
produce a greater recovery to Certificateholders, on a net present value
basis, than would liquidation; (b) the Special Servicer terminates the
related manager (unless the Special Servicer determines that retaining such
manager is conducive to maintaining the value of the related Mortgaged
Properties); and (c) the Special Servicer may only agree to reductions of
principal lasting a period of no more than twelve consecutive months and, in
the aggregate, to no more than three reductions of twelve months or less
each; provided, however, Certificateholders representing greater than 66 2/3
of all Voting Rights may direct the Special Servicer not to agree to any such
modification.
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Additionally, the Special Servicer may, consistent with the Servicing
Standard, agree to any modification, waiver or amendment of any term or
forgive or defer interest on and principal of, and/or add collateral for, any
Mortgage Loan with the consent of Certificateholders representing 100% of the
Percentage Interests of the most subordinate class of Certificates then
outstanding (the "Directing Class"), subject, however, to each of the
following limitations, conditions and restrictions: (a) a material default in
respect of such Mortgage Loan has occurred or, in the Special Servicer's
reasonable and good faith judgment, a default in respect of payment on such
Mortgage Loan is reasonably foreseeable, and such modification, waiver,
amendment or other action is reasonably likely to produce a greater recovery
to Certificateholders on a net present value basis, than would liquidation;
(b) no reduction in the scheduled monthly payment of interest on any Mortgage
Loan as result of such modification, waiver or amendment may result in an
Interest Shortfall to any class other than the Directing Class, determined as
of the date of such modification, waiver or amendment; (c) any reduction in
the scheduled monthly payment of principal and/or interest on any Mortgage
Loan must require that all cash flow on all related Mortgaged 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; (d)
the Special Servicer may only agree to reductions of principal and/or
interest lasting a period of no more than twelve consecutive months and, in
the aggregate, to no more than three reductions of twelve months or less
each; (e) the Special Servicer may not reduce any Prepayment Premium or
Prepayment Lockout Period; (f) the Special Servicer may not forgive an
aggregate amount of principal of the Mortgage Loans in excess of (i) 80
percent of the Certificate Balance of the Directing Class less (ii) the
aggregate amount of Interest Shortfalls, Reduction Interest Distribution
Amounts and Reduction Interest Shortfalls then outstanding (other than with
respect to the Directing Class); and (g) the Special Servicer will not permit
any borrower to add any collateral unless the Special Servicer has first
determined in accordance with the Servicing Standard, based upon an
environmental assessment prepared by an independent person who regularly
conducts environmental assessments, at the expense of the borrower, that such
additional collateral is in compliance with applicable environmental laws and
regulations and that there are no circumstances or conditions present with
respect to such new collateral relating to the use, management or disposal of
any hazardous materials for which investigation, testing, monitoring,
containment, clean-up or remediation would be required under any then
applicable environmental laws and/or regulations. If the Certificateholders
representing 100% of the Percentage Interests of the second most subordinate
class of Certificates then outstanding consent to such modification, waiver
or amendment, the Directing Class for purposes of the determinations made in
clauses (b) and (f) shall include the second most subordinate class of
Certificates and the amount by which principal can be reduced shall not be in
excess of 80% of the aggregate principal balance of both such classes less
the items specified in clause (f)(ii). A modification pursuant to this
paragraph is not subject to the veto of Certificateholders set forth in the
preceding paragraph.
The Servicer or the Special Servicer, as applicable, shall be permitted to
modify, waive or amend any term of a Mortgage Loan that is not in default or
as to which default is not reasonably foreseeable if, and only if, such
modification, waiver or amendment (a) would not be "significant" as such term
is defined in Code Section 1001, or Treasury Regulations Section
1.860G-2(b)(3), as evidenced by an Opinion of Counsel, (b) would be in
accordance with the Servicing Standard and (c) would not adversely affect in
any material respect the interest of any Certificateholder not consenting
thereto. The consent thereto of the majority of Percentage Interests of each
Class of Certificates affected thereby or written confirmation from each
Rating Agency that such modification, waiver or amendment will not result in
a qualification, withdrawal or downgrading of the then-current ratings
assigned to the Certificates shall not be required but shall be conclusive
evidence that such modification, waiver or amendment would not adversely
affect in any material respect the interest of any Certificateholder not
consenting thereto. The Servicer or Special Servicer, as applicable, shall
provide copies of any modifications, waiver or amendment to each Rating
Agency.
OPTIONAL TERMINATION; OPTIONAL MORTGAGE LOAN PURCHASE
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 Stated 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
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determined by an independent appraiser as of a date not more than 30 days
prior to the last day of the Interest Accrual Period 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 Interest Accrual Period, and (D) unreimbursed Advances, and
unpaid servicing compensation, special servicing compensation, Trustee Fees
and Trust Fund expenses, in each case to the extent permitted under the
Pooling and Servicing Agreement with interest thereon at the Advance Rate 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 related Mortgage Rates. There can be no assurance
that payment of the Certificate Balance, if any, of each outstanding class of
Certificates plus accrued interest would be made in full in the event of such
a termination of the Trust Fund. See "Description of the Certificates --
Termination" in the Prospectus.
The holders of a 100% Percentage Interest in the Class LR Certificates may
purchase any Mortgage Loan on the last day of the first Collection Period
following 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 the date of purchase; (ii) all unpaid interest accrued on such
principal balance of such Mortgage Loan at the Mortgage Rate thereof (plus
the Excess Rate, to the extent applicable), to the last day of the Interest
Accrual Period preceding such Distribution Date on which the payment will be
distributed to Certificateholders; (iii) the aggregate amount of unreimbursed
Advances with respect to such Mortgage Loan, unpaid special servicing
compensation, servicing compensation, Trustee Fees and Trust Fund expenses,
in each case to the extent permitted under the Pooling and Servicing
Agreement with interest thereon at the Advance Rate; and (iv) the amount of
any liquidation expenses incurred by the Trust Fund in connection with such
purchase. Initially the Depositor expects to retain the Class LR
Certificates.
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 VII.
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 reimbursement
for all Advances made by them 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 receive a monthly fee (the "Trustee Fee") at a specified rate
(the "Trustee Fee Rate"), payable by the Servicer out 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
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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 and Special
Servicer each 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 or
Special Servicer's duties as applicable, under the Pooling and Servicing
Agreement or by reason of reckless disregard of its respective 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 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, Interest Reserve Account, Excess Interest Distribution
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, is obligated to 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.
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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 be obligated to 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
Pacific Mutual Life Insurance Company, a California corporation (the
"Servicer"), will be responsible for servicing the Mortgage Loans.
Pacific Mutual's offices are located at 700 Newport Center Drive, Newport
Beach, California 92660. Founded in 1868, Pacific Mutual had approximately
$21.2 billion of admitted assets as of December 31, 1996. With its
subsidiaries and affiliates, Pacific Mutual manages more than $136.7 billion
of assets. Pacific Mutual performs a variety of real estate services for
itself and others, including loan origination, underwriting and due
diligence, loan servicing, property and asset management, property
acquisition and disposition, appraisals and problem asset management.
As of December 31, 1996, Pacific Mutual serviced for its own account and
others approximately 770 commercial and multi-family mortgage loans totaling
approximately $5.0 billion in aggregate principal amount. As of December 31,
1996, approximately $216.7 million of such mortgage loans, representing
approximately 4.32% of the aggregate balance of the portfolio, were two or
more months delinquent or were the subject of foreclosure proceedings.
The information set forth above regarding the servicing portfolio of
Pacific Mutual should not be considered to reflect the credit quality of the
Mortgage Loans or as a basis for assessing the likelihood, amount or severity
of losses on the Mortgage Loans. Such information is included only as an
indication of the recent experience of Pacific Mutual. There can be no
assurance that the default, delinquency and loss experience of Pacific Mutual
will be representative of the results that may be experienced with respect to
the Mortgage Loans.
The information concerning Pacific Mutual set forth herein has been
provided by Pacific Mutual, and none of the Originator, 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 sum
for each Mortgage Loan of the product of (i) 1/12 times a per annum rate of
0.055% (the "Servicing Fee Rate") and (ii) the Stated Principal Balance of
such Mortgage Loan as of the first day of such Interest Accrual Period 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, the
Servicing Fee will be reduced by the aggregate 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.
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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 Pooling and Servicing Agreement provides that interest at the Advance
Rate will accrue and be payable in respect of any accrued but unpaid
Servicing Compensation.
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 and Class A-1B Certificates and the Coupon Strip
Certificates are the only classes outstanding, the Class A-1A Certificates
and Class A-1B Certificates and the Coupon Strip Certificates together will
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, at the expense of the Trust
Fund.
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 any 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 the product of (i) 1/12 times a per annum rate of 0.50% and (ii) the
Stated Principal Balance of each related Specially Serviced Mortgage Loan as
of the first day of such Interest Accrual Period (the "Special Servicing
Fee"). The Special Servicer will be entitled, 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 to receive a
"Rehabilitation Fee" with respect
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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 or the Depositor
as described herein under "--Representations and Warranties; Repurchase,"
(ii) by the Servicer, the Depositor or the Certificateholders as described
herein under "--Optional Termination; Optional Mortgage Loan Purchase," 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 make payments 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 more than 50% 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 and the Coupon Strip Certificates are
the only classes outstanding, the Class A-1A, Class A-1B Certificates and the
Coupon Strip Certificates together will be treated as the most subordinate
class), the Special Servicer will be entitled to receive with respect to each
Interest Accrual Period a Special Servicing Fee equal to 1/12th of 0.25%
(rather than 0.50%) per annum of the Stated Principal Balance of each related
Specially Serviced Mortgage Loan as of the first day of such Interest Accrual
Period.
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 mail 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. 243. 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
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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.
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.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Elections will be made to treat the Trust Fund exclusive of the Reserve
Accounts, the Lock Box Accounts, the Cash Collateral Accounts, the Excess
Interest, the Excess Interest Distribution Account, the Default Interest and
the Default Interest Distribution Account (such portion of the Trust Fund,
the "Trust REMICs"), and the Trust REMICs, in the opinion of counsel, 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) classes of
regular interests represented by the Regular Certificates and (ii) the Class
R Certificates, which will represent the sole class of residual interests in
the Upper-Tier REMIC. 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 a grantor trust for
federal income tax purposes.
TAXATION OF OFFERED CERTIFICATES
The Offered Certificates will be treated as "real estate assets" under
Code Section 856(c)(5)(A), to the extent that the assets of the Upper-Tier
REMIC are so treated. The interest on the Offered Certificates will be
"interest on obligations secured by mortgages on real property" described in
Code Section 856(c)(3)(B) for a real estate investment trust, in the same
proportion that the income of the Upper-Tier REMIC is so treated.
A beneficial owner's interest in an Offered Certificate 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 Offered
Certificate 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 Offered Certificate will constitute an "evidence of
indebtedness" within the meaning of Code Section 582(c) in the case of
certain financial institutions.
The Lower-Tier REMIC and the Upper-Tier REMIC will be treated as one REMIC
solely for the purpose of making the foregoing determinations.
The Offered Certificates 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 Offered
Certificates (other than the Class PS-1 and Class CS-1 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 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 Class PS-1 and Class CS-1 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
Weighted Average Net Mortgage Pass-Through Rate changes in accordance with
Scenario 1, as described under the heading "Prepayment and Yield
Considerations -- Yield on the Class PS-1 and Class CS-1 Certificates") over
their respective issue prices (including accrued interest). Any "negative"
amounts of original issue discount on the Class PS-1 or Class CS-1
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 PS-1 or Class CS-1 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 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 PS-1 and Class CS-1 Certificates. See
"Certain Federal Income Taxes Federal Income Tax Consequences for REMIC --
Certificates Taxation of Regular
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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 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 Offered Certificates. 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, 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 PS-1 and
Class CS-1 Certificates." No representation is made as to the rate, if any,
at which the Mortgage Loans will prepay.
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.
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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-1C, Class
A-2, Class A-3, Class A-4 and Class A-5 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-1C, Class A-2, Class A-3, Class A-4 and Class A-5 Certificates.
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 other
Certificates of the trust fund;
(3) The certificates acquired by the Plan have received a rating at the
time of such acquisition that is one of the three highest generic rating
categories from any of S&P, Moody's, DCR or Fitch;
(4) The trustee must not be an affiliate of any other member of the
Restricted Group;
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of certificates represents not more than
reasonable compensation for underwriting the certificates. The sum of all
payments made to and retained by the depositor pursuant to the assignment
of the mortgage loans to the trust fund represents not more than the fair
market value of such mortgage loans. The sum of all payments made to and
retained by the master servicer and any other servicer represents not more
than reasonable compensation for such person's services under the pooling
and servicing agreement and reimbursement of such person's reasonable
expenses in connection therewith; and
(6) The Plan investing in the certificates is an "accredited investor" as
defined in Rule 501(a)(1) of Regulation D of the 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 evidencing interests 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
S-171
<PAGE>
(c) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least
one year prior to any Plan's acquisition of the certificates pursuant
to the Exemption.
If 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 certain of 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, 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; (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
acquisition; 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 PS-1 and Class CS-1 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-1C,
CLASS A-2, CLASS A-3, CLASS A-4 AND CLASS A-5 CERTIFICATES ARE SUBORDINATE TO
ONE OR MORE OTHER CLASSES OF CERTIFICATES AND, ACCORDINGLY, SUCH CERTIFICATES
MAY NOT BE PURCHASED BY OR TRANSFERRED TO A PLAN OR PERSON ACTING ON BEHALF
OF ANY PLAN OR USING THE ASSETS OF ANY SUCH PLAN, 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.
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, other than the [Class A-3, Class A-4 and Class
A-5] Certificates, constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), so long as
they are rated in one of the two highest rating categories by one or more
Rating Agencies.
Except as to the status of certain Classes of Offered Certificates as
"mortgage related securities", no representations are made 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
S-172
<PAGE>
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.
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 aggregate Certificate 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 or an affiliate has entered into and may, in the
future, enter into other financing arrangements with affiliates of some or
all of the Borrowers. Certain officers and directors of the Originator and
its affiliates own 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 and the Prospectus may only be issued or passed
on in the United Kingdom to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom this Prospectus Supplement and
the Prospectus 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 (as amended).
EXPERTS
The financial statements of Fairfield Inn by Marriott Limited Partnership
included in this Prospectus Supplement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said report.
The combined financial statements of Hudson Street Owners Limited
Partnership I and Hudson Street Owners Limited Partnership II (which include
the accounts of 101 Hudson Street Associates, 101 Hudson Urban Renewal
Associates and 101 Hudson Leasing Associates) included in this Prospectus
Supplement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
LEGAL MATTERS
Certain legal matters will be passed upon for the Depositor and for the
Underwriter by Cleary, Gottlieb, Steen & Hamilton, New York, New York.
S-173
<PAGE>
RATING
It is a condition to the issuance of the Offered Certificates that (i)
each of the Class A-1A and Class A-1B Certificates be rated ["AAA," "AAA,"
"Aaa" and "AAA" by Duff & Phelps Credit Rating Co. ("DCR") [all Duff & Phelps
and Moody's rating symbols to be confirmed], Fitch Investors Service, L.P.
("Fitch"), Moody's Investors Service, Inc. ("Moody|Als") and Standard & Poor's
Ratings Group, a division of The McGraw-Hill Companies, Inc. ("S&P" and,
together with DCR, Fitch and Moody's, the "Rating Agencies"), respectively;
(ii) each of the Class PS-1 and Class CS-1 Certificates be rated "AAA," "AAA"
and "Aaa" by DCR, Fitch and Moody's, respectively; (iii) the Class A-1C
Certificates be rated "AAA" and "Aaa" by S&P and Moody's, respectively; (iv)
the Class A-2 Certificates be rated "AA," "AA," "Aa" and "AA" by DCR, Fitch,
Moody's and S&P, respectively; (v) the Class A-3 Certificates be rated "A,"
"A," "A" and "A" by DCR, Fitch, Moody's and S&P, respectively; (vi) the Class
A-4 Certificates be rated "BBB," "BBB," "Baa" and "BBB" by DCR, Fitch,
Moody's and S&P, respectively and (vii) the Class A-5 Certificates be rated
"BBB-," "BBB-," "Baa3" and "BBB-" by DCR, Fitch, Moody's and S&P,
respectively]. 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 due to variations in the rates of amortization of the Mortgage Loans.
See "Risk Factors and Other Special Considerations" 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. 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 PS-1 or Class CS-1 Certificates might not fully
recover their initial investment in the event of delinquencies or defaults or
rapid prepayments of the Mortgage Loans (including both voluntary and
involuntary prepayments) or the application of Realized Losses, Appraisal
Reduction Amounts or Delinquency Reduction Amounts. As described herein, the
amounts payable with respect to the Class PS-1 or Class CS-1 Certificates
consist only of interest. If all of the Mortgage Loans were to prepay in the
initial month, with the result that the Class PS-1 or Class CS-1
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 PS-1 or Class CS-1 Certificates.
Accordingly, the ratings of the Class PS-1 or Class CS-1 Certificates should
be evaluated independently from similar ratings on other types of securities.
There can be no assurance as to whether any rating agency not requested to
rate the 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-174
<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
A
AA S-153
Aa2 S-153
AAI S-115
ACMs S-33
ADA S-39
ADR S-47, S-57
Advance Rate S-152
Advances S-151
Anticipated Repayment Date S-45
ARD S-4
B
Best's S-37
Building Lease S-74
C
Capital Expenditure/FF&E Reserve Account S-67
Cash Collateral Accounts S-152
CEDEL S-1, S-8, S-43, B-1
CEDEL Participants S-130
CERCLA S-33
Certificate Balance S-2
Certificate Owners S-131
Certificate Registrar S-129
Certificates S-1, S-7
Collection Account S-153
Cooperative S-131
Current Interest Rate S-42
Cut-off Date S-1
D
DCOTA Anticipated Repayment Date S-99
DCOTA Borrower S-99
DCOTA Current Interest Rate S-99
DCOTA Defeasance Date S-100
DCOTA Deposit Account S-101
DCOTA Excess Cash Flow S-99
DCOTA Excess Interest S-99
DCOTA GP S-99
DCOTA Loan S-98
DCOTA Management Agreement S-103
DCOTA Manager S-99
DCOTA Maturity Date S-99
DCOTA Monthly Debt Service Payment S-99
DCOTA Mortgage S-98
DCOTA Property S-98
DCOTA Revised Interest Rate S-14
DCR S-27, S-174
Debt Service Reserve Account S-67
Defeasance Collateral S-76
Defeasance Deposit S-46
S-175
<PAGE>
Defeasance Lockout Period S-18
Definitive Certificate S-128
Department S-171
Depositaries S-129
Depositor S-1
Directing Class S-162
Distribution Date S-2, S-117
DTC S-1, S-8, B-1
E
Earthquake Restoration Reserve Account S-67
Eligible Bank S-153
EPA S-34
ERISA S-26, S-171
Euroclear S-1, S-8, S-43, B-1
Euroclear Operator S-131
Euroclear Participants S-131
Event of Default S-157
Excess Cash Flow S-41
Excess Interest S-42
Exemption S-26
F
Fairfield Inn Anticipated Repayment Date S-9, S-64
Fairfield Inn Borrower S-9, S-64
Fairfield Inn Cash Collateral Account S-68
Fairfield Inn Current Interest Rate S-9, S-64
Fairfield Inn Debt Service Payment Date S-65
Fairfield Inn Defeasance Date S-66
Fairfield Inn Excess Cash Flow S-65
Fairfield Inn Excess Interest S-64
Fairfield Inn Lockbox Account S-69
Fairfield Inn Management Agreement S-73
Fairfield Inn Manager S-67
Fairfield Inn Maturity Date S-10, S-64
Fairfield Inn Monthly Debt Service Payment S-10, S-64
Fairfield Inn Mortgages S-9, S-64
Fairfield Inn Operating Account S-69
Fairfield Inn Properties S-9, S-64
Fairfield Inn Revised Interest Rate S-9, S-64
Fiscal Agent S-2, S-7
Fitch S-27, S-174
Fixed Voting Rights Percentage S-159
Form 8-K S-63
FSA S-173
G
GAAP S-46
G&L II Anticipated Repayment Date S-15, S-104
G&L II Cash Collateral Account S-106
G&L II Collection Account S-106
G&L II Current Interest Rate S-15, S-104
G&L II Defeasance Date S-106
G&L II Excess Cash Flow S-104
S-176
<PAGE>
G&L II Excess Interest S-104
G&L II GP S-103
G&L II Loan Amount S-103
G&L II Loan Origination Date S-103
G&L II LP S-104
G&L II Maturity Date S-15, S-104
G&L II Monthly Debt Service Amount S-15, S-104
G&L II REIT S-103
G&L II Release Price S-105, S-106
G&L II Revised Interest Rate S-15, S-104
G&L Medical Office II Management Agreement S-110
G&L Medical Office II Pool Borrower S-15, S-103
G&L Medical Office II Pool Mortgages S-15
G&L Medical Office II Pool Properties S-15, S-103
GLA S-11
Global Securities B-1
Green Equities S-74
Ground Rent Reserve Account S-67
H
Hampton Inn Franchise Agreements S-97
Hampton Inn Franchisor S-97
Holders S-131
Hudson Additional Pledged Property S-80
Hudson Anticipated Repayment Date S-75
Hudson Base Additional Amortization Amount S-75
Hudson Borrower S-11, S-74
Hudson Building S-11, S-80
Hudson Cash Collateral Account S-77
Hudson Default Rate S-75
Hudson Defeasance Date S-76
Hudson Excess Cash Flow S-75
Hudson Ground Lease S-74
Hudson Improvements S-10, S-74
Hudson Interest Rate S-11, S-75
Hudson Land S-10, S-74
Hudson Lease Rollover Expenses S-76
Hudson Lease Rollover Guaranteed Costs S-77
Hudson Lease Rollover Guarantor S-77
Hudson Loan S-10, S-74
Hudson Lock Box Account S-77
Hudson Management Agreement S-80
Hudson Manager S-80
Hudson Maturity Date S-11, S-75
Hudson Monthly Debt Service Payment S-75
Hudson Monthly Debt Service Payment Amount S-11
Hudson Mortgage S-10
Hudson Particular Servicing Expenses S-75
Hudson Property S-11, S-74
I
ICW S-30
ICW Anticipated Repayment Date S-16, S-111
S-177
<PAGE>
ICW Borrower S-16, S-111
ICW Collection Account S-113
ICW Current Interest Rate S-16, S-111
ICW Defeasance Date S-112
ICW Excess Interest S-111
ICW GP S-111
ICW Lease S-17, S-111
ICW Loan S-16
ICW Maturity Date S-16, S-111
ICW Monthly Debt Service Amount S-16, S-112
ICW Mortgage S-16
ICW Parking Parcel S-111
ICW Plaza S-16, S-111
ICW Property S-16, S-111
ICW Revised Interest Rate S-16, S-111
ICW Tenant S-111
ICW Trust S-111
Impositions S-68
Indirect Participants S-129
Innkeepers Anticipated Repayment Date S-13, S-90
Innkeepers Borrowers S-89
Innkeepers Current Interest Rate S-13, S-90
Innkeepers Default Date S-91
Innkeepers Defeasance Date S-91
Innkeepers Deposit Account S-93
Innkeepers Excess Cash Flow S-91
Innkeepers Excess Interest S-90
Innkeepers Franchise Agreements S-97
Innkeepers GP S-90
Innkeepers Individual Borrower S-89
Innkeepers LP S-90
Innkeepers Marriott Management Agreements S-97
Innkeepers Marriott Manager S-92
Innkeepers Maturity Date S-90
Innkeepers Monthly Debt Service Payments S-13, S-90
Innkeepers Mortgages S-12, S-89
Innkeepers Operating Leases S-96
Innkeepers Operators S-96
Innkeepers Permitted Encumbrances S-90
Innkeepers Properties S-13, S-89
Innkeepers REIT S-90
Innkeepers Release Amount S-92
Innkeepers Revised Interest Rate S-13, S-90
Interest Reserve Account S-153
J
JF Hotel IV Operator S-96
JF Hotel V Operator S-96
L
Leasing S-11, S-74
Lehman Brothers S-30, S-80
Linpro Jersey City S-78
S-178
<PAGE>
Linpro-CP S-74
Loan DSCR S-48
Local Account S-67
Lock Box Accounts S-152
Lower-Tier Distribution Account S-153
Lower-Tier REMIC S-2, S-25, S-169
Lower-Tier REMIC Regular Interests S-169
LP I S-74
LP II S-74
LTV S-9, S-45
LUSTs S-34
M
Manager Lockbox Account S-69
Manager's Account S-67
Marriott Franchise Agreements S-97
Merrill Lynch S-30, S-80
Method of Distribution S-2
M&H Operating Expense Account S-84
M&H Retail Anticipated Repayment Date S-12, S-82
M&H Retail Cash Collateral Account S-84
M&H Retail Current Interest Rate S-12, S-82
M&H Retail Defeasance Date S-83
M&H Retail Excess Cash Flow S-82
M&H Retail Excess Interest S-82
M&H Retail Management Agreement S-88
M&H Retail Manager S-88
M&H Retail Maturity Date S-12, S-82
M&H Retail Monthly Debt Service Amount S-12
M&H Retail Monthly Debt Service Payment Amount S-82
M&H Retail Mortgages S-11
M&H Retail Pool Borrower S-12, S-81
M&H Retail Pool Properties S-11, S-81
M&H Retail Revised Interest Rate S-12, S-82
MHRP S-81
MHRP GP S-81
MII S-64
MII Master Account S-67
ML Lease S-80
Moody's S-27, S-174
Mortgage S-44
Mortgage Loan Purchase and Sale Agreement S-44
Mortgage Loans S-1
Mortgage Pool S-1
Mortgage Rate S-9
Mortgaged Properties S-1, S-8
Mortgaged Property S-44
Mortgages S-8
N
NACC S-44
Negative Adjustment S-170
Note S-8, S-44
S-179
<PAGE>
Notional Balance S-2
O
Offered Certificates S-1
Originator S-1, S-44
P
Participants S-129
Pass-Through Rate S-2, S-19
PCBs S-34
Permitted Investments S-153
P&I Advance S-151
P&I Advances S-23
Plan S-132, S-171
Plans S-26
Pooling and Servicing Agreement S-7, S-145
Prepayment Lockout Period S-41
Private Certificates S-1, S-117
Property Advances S-151
Property Condition Reports S-62
R
Rating Agencies S-27, S-174
Record Date S-118
Regular Certificates S-25
REMIC S-2, S-25
REO Account S-117
REO Property S-117
Repurchase Price S-149
Reserve Accounts S-17, S-45
Residual Certificates S-25
Restoration Benchmark S-71, S-79
Restricted Group S-26, S-172
Revised Interest Rate S-42
Rules S-130
S
Scenarios S-135
SEL S-2
Servicer S-2, S-7, S-44, S-165
Servicer Remittance Date S-151
Servicer|Als Appraisal Reduction Estimate S-128
Servicing Compensation S-118
Servicing Expenses S-65
Servicing Fee S-165
Servicing Fee Rate S-165
Servicing Standard S-150
Similar Law S-171
SMMEA S-172
S&P S-27, S-174
SPE I S-74
SPE II S-74
Special Servicer S-166
Special Servicing Fee S-166
Street S-10, S-74
S-180
<PAGE>
Subordinate Class Advance Amount S-151
T
Tax and Insurance Account S-67
Terms and Conditions S-131
Trust Fund S-1
Trust REMICs S-2, S-169
Trustee S-2, S-7, S-44
Trustee Fee S-163
Trustee Fee Rate S-163
U
UDC Loan S-78
Underwriter S-1, S-7
Updated Appraisal S-159
Upper-Tier Distribution Account S-153
Upper-Tier REMIC S-2, S-25, S-169
Urban S-10, S-74
U.S. Obligations S-18
W
WIH Loan S-35, S-114
Withheld Amounts S-153
</TABLE>
S-181
<PAGE>
EXHIBIT A-1
FAIRFIELD INN PROPERTIES
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP PAGE
- --------------------------------------------- ----
Report of Independent Public Accountants .......................... A-1-2
Statement of Operations ............................................ A-1-3
Balance Sheet ...................................................... A-1-4
Statement of Changes in Partners' Capital ......................... A-1-5
Statement of Cash Flows ............................................ A-1-6
Notes to Financial Statement ....................................... A-1-7
A-1-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE PARTNERS OF FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP:
We have audited the accompanying balance sheet of Fairfield Inn by Marriott
Limited Partnership (a Delaware limited partnership) as of December 31, 1996
and 1995 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, 1996. 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 Fairfield Inn by Marriott
Limited Partnership as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
February 28, 1997
A-1-2
<PAGE>
STATEMENT OF OPERATIONS
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ----------
<S> <C> <C> <C>
REVENUES
Inn (Note 3) ..................................... $47,065 $45,262 $40,854
Other ............................................ 749 651 356
--------- --------- ----------
47,814 45,913 41,210
--------- --------- ----------
OPERATING COSTS AND EXPENSES
Interest ......................................... 16,645 16,585 16,464
Depreciation and amortization .................... 13,239 13,338 14,639
Incentive management fee ......................... 4,898 4,666 4,304
Property taxes ................................... 3,270 3,528 3,542
Fairfield Inn system fee ......................... 2,923 2,751 2,555
Ground rent ...................................... 2,627 2,570 2,499
Base management fee .............................. 1,949 1,834 851
Insurance and other .............................. 843 1,592 530
--------- --------- ----------
46,394 46,864 45,384
--------- --------- ----------
NET INCOME/(LOSS) ................................. $ 1,420 $ (951) $(4,174)
========= ========= ==========
ALLOCATION OF NET INCOME/(LOSS)
General Partner .................................. $ 14 $ (10) $ (42)
Limited Partners ................................. 1,406 (941) (4,132)
--------- --------- ----------
$ 1,420 $ (951) $(4,174)
========= ========= ==========
NET INCOME/(LOSS) PER LIMITED PARTNER UNIT (83,337
UNITS) ........................................... $ 17 $ (11) $ (50)
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-1-3
<PAGE>
BALANCE SHEET
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
ASSETS
Property and equipment, net ............................................. $164,148 $172,099
Deferred financing and organization costs, net of accumulated
amortization .......................................................... 4,622 644
Property improvement fund ............................................... 3,115 2,641
Due from Marriott International, Inc. and affiliates .................... 3,079 3,057
Cash and cash equivalents ............................................... 10,028 7,040
---------- ----------
Total Assets ........................................................... $184,992 $185,481
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES
Mortgage debt ........................................................... $164,847 $164,850
Due to Marriott International, Inc. and affiliates ...................... 13,451 11,199
Accounts payable and accrued liabilities ................................ 4,928 668
---------- ----------
Total Liabilities ...................................................... 183,226 176,717
---------- ----------
PARTNERS' CAPITAL
General Partner
Capital contribution, net of offering costs of $1,109 .................. 813 813
Capital distributions .................................................. (509) (425)
Cumulative net losses .................................................. (236) (250)
---------- ----------
68 138
---------- ----------
Limited Partners
Capital contributions, net of offering costs of $7,250 .................. 75,479 75,479
Capital distributions ................................................... (50,436) (42,102)
Cumulative net losses ................................................... (23,345) (24,751)
---------- ----------
1,698 8,626
---------- ----------
Total Partners' Capital ................................................ 1,766 8,764
---------- ----------
$184,992 $185,481
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-1-4
<PAGE>
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
--------- ---------- ----------
<S> <C> <C> <C>
Balance, December 31, 1993 $358 $30,367 $30,725
Capital distributions .... (84) (8,334) (8,418)
Net loss .................. (42) (4,132) (4,174)
--------- ---------- ----------
Balance, December 31, 1994 232 17,901 18,133
Capital distributions .... (84) (8,334) (8,418)
Net loss .................. (10) (941) (951)
--------- ---------- ----------
Balance, December 31, 1995 138 8,626 8,764
Capital distributions .... (84) (8,334) (8,418)
Net income ................ 14 1,406 1,420
--------- ---------- ----------
Balance, December 31, 1996 $ 68 $ 1,698 $ 1,766
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these finanical statements.
A-1-5
<PAGE>
STATEMENT OF CASH FLOWS
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ....................................... $ 1,420 $ (951) $(4,174)
Noncash items:
Depreciation and amortization ......................... 13,239 13,338 14,639
Deferred management fee ............................... 2,470 2,857 3,429
Amortization of deferred financing costs as interest
expense ............................................. 646 644 523
Loss on disposal of equipment ......................... -- 591 301
Straight-line ground rent adjustment .................. -- -- 246
Changes in operating accounts:
Accounts payable and accrued liabilities .............. (27) 279 (16)
Due to/from Marriott International, Inc. and affiliates (240) (401) (278)
---------- ---------- ----------
Cash provided by operations ......................... 17,508 16,357 14,670
---------- ---------- ----------
INVESTING ACTIVITIES
Additions to property and equipment, net ................ (5,288) (4,495) (5,552)
Change in property improvement fund ..................... (474) (1,203) 389
---------- ---------- ----------
Cash used in investing activities ................... (5,762) (5,698) (5,163)
---------- ---------- ----------
FINANCING ACTIVITIES
Capital distributions ................................... (8,418) (8,418) (8,418)
Payment of financing costs .............................. (337) -- --
Repayment of mortgage debt .............................. (3) -- --
---------- ---------- ----------
Cash used in financing activities ................... (8,758) (8,418) (8,418)
---------- ---------- ----------
INCREASE IN CASH AND CASH EQUIVALENTS ...................... 2,988 2,241 1,089
CASH AND CASH EQUIVALENTS at beginning of year ............. 7,040 4,799 3,710
---------- ---------- ----------
CASH AND CASH EQUIVALENTS at end of year ................... $10,028 $ 7,040 $ 4,799
========== ========== ==========
SUPPLEMENT DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for mortgage interest ......................... $15,941 $15,941 $15,941
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these finanical statements.
A-1-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
FAIRFIELD INN BY MARRIOTT LIMITED PARTNERSHIP
DECEMBER 31, 1996 AND 1995
NOTE 1. THE PARTNERSHIP
Description of the Partnership
Fairfield Inn by Marriott Limited Partnership (the "Partnership"), a Delaware
limited partnership, was formed to acquire, own and operate 50 Fairfield Inn
by Marriott properties (the "Inns") located in sixteen states and the land on
which 18 of the Inns are situated. The Partnership leases the land underlying
32 of the Inns from Marriott International, Inc. ("MII") and certain of its
affiliates (the "Land Leases"). Of the Partnership's 50 Inns, seven are
located in each of Georgia and North Carolina; six in Michigan; four in each
of Florida, Illinois, and Ohio; and three or less in each of the other ten
states. 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 FIBM One Corporation (the
"General Partner"), a Delaware corporation and a wholly-owned subsidiary of
Host Marriott. The Inns are managed by Fairfield FMC Corporation (the
"Manager"), a wholly-owned subsidiary of MII, as part of the Fairfield Inn by
Marriott hotel system.
The Partnership was formed on August 23, 1989, and operations commenced on
July 31, 1990 (the "Closing Date"). Between November 17, 1989, and the
Closing Date, 83,337 limited partnership interests (the "Units") were sold in
a public offering. The offering price per unit was $1,000. The General
Partner contributed $841,788 for its 1% general partnership interest and $1.1
million to establish the initial working capital reserve of the Partnership
at $1.5 million (as required in the partnership agreement). In addition, the
General Partner has a 10% limited partnership interest through the purchase
of Units on the Closing Date.
On November 17, 1989, the Partnership executed a purchase agreement (the
"Purchase Agreement") with Host Marriott to acquire the Inns and the land on
which 18 Inns are situated for $235.5 million. The total purchase price was
paid from proceeds of the mortgage financing and sale of the Units.
Partnership Allocations and Distributions
Partnership allocations and distributions are generally made as follows:
a. Cash available for distribution for each fiscal year will be
distributed quarterly as follows: (i) 99% to the limited partners and
1% to the General Partner (collectively, the "Partners") until the
Partners have received, with respect to such fiscal year, an amount
equal to the Partners' Preferred Distribution (9% of the excess of
original cash contributions over cumulative distributions of net
refinancing and sales proceeds ("Capital Receipts") on an annualized
basis in 1990, 9.5% in 1991 and 1992 and 10% for each year thereafter);
(ii) remaining cash available for distribution will be distributed as
follows, depending on the amount of Capital Receipts previously
distributed:
1) 99% to the limited partners and 1% to the General Partner, if the
Partners have received aggregate cumulative distributions of Capital
Receipts of less than 50% of their original capital contributions;
or
2) 90% to the limited partners and 10% to the General Partner, if the
Partners have received aggregate cumulative distributions of Capital
Receipts equal to or greater than 50% but less than 100% of their
original capital contributions; or
A-1-7
<PAGE>
3) 80% to the limited partners and 20% to the General Partner, if the
Partners have received aggregate cumulative distributions of Capital
Receipts equal to 100% or more of their original capital
contributions.
b. Refinancing proceeds and sale proceeds from the sale or other
disposition of less than substantially all of the assets of the
Partnership will be distributed (i) 99% to the limited partners and 1%
to the General Partner until the Partners have received the then
outstanding Partners' 12% Preferred Distribution, as defined, and
cumulative distributions of Capital Receipts equal to 100% of their
original capital contributions; and (ii) thereafter 80% to the limited
partners and 20% to the General Partner.
c. Sale proceeds from the sale of substantially all of the assets of the
Partnership will be distributed to the Partners pro-rata in accordance
with their capital account balances as adjusted to take into account
gain or loss resulting from such sale.
d. Net profits for each fiscal year generally will be allocated in the
same manner in which cash available for distribution is distributed.
Net losses for each fiscal year generally will be allocated 99% to the
limited partners and 1% to the General Partner.
e. Gains recognized by the Partnership generally will be allocated in
the following order of priority: (i) to those Partners whose capital
accounts have negative balances until such negative balances are
brought to zero; (ii) to all Partners up to the amount necessary to
bring the Partners' capital account balances to an amount equal to
their pro-rata share of the Partners' 12% Preferred Distribution, as
defined, plus their Net Invested Capital, as defined; and (iii)
thereafter, 80% to the limited partners and 20% to the General Partner.
f. For financial reporting purposes, profits and losses are 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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A-1-8
<PAGE>
Working Capital and Supplies
Pursuant to the terms of the Partnership's management agreement discussed in
Note 8, the Partnership is required to provide the Manager with working
capital and supplies to meet the operating needs of the Inns. 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 the
termination of the management agreement, the Manager is required to convert
working capital and supplies into cash and return it to the Partnership. As a
result of these conditions, the individual components of working capital and
supplies controlled by the Manager are not reflected in the accompanying
balance sheet.
Revenues and Expenses
Inn revenues represent house profit of the Partnership's Inns since the
Partnership has delegated substantially all of the operating decisions
related to the generation of house profit of the Inns to the Manager. House
profit reflects Inn operating results which flow to the Partnership as
property owner and represents gross Inn sales less property-level expenses,
excluding depreciation and amortization, Fairfield Inn system, 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 (see Note 3).
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets as
follows:
<TABLE>
<CAPTION>
<S> <C>
Land improvements 30 years
Leasehold improvements 30 years
Building and improvements 30 years
Furniture and equipment 4 to 10 years
</TABLE>
All property and equipment is pledged as security for the mortgage debt
described in Note 6.
The Partnership assesses impairment of its real estate properties based on
whether estimated future undiscounted cash flows from such properties on an
individual property basis will be less than their net book value. If a
property is impaired, its basis is adjusted to fair market value.
Deferred Financing and Organization Costs
Deferred financing costs represent the costs incurred in connection with
obtaining the mortgage debt (see Note 6) and are amortized over the term
thereof. Organization costs incurred in the formation of the Partnership were
amortized using the straight-line method over five years and were fully
amortized as of December 31, 1995. As of December 31, 1996, the Partnership
incurred approximately $4,622,000 of costs in connection with the proposed
refinancing (see Note 6). At December 31, 1996 and 1995, accumulated
amortization of deferred financing costs totaled $3,513,000 and $2,867,000,
respectively.
A-1-9
<PAGE>
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.
Ground Rent
The Land Leases with MII or affiliates (see Note 7) include scheduled
increases in minimum rents per property. These scheduled rent increases,
which are included in minimum lease payments, are being recognized by the
Partnership on a straight-line basis over the 99 year term of the leases. The
adjustment included in ground rent expense and Due to Marriott International,
Inc. and affiliates to reflect minimum lease payments on a straight-line
basis was a decrease of $218,000 for each of the years ended December 31,
1996 and 1995, and was an increase of $246,000 for the year ended December
31, 1994. Deferred ground rent as of December 31, 1996 and 1995 was $665,000
and $883,000, respectively.
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 profits and losses to the individual Partners.
Significant differences exist between the net income (loss) for financial
reporting purposes and the net income (loss) as reported in the Partnership's
tax return. These differences are due primarily to the use for income tax
purposes of accelerated depreciation methods, shorter depreciable lives of
the assets and differences in the timing of recognition of certain fees and
straight-line rent adjustments. As a result of these differences, the excess
of the net assets reported in the accompanying financial statements over the
Partnership's tax basis in net assets is $2,013,000 and $9,588,000 as of
December 31, 1996 and 1995, respectively.
New Statement of Financial Accounting Standards
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.
A-1-10
<PAGE>
NOTE 3. REVENUES
Partnership revenues consist of Inn operating results for the three years
ended December 31 (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
SALES .................... $97,441 $91,693 $85,153
--------- --------- ---------
EXPENSES
Departmental Direct
Costs
Rooms .................. 49,109 45,239 43,295
Chain Services ......... 1,267 1,192 1,004
--------- --------- ---------
50,376 46,431 44,299
--------- --------- ---------
REVENUES ................. $47,065 $45,262 $40,854
========= ========= =========
</TABLE>
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following as of December 31 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Land and improvements ........ $ 37,134 $ 36,958
Leasehold improvements ....... 89,056 89,056
Building and improvements ... 57,247 52,957
Furniture and equipment ..... 67,007 66,185
---------- ----------
250,444 245,156
Less accumulated depreciation
and amortization ............ (86,296) (73,057)
---------- ----------
$164,148 $172,099
========== ==========
</TABLE>
A-1-11
<PAGE>
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, 1996 As of December 31, 1995
--------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C>
Mortgage debt ................ $164,847 $164,847 $164,850 $164,850
Management fees due to
Fairfield FMC Corporation .. $ 12,786 $ 843 $ 10,316 $ 1,017
</TABLE>
The estimated fair value of the mortgage debt is based on the expected future
debt service payments discounted at estimated market rates. Management fees
due to Fairfield FMC Corporation (included in Due to Marriott International,
Inc. and affiliates on the accompanying balance sheet) are valued based on
the expected future payments from operating cash flow discounted at risk
adjusted rates.
NOTE 6. DEBT
Mortgage Debt
On July 31, 1990, the partnership borrowed $164.9 million, bearing a fixed
interest rate of 9.67%, pursuant to the terms of a non-recourse mortgage loan
agreement (the "Mortgage Debt") to finance a portion of the purchase price of
the Inns. The Mortgage Debt required semi-annual interest payments with no
principal payments required through maturity. Although the Mortgage Debt
matured on December 31, 1996, the Partnership was unable to refinance the
debt until January 13, 1997 (see Note 9). During the period of December 31,
1996 through January 13, 1997, the existing Mortgage Debt bore interest at a
default rate of 12.67%.
The Mortgage Debt was secured by a first mortgage on the Partnership's fee or
leasehold interest in each Inn, a security interest in all personal property
associated with the Inns and a security interest in the Partnership's rights
under the management agreement, the Purchase Agreement, and the Land Leases.
NOTE 7. LAND LEASES
The land on which 32 of the Inns are situated is leased by the Partnership
from MII or its affiliates. The Land Leases expire on November 30, 2088 and
provide that the Partnership will pay annual rents equal to the greater of a
specified minimum rent for each property or a percentage rent based on gross
sales of the Inn operated thereon. The minimum rentals are adjusted at
various anniversary dates through 1999, as defined in the agreements. The
minimum rentals are
A-1-12
<PAGE>
adjusted annually for the remaining life of the leases based on changes in
the Consumer Price Index. The percentage rent, which also varies from
property to property, is fixed at predetermined percentages of gross sales
that increase over time.
Minimum future rental payments during the term of the Land Leases are as
follows (in thousands):
<TABLE>
<CAPTION>
Lease Year Minimum Rental
- ------------ --------------
<S> <C>
1997 ........ $ 2,659
1998 ........ 2,659
1999 ........ 2,659
2000 ........ 2,659
2001 ........ 2,659
Thereafter . 231,333
--------------
$244,628
==============
</TABLE>
Total rental expense on the Land Leases was $2,627,000 for 1996, $2,570,000
for 1995 and $2,499,000 for 1994.
Under the terms of the Land Leases, during any fiscal year from 1993 through
1996, the payment of rental expense was subordinate to an $8.4 million annual
return to the Partnership. Any rent that was not paid currently as a result
of such subordination was payable out of Capital Receipts remaining after the
Partnership's payment or retention of certain priority returns and other
amounts. No rental expense was subordinated for 1993 through 1996.
Subsequent to year-end, the Land Leases were amended (see Note 9).
NOTE 8. MANAGEMENT AGREEMENT
The Manager operates the Inns pursuant to a long-term management agreement
(the "Management Agreement") with an initial term expiring on December 31,
2009. The Manager may renew the Management Agreement, as to one or more of
the Inns at its option, for up to five additional 10-year terms plus one
five-year term. The Partnership may terminate the Management Agreement after
December 1995 if specified minimum operating results are not achieved.
However, the Manager may prevent termination by paying the Partnership the
amount by which the minimum operating results were not achieved.
The Manager earns a base management fee equal to 1% of gross sales from Inn
operations for each fiscal year through 1994 and 2% of gross sales from Inn
operations for each fiscal year thereafter. For the years 1993 through 1996,
payment of the base management fee was subordinate to an $8.4 million annual
return to the Partnership subject to certain aggregate limitations when
combined with ground rent deferrals for the same period. The maximum amount
of base management fees and ground rent to be subordinated during this
four-year period was limited to $8,000,000. Any base management fees that
were not paid currently as a result of such subordination were payable out of
Capital Receipts subject to the Partnership payment or retention of certain
priority returns and other amounts. As of December 31, 1996, no base
management fees or ground rent were deferred. The Management Agreement also
provides for payment of a Fairfield Inn system fee equal to 3% of gross sales
from Inn operations.
A-1-13
<PAGE>
In addition, the Manager is entitled to an incentive management fee equal to
15% of Operating Profit, as defined, increasing to 20% after the Inns have
achieved total Operating Profit during any 12 month period equal to or
greater than $33.9 million. The incentive management fee is payable out of
50% of cash flow from operations remaining after payment of ground rent, debt
service, partnership administrative expenses and the owner's priority return,
as defined. In accordance with the Management Agreement, incentive management
fees through 1992 were waived by the Manager, as cash flow available for
incentive management fees, as defined, was insufficient to pay the fees.
Incentive management fees earned after 1992 accrue and are payable as
outlined above or from Capital Receipts. During 1996, 1995 and 1994, the
Manager deferred $2,470,000, $2,857,000 and $3,429,000 of incentive
management fees, respectively. Cumulative deferred incentive management fees
at December 31, 1996 and 1995 were $12,786,000 and $10,316,000, respectively.
The Manager is required to furnish certain services ("Chain Services") which
are furnished generally on a central or regional basis to all managed or
owned Inns in the Fairfield Inn by Marriott hotel system. The total amount of
Chain Services allocated to the Partnership for the years ended December 31,
1996, 1995 and 1994 was $1,267,000, $1,192,000 and $1,004,000, respectively.
In addition, the Manager maintains a marketing fund to pay the costs
associated with certain system-wide advertising, marketing, sales,
promotional and public relations materials and programs. Each Inn within the
system contributes 2.5% of gross Inn sales to the marketing fund. The Manager
has no ownership interest in the marketing fund. For the years ended December
31, 1996, 1995 and 1994, the Partnership contributed $2,436,000, $2,292,000
and $2,129,000, respectively, to the marketing fund.
The Partnership is required to provide the Manager with working capital to
meet the operating needs of the Inns. Upon termination of the Management
Agreement, the working capital will be returned to the Partnership. As of
December 31, 1996 and 1995, $1,000,000 had been advanced to the Manager for
working capital and is included in Due from Fairfield FMC Corporation on the
accompanying balance sheet.
The Management Agreement provides for the establishment of a property
improvement fund for the Inns to cover (a) the cost of certain non-routine
repairs and maintenance to the Inns which are normally capitalized; and (b)
the cost of replacements and renewals to the Inns' property and improvements.
Contributions to the property improvement fund are based on a percentage of
gross sales of each Inn equal to 6% for 1996, 1995 and 1994. For the years
ended December 31, 1996, 1995 and 1994, the Partnership contributed
$5,846,000, $5,502,000 and $5,109,000, respectively, to the property
improvement fund.
Subsequent to year-end, the Management Agreement was amended (see Note 9).
NOTE 9. SUBSEQUENT EVENT
Mortgage Debt
On January 13, 1997 (the "Refinancing Date") the Mortgage Debt was
successfully refinanced with a new third party lender. The principal amount
of the Partnership's refinanced debt was increased from $164.8 million to
$165.4 million. Proceeds from the new loan were used to repay the existing
mortgage debt and pay refinancing costs. The refinanced debt continues to be
non-recourse, bears interest at a fixed rate of 8.40% and requires monthly
payments of principal and interest based upon a 20-year amortization schedule
for a 10-year term expiring January 11, 2007. Thereafter, until the final
maturity date of January 11, 2017, interest is payable at an adjusted rate,
as defined, and all excess cash flow is applied toward principal
amortization.
A-1-14
<PAGE>
Debt maturities under the refinanced mortgage are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1997 ........ $ 3,002
1998 ........ 3,639
1999 ........ 3,912
2000 ........ 4,253
2001 ........ 4,625
Thereafter . 145,969
---------
$165,400
=========
</TABLE>
The refinanced mortgage debt is secured by first mortgages on all of the
Inns, the land on which they are located, or an assignment of the
Partnership's interest under the Land Leases, including ownership interest in
all improvements thereon, fixtures and personal property related thereto.
As part of the refinancing, the Partnership is required to establish various
reserves for capital expenditures, working capital, debt service and
insurance needs. On the Refinancing Date, the Partnership established
reserves totaling $3.9 million for certain capital expenditure items. The
funds will be expended during 1997 for various renewals and replacements,
site improvements, Americans with Disabilities Act of 1990 modifications and
environmental studies undertaken in conjunction with the refinancing.
Additionally, the Partnership is required to deposit two months' debt service
payments, or $2,850,000, into a debt service reserve payable in 12 equal
consecutive monthly installments commencing on March 11, 1997. The
Partnership is also required to deposit $161,000 into a ground rent reserve
payable in six equal monthly installments commencing on March 11, 1997. The
Partnership is also obligated to fund $300,000 into an earthquake restoration
reserve account, payable in 3 consecutive monthly installments commencing on
January 31, 1997. Transfers from this fund are to be made in conjunction with
any damages (not covered by insurance) suffered from earthquakes to the two
Inns located in California.
In addition, the Partnership has entered into a Working Capital Maintenance
and Supplemental Debt Service Agreement ("Agreement") with the Manager,
effective January 13, 1997. As part of this Agreement, the Partnership has
agreed to furnish the Manager additional working capital to be deposited into
a segregated interest bearing account (the "Working Capital Reserve"). The
Working Capital Reserve is to be funded from Operating Profit, as defined,
retained by or distributed to the Partnership as such amounts become
available, until the Working Capital Reserve reaches $670,000. This Agreement
also requires the funding of another segregated account for debt service
shortfalls (the "Supplemental Debt Service Reserve"). This reserve is also to
be funded out of Operating Profit retained or distributed to the Partnership
as such amounts become available, until the Supplemental Debt Service Reserve
reaches $1,425,000.
The lender is currently working on the securitization of the mortgage debt
through the issuance and sale of commercial mortgage-backed securities. In
connection with the securitization, the Partnership may be required to
establish additional reserves.
Management Agreement
The Management Agreement (see Note 8) has also been amended in conjunction
with the refinancing, effective January 13, 1997. Per the amendment, the
initial term of the Management Agreement has been extended ten years from
December 31, 2009 to December 31, 2019. However, the renewal period has been
shortened. The Manager may renew
A-1-15
<PAGE>
the Management Agreement, as to one or more of the Inns at its option, for up
to four successive periods of ten years and one period of five years. The
amendment also reduces the owner's priority return, as defined, by the amount
of any outstanding advances by the Manager for working capital needs or
funding of shortfalls in the debt service reserve account. These loans bear
interest at 1% above the prime rate. Additionally, the amendment increases
the amount of the contribution to the property improvement fund by 1% of
gross sales of each Inn. Commencing in 1997 and for all fiscal years
thereafter, the Partnership will contribute 7% of gross sales of each Inn.
However, if the Manager determines 7% exceeds the amount needed for making
capital expenditures, then the Manager can adjust the incentive management
fee calculation to exclude as a deduction in calculating incentive fees up to
1 percentage point of contributions to the property improvement fund.
Land Leases
Additionally, the Land Leases (see Note 7) have also been amended beginning
in 1997. Until the refinanced mortgage debt is repaid, the payment of rental
expense exceeding 3% of gross sales from the 32 leased Inns in the aggregate
shall be deferred in any fiscal year that cash flow is less than regularly
scheduled principal and interest payments on the mortgage debt.
A-1-16
<PAGE>
EXHIBIT A-2
HUDSON PROPERTY
HUDSON STREET OWNERS LIMITED PARTNERSHIP I AND
HUDSON STREET OWNERS LIMITED PARTNERSHIP II PAGE
- ------------------------------------------- ----
Report of Independent Public Accountants ........................... A-2-2
Combined Balance Sheets ............................................. A-2-3
Combined Statements of Operations ................................... A-2-4
Combined Statements of Partners' Equity ............................ A-2-5
Combined Statements of Cash Flows ................................... A-2-6
Notes to Combined Financial Statements ............................. A-2-7
A-2-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Hudson Street Owners Limited Partnership I and
Hudson Street Owners Limited Partnership II:
We have audited the accompanying combined balance sheets of Hudson Street
Owners Limited Partnership I and Hudson Street Owners Limited Partnership II
(Delaware Limited Partnerships) as of December 31, 1996 and 1995, and the
related combined statements of operations, partners' equity and cash flows for
the three years in the period ended December 31, 1996. These combined
financial statements are the responsibility of the Partnerships' management.
Our responsibility is to express an opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Hudson
Street Owners Limited Partnership I and Hudson Street Owners Limited
Partnership II as of December 31, 1996 and 1995, and their combined results of
operations and cash flows for the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Philadelphia, Pa.,
March 7, 1997
A-2-2
<PAGE>
HUDSON STREET OWNERS LIMITED PARTNERSHIP I AND
HUDSON STREET OWNERS LIMITED PARTNERSHIP II
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------
ASSETS: 1996 1995
----------- ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS, including tenant
security deposits of $245,992 and $87,557 in
1996 and 1995, respectively
(Notes 2 an$ 5) 2,023,563 $ 263,151
RESTRICTED CASH (Note 3) 61,487 61,487
ADVANCES TO AFFILIATE (Note 5) 114,504 238
ACCOUNTS RECEIVABLE 715,916 612,554
ACCRUED RENTAL INCOME (Notes 2 and 10) 15,974,723 14,800,975
OFFICE PROPERTY, net (Notes 2, 4, 6, 7, 10 and 12) 179,065,933 185,021,646
DEFERRED CHARGES, net (Note 2) 8,254,157 7,949,246
OTHER ASSETS 78,012 67,469
------------ ------------
$206,288,295 $208,776,766
============ ============
LIABILITIES AND PARTNERS' EQUITY
MORTGAGE NOTES PAYABLE (Notes 2, 8 and 12) $182,450,731 $179,922,867
NOTES PAYABLE (Note 7) -- 2,069,657
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
(Notes 6 and 11) 514,983 2,449,980
ACCRUED INTEREST PAYABLE (Notes 7 and 8) 1,178,962 2,001,305
DEFERRED INCOME (Note 2) 715,180 --
TENANT SECURITY DEPOSITS (Note 5) 245,992 87,557
------------ ------------
185,105,848 186,531,366
COMMITMENTS AND CONTINGENCIES
(Notes 2, 7, 9, 11 and 12)
PARTNERS' EQUITY (Notes 1, 2, 9 and 12) 21,182,447 22,245,400
------------ ------------
$206,288,295 $208,776,766
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
A-2-3
<PAGE>
HUDSON STREET OWNERS LIMITED PARTNERSHIP I AND
HUDSON STREET OWNERS LIMITED PARTNERSHIP II
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Base rents (Notes 2, 6 and 10) $ 20,719,097 $ 20,264,536 $ 16,094,691
Tenant reimbursements 8,504,287 6,089,891 4,377,881
Interest income 103,573 9,976 3,621
------------ ------------ ------------
29,326,957 26,364,403 20,476,193
------------ ------------ ------------
OPERATING EXPENSES (Notes 5 and 6) 9,145,082 8,302,601 7,174,237
INTEREST EXPENSE (Notes 7 and 8) 13,143,651 15,017,019 13,639,132
DEPRECIATION 6,186,228 6,174,763 6,162,334
AMORTIZATION 1,155,949 1,152,146 1,469,743
------------ ------------ ------------
29,630,910 30,646,529 28,445,446
------------ ------------ ------------
Net loss $ (303,953) $ (4,282,126) $ (7,969,253)
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
A-2-4
<PAGE>
HUDSON STREET OWNERS LIMITED PARTNERSHIP I AND
HUDSON STREET OWNERS LIMITED PARTNERSHIP II
COMBINED STATEMENTS OF PARTNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Hudson I Hudson II Total
------------ ------------ ------------
<S> <C> <C> <C>
PARTNERS' EQUITY,
January 1, 1994 $ 34,151,811 $ 344,968 $ 34,496,779
Net loss (7,889,560) (79,693) (7,969,253)
------------ ------------ ------------
PARTNERS' EQUITY,
December 31, 1994 26,262,251 265,275 26,527,526
Net loss (4,239,305) (42,821) (4,282,126)
------------ ------------ ------------
PARTNERS' EQUITY,
December 31, 1995 22,022,946 222,454 22,245,400
Special distributions (Note 9) (751,410) (7,590) (759,000)
Net loss (300,913) (3,040) (303,953)
------------ ------------ ------------
PARTNERS' EQUITY,
December 31, 1996 $ 20,970,623 $ 211,824 $ 21,182,447
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
A-2-5
<PAGE>
HUDSON STREET OWNERS LIMITED PARTNERSHIP I AND
HUDSON STREET OWNERS LIMITED PARTNERSHIP II
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Year Ended
December 31,
--------------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Rental receipts $ 28,661,454 $ 18,962,474 $ 14,992,234
Rental expenses paid (11,080,079) (8,715,651) (9,600,165)
Interest received 103,573 9,976 3,621
Interest paid (13,965,994) (15,555,263) (12,040,151)
------------ ------------ ------------
Net cash provided by (used in)
operating activities 3,718,954 (5,298,464) (6,644,461)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for construction-in-progress and
office property (230,515) -- (19,029,373)
Reimbursements for consturction-in-progress
and office property -- 21,934 --
Expenditures for deferred charges (110,374) (141,012) (2,636,018)
Increase in other assets (10,543) (14,670) (3,195)
Decrease in restricted cash -- -- 1,280
------------ ------------ ------------
Net cash used in investing activities (351,432) (133,748) (21,667,306)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from mortgage notes payable 2,527,864 3,367,057 27,670,165
Proceeds from notes payable -- 1,575,000 --
Repayments of notes payable (2,069,657) (28,137) --
Expenditures for deferred financing charges (1,350,486) -- --
(Increase) decrease in advances to affiliate (114,266) 85,500 (201,437)
Increase in tenant security deposits 158,435 20,991 11,785
Special distribution to partners (759,000) -- --
------------ ------------ ------------
Net cash (used in) provided by
financing activities (1,607,110) 5,020,411 27,480,513
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents 1,760,412 (411,801) (831,254)
CASH AND CASH EQUIVALENTS, BEGINNING
OF YEAR 263,151 674,952 1,506,206
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END
OF YEAR $ 2,023,563 $ 263,151 $ 674,952
============ ============ ============
</TABLE>
A-2-6
<PAGE>
HUDSON STREET OWNERS LIMITED PARTNERSHIP I AND
HUDSON STREET OWNERS LIMITED PARTNERSHIP II
COMBINED STATEMENTS OF CASH FLOWS
(continued)
<TABLE>
<CAPTION>
For the Year Ended
December 31,
-----------------------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
RECONCILIATION OF NET LOSS TO NET CASH
PROVIDED BY OPERATING ACTIVITIES:
Net loss $ (303,953) $(4,282,126) $(7,969,253)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 7,342,177 7,326,909 7,632,077
Increase in accrued rental income (1,173,748) (7,359,868) (4,353,702)
Increase in accounts receivable (103,362) (182,085) (164,543)
Decrease in accrued interest payable (822,343) (538,244) 1,598,982
Decrease in accounts payable and accrued
expenses (1,934,997) (263,050) (2,425,929)
Increase in deferred income 715,180 -- (962,093)
----------- ----------- -----------
Net cash provided by operating activities $ 3,718,954 $(5,298,464) $(6,644,461)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
A-2-7
<PAGE>
HUDSON STREET OWNERS LIMITED PARTNERSHIP I AND
HUDSON STREET OWNERS LIMITED PARTNERSHIP II
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION AND NATURE OF OPERATIONS:
Hudson Street Owners Limited Partnership I ("Hudson I") and Hudson Street
Owners Limited Partnership II ("Hudson II"), both Delaware limited
partnerships, were formed on December 27, 1989, for the purpose of investing
in certain related entities as described below. These entities acquired a
parcel of land located at 101 Hudson Street in Jersey City, New Jersey, and
have constructed an office building containing approximately 1,200,000 square
feet at this site. As of December 31, 1996, 1995 and 1994, the office
building was 99%, 99% and 98% leased, respectively.
Hudson Street Owners SPE, Inc. ("SPE I") and Hudson Street Owners SPE II,
Inc. ("SPE II"), both of which are Delaware corporations, were formed on
December 31, 1996, for the purpose of investing in certain related entities
as described below. For accounting purposes, SPE I and SPE II are included in
the combined financial statements effective January 1, 1997. Each of Hudson
I, Hudson II, SPE I and SPE II is owned by Linpro-CP Hudson Street Limited
Partnership ("Linpro-CP"), a New Jersey general partnership; Green Equities,
Inc. ("GEI"), a New Jersey corporation, an affiliate of Merrill Lynch; and
OTR, an Ohio general partnership and an affiliate of the State Teachers'
Retirement System of Ohio. Effective December 31, 1996, OTR converted its
limited partner interest in Hudson I and Hudson II to a general partner
interest.
Linpro-CP is an affiliate of both LCOR, Inc. and Colgate-Palmolive NJ,
Inc.
2. SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF COMBINATION
The accompanying financial statements include the accounts of Hudson I,
Hudson II and the following related entities (the "Partnerships") in which
Hudson I holds a 97% partnership interest and Hudson II, SPE I and SPE II
each hold a 1% partnership interest.
101 Hudson Street Associates ("Street") -- A New Jersey general
partnership, formed for the purpose of acquiring a parcel of land located at
101 Hudson Street in Jersey City, New Jersey, constructing land improvements
on the parcel and leasing the improved parcel as a lessor.
101 Hudson Urban Renewal Associates ("Renewal") --A New Jersey general
partnership formed for the purpose of acquiring the land leasehold interest
at 101 Hudson Street from Street and constructing an office building
containing approximately 1,200,000 square feet thereon.
101 Hudson Leasing Associates ("Leasing") --A New Jersey general
partnership formed for the purpose of acquiring a leasehold interest in the
land and building at 101 Hudson Street from Renewal and constructing tenant
improvements therein.
BASIS OF PRESENTATION
The books of the Partnerships are maintained on the accrual basis for
federal income tax purposes, and adjusting entries have been made to present
the accompanying financial statements in accordance with generally accepted
accounting principles.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The ultimate results could differ from those estimates.
A-2-8
<PAGE>
CASH AND CASH EQUIVALENTS
The Partnerships consider all investments purchased with original
maturities of three months or less to be cash equivalents.
ACCRUED RENTAL INCOME
Revenue relating to operating leases is recognized on a straight-line
basis, regardless of when cash payments are received. Accrued rental income
on the combined balance sheet reflects rental income from third-party tenants
recognized in excess of payments due, and is scheduled to be received as
follows:
<TABLE>
<CAPTION>
<S> <C>
1997.......... $ 127,014
1998 ......... 340,753
1999 ......... 380,878
2000 ......... 401,201
2001 ......... 968,501
Thereafter .. 13,756,376
------------
$15,974,723
============
</TABLE>
Payments for rent received in advance are deferred and recognized in
rental income during the month in which these amounts are earned.
The Partnerships are subject to a concentration of credit risk related to
accrued rental income, as two tenants (see Note 10) account for approximately
66% of the accrued rental income balance in the accompanying balance sheet as
of December 31, 1996 and 1995.
OFFICE PROPERTY
The office building and improvements are being depreciated on a
straight-line basis over the estimated useful life of the building and
improvements, ranging from 10 to 40 years. Leasehold improvements are being
amortized over the life of the related leases, ranging from 5 to 15 years.
Effective January 1, 1994, the Partnership changed their estimate of the
useful life of the office building from 31.5 to 40 years. The resulting
effect was a decrease of approximately $891,000 in depreciation expense, in
1994, which has been reflected in the accompanying combined statement of
operations.
In 1996, the Partnerships 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." SFAS No. 121 requires
that long-lived assets to be held and used by the Partnerships be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, the Partnerships should estimate the future undiscounted
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the expected undiscounted future cash flows is
less than the carrying amount of the asset, an impairment loss should be
recognized. Measurement of an impairment loss for these assets should be
based on the fair market value of the asset. No adjustment was necessary as a
result of adopting SFAS No. 121.
CAPITALIZATION OF COSTS
For financial reporting purposes, all costs (including direct costs,
project overhead and interest) associated with the construction and
development of the project have been capitalized. These costs are included in
building and improvements and are being depreciated over the estimated useful
lives of the related assets.
Deferred charges represent costs incurred in connection with obtaining the
mortgage loans, and brokerage commissions and other costs incurred in
obtaining tenant leases. These costs are being amortized on a straight-line
basis over the terms of the related loans and the periods of the related
leases, respectively.
Costs incurred in connection with the organization and structuring of the
Partnerships were capitalized and amortized on a straight-line basis over a
60-month period beginning January 1, 1990.
A-2-9
<PAGE>
The components of deferred charges are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------- -------------- ------------
<S> <C> <C> <C>
Deferred leasing fees ... $ 9,612,505 $2,803,114 $6,809,391
Deferred financing costs 1,457,905 13,139 1,444,766
------------- -------------- ------------
$11,070,410 $2,816,253 $8,254,157
============= ============== ============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------
ACCUMULATED
COST AMORTIZATION NET
------------- -------------- ------------
<S> <C> <C> <C>
Deferred leasing fees ... $ 9,572,175 $2,034,489 $7,537,686
Deferred financing costs 2,389,067 1,977,507 411,560
Organization costs ....... 1,610,237 1,610,237 --
------------- -------------- ------------
$13,571,479 $5,622,233 $7,949,246
============= ============== ============
</TABLE>
INCOME TAXES
No federal or state income taxes are payable by the individual
Partnerships, and none have been provided in the accompanying financial
statements. The partners are required to include their respective share of
Partnership profits or losses in their individual tax returns.
The Partnerships' tax returns and the amount of allocable Partnership
profits or losses are subject to examination by federal and state taxing
authorities. If such examinations result in changes to partnership profit or
losses, the tax liability of the partners would be changed accordingly.
The Partnerships' taxable net loss for the year ended December 31, 1996,
1995, and 1994, exceeded their net loss for financial reporting purposes by
approximately $600,000, $6,400,000 and $4,300,000, respectively. The
difference reflects accelerated methods used to calculate depreciation and
amortization for federal income tax purposes offset by the recognition of
rental income on a straight-line basis for financial reporting purposes
versus when paid or due for federal income tax purposes. The Partnerships'
total assets at December 31, 1996 and 1995, exceeded their total assets for
federal income tax purposes by approximately $4,700,000 and $7,200,000,
respectively.
RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 financial statement presentation.
3. RESTRICTED CASH:
Pursuant to an agreement between Street and Renewal, and the Renewal and
Leasing lenders, all requests for equity contributions by Hudson I and Hudson
II related to the construction of the ground improvements are subject to the
lenders' prior approval. Prior to the lenders' obligation to fund any loan
proceeds, the remaining equity contributions for future ground improvement
expenditures shall be jointly advanced by Hudson I and Hudson II to Renewal
for the benefit of Street. These funds ($61,487 as of December 31, 1996 and
1995) are to be used by Street for funding of the ground improvements
construction costs and are included as restricted cash in the accompanying
combined balance sheets.
A-2-10
<PAGE>
4. OFFICE PROPERTY:
The Partnerships' net investment in office property consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------
1996 1995
-------------- --------------
<S> <C> <C>
Land ............................ $ 27,069,897 $ 27,069,897
Building and improvements ...... 181,009,780 180,926,641
Construction in progress ........ 179,991 32,615
-------------- --------------
208,259,668 208,029,153
Less--Accumulated depreciation . (29,193,735) (23,007,507)
-------------- --------------
Net investment in real estate .. $179,065,933 $185,021,646
============== ==============
</TABLE>
5. TRANSACTIONS WITH LCOR, INC.:
The Partnerships, in the normal course of their business, have numerous
transactions with an affiliated corporation, LCOR, Inc., which receives and
disburses funds for the Partnerships. These transactions result from the use
of a centralized receipts and disbursements system whereby all project
deposits are transferred to the central operating account of the affiliated
corporation and all construction disbursements and other expenses are paid
therefrom. The affiliated corporation commingles the funds of the
Partnerships with other related entities. These transfers and payments are
accounted for as advances to or from affiliate.
At December 31, 1996 and 1995, the Partnerships had certain tenant
security deposits totaling $245,992 and $87,557, respectively, which are
being held for LCOR, Inc. in a pooled investment account at a commercial
bank.
An affiliate of LCOR, Inc. performs various services on behalf of the
Partnerships including accounting, leasing, maintenance and data processing
services. The costs for these services ($375,059, $340,631 and $280,264 in
1996, 1995 and 1994, respectively) are included in operating expenses in the
accompanying combined statements of operations.
6. TRANSACTIONS AMONG RELATED ENTITIES:
For its services in connection with the management of the Partnerships'
affairs, an affiliate of LCOR, Inc. receives a management fee equal to 3% of
Leasing's gross receipts, as defined. Management fees totaling $846,223,
$584,219 and $745,524 were incurred during 1996, 1995 and 1994, respectively,
and are included in operating expenses in the accompanying combined
statements of operations.
The Partnerships lease office space to an affiliate for which minimum
rental income amounted to $129,118 in 1996, 1995 and 1994, respectively.
Leasing commissions of $1,429,369, $109,078 and $1,953,511 and construction
fees of $174,627, $76,091 and $338,246 were paid to this affiliate during
1996, 1995 and 1994, respectively. In addition, accounts payable and accrued
expenses at December 31, 1995, included $1,402,421. During 1995, the
affiliate remitted $153,415 to the Partnerships, representing its obligation
to fund tenant finish cost overruns.
7. MORTGAGE NOTES PAYABLE:
Mortgage notes payable at December 31, 1996 and 1995, consists of the
following:
101 HUDSON STREET ASSOCIATES
On December 31, 1989, Street borrowed $3,000,000 from the New Jersey Urban
Development Corporation to finance a portion of the acquisition price of the
land parcel and the construction of related land improvements at 101 Hudson
Street. Interest on the note accrues at an annual rate of 4% beginning
December 31, 1989 through December 31, 2004, at which time the cumulative
interest will be added to the original principal amount. Thereafter, the loan
shall be repaid in 60 equal monthly installments of principal and interest of
$88,391 beginning February 2005 and ending December 2009. The loan may be
prepaid at any time either in whole or in part without penalty prior to the
maturity date of December 31, 2009. The loan is secured by a second mortgage
on the land and building. As of December 31, 1996 and 1995, $840,000 and
$720,000, respectively, have been accrued in the accompanying balance sheets.
101 HUDSON URBAN RENEWAL ASSOCIATES
On December 31, 1989, Renewal entered into a construction loan agreement
to provide an additional source of funds for costs associated with the
construction of the building. The entire principal amount along with accrued
interest was due
A-2-11
<PAGE>
on December 31, 1996, and was repaid with the proceeds from a permanent loan
originated on January 3, 1997 (see Note 12). Renewal was able to select an
interest rate based on (a) a floating base rate plus 0.25%, a CD rate (as
defined) plus 1%, or a Eurodollar rate (as defined) plus 1%, and (b) a 30-,
60-, 90-or 180-day period, for the purpose of computing the periodic interest
expense. At December 31, 1996, $126,933,011 was outstanding under this loan
at an interest rate of 8.5%. At December 31, 1995 and 1994, $126,933,011 and
$124,191,291, respectively was outstanding under this loan at the following
interest rates:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
- ------------------------ -----------------------
<S> <C> <C> <C>
$ 98,376,599 7.000% $ 97,862,112 6.825%
16,149,072 6.875% 16,043,646 7.000%
12,407,340 6.875% 10,285,533 6.813%
- -------------- -------------
$126,933,011 $124,191,291
============== =============
</TABLE>
101 HUDSON LEASING ASSOCIATES
On December 31, 1989, Leasing entered into a construction loan agreement
to provide an additional source of funds for costs associated with the
construction of the leasehold improvements. The entire principal amount along
with accrued interest was due on December 31, 1996, and was repaid with the
proceeds from a permanent loan originated on January 3, 1997 (see Note 12).
Leasing was able to select an interest rate based on (a) a floating base rate
plus 0.25%, a CD rate (as defined) plus 1%, or a Eurodollar rate (as defined)
plus 1%, and (b) a 30-, 60-, 90-or 180-day period, for the purpose of
computing the periodic interest expense. At December 31, 1996, $52,517,720
was outstanding under this loan at an interest rate of 8.5%. At December 31,
1995 and 1994, $49,989,856 and $49,364,519, respectively was outstanding
under this loan at the following interest rates:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
- ----------------------- -----------------------
<S> <C> <C> <C>
$30,760,903 6.969% $30,574,763 7.634%
10,540,933 6.875% 10,341,207 6.750%
8,604,370 7.250% 8,396,972 6.938%
83,650 8.750% 51,577 8.750%
- ------------- -------------
$49,989,856 $49,364,519
============= =============
</TABLE>
The borrowers were initially required to protect at least 80% of the
outstanding construction loan balance with an interest rate protection
product to reduce the impact of changes in interest rates on the floating
rate debt. The borrowers entered into an Interest Rate Swap Agreement, dated
June 28, 1990, that allows the borrower to enter into interest rate swaps
through one of the lenders. These agreements provide for the payment of
interest at a fixed rate by Renewal and Leasing in return for the payment by
the commercial bank of a variable interest rate, which effectively fixes the
rate of interest on this variable rate debt at 8.5%.
At December 31, 1995, these Partnerships had outstanding interest rate
swap agreements having a total notional principal amount of $30,000,000. Swap
agreements with a notional principal amount of $80,000,000 expired during
1995. The remaining agreement of $30,000,000 expired in 1996.
The Renewal and Leasing loans were nonrecourse to the Partnerships and
were secured by a first mortgage on the land and building, the assignment of
the rents and leases, and the Completion Guaranty and the Environmental
Indemnity, both defined in the related loan agreements. Any indebtedness
incurred pursuant to the interest rate protection agreements constitutes
additional interest under the loan and is secured by the mortgage and other
loan documents.
The fair value of the mortgage notes payable at December 31, 1996, was
approximately equal to its aggregate carrying value.
8. NOTES PAYABLE:
On December 16, 1993, Street, Renewal and Leasing borrowed $550,000 from
the New Jersey Economic Development Authority to finance certain tenant
improvement costs. The loan bears interest at an annual rate of 4% and was
scheduled to be repaid in 180 equal monthly installments of principal and
interest of $4,068 commencing on January 15, 1994, and ending January 15,
2009. The loan was able to be prepaid at any time either in whole or in part
without
A-2-12
<PAGE>
penalty prior to the maturity date of January 15, 2009. The loan was secured
by substantially all of the Partnerships' assets. The outstanding principal
balance at December 31, 1995, was $494,657. The full amount outstanding of
$494,657 was repaid during 1996. The final installment of $465,413 was paid
on December 26, 1996.
On August 31, 1995, Hudson I and Hudson II executed a $2,000,000 Revolving
Promissory Note with OTR. The note bears interest at 12% and matured on
December 31, 1996. At December 31, 1995, the balance was $1,575,000. The note
was repaid on April 4, 1996.
The fair value of the note payable at December 31, 1995, was approximately
equal to its aggregate carrying value.
9. EQUITY:
Hudson I and Hudson II were each initially capitalized with a $100
contribution from the general and limited partners. In accordance with the
Partnership Agreements, OTR contributed $49,500,000 and $500,000 to Hudson I
and Hudson II, respectively, and GEI contributed $13,860,000 and $140,000 to
Hudson I and Hudson II, respectively.
Additional funds required by Hudson I and Hudson II to meet their cash
requirements shall, to the extent possible, be provided by third-party
borrowings. If the Partnerships are unable to borrow the amounts required,
then capital contributions may be provided in accordance with the Partnership
Agreements.
Distributions of available cash, as defined (none in 1996, 1995 and 1994),
will be made in accordance with the provisions of the respective Partnership
Agreements. The Partnership Agreements also provide for special distributions
to the general partner for general and administrative cost recovery up to
$5,060,000 as follows: (i) $1,265,000 upon the execution of the Partnership
Agreements (distributed December 31, 1989); (ii) $93,704 per month beginning
January 1, 1990 through March 1, 1993; (iii) $506,000 when payments under the
lease described in Note 10 commence (distributed April 30, 1993); and (iv)
$759,000 at the earlier of the date the Partnerships are profitable or the
date that the project is sold to a third party. During 1995 and 1994, there
were no special distributions to the General Partner. The final installment
of the special distribution of $759,000 was distributed on January 1, 1996.
The partners are entitled to an 8.5% preferred return on their unrecovered
capital, as defined. The preferred return arrearage was as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------------
HUDSON I HUDSON II TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
OTR....... $29,464,057 $297,646 $29,761,703
LINPRO ... 3,977,659 40,193 4,017,852
GEI ...... 1,325,896 13,408 1,339,304
------------- ----------- -------------
$34,767,612 $351,247 $35,118,859
============= =========== =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------------------------------
HUDSON I HUDSON II TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
OTR....... $25,256,553 $255,142 $25,511,695
LINPRO ... 3,409,644 34,453 3,444,097
GEI ...... 1,136,556 11,493 1,148,049
------------- ----------- -------------
$29,802,753 $301,088 $30,103,841
============= =========== =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1994
-----------------------------------------
HUDSON I HUDSON II TOTAL
------------- ----------- -------------
<S> <C> <C> <C>
OTR....... $21,049,049 $212,638 $21,261,687
LINPRO ... 2,841,629 28,714 2,870,343
GEI ...... 947,217 9,578 956,795
------------- ----------- -------------
$24,837,895 $250,930 $25,088,825
============= =========== =============
</TABLE>
Partnership profits and losses are allocated to the individual partners of
Hudson I and Hudson II in accordance with the provision of the respective
Partnership Agreements.
A-2-13
<PAGE>
10. OPERATING LEASES:
The Partnerships lease their property to tenants under operating leases
with expiration dates extending to the year 2011. The leases typically
provide for minimum rent and other charges to cover increases in certain
operating expenses over an amount stipulated in each tenant's lease. One
lease also provides for additional rents based on a percentage of the
tenant's sales over a stipulated amount.
Leasing, as landlord, has entered into a lease agreement dated December
29, 1989, with Jersey Hudson Tenant, Inc. ("Tenant"), an affiliate of GEI.
Under the terms of the lease, Tenant will lease approximately 49% of the
building for an initial term through March 31, 2007. The lease contains five
renewal options, each for five years. The lease provides that Tenant will
reimburse Leasing for its proportionate share of the property's operating
expenses, as defined. The obligations of Tenant under the lease have been
guaranteed by Merrill Lynch & Co., Inc.
Base annual rentals under the lease are as follows:
<TABLE>
<CAPTION>
<S> <C>
April 1993-March 1997 $ 8,860,439
April 1997-March 2002 9,450,613
April 2002-March 2007 10,040,787
</TABLE>
In addition to the lease described above, the Partnership entered into a
lease agreement during 1994 with Lehman Brothers Holding, Inc. ("Lehman").
Under the terms of the lease, Lehman will lease approximately 32% of the
building for an initial term through December 31, 2010. The lease contains
two five-year renewal terms. The lease provides that Lehman will reimburse
Leasing for its proportionate share of the property's operating expenses, as
defined.
Base annual rentals under the lease are as follows:
<TABLE>
<CAPTION>
<S> <C>
January 1996-December 2000 $5,234,928
January 2001-December 2005 5,938,725
January 2006-December 2010 6,642,523
</TABLE>
Minimum future rentals on noncancelable leases at December 31, 1996, are
as follows:
<TABLE>
<CAPTION>
ACCRUED ACCRUAL BASIS
CASH RENTALS RENTAL INCOME RENTAL INCOME
-------------- --------------- ---------------
<S> <C> <C> <C>
1997 ......... $ 19,227,997 $ 319,059 $ 19,547,056
1998 ......... 19,530,618 16,438 19,547,056
1999 ......... 19,427,357 119,699 19,547,056
2000 ......... 19,397,647 149,409 19,547,056
2001 ......... 20,105,442 (558,386) 19,547,056
Thereafter .. 137,808,040 (16,020,942) 121,787,098
-------------- --------------- ---------------
$235,497,101 $(15,974,723) $219,522,378
============== =============== ===============
</TABLE>
The total minimum future rentals presented above do not include amounts
that may be received under tenant leases for percentage rents or other
charges to cover increases in certain operating costs.
11. COMMITMENTS AND CONTINGENCIES:
On December 11, 1989, one of the Partnerships entered into an agreement
with the City of Jersey City ("Jersey City") which requires payment of an
annual service charge to Jersey City in lieu of real estate taxes for a term
ending the earlier of (a) December 11, 2009, or (b) 15 years after the
Commencement Date, defined as the substantial completion of the project. For
the first five-year period, quarterly payments, totaling 1% of the assessed
project cost are due. For the next two consecutive five-year terms, total
payments made will increase to 2% and 3% of total project costs,
respectively.
In addition to these quarterly payments, the Partnership has agreed to
contribute $1,750,500 to Jersey City's affordable housing linkage program. As
of December 31, 1995, $1,367,647 had been paid to Jersey City and the
remaining unpaid balance is included in accounts payable and accrued expenses
in the accompanying balance sheet. The final installment, totaling $382,853,
was paid on January 12, 1996.
A-2-14
<PAGE>
12. SUBSEQUENT EVENT:
On January 3, 1997, the Renewal and Leasing construction loans were
repaid. The sources of funds to repay these loans were a permanent loan for
$135,000,000 and an equity contribution from OTR for $53,000,000. In
addition, the $3,000,000 loan from the New Jersey Urban Development
Corporation was fully collateralized as part of the refinancing.
The $135,000,000 loan bears interest at an annual fixed rate of 7.916% and
amortizes based upon 25 years. However, the loan amortization will be
accelerated, to the extent of Excess Cash Flow, as defined, exists on a
monthly basis, by the payment of additional monthly principal payments of
$87,696 ("Additional Amortization") and any such payments unpaid in the
previous periods. These additional principal payments would reduce the
outstanding balance on January 11, 2007 (the "Optional Prepayment Date"), to
approximately $95,000,000.
On the Optional Prepayment Date, the interest rate increases to the
greater of 12.916% or the yield on U.S. Treasuries maturing on January 11,
2002, plus 6.445%. The loan may be defeased after the first two years, in
whole or in part, prior to the Optional Prepayment Date, upon payment of a
Yield Maintenance Premium. The Yield Maintenance Premium is not required on
the payment of the Additional Amortization or payments made after the
Optional Prepayment Date. The loan is secured by substantially all of the
Partnership's assets.
The OTR equity contribution of $53,000,000 will receive a monthly
distribution of $504,731, representing a preferred return on equity of 11%
and return of equity over 30 years.
A-2-15
<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 1997-MD VII (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"), Centrale de
Livraison de Valeurs Mobiliers S.A. ("CEDEL") or The Euroclear System
("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 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.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to similar issues of pass-through
certificates. 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 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
B-1
<PAGE>
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 or Euroclear 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 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
B-2
<PAGE>
(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, 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 of 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.
EXEMPTION 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.
EXEMPTION 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 (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity created or organized
in or under the laws of the United States or any political subdivision
thereof, (iii) an estate that is subject to U.S. federal income tax
regardless of the source of its income or (iv) a trust if 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. 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>
EXHIBIT C
WEIGHTED AVERAGE NET MORTGAGE PASS-THROUGH RATES
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DISTRIBUTION DATE DISTRIBUTION DATE
(ASSUMING THAT THE 13TH DAY OF EACH MONTH (ASSUMING THAT THE 13TH DAY OF EACH MONTH
IS THE DISTRIBUTION DATE) WAC IS THE DISTRIBUTION DATE) WAC
</TABLE>
C-1
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPE ADDRESS CITY STATE ZIP
-------- ---- ------- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C>
FAIRFIELD INNS
Fairfield - Atlanta Metro - 1 HOTL LTD
Fairfield - Atlanta Metro - 2 HOTL LTD
Fairfield - Atlanta Metro - 3 HOTL LTD
Fairfield - Atlanta Metro - 4 HOTL LTD
Fairfield - Atlanta Metro - 5 HOTL LTD
Fairfield - Atlanta Metro - 6 HOTL LTD
Fairfield - Florida - 1 HOTL LTD
Fairfield - Florida - 2 HOTL LTD
Fairfield - Florida - 3 HOTL LTD
Fairfield - Florida - 4 HOTL LTD
Fairfield - Great Lakes - 1 HOTL LTD
Fairfield - Great Lakes - 2 HOTL LTD
Fairfield - Great Lakes - 3 HOTL LTD
Fairfield - Great Lakes - 4 HOTL LTD
Fairfield - MidAtlantic - 1 HOTL LTD
Fairfield - MidAtlantic - 2 HOTL LTD
Fairfield - MidAtlantic - 3 HOTL LTD
Fairfield - MidAtlantic - 4 HOTL LTD
Fairfield - MidAtlantic - 5 HOTL LTD
Fairfield - MidAtlantic - 6 HOTL LTD
Fairfield - MidAtlantic - 7 HOTL LTD
Fairfield - MidAtlantic - 8 HOTL LTD
Fairfield - MidAtlantic - 9 HOTL LTD
Fairfield - Midwest - 1 HOTL LTD
Fairfield - Midwest - 10 HOTL LTD
Fairfield - Midwest - 11 HOTL LTD
Fairfield - Midwest - 2 HOTL LTD
Fairfield - Midwest - 3 HOTL LTD
Fairfield - Midwest - 4 HOTL LTD
Fairfield - Midwest - 5 HOTL LTD
Fairfield - Midwest - 6 HOTL LTD
Fairfield - Midwest - 7 HOTL LTD
Fairfield - Midwest - 8 HOTL LTD
Fairfield - Midwest - 9 HOTL LTD
Fairfield - North Central - 1 HOTL LTD
Fairfield - North Central - 2 HOTL LTD
Fairfield - North Central - 3 HOTL LTD
Fairfield - North Central - 4 HOTL LTD
Fairfield - North Central - 5 HOTL LTD
Fairfield - North Central - 6 HOTL LTD
Fairfield - North Central - 7 HOTL LTD
Fairfield - SouthEast - 3 HOTL LTD
Fairfield - SouthEast - 4 HOTL LTD
Fairfield - SouthEast - 5 HOTL LTD
Fairfield - SouthEast - 6 HOTL LTD
Fairfield - SouthEast - 7 HOTL LTD
Fairfield - West - 1 HOTL LTD
Fairfield - West - 2 HOTL LTD
Fairfield SouthEast - 1 HOTL LTD
Fairfield SouthEast - 2 HOTL LTD
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CUT-OFF DATE
YEAR 1996 AS OF ALLOCATED LOAN 1993 TOTAL
PROPERTY BUILT/RENOVATED SF/UNITS 1996 OCC DATE AMOUNT REVENUE
-------- --------------- -------- -------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
FAIRFIELD INNS
Fairfield - Atlanta Metro - 1 1987 130 77% YEAR END $ 3,664,952 $ 1,826,338
Fairfield - Atlanta Metro - 2 1988 133 79% YEAR END 3,397,005 1,569,567
Fairfield - Atlanta Metro - 3 1989 134 72% YEAR END 3,815,217 1,645,743
Fairfield - Atlanta Metro - 4 1988 135 80% YEAR END 4,291,786 1,665,418
Fairfield - Atlanta Metro - 5 1989 135 76% YEAR END 3,920,530 1,526,886
Fairfield - Atlanta Metro - 6 1987 132 77% YEAR END 1,652,280 1,561,952
Fairfield - Florida - 1 1988 132 86% YEAR END 2,066,488 1,538,156
Fairfield - Florida - 2 1991 135 82% YEAR END 4,005,256 1,590,514
Fairfield - Florida - 3 1990 135 86% YEAR END 5,031,625 2,734,026
Fairfield - Florida - 4 1989 135 84% YEAR END 2,503,047 1,861,406
Fairfield - Great Lakes - 1 1988 132 80% YEAR END 2,555,925 1,508,881
Fairfield - Great Lakes - 2 1988 133 79% YEAR END 2,592,120 1,401,899
Fairfield - Great Lakes - 3 1988 132 73% YEAR END 2,055,047 1,270,546
Fairfield - Great Lakes - 4 1989 134 77% YEAR END 3,108,567 1,505,798
Fairfield - MidAtlantic - 1 1988 132 82% YEAR END 2,690,624 1,623,039
Fairfield - MidAtlantic - 2 1989 135 84% YEAR END 4,217,465 1,770,148
Fairfield - MidAtlantic - 3 1989 135 76% YEAR END 2,687,860 1,565,436
Fairfield - MidAtlantic - 4 1989 134 82% YEAR END 5,212,182 1,830,061
Fairfield - MidAtlantic - 5 1990 135 84% YEAR END 4,025,903 1,440,940
Fairfield - MidAtlantic - 6 1988 133 78% YEAR END 2,643,099 1,330,392
Fairfield - MidAtlantic - 7 1989 135 77% YEAR END 4,003,568 1,740,499
Fairfield - MidAtlantic - 8 1989 134 72% YEAR END 2,754,074 1,285,301
Fairfield - MidAtlantic - 9 1990 134 59% YEAR END 2,159,098 1,160,184
Fairfield - Midwest - 1 1989 135 73% YEAR END 3,685,768 1,735,880
Fairfield - Midwest - 10 1989 134 80% YEAR END 2,832,920 1,532,585
Fairfield - Midwest - 11 1989 135 72% YEAR END 2,758,899 1,428,183
Fairfield - Midwest - 2 1988 128 68% YEAR END 3,665,802 1,506,936
Fairfield - Midwest - 3 1989 135 75% YEAR END 3,465,697 1,514,637
Fairfield - Midwest - 4 1989 135 84% YEAR END 3,087,777 1,981,602
Fairfield - Midwest - 5 1988 131 74% YEAR END 4,352,786 1,623,167
Fairfield - Midwest - 6 1988 131 74% YEAR END 3,451,405 1,571,569
Fairfield - Midwest - 7 1989 134 78% YEAR END 3,993,971 1,607,049
Fairfield - Midwest - 8 1989 135 79% YEAR END 4,674,460 1,659,628
Fairfield - Midwest - 9 1988 133 72% YEAR END 2,789,797 1,475,143
Fairfield - North Central - 1 1990 135 77% YEAR END 3,663,744 1,522,006
Fairfield - North Central - 2 1989 135 74% YEAR END 2,539,040 1,526,328
Fairfield - North Central - 3 1989 135 74% YEAR END 2,348,910 1,565,554
Fairfield - North Central - 4 1989 135 81% YEAR END 4,488,528 1,686,869
Fairfield - North Central - 5 1989 135 86% YEAR END 3,713,928 1,719,805
Fairfield - North Central - 6 1988 134 66% YEAR END 2,816,144 1,588,369
Fairfield - North Central - 7 1989 135 71% YEAR END 3,652,826 1,571,593
Fairfield - SouthEast - 3 1990 135 73% YEAR END 2,461,143 1,541,560
Fairfield - SouthEast - 4 1988 132 77% YEAR END 3,110,458 1,447,947
Fairfield - SouthEast - 5 1989 120 68% YEAR END 2,704,551 1,343,443
Fairfield - SouthEast - 6 1989 132 80% YEAR END 3,695,961 1,462,297
Fairfield - SouthEast - 7 1989 134 77% YEAR END 3,712,070 1,671,819
Fairfield - West - 1 1990 135 71% YEAR END 1,829,385 1,294,628
Fairfield - West - 2 1990 135 78% YEAR END 2,532,054 1,410,008
Fairfield SouthEast - 1 1988 132 74% YEAR END 3,776,632 1,904,646
Fairfield SouthEast - 2 1988 133 76% YEAR END 3,967,283 1,645,599
6,672 $164,825,657 $79,491,980
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994 TOTAL 1995 TOTAL 1996 TOTAL AS OF 1996 1993 TOTAL
REVENUE REVENUE REVENUE PERIOD NOI 1994 TOTAL NOI
------- ------- ------- ------ --- --------------
<S> <C> <C> <C> <C> <C>
$ 1,973,039 $ 2,058,768 $ 2,207,051 TTM Sept $ 628,411 $ 703,797
1,766,849 1,956,324 2,225,543 TTM Sept 393,089 504,768
1,733,095 1,816,210 1,930,652 TTM Sept 592,371 624,896
2,005,369 2,293,097 2,485,183 TTM Sept 520,166 667,055
1,783,763 2,040,651 2,247,025 TTM Sept 432,657 557,216
1,734,501 1,843,775 2,085,900 TTM Sept 282,602 315,468
1,512,669 1,582,792 1,725,849 TTM Sept 374,198 301,736
1,793,044 1,971,353 2,017,364 TTM Sept 496,599 595,758
2,595,163 2,640,828 2,488,507 TTM Sept 1,140,888 964,333
1,759,200 1,762,489 1,949,699 TTM Sept 551,251 413,938
1,703,216 1,830,848 1,988,884 TTM Sept 295,331 407,132
1,619,507 1,871,737 2,011,645 TTM Sept 293,051 476,229
1,420,087 1,613,298 1,726,987 TTM Sept 174,961 275,644
1,739,871 1,904,372 2,102,629 TTM Sept 391,962 452,735
1,762,588 1,893,521 2,014,946 TTM Sept 507,321 581,407
1,844,406 2,044,062 2,043,760 TTM Sept 616,073 669,288
1,597,399 1,694,066 1,718,640 TTM Sept 443,667 432,133
1,947,353 2,098,814 2,177,972 TTM Sept 820,288 874,528
1,653,990 1,919,170 2,042,522 TTM Sept 382,823 531,444
1,496,450 1,625,193 1,660,519 TTM Sept 332,596 434,228
1,757,305 1,841,058 1,842,710 TTM Sept 569,290 539,670
1,346,407 1,501,006 1,548,491 TTM Sept 414,945 330,617
1,306,604 1,383,966 1,412,860 TTM Sept 276,506 265,522
1,769,022 1,745,696 1,749,343 TTM Sept 616,882 638,462
1,685,488 1,911,650 2,034,539 TTM Sept 378,061 425,557
1,535,867 1,663,037 1,693,514 TTM Sept 444,858 470,573
1,638,658 1,770,541 1,614,543 TTM Sept 496,571 561,961
1,612,128 1,838,842 1,899,356 TTM Sept 431,005 555,317
2,168,585 2,319,712 2,426,466 TTM Sept 663,235 577,449
1,757,434 1,905,908 1,875,887 TTM Sept 628,825 735,428
1,712,476 1,860,661 1,941,715 TTM Sept 514,910 580,281
1,759,136 1,914,651 2,029,911 TTM Sept 557,146 625,878
1,840,331 2,083,602 2,160,957 TTM Sept 628,128 708,077
1,554,840 1,617,338 1,670,050 TTM Sept 458,067 454,609
1,726,392 1,913,443 2,061,869 TTM Sept 519,292 551,773
1,540,364 1,601,284 1,689,375 TTM Sept 496,658 599,463
1,538,049 1,629,163 1,753,943 TTM Sept 378,355 352,031
1,774,565 1,902,166 2,019,442 TTM Sept 721,977 740,118
1,854,486 2,042,486 2,130,719 TTM Sept 585,042 648,527
1,580,921 1,648,652 1,636,545 TTM Sept 510,516 509,233
1,587,145 1,724,855 1,875,646 TTM Sept 585,796 580,108
1,633,307 1,717,448 1,849,755 TTM Sept 371,787 389,108
1,547,350 1,607,938 1,630,720 TTM Sept 449,315 553,716
1,487,877 1,670,538 1,666,292 TTM Sept 226,193 304,178
1,632,671 1,842,923 1,957,803 TTM Sept 516,769 563,926
1,759,676 1,825,824 1,949,504 TTM Sept 615,955 644,263
1,332,547 1,447,449 1,406,964 TTM Sept 180,919 122,771
1,539,088 1,580,513 1,684,302 TTM Sept 390,535 401,708
1,890,246 1,928,183 1,932,814 TTM Sept 758,931 653,203
1,842,051 1,791,435 1,912,843 TTM Sept 544,647 753,659
$85,152,575 $91,693,336 $95,910,155 $24,601,421 $26,620,919
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1995 TOTAL NOI 1996 TOTAL NOI NET CASH FLOW VALUE FEE
- -------------- -------------- ------------- ----- ---
<C> <C> <C> <C> <C>
$632,676 $640,403 $608,438 $4,190,000 Ground Lease
586,420 748,420 706,279 5,362,000 Ground Lease
658,616 650,600 636,523 5,580,000 Simple
740,885 814,572 713,959 5,119,000 Simple
676,796 768,565 733,947 5,280,000 Simple
285,231 399,020 372,854 2,991,000 Ground Lease
356,735 392,861 349,104 3,983,000 Ground Lease
691,422 676,606 566,758 6,134,000 Ground Lease
868,603 668,482 594,610 5,446,000 Ground Lease
432,098 515,863 476,747 5,444,000 Ground Lease
439,229 546,897 508,232 5,335,000 Ground Lease
445,476 504,491 447,695 4,950,000 Ground Lease
352,762 353,119 336,790 4,246,000 Ground Lease
534,630 590,587 538,499 5,447,000 Ground Lease
660,286 740,024 722,598 6,710,000 Ground Lease
726,058 668,086 597,727 5,997,000 Ground Lease
462,004 456,840 443,297 4,661,000 Ground Lease
897,774 925,608 887,038 8,541,000 Simple
692,989 710,260 680,452 6,619,000 Ground Lease
454,277 469,855 459,964 4,692,000 Ground Lease
491,328 518,363 503,572 3,717,000 Ground Lease
475,432 469,570 469,570 4,801,000 Simple
372,722 380,626 380,626 3,838,000 Ground Lease
634,271 613,024 608,618 5,080,000 Simple
487,046 497,399 428,188 4,984,000 Ground Lease
474,268 498,116 478,975 4,802,000 Simple
630,825 526,931 526,931 5,672,000 Ground Lease
596,281 585,562 557,663 6,018,000 Simple
531,041 550,119 469,242 5,491,000 Ground Lease
749,418 710,871 692,499 6,079,000 Simple
593,814 611,513 572,386 6,071,000 Ground Lease
689,474 746,188 746,188 7,019,000 Simple
806,946 846,249 805,485 6,848,000 Simple
479,601 492,123 459,917 5,404,000 Ground Lease
630,470 690,016 609,335 6,999,000 Ground Lease
436,313 438,059 404,083 4,341,000 Ground Lease
403,492 419,898 408,668 3,647,000 Ground Lease
772,851 766,478 712,255 7,953,000 Simple
639,133 626,714 530,448 5,916,000 Simple
486,147 462,314 461,593 5,489,000 Ground Lease
630,582 689,467 689,794 6,529,000 Simple
424,864 509,093 482,793 4,699,000 Ground Lease
536,954 534,781 526,811 6,585,000 Ground Lease
464,885 437,545 433,973 4,249,000 Ground Lease
636,031 676,324 646,082 5,396,000 Simple
638,812 777,138 699,419 6,739,000 Simple
313,807 257,937 257,937 2,534,000 Ground Lease
435,107 402,375 329,247 5,048,000 Simple
681,183 636,763 621,876 5,613,000 Ground Lease
715,570 755,606 728,419 7,017,000 Simple
$28,453,635 $29,368,321 $27,624,104 $271,305,000
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PROPERTY TYPE ADDRESS CITY STATE ZIP
-------- ---- ------- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C>
101 HUDSON
101 Hudson OFFC OFFC 101 Hudson Jersey City NJ 07302
M & H II
Westgate Mall RETL ANCHOR 1600 Saratoga Avenue San Jose CA 95129
The Promenade RETL ANCHOR 3501 McHenry Avenue Modesto CA 95356
County Hills Town Center RETL ANCHOR 2700-2800 Diamond Bar Blvd. Diamond CA 91765
Lincoln Park Center RETL ANCHOR 8888 Knott Avenue Buena Park CA 90620
Mission Square RETL ANCHOR 1018-1068 Mission Avenue Oceanside CA 92054
Plaza La Quinta RETL ANCHOR 78267 Highway 111 La Quinta CA 92253
INNKEEPERS
Residence Inn - Sunnyvale HOTL EXTENDED 750 Lakeway Dr Sunnyvale CA 94086
Residence Inn - Denver HOTL EXTENDED 2777 Zuni Street Denver CO 80211
Hampton Inn - Islandia HOTL LTD 1600 Vetrans Memorial Hwy. Islandia NY 11722
Residence Inn - Cherry Hill HOTL EXTENDED 1821 Old Cuthbert Road Cherry Hill NJ 08034
Hampton Inn - Naples HOTL LTD 3210 Tamiami Trail North Naples FL 34103
Residence Inn - Binghampton HOTL EXTENDED 4610 Vestal Parkway Binghampton NY 13850
Hampton Inn - Tallahassee HOTL LTD 3210 North Monroe Street Tallahassee FL 32303
Residence Inn - Wichita HOTL EXTENDED 411 South Webb Wichita KS 67207
DESIGN CENTER OF THE AMERICAS
Design Center of the Americas RETL DESIGN CENTER 1855 Griffin Road Dania FL 33004
G&L
North Bedford OFFC MED OFFC 436 North Bedford Drive Beverly Hills CA 90210
Regents Medical Center OFFC MED OFFC 4150 Regents Row Park La Jolla CA 92037
Friendly Hills Healthcare
Building OFFC MED OFFC 12701 Schabarum Avenue Irwindale CA 91706
Sherman Oaks Medical Plaza OFFC MED OFFC 4955 Van Nuys Blvd. Sherman Oaks CA 91403
INSURANCE COMPANY OF THE WEST
NET
Insurance Company of the West LEASE OFFC 10140 Campus Point Drive, Suite 400 San Diego CA 92121
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
CUT-OFF DATE
YEAR 1996 AS OF ALLOCATED LOAN 1993 TOTAL
PROPERTY BUILT/RENOVATED SF/UNITS 1996 OCC DATE AMOUNT REVENUE
-------- --------------- -------- -------- ---- ------ -------
<S> <C> <C> <C> <C> <C> <C>
101 HUDSON
101 Hudson 1992 1,230,087 99% 12/31/96 $134,505,878 $16,302,306
1,230,087 $134,505,878 $16,302,306
M & H II
Westgate Mall 1960/1996 665,461 88% 1/1/97 $ 33,956,594
The Promenade 1988/1996 118,485 94% 1/1/97 6,162,987
County Hills Town Center 1965/1990 164,338 85% 1/1/97 5,614,647
Lincoln Park Center 1958/1995 144,076 73% 1/1/97 4,961,560
Mission Square 1963/1988 191,673 75% 1/1/97 4,330,225
Plaza La Quinta 1982 114,483 80% 1/1/97 3,274,956
1,398,516 $ 58,300,969
INNKEEPERS
Residence Inn - Sunnyvale 1984 231 91% YEAR END $ 13,702,786 $ 5,558,561
Residence Inn - Denver 1981 156 86% YEAR END 6,074,078 3,546,638
Hampton Inn - Islandia 1988 121 76% YEAR END 5,322,401 2,110,426
Residence Inn - Cherry Hill 1989 96 89% YEAR END 4,732,666 2,727,627
Hampton Inn - Naples 1990 107 72% YEAR END 3,653,650 1,783,485
Residence Inn - Binghampton 1987 72 83% YEAR END 3,117,109 1,903,059
Hampton Inn - Tallahassee 1993 93 82% YEAR END 2,991,408
Residence Inn - Wichita 1981 64 81% YEAR END 2,405,902 1,472,595
940 $ 42,000,000 $19,102,391
DESIGN CENTER OF THE AMERICAS
Design Center of the Americas 1985/1988 554,273 96% 12/31/96 $ 39,899,849 $10,788,451
554,273 $ 39,899,849 $10,788,451
G&L
North Bedford 1990 78,944 98% 1/97 $ 15,113,705 $ 3,343,361
Regents Medical Center 1989 65,906 94% 1/97 6,761,394
Friendly Hills Healthcare
Building 1992 47,604 100% 1/97 6,761,394
Sherman Oaks Medical Plaza 1969/1996 69,326 89% 12/96 6,164,801
261,780 $ 34,801,294 $ 3,343,361
INSURANCE COMPANY OF THE WEST
Insurance Company of the West 1996 164,764 100% 1/1/97 $ 25,234,505
164,764 $ 25,234,505
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994 TOTAL 1995 TOTAL 1996 TOTAL AS OF 1996 1993 TOTAL
REVENUE REVENUE REVENUE PERIOD NOI 1994 TOTAL NOI
------- ------- ------- ------ --- --------------
<S> <C> <C> <C> <C> <C>
$20,472,572 $26,354,427 $29,223,384 Year End $ 8,689,421 $13,298,335
$20,472,572 $26,354,427 $29,223,384 $ 8,689,421 $13,298,335
6,325,342 $ 6,566,331 Year End
1,201,872 1,066,914 Year End
1,887,716 1,771,626 Year End
1,495,103 1,535,222 Year End
1,187,564 1,283,347 Year End
1,348,294 1,202,113 Year End
$13,445,891 $13,425,553
$ 5,906,049 $ 6,770,577 $ 8,254,184 Year End $ 2,086,464 $ 2,378,131
3,684,690 3,812,228 4,261,361 Year End 1,193,426 1,241,304
2,407,905 2,577,337 2,689,411 Year End 779,496 1,029,247
2,864,557 2,901,869 2,986,581 Year End 1,023,390 1,132,993
1,808,832 1,844,397 1,922,958 Year End 665,948 702,421
1,870,816 1,908,239 1,943,854 Year End 752,743 737,068
1,464,116 1,679,037 1,712,461 Year End 674,661
1,507,912 1,504,444 1,578,554 Year End 537,746 552,367
$21,514,877 $22,998,128 $25,349,364 $ 7,039,213 $ 8,448,192
$11,939,849 $12,300,142 $12,595,107 Year End $ 7,335,581 $ 8,614,096
$11,939,849 $12,300,142 $12,595,107 $ 7,335,581 $ 8,614,096
$ 3,754,838 $ 3,639,750 $ 3,445,514 TTM 11/31/96 $ 2,393,409 $ 2,768,156
1,505,390 1,675,740 1,651,246 TTM 11/30/96 1,099,797
978,860 1,096,800 1,096,796 TTM 11/30/96 978,860
$ 1,652,748 $ 1,654,369 $ 1,693,162 TTM 11/30/96 909,074
$ 7,891,836 $ 8,066,659 $ 7,886,718 $ 2,393,409 $ 5,755,887
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
1995 TOTAL NOI 1996 TOTAL NOI NET CASH FLOW VALUE FEE
- -------------- -------------- ------------- ----- ---
<S> <C> <C> <C> <C>
$18,051,826 $20,078,302 $20,495,199 $236,000,000 Simple
$18,051,826 $20,078,302 $20,495,199 $236,000,000
$ 2,980,890 $ 3,480,852 $4,292,823 $ 61,000,000 Simple
839,460 701,479 1,253,078 13,000,000 Simple
1,545,172 1,269,607 1,054,874 15,100,000 Simple
1,131,084 1,104,989 929,266 12,700,000 Simple
748,970 871,055 825,485 11,200,000 Simple
886,480 712,113 646,091 10,200,000 Simple
$ 8,132,056 $ 8,140,095 $9,001,617 $123,200,000
$ 2,970,357 $ 4,014,185 $3,153,294 $ 32,300,000 Simple
1,296,263 1,659,161 1,354,614 11,100,000 Simple
1,204,276 1,257,882 1,072,835 10,300,000 Simple
1,131,303 1,281,810 1,003,088 9,900,000 Simple
787,336 865,333 724,884 6,500,000 Simple
726,327 754,739 602,825 5,700,000 Simple
815,922 819,175 669,610 6,300,000 Simple
555,465 559,914 484,930 3,900,000 Simple
$ 9,487,249 $11,212,199 $9,066,080 $ 86,000,000
$ 8,793,895 $ 8,750,376 $7,841,617 $ 97,000,000 Simple
$ 8,793,895 $ 8,750,376 $7,841,617 $ 97,000,000
$ 2,664,499 $ 2,631,212 $2,276,714 $ 22,230,000 Simple
1,156,514 1,140,633 1,026,390 10,200,000 Simple
1,091,519 1,078,038 954,508 9,610,000 Simple
878,744 959,675 798,671 9,130,000 Simple
$ 5,791,276 $ 5,809,558 $5,056,283 $ 51,170,000
$2,295,000 $ 25,000,000 Simple
$2,295,000 $ 25,000,000
</TABLE>
<PAGE>
PROSPECTUS DATED MARCH , 1997
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 MARCH , 1997
<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
2
<PAGE>
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 the 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.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Supplement ............................................................... 2
Available Information ............................................................... 2
Incorporation of Certain Information by Reference ................................... 3
Summary of Prospectus................................................................ 8
Special Considerations............................................................... 13
Limited Liquidity.................................................................... 13
Limited Assets....................................................................... 13
Average Life of Certificates; Prepayments; Yields.................................... 13
Limited Nature of Ratings............................................................ 14
Risks Associated with Certain Mortgage Loans and Mortgaged Properties ............... 14
Balloon Payments .................................................................... 15
Obligor Default...................................................................... 15
Mortgagor Type....................................................................... 15
Credit Support Limitations........................................................... 15
Enforceability....................................................................... 16
Environmental Risks.................................................................. 16
ERISA Considerations ................................................................ 16
Certain Federal Tax Considerations Regarding Residual Certificates................... 17
Certain Federal Tax Considerations Regarding Original Issue Discount ................ 17
Consent.............................................................................. 17
Book-Entry Registration.............................................................. 17
Description of the Trust Funds....................................................... 18
Mortgage Assets...................................................................... 18
Mortgage Loans....................................................................... 18
Default and Loss Considerations with Respect to the Mortgage Loans .................. 18
Mortgage Loan Information in Prospectus Supplements.................................. 20
Mortgage Underwriting Standards and Procedures....................................... 20
Payment Provisions of the Mortgage Loans............................................. 21
MBS.................................................................................. 21
Collection Accounts.................................................................. 22
Credit Support....................................................................... 22
Cash Flow Agreements................................................................. 22
Use of Proceeds...................................................................... 22
Yield Considerations................................................................. 23
General.............................................................................. 23
Pass-Through Rate.................................................................... 23
Timing of Payment of Interest and Principal.......................................... 23
Principal Prepayments................................................................ 23
Prepayments--Maturity and Weighted Average Life ..................................... 24
Other Factors Affecting Weighted Average Life........................................ 25
Type of Mortgage Loan................................................................ 25
Foreclosures and Payment Plans....................................................... 25
Due-on-Sale and Due-on-Encumbrance Clauses........................................... 25
The Depositor........................................................................ 25
Description of the Certificates...................................................... 26
General.............................................................................. 26
Distributions........................................................................ 27
Available Funds...................................................................... 28
4
<PAGE>
PAGE
--------
Distributions of Interest on the Certificates........................................ 28
Distributions of Principal of the Certificates....................................... 29
Distributions on the Certificates of Prepayment Premiums or in
Respect of Equity Participations.................................................... 29
Allocation of Losses and Shortfalls.................................................. 29
Advances in Respect of Delinquencies................................................. 29
Reports to Certificateholders........................................................ 30
Termination.......................................................................... 32
Book-Entry Registration and Definitive Certificates.................................. 32
Description of the Agreements........................................................ 33
Assignment of Mortgage Assets; Repurchases........................................... 33
Representations and Warranties; Repurchases.......................................... 34
Payments on Mortgage Assets; Deposits to Collection Account.......................... 35
Collection and Other Servicing Procedures............................................ 37
Special Servicers.................................................................... 37
Sub-Servicers........................................................................ 37
Realization Upon Defaulted Whole Loans............................................... 38
Hazard Insurance Policies ........................................................... 39
Due-on-Sale and Due-on-Encumbrance Provisions........................................ 40
Retained Interest; Servicing Compensation and Payment of Expenses.................... 41
Evidence as to Compliance............................................................ 41
Certain Matters Regarding a Master Servicer, a Special Servicer and the Depositor ... 41
Event of Default .................................................................... 42
Rights Upon Event of Default ........................................................ 42
Amendment ........................................................................... 43
Duties of the Trustee................................................................ 43
The Trustee.......................................................................... 43
Description of Credit Support........................................................ 44
General.............................................................................. 44
Subordinate Certificates............................................................. 44
Cross-Support Provisions............................................................. 44
Insurance or Guarantees with Respect to the Mortgage Assets.......................... 44
Letter of Credit..................................................................... 45
Insurance Policies and Surety Bonds.................................................. 45
Certificate Guarantee Insurance...................................................... 45
Reserve Funds........................................................................ 45
Certain Legal Aspects of Mortgage Loans.............................................. 46
General.............................................................................. 46
Types of Mortgage Instruments........................................................ 46
Leases and Rents..................................................................... 46
Personalty........................................................................... 47
Installment Contracts................................................................ 47
Junior Mortgages; Rights of Senior Mortgages or Beneficiaries........................ 47
Subordinate Financing ............................................................... 49
Foreclosure.......................................................................... 49
Judicial Foreclosure................................................................. 49
Non-Judicial Foreclosure/Power of Sale............................................... 49
Limitations on Lender's Rights....................................................... 50
Rights of Redemption................................................................. 51
Anti-Deficiency Legislation.......................................................... 51
5
<PAGE>
PAGE
--------
Leasehold Risks...................................................................... 52
Bankruptcy Laws...................................................................... 52
Environmental Legislation............................................................ 54
Due-on-Sale and Due-on-Encumbrance................................................... 55
Acceleration on Default.............................................................. 55
Default Interest, Prepayment Charges and Prepayments................................. 55
Applicability of Usury Laws ......................................................... 56
Alternative Mortgage Instruments..................................................... 56
Soldiers' and Sailors' Civil Relief Act of 1940...................................... 57
Forfeitures in Drug and RICO Proceedings............................................. 57
Certain Laws and Regulations......................................................... 57
Type of Mortgaged Property........................................................... 57
Americans with Disabilities Act...................................................... 58
Federal Income Tax Consequences...................................................... 58
Federal Income Tax Consequences for REMIC Certificates............................... 58
General.............................................................................. 58
Status of REMIC Certificates......................................................... 59
Qualification as a REMIC............................................................. 59
Taxation of Regular Certificates..................................................... 61
General.............................................................................. 61
Original Issue Discount.............................................................. 61
Acquisition Premium.................................................................. 63
Variable Rate Regular Certificates................................................... 63
Deferred Interest.................................................................... 64
Market Discount...................................................................... 64
Premium ............................................................................. 65
Election to Treat All Interest Under the Constant Yield Method....................... 65
Sale or Exchange of Regular Certificates............................................. 65
Treatment of Losses.................................................................. 66
Taxation of Residual Certificates.................................................... 66
Taxation of REMIC Income ............................................................ 66
Basis and Losses..................................................................... 67
Treatment of Certain Items of REMIC Income and Expense............................... 68
Limitations on Offset or Exemption of REMIC Income................................... 69
Tax-Related Restrictions on Transfer of Residual Certificates ....................... 69
Sale or Exchange of a Residual Certificate........................................... 71
Mark to Market Regulations........................................................... 72
Taxes That May Be Imposed on the REMIC Pool.......................................... 72
Prohibited Transactions.............................................................. 72
Contributions to the REMIC Pool After the Startup Day................................ 72
Net Income from Foreclosure Property................................................. 72
Liquidation of the REMIC Pool........................................................ 73
Administrative Matters............................................................... 73
Limitations on Deduction of Certain Expenses......................................... 73
Taxation of Certain Foreign Investors................................................ 74
Regular Certificates................................................................. 74
Residual Certificates................................................................ 74
Backup Withholding................................................................... 74
Reporting Requirements............................................................... 74
6
<PAGE>
PAGE
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Federal Income Tax Consequences for Certificates as to
Which No REMIC Election Is Made .................................................... 75
Standard Certificates................................................................ 75
General.............................................................................. 75
Tax Status........................................................................... 76
Premium and Discount................................................................. 76
Recharacterization of Servicing Fees................................................. 77
Sale or Exchange of Standard Certificates ........................................... 77
Stripped Certificates................................................................ 77
General.............................................................................. 77
Status of Stripped Certificates...................................................... 78
Taxation of Stripped Certificates.................................................... 79
Reporting Requirements and Backup Withholding........................................ 80
Taxation of Certain Foreign Investors................................................ 80
ERISA Considerations................................................................. 81
General.............................................................................. 81
Certain Requirements Under ERISA..................................................... 81
General.............................................................................. 81
Parties in Interest/Disqualified Persons............................................. 81
Delegation of Fiduciary Duty......................................................... 81
Administrative Exemptions............................................................ 82
Governmental Plans .................................................................. 82
Unrelated Business Taxable Income; Residual Certificates............................. 82
Legal Investment..................................................................... 82
Method of Distribution............................................................... 84
Legal Matters........................................................................ 85
Financial Information................................................................ 85
Rating .............................................................................. 85
Index of Principal Definitions ...................................................... 86
</TABLE>
7
<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
8
<PAGE>
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 time to time to 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"),
9
<PAGE>
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, "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".
<PAGE>
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
10
<PAGE>
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".
<PAGE>
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
11
<PAGE>
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 persons 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.
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.
12
<PAGE>
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 Collection 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
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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 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, if applicable, a diversity of types of business operated by such tenants.
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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 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 may be provided in the related
Prospectus Supplement to the extent relevant.
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
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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. 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 are considered to have "participated in
the management" of the mortgagor, regardless of whether the environmental
damage or threat was caused by a prior owner. 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 would be in the best economic interest of the Trust Fund 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 would be
in the best economic interest of the Trust Fund. 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 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,
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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 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".
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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
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
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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.
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
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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.
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 or 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.
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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.
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
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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 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 class 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
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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
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 proceedings, 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.
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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
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 type have a single
structuring range. The different types have different structuring ranges and/or
different principal payment priorities.
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CATEGORY OF CLASS DEFINITION
- ----------------- ----------
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 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
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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, unless
otherwise specified in the applicable Prospectus Supplement, 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
(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.
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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 may 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.
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.
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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;
(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;
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(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;
(xix) as to any series which includes 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.
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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 Agreement.
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. 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.
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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.
Unless otherwise specified in the applicable Prospectus Supplement,
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
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the address of the related Mortgaged Property and type of such 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,
if the related Agreement provides, 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.
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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 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.
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
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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. 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 ("REO Properties");
(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.
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The amount at any time credited to the REO Account may 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, unless
otherwise specified in the applicable Prospectus Supplement.
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") must be consistent with the terms
of the related 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.
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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 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).
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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. 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, to the
extent required by such Whole Loan, 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 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
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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 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 use its best efforts 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".
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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 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 Attestation
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 the Uniform Single Attestation 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
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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 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 be described in the applicable Prospectus
Supplement and may 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
Trustee may, and at the direction of holders of Certificates evidencing not
less than the percentage specified in the related Prospectus Supplement 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
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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 the percentage specified in the related Prospectus Supplement of the
Voting Rights, it shall appoint, or petition a court of competent
jurisdiction for the appointment of, a loan servicing institution acceptable
to each Rating Agency. 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 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, the
Special Servicer, if any, and the Trustee, without the consent of any of the
holders of Certificates covered by the Agreement under the circumstances
described in the related Prospectus Supplement. 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 the
percentage specified in the related Prospectus Supplement of the Voting
Rights, for any purpose; subject to certain restrictions described in the
Prospectus Supplement and set forth in the Agreement. 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.
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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.
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 of 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.
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.
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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.
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 recovered as a
"voidable preference" payment under the Bankruptcy Code. A copy of the
certificate guarantee insurance for a series, if any, will be filed with the
Commission as an exhibit to 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.
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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.
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
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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
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
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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 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 beneficiary 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
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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.
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
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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 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
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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.
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
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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.
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
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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
modification or denial of enforceability of due-on-sale or due-on-encumbrance
clauses, 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 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 commencement of a bankruptcy proceeding in which the
lessee is the debtor 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 creditor 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.
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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 that is the subject of a bankruptcy
proceeding (a "debtor"). Thus, property ostensibly the property of a
non-debtor may be determined to be the property of the debtor and, as a
result, the automatic stay applicable to the debtor will extend to the
property of the other entity and the rights of creditors of the other entity
may be impaired in the fashion set forth above in the preceding paragraphs.
Depending on facts and circumstances not necessarily 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 reduce the likelihood that a
bankruptcy proceeding would be commenced by or against such mortgagor on the
basis of activities unrelated to owning and operating the mortgaged property,
and such mortgagor has been organized and is designed to operate in such a
manner 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.
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 management of . . . [the] facility, holds indicia of
ownership primarily to protect his security interest" ("secured creditor
exemption").
Notwithstanding the secured creditor exemption, a lender may be held
liable under CERCLA as an owner or operator, if such lender or its employees
or agents participate in management of the property. Judicial decisions
interpreting the secured creditor exemption had varied widely, and one
decision, United States v. Fleet Factors Corp., 901 F.2d 1550 (11th Cir.
1990), cert. denied, 498 U.S. 1046 (1991), had indicated that a lender's mere
power to affect and influence a borrower's operations might be sufficient to
subject the lender to CERCLA liability. However, on September 30, 1996, the
Asset Conservation, Lender Liability, and Deposit Insurance Protection Act of
1996 (the "Lender Liability Act") became law. The Lender Liability Act
clarifies the secured creditor exemption to impose liability only on a
secured lender who exercises control over operational aspects of the facility
and thus is "participating in management". A number of environmentally
related activities before the loan is made and during its pendency, as well
as "workout" steps to protect a security interest, are identified as
permissible to protect a security interest without triggering liability. The
Lender Liability Act also identifies the circumstances in which foreclosure
and post-foreclosure activities will not trigger CERCLA liability.
The Lender Liability Act also amends the federal Solid Waste Disposal Act
to limit the liability of lenders holding a security interest for costs of
cleaning up contamination for underground storage tanks. However, the Lender
Liability Act has no effect on other federal or state environmental laws
similar to CERCLA that may impose liability on lenders and other persons, and
not all of those laws provide for a secured creditor exemption. Liability
under many of these laws may exist even if the lender did not cause or
contribute to the contamination and regardless of whether the lender has
actually taken possession of the property through foreclosure, deed in lieu
of foreclosure or otherwise. Moreover, such liability is not limited to the
original or unamortized principal balance of a loan or to the value of a
property securing a loan.
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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 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
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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
State and federal usury laws limit the interest that lenders are entitled
to receive on a mortgage loan. In determining whether a given transaction is
usurious, courts may include charges in the form of "points" and "fees" as
"interest", but may exclude payments in the form of "reimbursement of
foreclosure expenses" or other charges found to be distinct from "interest".
If, however, the amount charged for the use of the money loaned is found to
exceed a statutorily established maximum rate, the form employed and the
degree of overcharge are both immaterial. Statutes differ in their provision
as to the consequences of a usurious loan. One group of statutes requires the
lender to forfeit the interest above the applicable limit or imposes a
specified penalty. Under this statutory scheme, the borrower may have the
recorded mortgage or deed of trust cancelled upon paying its debt with lawful
interest, or the lender may foreclose, but only for the debt plus lawful
interest. A second group of statutes is more severe. A violation of this type
of usury law results in the invalidation of the transaction, thereby
permitting the borrower to have the recorded mortgage or deed of trust
cancelled without any payment and prohibiting the lender from foreclosing.
Under the Agreement, a representation and warranty will be made (or the
benefit of such a representation and warranty assigned to the Trust Fund) to
the effect that the Mortgage Loans included in a given Trust Fund complied at
origination with applicable laws, including 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 ("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.
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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
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.
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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 U.S.
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 or such other counsel as may be specified in
the applicable Prospectus Supplment, 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"
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.
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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 "loans . . . secured by an interest in
real property" for purposes of Code Section 7701(a)(19)(C)(v) 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 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
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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 clause (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, 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.
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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 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 Treasury regulations under Code Sections
1271-1275 (the "OID Regulations") and in part on the provisions of the 1986
Act. Regular Certificateholders should be aware, however, that the 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
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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 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.
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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 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, are 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,
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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, 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
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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.
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.
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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.
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
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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.
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.
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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 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
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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 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
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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.
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
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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 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 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.
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
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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 December 23, 1996, the Service released final regulations (the "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. 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.
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.
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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.
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 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.
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o 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 and provided further, with respect
to interest income from the Regular Certificate (including OID), that such
interest is not "contingent". Interest on the Regular Certificates generally
will not be considered contingent for this purpose, but the Internal Revenue
Service may take the position that any Prepayment Penalties should be treated
as such contingent interest. If the conditions described in the second
preceding sentence are not met, a 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.
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.
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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".
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
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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).
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
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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 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.
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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 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.
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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 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.
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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 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".
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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 or other
persons acting on behalf of any such plan, account or arrangement or using
the assets of any such plan, account or arrangement, which are subject to
ERISA and Section 4975 of 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, Section 4975 of the Code or
other applicable similar law 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 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
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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 plans subject to ERISA, 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 the rules under ERISA and Code Section 4975 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 and Code
Section 4975 of their acquisition and ownership of Certificates.
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
The Prospectus Supplement for each Series of Certificates will specify
which, if any, of the Classes of Certificates offered thereby will 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.
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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 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" secured by liens on residential,
or mixed residential and commercial properties, in most cases by requiring
the affected investors to rely solely upon existing state law, and not SMMEA.
Pursuant to Section 347 of the Riegle Community Development and Regulatory
Improvement Act of 1994, which amended the definition of "mortgage related
security" to include, in relevant part, Certificates satisfying the rating
and qualified Originator requirements for "mortgage related securities," but
evidencing interests in a Trust Fund consisting, in whole or in part, of
first liens on one or more parcels of real estate upon which are located one
or more commercial structures, states were authorized to enact legislation,
on or before September 23, 2001, specifically referring to Section 347 and
prohibiting or restricting the purchase, holding or investment by
state-regulated entities in such types of Certificates. Accordingly, the
investors affected by any such state legislation, when and if enacted, 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, effective December 31, 1996, the Office of the Comptroller
of the Currency (the "OCC") has amended 12 C.F.R. Part 1 to authorize
national banks to purchase and sell for their own account, without limitation
as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards concerning "safety and soundness"
and retention of credit information in 12 C.F.R. Section 1.5), certain "Type
IV securities," defined in 12 C.F.R. Section 1.2(l) to include certain
"commercial mortgage-related securities" and "residential mortgage-related
securities." As so defined, "commercial mortgage-related security" and
"residential mortgage-related security" mean, in relevant part, "mortgage
related security" within the meaning of SMMEA, provided that, in the case of
a "commercial mortgage-related security," it "represents ownership of a
promissory note or certificate of interest or participation that is directly
secured by a first lien on one or more parcels of real estate upon which one
or more commercial structures are located and that is fully secured by
interests in a pool of loans to numerous obligors." In the absence of any
rule or administrative interpretation by the OCC defining the term "numerous
obligors," no representation is made as to whether any Class of Certificates
will qualify as "commercial mortgage-related securities," and thus as "Type
IV securities," for investment by national banks. 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. Section Section 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 OCC and the Office of
Thrift Supervision, and by the NCUA (with certain modifications), prohibits
depository institutions from investing in certain "high-risk mortgage
securities" (including securities such as certain Series, 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).
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The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not
limited to, "prudent investor" provisions, percentage-of-assets limits,
provisions which may restrict or prohibit investment in securities which are
not "interest bearing" or "income paying," and, with regard to any
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 offerings may be made concurrently through more than one of these
methods or 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 Depositor 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.
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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.
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, or such other
counsel as may be specified in the applicable Prospectus Supplement.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of
Certificates and no Trust Fund will engage in any business activities or have
any assets or obligations prior to the issuance of the related series of
Certificates. Accordingly, no financial statements with respect to any Trust
Fund will be included in this Prospectus or in the related Prospectus
Supplement.
RATING
It is a condition to the issuance of any class of Offered Certificates
that they shall have been rated not lower than investment grade, that is, in
one of the four highest categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying mortgage
loans and the credit quality of the guarantor, if any. Ratings on mortgage
pass-through certificates do not represent any assessment of the likelihood
of principal prepayments by mortgagors or of the degree by which such
prepayments might differ from those originally anticipated. As a result,
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.
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INDEX OF PRINCIPAL DEFINITIONS
PAGE(S) ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ---------------------
1933 Act 84
1986 Act 61
Accrual Certificates 10
Accrued Certificate Interest 29
ADA 58
ARM Loans 20
Bankruptcy Code 52
BIF 35
Book-Entry Certificates 27
Cash Flow Agreement 9, 22
Cede 2, 32
CERCLA 16
Certificate Balance 10
Certificateholders 2
Certificates 8
Code 12, 58
Collection Account 9, 22
Collection Period 28
Commercial Loans 18
Commercial Properties 8, 18
Commission 2
Cooperatives 18
Covered Trust 16
CPR 24
Credit Support 1, 9, 22
Crime Control Act 57
Cut-off Date 11
Debt Service Coverage Ratio 18
Definitive Certificates 27, 33
Department 81
Determination Date 28
Disqualified Organization 70, 82
Distribution Date 10
DTC 2, 32
Equity Participations 21
ERISA 12, 81
Exchange Act 3
FDIC 35
FHA 20
Foreign Investors 70
HUD 20
Indirect Participants 32
Installment Contracts 8
Insurance Proceeds 36
L/C Bank 45
Liquidation Proceeds 36
Loan-to-Value Ratio 19
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PAGE(S) ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ---------------------
Lock-out Date 21
Lock-out Period 21
Master Servicer 8
MBS 1, 8, 18
MBS Agreement 21
MBS Issuer 21
MBS Servicer 21
MBS Trustee 21
Mortgage Asset Seller 18
Mortgage Assets 1, 18
Mortgage Loans 1, 8, 18
Mortgage Rate 9, 21
Mortgaged Properties 8
Mortgages 18
Multifamily Loans 18
Multifamily Properties 8, 18
NCUA 56
Net Leases 19
Net Operating Income 18
Nomura 84
Nomura Capital 84
Nonrecoverable Advance 30
Non-SMMEA Certificates 82
Offered Certificates 1
OID Regulations 61
Originator 18
Participants 32
Pass-Through Entity 70
Pass-Through Rate 10
Permitted Investments 35
Plans 81
Policy Statement 83
Prepayment Assumption 62
Prepayment Premium 21
Random Lot Certificates 61
Rating Agency 12
Record Date 27
Regular Certificateholder 61
Regular Certificates 58, 74
Regulations 81
Related Proceeds 30
Relief Act 57
REMIC 12
REMIC Certificates 58
REMIC Pool 58
REMIC Regulations 58
REO Account 36
Residual Certificateholders 66
Residual Certificates 58
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PAGE(S) ON WHICH
TERM IS DEFINED
TERM IN THE PROSPECTUS
- ------------------------------------ ---------------------
RICO 57
SAIF 35
Senior Certificates 10, 26
Service 60
Similar Law 82
SMMEA 82
SPA 24
Special Servicer 8, 37
Standard Certificateholder 75
Standard Certificates 75
Stripped Certificateholder 79
Stripped Certificates 75, 78
Stripped Interest Certificates 10
Stripped Principal Certificates 10
Subordinate Certificates 10, 26
Sub-Servicer 37
Sub-Servicing Agreement 37
Title V 56
Title VIII 56
Treasury 58
Trust Assets 2
Trust Fund 1
Trustee 8
UCC 47
U.S. Person 71
Value 19
Voting Rights 17
Warranting Party
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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
PROSPECTUS SUPPLEMENT
PAGE
-------------
Executive Summary............................. S-3
Table of Contents ............................ S-5
Summary of Prospectus Supplement.............. S-7
Risk Factors and Other Special
Considerations............................... S-28
Description of the Mortgage Pool.............. S-44
Description of the Mortgage Loans and
Mortgaged Properties......................... S-64
Description of the Offered Certificates ...... S-117
Prepayment and Yield Considerations ......... S-133
The Pooling and Servicing Agreement ......... S-145
Use of Proceeds .............................. S-168
Certain Federal Income Tax Consequences ..... S-169
ERISA Considerations ......................... S-171
Legal Investment ............................. S-172
Method of Distribution........................ S-173
Experts ...................................... S-173
Legal Matters................................. S-173
Rating........................................ S-174
Index of Significant Definitions.............. S-175
Financial Information......................... Exhibit A
Global Clearance, Settlement and Tax
Documentation Procedures..................... Exhibit B
Schedule of Weighted Average Net Mortgage
Pass-Through Rates........................... Exhibit C
Mortgaged Property Characteristics............ Annex A
PROSPECTUS
Prospectus Supplement......................... 2
Available Information......................... 2
Incorporation of Certain Information by
Reference.................................... 3
Table of Contents............................. 4
Summary of Prospectus......................... 8
Special Considerations........................ 13
Description of the Trust Funds................ 18
Use of Proceeds............................... 22
Yield Considerations.......................... 23
The Depositor................................. 25
Description of the Certificates............... 26
Description of the Agreements................. 33
Description of Credit Support................. 44
Certain Legal Aspects of Mortgage Loans ...... 46
Federal Income Tax Consequences............... 58
ERISA Considerations.......................... 81
Legal Investment.............................. 82
Method of Distribution........................ 84
Legal Matters................................. 85
Financial Information......................... 85
Rating........................................ 85
Index of Principal Definition................. 86
<PAGE>
$[ ]
(APPROXIMATE)
ASSET SECURITIZATION
CORPORATION,
DEPOSITOR
COMMERCIAL MORTGAGE
PASS-THROUGH CERTIFICATES,
SERIES 1997-MD VII
PROSPECTUS SUPPLEMENT
NOMURA SECURITIES
INTERNATIONAL, INC.
MARCH , 1997
